GAB Decision 361
November 30, 1982 North Carolina Department of Human Resources; Docket
No. 82-54-NC-HC Ford, Cecilia; Garrett, Donald Settle, Norval
The North Carolina Department of Human Resources (State) appealed a
determination by the Health Care Financing Administration (Agency)
disallowing federal financial participation in the amount of $788,016
claimed under Title XIX of the Social Security Act. The Agency found
that, during the period January 1977 through December 1979, the State
earned interest on recoveries from Medicaid providers which had been
placed in a holding account pending their distribution to federal, State
and county governments. In the Agency's view, the interest constituted
an overpayment within the meaning of section 1903(d) of the Social
Security Act, 42 U.S.C. 1396b(d), and a pro rata share of the interest
should have been applied to reduce expenditures claimed on the State's
Quarterly Expenditure Report. The State argued on appeal that all but
$11,658 of the amount in question represented inputed interest, and that
even if interest was actually earned, it did not constitute an
overpayment. The State also argued in the alternative that it was
permitted to retain the interest under Section 203 of the
Intergovernmental Cooperation Act, which provides that states shall not
be held accountable for interest earned on grant-in-aid funds pending
their disbursement for program purposes. /1/
(2) For the reasons set forth below, we find that interest was earned on
the Medicaid recoveries and that the State was required to remit to the
federal government an amount equal to the interest which was allocable
to the federal share of the Medicaid recoveries. This decision is based
on the parties' written submissions and on a conference held pursuant to
45 CFR 16.10 (1981).
I. Was Interest Earned or Imputed?
The State argued that all but $11,658 of the $788,016 disallowed
represented imputed interest /2/ and that "(under) Board precedent,
imputed interest cannot be disallowed." (State's brief dated June 14,
1982, p. 2) It cited in this respect Education Commission of the States,
Decision No. 14, March 10, 1976, in which the Board held that the
grantee was not obligated to pay to the government imputed interest on
excessive drawdowns of grant funds on which no interest was in fact
earned. Since we have determined that interest was in fact earned on
all of the Medicaid recoveries, we need not consider whether the State's
argument correctly applies Decision No. 14.
Background
The State asserted without contradiction that the recoveries from
Medicaid providers were placed in a holding account (Account No. 64445)
which was among a number of accounts maintained by the State Treasurer.
State law required that the money in several of these accounts be
invested in interest-bearing instruments. However, the State was under
no statutory or other obligation to invest any of the money which made
up Account No. 64445. State law also required that the Treasurer keep
an uninvested reserve to pay warrants presented for the State's
day-to-day expenses and to compensate the banks in which the reserve was
deposited for thier services ("compensating balance"). The amount
of
the reserve at all times exceeded the amount of federal funds in Account
No. 64445 as well as other federal funds held by the State.
The various accounts held by the State Treasurer were pooled and
investments were made without regard to the scource of funds. Pro rata
shares of the interest earned on the investments were credited to
accounts which were required to be invested. The remainder of the
interest was credited to the General Fund, not to individual accounts
such as Account No. 64445. The State represented that monies in the (3)
General Fund, by State law, can only be spent pursuant to the State
budget, a contract or a special appropriation, and that there was thus
no authority by which the State could have withdrawn funds from the
General Fund to give the federal government a share of the interest.
(State's brief dated June 14, 1982, pp. 9-13, 15, 22; Transcript of
conference held October 28, 1982 (Tr.), pp. 15, 19-20, 30, 43)
Parties' Arguments
The Agency took the position that since the funds in Account No.
64445 had been commingled with the funds from other accounts, it was
justified in assuming that the former were invested in the same ratio as
the total amount of funds held by the State Treasurer (97% invested, 3%
uninvested). The State argued that this was not a reasonable
assumption, stating that, although there was " . . . no clear-cut answer
since the monies were not segregated and dealt with separately, . . .
the facts . . . point in the direction that the Federal funds were not
invested." (Tr., p. 43) The "facts" relied on by the State were:
(1)
that the State was not obligated to invest federal funds; (2) that the
uninvested reserve always exceeded the total federal money on deposit in
the State; and (3) that no interest was ever credited to Account No.
6445. (Tr., p. 15) The State also asserted more specifically that the
federal money in Account No. 64445 should be viewed as part of the
"compensating balance" maintained by the State in the banks in which
the
uninvested reserve was deposited, in which case it was clearly not
invested. (Tr. p. 23)
Discussion
On the record before us, we find that it was reasonable for the
Agency to assume that the funds in Account No. 64445 were invested in
the same ratio as the total amount of funds held by the State Treasurer.
