GAB Decision 367
December 17, 1982 Oklahoma Department of Human Services; Docket No.
79-239-OK-HC Ford, Cecilia; Garrett, Donald Settle, Norval
The Oklahoma Department of Human Services appealed a decision by the
Health Care Financing Administration disallowing $268,045 in federal
financial participation claimed under Title XIX of the Social Security
Act. The basis for the disallowance was that, in determining the
Medicaid reimbursement rate for intermediate care facilities for the
mentally retarded (ICF/MRs) for calendar year 1978, the State had
improperly included educational activity costs.
Based on a preliminary analysis of the issues, the Board issued an
order directing the State to show cause why the disallowance should not
be upheld. The order also requested information from the Agency
clarifying its position. The parties' responses indicated that the
parties might be able to resolve the dispute informally. After lengthly
negotiations, however, the parties returned to the Board, submitting
further briefing and information which newly illuminated the issues and
facts in the case.
I. Summary of Our Decision
The primary issue here is how a Medicaid regulation denying
reimbursement for costs of "educational activities" applies to certain
costs associated with school programs in three Oklahoma ICF/MRs.The
issue arises because many school program activities can be described
generally either as "educational" or as "habilitative,"
and certain
"habilitative" services must be provided by an ICF/MR receiving Medicaid
funds. Both parties relied on an Agency action transmittal to interpret
the regulation. The State argued that the action transmittal
interpreted "educational activities" to mean only those services
actually charged to federal education funds (a reading allegedly
required by Congressional intent) and that, in any event, the action
transmittal permitted the State to treat these activities as
"habilitative" rather than "educational." The Agency claimed
that
Medicaid reimbursement was prohibited for any service provided to the
handicapped as part of a "free appropriate public education," even
though that service could also reasonably be considered "habilitative."
We conclude that the action transmittal, read as a whole, supprots an
interpretation which lies between the extremes of the parties'
arguments. States receiving federal education funds are required to
provide to the handicapped (including the mentally retarded) a free
appropriate public (2) education, which means special education and
related services. The terms "special education" and "related
services"
are defined in education program regulations. The record before us
indicates that some of the school program activities were associated
with "special education," some may be merely "related services"
under
State standards, and some may be neither. The action transmittal cites
to the education regulations and states that, if a cost is for a
"related service" and is otherwise reimbursable under Medicaid, it
may
be funded by Medicaid. Thus, the interpretation of the term
"educational activites" which the Agency advanced here is clearly
overbroad.
On the other hand, the action transmittal permits allocation of costs
between education and Medicaid programs only where this is consistent
with Medicaid requirements, including the prohibition on funding
"educational activities." Unlike "related service" costs,
the costs of
"special education" are not mentioned in the action transmittal as
costs
which may be charged to Medicaid funds. Thus, we interpret the
regulation (by which we are bound) to deny reimbursement for "special
education" activities, even if they are also "habilitative" and
federal
education funds have not paid for them. This is consistent with the
plain wording of the regulation, with the action transmittal read as a
whole, and, as we conclude below, with legislative intent. However,
since the parties did not clearly focus on the distinction between
special education and related services, the record is inadequate as a
basis for applying the regulation to the costs here. Accordingly, we
remand part of the disallowance to the Agency to provide the State an
opportunity to demonstrate allowability under the standards set out
here.
We also uphold part of the disallowance, in an amount to be
determined, because certain of the questioned costs should not have been
included in the rate, regardless of whether they were for educational
activities. The State admittedly received reimbursement for these costs
and, we conclude, was required to reduce claimed costs accordingly.
II. Background
A. The General Nature of the Programs and Costs Involved
The Oklahoma Department of Human Services (DHS) operates three state
facilities for the mentally retarded -- Pauls Valley State School, Enid
State School, and Hissom Memorial Center. These facilities qualify
under the Medicaid program as ICF/MRs, providing intermediate care
facility services eligible for federal financial participation (FFP)
under sections 1905(d)(15) and 1905(d) of the Social Security Act.
Medicaid reimbursement rates for these facilities are determined on a
prospective basis. Costs incurred in a base period are used to
determine a per diem reimbursement rate for the payment year.
(3) The particular expenditures at issue here relate to school, or
classroom programs conducted on the campuses of the three ICF/MRs. DHS
provides the school programs to the ICF/MR residents through contracts
with the local school districts. Under the contracts, the local school
districts provide the services of school principals, teachers, and
teachers' aides, covering most of the costs of these services and other
operating costs with a combination of local, state, and federal
education funds. DHS pays operating expenditures which are not covered
by other sources of funding, and also provides and maintains the school
buildings. School programs include activities designed to develop basic
skills, such as motor movements or verbal ability, as well as classes in
mathematics, language arts, music, arts and crafts, physical education,
horticulture, and home economics.
