GAB Decision 224
October 29, 1981 Michigan Department of Social Services; Docket No.
79-216-MI-HC Ford, Cecilia; Teitz, Alexander Settle, Norval
This case involves and October 15, 1979 determination by the Health
Care Financing Administration (HCFA, Agency) to disallow $12,706,662 in
Federal financial participation (FFP) claimed by the State of Michigan
Department of Social Services (MDSS or State). The State appealed only
part of the disallowance in the amount of $5,659,300, which represents
the federal share of administrative costs under Section 1903(a)(6),
presently Section 1903(a)(7), of the Social Security Act for the period
January 1, 1973 to September 30, 1975. The issue in dispute is whether
the State claimed administrative costs attributable to Title XIX in
accordance with its approved cost allocation plan.
The record on which this decision is based includes the state's
application for review, the Agency response to the application, an Order
to Show Cause issued by the Board, the Grantee's response to the Order,
the Agency response submitted in accordance with the Board's request
during a telephone conference call held July 29, 1981, the transcript of
the hearing held in this matter on August 19, 1981, the Agency's
post-hearing briefing submitted in accordance with the presiding Board
member's request made at the hearing, and the State's response to the
Agency's post-hearing briefing.
We conclude that the Agency's determination cannot be sustained, for
reasons set forth below.
Relevant Regulatory Provisions
The Agency, in its notice of disallowance dated October 15, 1979,
cited the following provision as the basis for its disallowance:
As a condition for receipt of Federal financial participation in
administration services (excluding purchased services) and training for
any quarterly period, a State's claim for such expenditures must be in
accord with a cost allocation plan on file with and approved by the
Regional Commissioner for that period. 45 CFR 205.150(b)(1) (1976).
(2) The above-cited provision was published March 31, 1976 at 41 FR
13584, and was to become effective 90 days after the publication or
earlier at State option. Since the disallowance period ends September
30, 1975, the provision cited by the Agency is not applicable here.
During the period for which the disallowance was taken, two versions
of 45 CFR 205.150 were in effect. The first, which was in effect from
February 27, 1971 until November 26, 1973, is as follows:
Sec. 205.150 Cost allocation.
State plan requirements: A State plan under title I, IV-A, X, XIV,
or XIX of the Social Security Act must provide that the State agency
will establish and maintain methods and procedures for properly charging
the costs of activities under the plan to the program in accordance with
Federal requirements (Bureau of the Budget Circular A-87 and Department
and Social and Rehabilitation Service regulations and instructions).
Such methods and procedures and revisions of them are subject to
approval by the Department; revisions must be submitted promptly and in
no case later than 12 months following the effective date of the change.
The State's methods and procedures must include a description of the
method for:
(a) Allocating all administrative costs of the State department in
which the State agency is located between Federal and non-federal
programs;
(b) Identifying, of the costs applicable to more than on of the
Federal programs, those applicable to each of the separate programs, in
accordance with program classifications specified by the Secretary; and
(c) Segregating costs in paragraph (b) of this section by service and
income maintenance functions, where applicable, and such other
classifications as are found necessary by the Secretary.
The second version of 45 CFR 205.150 was in effect from November 26,
1973 to June 29, 1976. The NPRM for the second version, published is to
"implement an administrative determination that State public assistance
and medical assistance agencies must submit cost allocation plans when
requested by the Regional Commissioner. This will permit the
significance of costs in relation to the allocation base." The final
rule, published September 26, 1973 at 38 FR 26804 effective November 26,
1973, is as follows: (3) (a) State plan requirements. A State plan
under title I, IV-A, IV-B, X, XIV,XVI, or XIX of the Social Security Act
must provide that the single State agency will establish and maintain
methods and procedures for properly charging the costs of
administration. . . under the plan in accordance with Federal
requirements (Office of Management and Budget Circular No. A-87 and
Department and Social and Rehabilitation Service regulations and
instructions). Such methods and procedures must include those for:
(Subparagraphs (1), (2), and (3) have been deleted here. They are
the same as subparagrahs (a), (b), and (c) of the 1971 regulation,
quoted above.)