We find no substantial basis for the State's assertion that the federal
money in Account No. 64445 was part of the "compensating balance"
maintained in State banks. The existence of Account No. 64445 was due
to the fact that the State had not identified the share of the Medicaid
program. State's brief dated June 14, 1982, p. 6) If the State could
not identify the federal share, then clearly it had no way of knowing
that the federal share was used for the compensating balance. Moreover,
even if it knew the allocable federal share, the State did not show
whether that share would have been used for the compensating balance.
Asked how the State could specifically identify the federal funds as
being part of the compensating balance, a witness for the State stated:
(4) All I can say to that is that naturally the State Treasurer is going
to invest what he is required by law to invest. And those funds that he
is not required by law to invest he's going to leave them in the bank to
pay for daily warrants and to compensate the banks. (Tr., p. 35)
If the federal funds in Account No. 64445 were the only funds not
required to be invested, there might be a basis for finding that they
made up the compensating balance. The State admitted, however, that
there were other funds as well which were not required to be invested,
including the State and county shares of Account No. 64445. Thus, these
other funds could have comprised the 3% uninvested reserve, leaving the
federal funds free to be invested. The fact that the State was not
obligated to invest the federal funds is of no significance since the
State admitted that it invested a broader range of funds than those
which it was required by State law to invest. (Tr., p. 34)
Since the State's accounting procedures made it impossible to trace
any specific funds held by the State Treasurer, we conclude that the
Agency reasonably treated all such fundds as sharing proportionately in
the interest earned. The State's failure to credit any interest to
Account No. 64445 does not affect our conclusion, since a grantee's
accounting procedures cannot be used to mask the true nature of a
transaction.
Moreover, even if the federal funds in Account No. 64445 were used
for the compensating balance, we think that it can be reasonably
concluded that interest was earned. The State admitted that the
availability of the federal funds would allow the State to invest more
State dollars, i.e., that in the absence of the federal funds, State
funds would be used to maintain the compensating balance. (Tr., p. 38)
Thus, part of the interest earned by the State would be earned only
because the federal funds were used for the compensating balance.
Accordingly, it is not unreasonable to treat the interest earned on an
amount equal to the federal funds in Account No. 64445 (less 3%) as
attributable to those federal funds. Interest found under this logic
would not be imputed interest since the federal funds were substituted
for State funds which actually earned interest.
II. Does the Interest Constitute an Overpayment?
As noted previously, the disallowance was taken on the ground that
the interest earned represented an overpayment within the meaning of
section 1903(d) of the Act. Subsection (d)(2) of that section provides
that the Secretary's quarterly payments to the State for Medicaid shall
be -- (5) . . . reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this section
to such State for any prior quarter . . . . Expenditures for which
payments were made to the State . . . shall be treated as an overpayment
to the extent that the State or local agency administering such plan has
been reimbursed for such expenditures by a third party pursuant to the
provisions of its plan in compliance with section 1902( a)(25).
Subsection (d)(3) further provides that --
(the) pro rata share to which the United States is equitably
entitled, as determined by the Secretary, of the net amount recovered
during any quarter by the State or any political subdivision thereof
with respect to medical assistance furnished under the State plan shall
be considered an overpayment to be adjusted under this subsection.
The State took the position, however, that " . . . an overpayment is
an expenditure of federal money for Medicaid purposes which need not
have been made, either because it was improper at the time or because it
later proved to be unnecessary . . . . " It asserted that the interest
earned in this case did not fit this definition since it was credited to
the General Fund and could not be used to reduce the State's draw of
federal Medicaid money. (State's brief dated June 14, 1982, pp. 18, 22,
emphasis added) The State based its definition on the language of
section 1903(d)(2) and (3), which it stated " . . . specifically
identifies as overpayments federal expenditures which have been
reimbursed or recovered." (State's brief dated June 14, 1982, p. 17)
The State also relied on several court cases and Board decisions in
which the overpayments in question fit its definition.
The Agency responded that the Board had rejected a similarly limited
definition of the term "overpayment" in Texas Department of Human
Resources, Decision No. 213, September 22, 1981. (Agency's brief dated
July 16, 1982, p. 8) That decision read, in pertinent part, as follows:
The State's view, hoever, is based on a misunderstanding of the term
"overpayment" in Section 1903(d) of the Act. While the term
"overpayment" is sometimes used in the Medicaid program to refer to
payments erroneously made by the State (for instance, payments for
services to an ineligible recipient or provider), the term (6) as used
in Section 1903(d) encompasses the total Federal/State fiscal
relationship and applies whenever "the Secretary determines" that
there
should be a decreasing adjustment to the amount paid to the State.
