GAB Decision 293
April 30, 1982 Pennsylvania Department of Public Welfare; Docket No.
81-180-PA-HC Settle, Norval; Teitz, Alexander Garrett, Donald
Pennsylvania appealed a Health Care Financing Administration (Agency)
disallowance of $4,822,075 in federal financial participation (FFP) for
costs claimed by the State for the administration of its Medicaid
program between July 1, 1969 and June 30, 1978. The Agency disallowed
the costs because they were not part of Pennsylvania's approved cost
allocation plans (CAPs) for the years in question. The Agency also
noted that letter agreements executed between State and federal
officials had closed the CAP's for these years to further adjustment.
We uphold the Agency's determination for the reasons discussed below.
Our decision is based on the parties' written submissions.
I. The period July 1, 1969 to June 30, 1971
The costs for the period July 1, 1969 to June 30, 1971 are those of
the State Bureau of State-Aided Institutions within the Department of
the Auditor General under the category "State and Local Administration
and Training."
A. Costs covered by the CAP
Pennsylvania argued that the disallowed costs for this period were
covered at least in part by the approved statewide CAPs, but that the
State had never been paid for these costs. Further, although the State
did not dispute that the letter agreements between the Agency and the
State by their terms preclude further adjustment by either party for
these claims, it argued that it should not be bound by those agreements.
The State alleged that the agreements "have no foundation in the
Agency's regulations" during 1969-71 and that the agreements were not
binding because they were executed by the State's Secretary of
Administration and not the Department of Public Welfare, which is the
single state agency with authority to administer the Medicaid program.
(State's brief, pp. 4-5)
The Agency conceded that at least a part of the costs disallowed for
this period were types of costs included under the State's (2) CAPs.
The Agency neverthless submitted that these amounts were correctly
disallowed because the authorized federal and State officials closed out
the CAPs for these years, after certifying that final adjustments had
been made. The Agency argued that:
to the extent that the disputed costs were included in the CAPs for
1969-71, the State's claim has already been paid; therefore, the State
is now seeking duplicative reimbursement for these costs, which must be
denied. (Agency's brief, p. 3)
The Agency indicated that it had asked the State by telephone how the
costs could not have been paid by the Agency in view of their admitted
inclusion in the State's 1969-71 CAPs and the joint federal-State
agreement certifying the final adjustment of the costs claimed under
those plans. In the State's reply to the Agency's response dated
February 8, 1982, /1/ the State argued that the closeout agreement makes
no mention at all of specific claims and as such is not evidence that
the claims had been paid. The State argued that the burden is on the
Agency to establish that the claims would be duplicative.
We conclude, on the contrary, that the State has the initial burden
to demonstrate that its claims would not be duplicative of previous
payments by the Agency. The State is making claims for costs that were
incurred 10 years ago and that were within the purview of a closeout
agreement having the State's concurrence dated February 19, 1975. This
agreement considered the two years in question to be "closed to further
adjustments." While it is true that the agreement makes no mention of
specific claims, the State presumably had the opprotunity to make every
claim it was entitled to under its CAPs for the years in question and
could even have proposed further adjustments to those proposed by the
Agency before concurring in the closeout agreement in 1975. It is
reasonable to assume, then, in the absence of evidence to the contrary,
that the State was paid for costs covered by its CAPs. If the State now
claims that it was not, it has the initial burden to so demonstrate.
Since the State has not met this burden, although the issue was
specifically raised in the briefing, we uphold the disallowance of costs
covered by (3) the CAPs for 1969-71. /2/ Further, in the absence of the
State's demonostration that the claims would not be duplicative, we need
not consider whether a closeout agreement signed by the State's
Secretary of Administration would be a bar to further adjustments for
these years.
B. Costs not covered by the CAPs
The parties in their submissions to the Board indicated that while
part of the claimed costs for the period 1969-71 clearly were included
in the State's CAPs, a portion of those costs may not have been
included. As a result, the parties made arguments concerning the
allowability of costs not covered by the CAPs for this period.
Pennsylvania argued that the Agency had no duly promulgated regulations
--
requiring any cost allocation plans as a condition for a claim,
limiting the time for the submisssion or amendment of any plans, or
limiting the time for the submission of claims, the first such
regulation becoming effective February 27, 1971. (State's brief, p. 2)
Further, the State argued that the Department instruction cited by
the Agency as basis for the CAP requirement was not binding on the State
as a substantive rule that limited the amount of reimbursement under the
State plan. Finally, in the alternative, the State argued that the
Agency lacked the authority under the statute to foreclose a claim for a
proper program cost merely because the State failed to include the cost
in its CAP for the period involved.