(b) Federal financial participation. As a condition for receipt of
Federal financial participation, a State must submit for approval a
revised cost allocation plan with 3 months after being request by the
SRS Regional Commissioner . . .
(Subsection (b) proceeds to detail when such requests will be made,
the content of the CAP, and the effect on FFP of the submission of a
revised plan.)
Background
The Agency's October 15, 1979 notification of disallowance stated
that the Agency's auditors determined that the allocation base for
administrative costs was incorrect and, therefore, costs charged to
Title XIX were overstated. The auditors claimed the basis used should
have been all medical assistance (MA) eligibles receiving assistance as
stated in the approved cost allocation plan (CAP), rather than those
eligible to receive assistance. The disallowance cites Section IX, B, 4
of the approved State CAP which provided that:
All income maintenance costs will be allocated to programs in
proportion to the number of cases receiving assistance under AFDC, MA,
GA, and the Non-public assistance segment of the Food Stamp program.
The notification of disallowance concluded that the claim for
expenditures was contrary to the State's approved CAP, and, therefore,
was not in accordance with 45 CFR 205.150(b)(1) - citing the 1976
inapplicable provision - and Section 1903 (a)(6) (presently Section
1903(a)(7)) of the Social Security Act. The latter provision provides
that the Secretary shall pay to each State which has an approved state
plan an amount equal to 50 percent of the amounts expended as found
necessary by the Secretary for the proper and efficient administration
of the State plan. (4) Discussion
Requirement of claiming costs in accordance with the State CAP.
The Agency based its disallowance here on the fact that the State
claimed administrative costs for medical assistance on a basis other
than that specified in its approved CAP for the period and, according to
45 CFR 205.150(b)(1) (1976), as a condition for FFP, a State's claims
for expenditures must be in accordance with its CAP. This regulation
with its specific language was not published until March 31, 1976.
During the period in question here, January 1, 1973 through September
30, 1975, applicable regulations did not specify that as a condition for
the receipt of FFP, a State's claim must be in accordance with its
approved CAP. Therefore, the State argued that since the requirement
contained in the disallowance letter was not a validly promulgated
regulation prior to the audit period, thhe requirement cannot now be
imposed on the State and the disallowance is not valid.
Both regulations in effect during the period, however, do specify
that the State establish and maintain methods and procedures for
charging the costs of activities "in accordance with Federal
requirements (Bureau of the Budget Circular A-87 and Department and
Social and Rehabilitation Service regulations and instructions)." The
Bureau of the Budget Circular A-87 provides principles and standard for
determining costs applicable to grants and contracts with State
government agencies. The Department of Health, Education, and Welfare
(now Department of Health and Human Services) in 1969 published a
brochure entitled "A Guide for State Government Agencies," OASC-6,
intended to implement the Bureau of the Budget Circular A-87. The
purpose of the brochure was to provide "guidance on the procedures to be
followed by State governments in seeking to recover the costs of
(central support) services . . . and the indirect costs of grantee State
departments." (OASC-6, March, 1969, p. iii). The brochure was sent to
State Administrators and established the Department's instructions
concerning cost allocation plans and indirect costs. (SRS Program
Regulation 1-1, from the SRS Commissioner dated April 18, 1969). The
Agency cited this brochure in its post-hearing response for the
proposition that the State must claim costs in accordance with its CAP.
(Supplemental Response of HCFA dated September 1, 1981, p. 4). The
State has not contested that this brochure was binding on it.
(Supplemental Response of the State of Michigan Department of Social
Services, dated September 4, 1981, p. 2).
This brochure states that in order for a State to recover indirect
costs, a CAP must be submitted to the Federal Government annually.