The prospective reimbursement rates for calendar year 1978 were
developed based on costs reports submitted by the three ICF/MRs for the
period January through June 1977. The Agency subsequently reviewed
these cost reports and determined that, in developing the 1978 rates,
the State had improperly included certain payments to the local school
districts, and the costs of depreciation, supplies, and equipment which
had been allocated to a cost center labeled "Academic and Vocational
Education." The Agency also determined that the State should have
allocated general administrative and indirect costs to an "educational
activities" cost center.
The Agency recomputed the 1978 rate, excluding costs identified as
"educational activities" costs and associated general administrative
expenses and indirect costs. The effect was to reduce the per diem rate
by $0.61. The disallowance amount was calculated by multiplying the
rate reduction times the number of Medicaid patient days claimed for the
three facilities in 1978, and then applying the federal medical
assistance percentage used to determine the federal share.
B. The Types of Costs Involved
Most of the State's evidence initially concerned the nature of the
school program activities. After the parties' negotiations broke down,
however, the State provided clarifying information concerning the
specific costs involved. Since understanding the nature of the costs is
important to analysis of the issues in the case, we summarize here the
types of costs and how they relate to the analysis below.
The State's information focused on costs related to the Hilltop
School program at the Pauls Valley State School. The State determined
the 1978 reimbursement rate using the median of the costs within each
cost center for the three ICF-MRs, and, since Pauls Valley had the
median costs for the "Academic and Vocational Education" and
"Administration" cost centers, its costs were used to calculate the
$0.61 per diem rate reduction.
(4) The major portion of the questioned costs is a charge for
depreciation on the Hilltop School building and 30% of the Hilltop
gymnasium ($0.35 of the $0.61 per diem reduction). This charge was
allocated to the "Academic and Vocational Education" cost center.
The
other questioned costs allocated to this center ($0.12 of the reduction)
were originally identified merely as supplies and equipment. The State
later clarified that DHS had received reimbursement from the local
school district for approximately $8400 of the total $10,105 costs in
this category. Report of the State of Oklahoma to the Board Following
Settlement Discussions (State's Report), p. 26. The remaining costs in
this category, approximately $1700, were ultimately described by the
State as the costs of housekeeping supplies used in cleaning the Hilltop
School, or as miscellaneous items ordered by ICF/ MR staff, rather than
by school district employees. State's Report, p. 26. As the State
noted, State's Report, p. 27, the housekeeping supplies result from the
ICF/MRs maintaining separate school buildings and, therefore, are
subject to the same analysis as the depreciation costs.
The amount of $9,931 allocated to the "Administration" cost center
for Pauls Valley originally was identified as a payment of DHS funds to
the local school district under the contract. The State later
determined that this amount was, in fact, for costs covered by a federal
vocational (DDSA) grant. These costs should have been offset by a
credit when the DDSA funds were received, but, because of a bookkeeping
error, the credit had never been entered on the records. Thus, the
State admitted that this portion of the costs ($0.11 of the per diem
reduction) was properly disallowed. State's Report, p. 29.
The remaining portion of the per diem reduction ($0.03) represents
the general administrative and indirect costs which the Agency
determined should have been allocated to an "educational activity"
cost
center. The allowability of these costs depends on the final
determination of allowability of the other costs questioned here.
The parties' arguments primarily concern the allowability of the
depreciation charges, and thus also the housekeeping supplies. In
sections A. to E. below, we discuss issues regarding Congressional
intent, the purpose of the regulation, the proper interpretation of the
regulation, and the effect of the action transmittal. In section F., we
discuss how our conclusions should be applied to the depreciation and
housekeeping costs.
The State's arguments concerning the allowability of the $8400 in
supplies and equipment for which the State received reimbursement are
discussed in section G below, the supplies ordered by the ICF/MR staff
are discussed in section H, and the general administrative and indirect
costs are discussed in section I.
(5) III. Discussion
A. A regulation denying Medicaid funding for "educational
activities" is consistent with Congressional intent.
The Parties' Arguments
Under Title XIX of the Social Security Act (Act), covered "medical
assistance" to needy individuals may include payment for "intermediate
care facility services." Section 1905(a)(15) of the Act.The term
"intermediate care facility services" is defined so that it may include
"services in a public institution (or distinct part thereof) for the
mentally retarded or persons with related conditions" if certain
requirements are met. Section 1905(d). Medicaid funding is available
only if the institution has as its primary purpose "to provide health or
rehabilitative services for mentally retarded individuals," the
institution meets standards prescribed by the Secretary of Health,
Education, and Welfare (now Health and Human Services), and the mentally
retarded individual for whom Medicaid payments are made is receiving
"active treatment." Subsections 1905(d)(1) and (2). In addition, any
state claiming Medicaid funds for ICF/MR services must have agreed
generally to maintain non-federal expenditures for services to ICF/MR
patients. Subsection 1905(d)(3).