(Decision No. 213, p. 6)
The Board's reading of the term "overpayment," as stated in the
Texas
decision, is clearly broader than the State's. /3/ In a subsequent
decision, moreover, the Board indicated that while subsection (d)(3)
applied only to expenditures for Medicaid ("medical assistance" costs)
which have been recovered, subsection (d)(2) is not as limited in its
application. California Department of Health Services, Decision No.
244, December 31, 1981, p. 6. That decision stated, in pertinent part
--
Subsection (d)(3) is more specific than (d)(2), but it simply does
not apply to costs which are not allowable "medical assistance" costs.
. . . .
The more general language of Subsection 1903(d)(2) has been
consistently read together with Section 1116(d) of the Act, which
provides for reconsideration of a determination that "an item or class
of items on account of which federal financial participation is claimed
. . . shall be disalloed . . . ." Under this construction, a
determination that a State has claimed and received FFP in unallowable
costs is tantamount to a determination that the disallowed amount is an
overpayment to be adjusted under subsection 1903(d)(2). (Citations
omitted.)
As explained below, we find that the State claimed unallowable costs
in the amount of the interest and tat consequently there was an
overpayment under subsection (d)(2). (7) III. Does the Interest
Constitute an Applicable Credit?
At the Board's request, the parties briefed the issue whether the
interest earned might be an "applicable credit" within the meaning
of 45
CFR Part 74, Appendix C, Part I, C.3 (1979). That provision states in
pertinent part, that --
a. Applicable credits refer to those receipts or reductions of
expenditure-type transactions which offset or reduce expense items
allocable to grants as direct or indirect costs. Examples of such
transactions are: purchase discounts; rebates or allowances;
recoveries or indemnities on losses; sale of publications, equipment,
and scrap; income from personal or incidental services; and
adjustments of overpayments or erroneous charges.
b. Applicable credits may also arise when Federal funds are received
or are available from sources other than the grant program involved to
finance operations or capital items of the grantee . . . . These types
of credits should likewise be used to reduce related expenditures in
determining the rates or amounts applicable to a given grant.
The cost principles further provide that, to be allowable under a
grant program, costs must "(be) net of all applicable credits." 45
CFR
Part 74, Appendix C, Part I, C.1.g. (1979). If the interest constituted
an applicable credit under C.3., part of the State's claim -- equal to
the federal share of the interest -- for FFP under Title XIX would be
unallowable under C.1.g. because the interest was not deducted from the
claim. There would then be an overpayment under the Board's decision in
California Department of Health Services, supra, /4/ and the
determination appealed from should be upheld, unless the interest falls
under the exemption in section 203 of the Intergovernmental Cooperation
Act (discussed later in this decision).
The State argued that the interest did not constitute an applicable
credit because it was not available to "offset or reduce expenses"
or
"to finance operations or capital items of the grantee" within the
meaning (8) of C. 3. It asserted that this was so because the interest
earned on Account No. 64445 as well as the interest earned on the
account held by the State's fiscal agent was in the General Fund and
beyond the reach of the State agency administering the Medicaid program.
(State's brief dated June 14, 1982, p. 25; State's reply brief dated
August 13, 1982, p. 13) It also asserted that states generally regard
such revenues as windfalls and use them for discretionary, one-time
expenditures and that the interest in this case, if used in this manner,
would therefore not have reduced the cost of the State's Medicaid
program. (Tr., pp. 54-55) Another argument advanced by the State was
that the examples of applicable credits listed in C.3.a. fell into three
categories: (1) refund or reduction of original expenditure, (2) income
generated out of the normal operation of a program, and (3) money
received from other federal grants, and that the interest fell into none
of these categories. In particular, the State asserted that the
interest was not generated out of normal program operations because it
did not grow out of the activities for which the grant was awarded, but
was instead attributable to the State's investment activities. (State's
reply brief dated August 13, 1982, pp. 7, 9; Tr., pp. 48-51) Finally,
the State asserted that certain income items are not required by
generally accepted accounting principles to be set off against the
expenses that were incurred to produce these items. (Tr., p. 50)
The Agency took the position that the ultimate use of the funds was
not relevant, asserting that "(when) normal accounting principles are
applied, expenses and credits arising out of the same activity must be
charged against each other to determine net cost." The Agency also
contended that, by reducing the State's obligation to generate funds for
its operations in general, the interest in effect reduced the income the
State had to generate in order to finance its Medicaid program.