We disagree with these arguments. Although the regulations in effect
during this period do not contain specific language limiting FFP
reimbursement to costs included in an approved CAP, the States have been
on notice of, and bound by, federal CAP requirements applicable to
Department grants since July 1, 1969. See, Michigan Department of
Social Services, Decision No. 224, October 29, 1981. The Department of
Health, Education, and Welfare in 1969 published a brochure entitled "A
Guide for State Government Agencies," OASC-6, which implemented the
Bureau of the Budget Circular A-87. The (4) Budget Circular A-87
provided principles and standards for determining costs applicable to
grants and contracts with state government agencies. The purpose of the
OASC-6 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) 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 to
Federal agencies making awards to States to reimburse indirect costs
under their programs . . . ." (OASC-6, p. 2)
The State did not deny that it had actual notice of OASC-6, and,
specifically, the provisions regarding the manner in which states could
claim indirect costs. These provisions could be regarded as procedural,
rather than substantive. Moreover, the notice and comment rulemaking
requirements of the Administrative Procedure Act for substantive rules
do not apply by their own terms to grant programs and were not adopted
for Health, Education, and Welfare grant programs until January 28,
1971. (36 Fed. Reg. 2532, Feb. 5, 1971) Finally, the binding effect of
Agency instructions where acutal notice was given has been discussed in
several Board decisions. See, e.g., Ohio Department of Public Welfare,
Decision No. 173, April 30, 1981; Social Services Board of North
Dakota, Decision No. 166, April 30, 1981.
Accordingly, we conclude that the State was bound by Department
instructions to claim indirect costs only in accordance with its CAPs.
Also, as we discuss with respect to costs claimed after June 30, 1971,
this limitation, whether in regulations or instructions, is entirely
consistent with the provisions of title XIX.
II. Costs claimed between July 1, 1971 and June 30, 1978
The claims for this period include annuitants' medical benefits costs
allocated to State facilities as well as costs incurred by the Bureau of
State-Aided Institutions. These costs were not included in the State's
approved CAPs. The State does not dispute that Agency regulations
limited reimbursement for FFP to costs included in an approved CAP for
the period beginning July 1, 1971. However, the State argued that this
regulatory limitation (5) is inconsistent with provisions of title XIX,
namely the requirement in section 1903(a) for the Secretary to pay each
state amounts expended "as found necessary by the Secretary for the
proper and efficient administration of the State plan." The State also
argued that "reclaiming" provisions in the regulations effective March
31, 1976 provided a basis for allowing these costs.
We agree with the Agency that the regulatory requirements do not
conflict with the statutory provisions authorizing reimbursement for
allowable program costs. The regulations at issue, 42 CFR 433.34,
formerly 45 CFR 205.150, specify the terms under which the Secretary
will reimburse costs that require allocation. Any claimed costs must be
part of a state's approved CAP.It is altogether reasonable that the
Secretary might wish to set limits for reimbursing claims submitted
under a complicated procedure such as cost allocation. These limits are
within the Secretary's authority to interpret the statute and to make
rules for the efficient administration of the program under section 1102
of the Act. Title XIX does not require the Agency to reimbuse any and
all claims irrespective of the circumstances under which the State
submits those claims to the Agency. In fact, the portion of section
1903(a) relied on by the State gives the Secretary discretion in
determing what is necessary for efficient administration.
Further, as the Agency argued, the State's belated cost claims do not
satisfy the necessary conditions for "reclaims" as provided at 42
CFR
433.34(e) and (f), formerly 45 CFR 205.150(a) and (b). Those provisions
apply where CAPs have become outdated because of "organizational changes
within the State agency, changes, in Federal law or regulations, or
other similar changes' and where a state has not filed a CAP with the
Agency. The provisions permit the Agency to disallow "overstated"
claims and to authorize reclaims based on an initial or revised CAP.
Here, the State has not alleged that it had no approved CAP or that its
CAP became outdated because of circumstances cited in the regulations;
rather, it appears that the costs were merely overlooked by the State
when it submitted its CAP to the Agency. /3/ If the State were
permitted to reclaim (6) costs not included in its CAP under these
procedures, the Agency argued, there would never be finality or
certainty in tabulating the allowable administrative costs for any
fiscal year: a state could come in years following the final adjustment
of its CAPs with claims that had never been submitted as part of the
approved CAPs, and demand federal payment. We agree with the Agency
that the reclaiming provisions do not authorize such a result.
Accordingly, we uphold the disallowance for the 1971-78 period. The
costs at issue were not included in the State's approved CAP as required
and the reclaiming provisions do not provide a basis for reimbursing
these claims.
Conclusion
We sustain in full the Agency's disallowance of $4,822,075 in federal
financial participation claimed by the State under title XIX. /1/
Although, as the Agency pointed out, this reply was submitted 13
days late under the Board's new procedures at 45 CFR Part 16, we have
included the reply in the record. /2/ Although the State
indicated that the Agency had the burden to verify that the claim was
not duplicative since the Agency had originally assumed that the claims
were not covered by the CAPs, it did not request the opportunity to
demonstrate that the claims were not dpulicative should the Board
conclude that the State had this burden. /3/ Although the cost
allocation regulations do not explicitly preclude retroactive revision
of an approved CAP in cases where a state might have amended the CAP but
did not, it is possible the regulations as a whole would require that
result. In any event, the State did not submit a proposed retroactive
revision for Agency consideration, and this issue is not raised by this
appeal. Moreover, the closeout agreements signed by the parties might
have provided a further bar to adjustment even if the CAP could have
been retroactively revised.
OCTOBER 22, 1983