These plans "form the basis for agreements between the State and the
Federal Government setting forth the indirect costs which may be charged
to Federally supported programs," and "these agreements constitute
authority (5) to Federal agencies making awards to States to reimburse
indirect costs under their programs. . . ." (OASC-6, p. 2). Although
the Agency's disallowance was based on the "regulatory requirement (45
CFR 205.150(a) and (b) (1976)) that FFP in administrative costs is
available only if provided in accordance with an approved CAP filed with
HEW, and although the regulations in effect during the period of the
disallowance do not contain this specific language, the regulations do
impose on the State a legal requirement to establish methods and
procedures on charging costs in accordance with Federal requirements,
specifically Bureau of the Budget Circular A-87 and the Department's
instructions pertaining to methods and procedures of charging costs.
Despite the fact that the Agency in its disallowance letter miscited
the legal basis for the Agency's actions, there still was an independent
requirement on the State to claim costs in accordance with its CAP.
Therefore, we conclude that the State was required to claim costs in
accordance with its CAP in order to receive FFP.
Interpretation of Provision in State CAP
Although we have determined that the State was required to claim
costs in accordance with its CAP, the question remains whether the
State, by its interpretation of the term "receiving assistance," did
in
fact claim costs in conformance with its CAP.
The dispute here revolves around Section XI, B, 4 of the approved CAP
and the meaning of "receiving assistance" as contained in that section.
The Agency interprets "receiving assistance" as cases actually receiving
medical services. The Agency admits that the State had an approved CAP
for the period in question and that, but for this provision in the CAP
(as the Agency interprets it), the claimed costs here are otherwise
allowable. (Response of HCFA to Petitioner's Application for Review,
pp. 9 and 10; Transcript of August 19, 1981 hearing, pp. 12 and 14).
The State's argument throughout this proceeding has been that
although the phrase "receiving assistance" was used, the State has
always interpreted it, for the MA programs, to mean all persons eligible
to receive assistance. The State indicated through written submissions
and oral testimony that it consistently claimed costs on this basis
until the Agency, by letter dated March 31, 1978, (State Exhibit 3)
informed the State that the initial review of the State's CAP submitted
for the fiscal year ending (FYE) September 30, 1978 indicated an
inconsistency as to the allocation base used. (Application for Review;
State Response to Order to Show Cause, p. 8; Transcript, pp. 24-27,
34-41). In response to the Agency, the State by letter dated May 19,
1978 (State Exhibit 4), indicated that in accordance with the Agency's
review, the CAP for FYE September 30, 1978 had been corrected to read
"the number of cases eligible for assistance" rather than "number
of
cases receiving assistance." (6) The section of the CAP in question also
referred to the allocation of administrative costs for three other
programs besides the MA program under Title XIX. These programs are
cash assistance programs, which means a determination of eligibility
entitles the recipient to receive cash assistance immediately. The MA
program is the only program unlike this. (Transcript, pp. 30-31,
56-58). It is not a cash assistance program but a vendor program,
meaning a recipient may be determined as medically needy but may not
receive medical services from a provider until some time later.
(Transcript, pp. 30-31, 56-58). If one would interpret "receiving
assistance" as the receipt of medical services, it is entirely possible
that the person determined eligible may not have received assistance,
i.e. medical services, until a later date. Therefore, the MA program is
unlike the other programs in that a determination of eligibility does
not mean that the person eligible receives some kind of medical service
or cash assistance upon the making of that determination.
The State indicated that it grouped these programs together in this
section not knowing that the wording of this section was ambiguous as to
the meaning of "receiving assistance." (Transcript, p. 56). The State
argued that its intent was and its practice has always been to claim
these costs on the basis of persons eligible. (Transcript, p. 56-57).
The State also explained that when the State makes a determination of
eligibility under the MA program, it incurs costs for establishing and
maintaining the file, issuing a card to the recipient and other
administrative costs of determining eligibility which are legitimate and
allowable costs. (Transcript, p.56). The Agency in rebuttal argues
that the CAP states "receiving assistance" and that this provision
means
"receiving medical assistance." (Response of HCFA to Petitioner's
Application for Review, pp. 4-8; Supplemental Response of HCFA, pp.
5-6)9
The Agency, in closing argument at the hearing, claimed the State did
make a distinction between those persons eligible to receive medical
assistance and those persons eligible who are actually receiving medical
assistance. (Transcript, p. 102). The Agency contends that it has the
right to rely on the plan inasmuch as the document should speak for
itself. (Transcript, p. 102).