(Agency's brief dated July 2l, 1982, pp. 11-12)
Discussion
We are not persuaded by the argument that the interest was generated
by the State's investment activities rather than by the Medicaid
program. The Medicaid recoveries directly supplied capital for
investment; the interest in dispute would not have been earned if the
State had not recovered money from its Medicaid providers. Thus, the
interest is covered by the second category of applicable credit noted
above. /5/ We agree with the Agency, moreover, that the interest did
reduce the cost of the State's Medicaid program regardless of its actual
disposition.
(9) Since the interest was attributable to the Medicaid program, it
should have been credited against program expenditures. That the State
instead credited the interest to the General Fund and possibly used it
for discretionary expenditures which did not free up other State money
for use in the Medicaid program does not relieve the State of its
obligation under C.1.g. to credit the income to the program which in
fact generated it. The State did not dispute that, as a general rule,
income must be credited against related expenses, but asserted that
there are exceptions to this accounting principle. Since the State did
not cite any authority for its assertion, or elaborate on the nature of
the exceptions, we are not persuaded that the general rule not apply in
this case.
Accordingly, we find that the interest earned on the Medicaid
recoveries constitutes an applicable credit, resulting in an overpayment
under section 1903(d) of the Social Security Act.
IV. Is the Intergovermental Cooperation Act Applicable
Background
The State argued that, even if the interest constituted an
overpayment within the meaning of section 1903(d) of the Social Security
Act, the State is entitled to keep the interest under section 203 of the
Intergovernmental Cooperation Act (ICA), 42 U.S.C. 4213, which provides
as follows:
Heads of Federal Departments and agencies responsible for
administering grant-in-aid programs shall schedule the transfer of
grant-in-aid funds consistent with program purposes and applicable
Treasury regulations, so as to minimize the time elapsing between the
transfer of such funds from the United States Treasury and the
disbursement thereof by a State, whether such disbursement occurs prior
to or subsequent to such transfer of funds. States shall not be held
accountable for interest earned on grant-in-aid funds, pending their
disbursement for program purposes.
Absent the exemption under the ICA for grants-in-aid to states, the
rule is that " . . . grantees shall remit to the Federal Government any
interest or other investment income earned on advances of HEW grant
funds." 45 CFR 74.47(a) (1979).
In arguing that the exemption in the ICA applied, the State noted
that the recoveries from Medicaid providers on which interest was earned
actually consisted of both "refunds" and "recoupments."
It stated that
refunds occurred when Medicaid providers returned money to the State's
(10) fiscal agent, which in turn deposited the money in a commercial
bank and periodically wrote checks to the State returning the refunds.
These refund checks were deposited by the State in the holding account
on which interest was earned (Account No. 64445). On the other hand,
recoupment arose when the State reduced current payments to a Medicaid
provider by the amount by which the provider had been overpaid in the
past. Since the State had already drawn down sufficient federal funds
to pay the provider's current claim not taking into account past
overpayments, it deposited in Account No. 64445 an amount equal to the
recoupment from the provider. Although the recoupments and refunds in
Account No. 64445 were eventually allocated among the federal, State and
county governments, the money was not distributed to these governments.
Instead, pursuant to an agreement with the federal government, the
State, beginning in June 1979, reduced its current drawdowns of federal
Medicaid funds by the amount (then estimated) of federal funds in
Account No. 64445 and used the latter to pay Medicaid providers. (The
same procedure was apparently followed with respect to the State and
county funds in Account No. 64445). (State's brief dated June 14, 1982,
pp. 4-7, 31; Tr., p. 58)
Parties' Arguments
The State argued that the part of the recoveries from Medicaid
providers which represented recoupments earned interest while "pending
disbursement for program purposes" within the meaning of the ICA since
it was paid to providers only after the interest was earned. The State
argued further that the refunds, although they had previously been paid
to Medicaid providers, earned interest "pending disbursement" since
they
were used a second time to pay Medicaid providers after the interest was
earned. (State's brief dated June 16, 1982, p. 33) It asserted that
section 203 of the ICA applied to interest earned pending any
disbursement of grant-in-aid funds for program purposes, not just an
initial disbursement. (Tr., pp. 71-73)
The Agency contended that both the refunds and the recoupments had
been previously disbursed and therefore did not fall under section 203.