The Agency has not shown why the phrase "receiving assistance" should
be interpreted for Title XIX as meaning "receiving medical assistance."
This phrase is susceptible to more than one reasonable interpretation.
Where ambiguous language exists, the general principle is to ascertain
and determine the intent and meaning of the parties. 17 Am Jur 2d
Contracts, Sec. 224. (7) The regulations in effect during the period in
question, 45 CFR 205.150 (1971) and (1973), provide that the methods and
procedures for charging costs to federal programs are subject to
approval by the Agency and method and procedures for charging costs
under the plan must be in accordance with SRS regulations and
instructions. The "Financial Review Guide" published January, 1974
by
the Social and Rehabilitation Service (the predecessor of HCFA) relating
to administrative costs and cost allocation states that the purpose of
the section on cost allocation plans and methods in this guide is to
determine whether the methods utilized for allocating costs are
consistent with the approved State cost allocation plan. The Guide
provides that the Agency review the State CAP and the State's methods
for allocating costs. Upon completion of the review of the actual
allocation methods in comparison with the approved department allocation
procedures, the Agency shall issue a final report which includes
recommendations for improvement if discrepancies between the approved
department cost allocation plan and actual cost allocation methods are
found. (Financial Review Guide, January 1974, pp. 8 and 43).
The Agency admitted that for the period in question, January 1, 1973,
to September 30, 1975, cost allocation plans for the fiscal years
involved were approved by the Agency. (Transcript, p. 14). Evidence
indicates that the Agency did not communicate to the State that there
was any discrepancy between the State's actual cost allocation method
and the approved cost allocation plan even though the State was claiming
costs based on "eligibles." (Transcript, pp. 39-42). In fact, the
first
evidence in the record of notice to the State that the Agency believed
there was any discrepancy between the method and plan was the audit
report issued December 21, 1977. Furthermore, the State indicates that
it changed its plan for the FYE September, 1978 only after the Agency
notified the State of the discrepancy and indicated that a correction
was necessary in order to receive approval of the CAP for the FYE
September, 1978. (Transcript, pp. 33-42 and p. 65).
The record also indicates that the State always claimed
administrative costs for the MA program based on the number of cases
eligible to receive assistance. (Transcript, p. 25). The State has
also shown that by making an eligibility determination that a recipient
is "medically needy," a recipient receives certain "assistance";
a file
is set up and maintained and a medical assistance card is issued each
month. (Transcript, pp. 46-48 and 56).
The uncontroverted evidence is that the State has consistently
interpreted its CAP as including all persons eligible to receive
assistance. The only costs the State is attempting to allocate are the
administrative costs of determining eligibility. The Agency has
admitted that these costs are otherwise allowable. (8) Given the
State's consistent interpretation of a phrase that the State itself put
in its own CAP and the fact that determination of eligibility results in
allowable costs to the State, we cannot concur in an overly technical
interpretation by the Agency of the State's plan. The State has shown
that the plan as interpreted does not result in an inequitable
distribution of costs. Furthermore, the Bureau of the Budget Circular
A-87, which establishes uniform Government-wide guidelines for
identifying costs under grants to states, was designed to provide that
"Federally assisted programs bear their fair share of costs." This
circular provides that unless otherwise restricted, "all indirect costs
of the grantee State department are allowable providing they are
necessary for the efficient conduct of the grant program." (OASC-6, p.
1).
We emphasize that we are not deciding that a State is not bound by
the provisions of its CAP. Rather, we conclude that in the
circumstances of this case, where there is an ambiguous phrase in the
CAP susceptible of two interpretations, and circumstances indicate that
the phrase was consistently and reasonably interpreted to mean "all
persons eligible to receive assistance," and the costs are otherwise
allowable, that the State, by its interpretation of "receiving
assistance," claimed costs in conformance with its CAP.
Conclusion
For the reasons stated above, the Agency's disallowance is reversed.
OCTOBER 22, 1983