(Agency's brief dated July 16, 1982, pp. 14-16) In addition, the Agency
noted that, although the refunds and recoupments were disbursed to
providers, the federal government could have required that the State
send it a check for the federal share of the refunds and recoupments
instead of reducing the federal draw. Thus, the Agency argued, the
Medicaid recoveries actually went back to the federal government and
were not pending disbursement. (Tr., p. 74) (11) Another argument
advanced by the State was that, under the regulation implementing
section 203 of the ICA, the funds on which interest is earned need not
be pending disbursement in order for the interest to be exempt. The
regulation which it cited provides that" . . . States . . . shall not be
accountable to the Federal Government for interest or investment income
earned by the State . . . where this income is attributable to
grants-in-aid . . . ." 45 CFR 74.47(b) (1978). State's brief dated June
16, 1982, p. 32, n. 14) Finally, the State argued that the legislative
history of the ICA indicated that Congress intended that the exemption
be given a liberal construction in favor of states. (State's brief
dated June 16, 1982, pp. 29-31)
Discussion
We agree with the Agency that the Medicaid recoveries cannot be
considered to have been pending disbursement when the interest was
earned. A share of the Medicaid recoveries in Account No. 64445 was
acknowledged as belonging to the federal government. Rather than
physically transferring (by check) the amount owed to the federal
government, the State, to simplify paperwork, reduced its current claim
for federal Medicaid funds by the amount owed. It then spent all of the
funds in Account No. 64445 to reimburse Medicaid providers. That
account, however, no longer included the money owed to the federal
government since the debt had been paid. Instead, the amount of the
former debt now represented funds advanced by the federal government for
current Medicaid expenditures. Thus, the federal share of the Medicaid
recoveries was never disbursed to providers. In view of this
conclusion, we need not reach the question whether the exemption in the
ICA covers only interest earned pending an initial disbursement of
grant-in-aid funds.
We are not persuaded, moreover, by the State's argument that the
implementing regulation did not require that the funds on which interest
was earned have been pending disbursement. While 45 CFR 74.47(b) (1978)
refers to income "attributable to grant-in-aid," subsection 74.47(a),
which must be read together with subsection 74.47( b), refers to income
" . . . earned to advances of HEW grant funds." Since funds are
"advanced" to cover the costs of a grant program, the regulation clearly
contemplates that the funds be pending disbursement.
Finally, we find that the language of section 203 requiring that
funds be pending disbursement is unambiguous, and that reference to the
legislative history of the ICA is thus unwarranted. There arguably may
be some ambiquity regarding whether a disbursement must be an initial
disbursement; however, as indicated above, we do not reach this
question. (12) Thus, we find that the interest earned on the recoveries
from Medicaid providers is not subject to the exemption in section 203.
v. Conclusion
For the reasons discussed above, we conclude that interest was earned
on the federal share of the Medicaid recoveries and that it constitutes
an applicable credit within the meaning of 45 CFR Part 74, Appendix, C,
C.3.a, which should have been applied to reduce the State's claim for
FFP under Title XIX. We further conclude that since the interest was
not applied to reduce the State's claim, an overpayment in the amount of
the federal share of the interest must be reported under section
1903(d)(2) of the Social Security Act. /1/ The State also argued on
appeal that the Board did not have jurisdiction in the case
since the interest did not constitute an overpayment and hence was not
subject to the disallowance process. In a letter to the parties dated
May 7, 1982, however, the Board Chair stated that the question of
whether there was an overpayment was substantive in nature. He further
stated that, since the Agency had required a decreasing adjustment on
the State's next quarterly expenditure report, the effect was to
disallow a part of the State's claim. Accordingly, the Chair ruled, the
Board had jurisdiction under 45 CFR Part 16, Appendix A, Section B.(a)
(1). In view of this ruling, the Board need not consider the State's
argument here. /2/ The State conceded that interest in the
amount of $11,658 was actually earned on refunds on deposit in a bank
account maintained by its fiscal agent. (State's brief dated June 14,
1982, pp. 7-8) /3/ Although the State asserted that the language
quoted from the Texas decision that was necessary to the Board's holding
(State's brief dated June 14, 1982, p. 20), the language quoted does
represent the Board's considered judgment, also applicable here even if
it is not technically binding. Moreover, the Board adopted essentially
the same interpretation of section 1903(d) in a subsequent case, as
discussed in the text of this decision. /4/ There would also
appear to be an overpayment even under the State's definition of that
term as set forth in section II. above, since Title XIX funds should
not have been expended to the extent that there was an applicable
credit. /5/ It is not clear that the interest would have to fall
into any of these categories to constitute an applicable credit as long
as it meets the general definition of applicable credits in the first
sentence of C. 3. a.
OCTOBER 22, 1983