The provisions regarding Medicaid coverage of ICF services, including
such services in a qualifying ICF/MR, were added to the Act in 1971 by
Pub. L. No. 92-223, as a result of an amendment proposed by Senator
Henry Bellmon of Oklahoma. In introducing the amendment on the floor of
the Senate, Senator Bellmon stated:
Mental retardation is not, in most instances, a condition which
responds to treatment. However, there are public institutions whose
primary objective is the active provision of rehabilitative,
educational, and training services to enhance the capacity of mentally
retarded individuals to care for themselves or to engage in employment.
Public institutions whose primary objective is the provision of health
services or rehabilitative services to the mentally retarded should be
subject to Federal participation under adequate safeguards . . . .
117 Cong. Rec. 44720 (1971)
Pointing to Senator Bellmon's reference to "educational" services,
the State argued that, in taking the disallowance here, the Agency had
disregarded this passage. According to the State, its view that
Congress intended to cover educational services provided by ICF/MRs is
supported by the circumstances under which the legislation was
introduced. Both Senator Bellmon, and Senator Harris, who co-sponsored
the amendment, (6) represented the State of Oklahoma. Senator Bellmon
was familiar with the school programs in the three Oklahoma facilities,
the State reasoned, and must have designed the legislation to provide
Medicaid coverage for institutions of this type. Brief of the State of
Oklahoma dated November 17, 1980 (State's Brief), p. 15.
In response, the Agency cited to the regulatory provision at 45 CFR
41.13(b) (formerly 42 CFR 449.10(c)(2)), which provides:
Payments to institutions for the mentally retarded or persons with
related conditions . . . may not include reimbursement for vocational
training or educational activities.
The Agency pointed out that this regulation was originally
promulgated in 1974, 39 Fed. Reg. 2222, January 17, 1974. Consequently,
the Agency argued, the regulation constitutes a longstanding
administrative interpretation of the statute. According to the Agency,
"if this view was contrary to the intent of Congress, the Congress has
had more than ample time to express that intent by amending the
statutory language, or by requesting that the regulation be changed . .
. ." Under applicable case law, the Agency contended, legislative
inaction following the administrative interpretation is persuasive
evidence of the validity of the interpretation. /1/
The Agency admitted that legislative inaction is less persuasive
where legislative history indicates a view of a statutory provision
contrary to that adopted by administrative interpretation, but argued
that here there was no such legislative history. With respect to
Senator Bellmon's 1971 statement, the Agency pointed to the second
sentence of his statement (quoted above) which mentions "health or
rehabilitative services" but omits any reference to educational services
as subject to Medicaid funding. Moreover, the Agency argued, "even if
Senator Bellmon was in fact thinking of the issue confronting the Board
in this case when he made those remarks, his reference to 'adequate
safeguards' may have easily conveyed to others that Medicaid would not
pay for services which were the responsibility of state programs other
than Medicaid." HCFA's Response to Order, pp. 10-11. According to the
Agency, this one quotation of a single Senator's remarks does not
represent proof of the intent of the entire Congress.
The State did not dispute the Agency's position that a longstanding
administrative interpretation is in some circumstances persuasive (7)
evidence of Congressional intent, but raised three points in response.
In the State's view, Senator Bellmon's floor remarks are the only
relevant legislative history, and Senator Bellmon clearly intended to
cover the Oklahoma school programs. The State also contended that,
prior to the disallowance here, there was no indication that the Agency
interpreted 42 CFR 441.13(b) to exclude from Medicaid reimbursement the
activities at issue. The State further asserted that the Agency was
incorrect in stating that there had been legislative inaction following
the regulatory interpretation. The "legislative action" which the
State
relied on is a statement made by Senator Bellmon on August 5, 1980 on
the Senate Floor in reaction to this disallowance. The statement
includes the following remarks:
If the regulation means what the Health Care Financing Administration
seems to suggest, it is plainly inconsistent with the 1971 amendment . .
. .
. . . . I am convinced that these officials are plainly wrong about
the effect of the 1971 amendment. That amendment covered all the
habilitative services that the Oklahoma State schools for the mentally
retarded offer, including the fine educational and vocational programs
that benefit Oklahom's mentally retarded children so much and help to
make the State schools among the finest institutions of their kind in
the Nation.
126 Cong. Rec. S 10802 (daily ed., Aug. 5, 1980)
Based on this 1980 statement and the 1971 floor remarks by Senator
Bellmon, the State argued generally that the Board should reverse the
disallowance on the ground that Congress intended the expenditures at
issue in this case to be reimbursable under Title XIX. The State also
argued that the statement supported a narrow interpretation of the
regulation to prevent duplication of funding for educational activities.
This latter point is discussed in section B. below.
Analysis
We do not agree with the State that a denial of funding under
Medicaid for educational activities is contrary to Congressional intent.
While Senator Bellmon's remarks in introducing the ICF/MR provisions in
1971 may have been made with the Oklahoma scholl programs in mind, they
are vague at best and certainly cannot be read as support for a
conclusion that Congress was requiring funding of all such activities
under Medicaid. The Senator's reference to educational activities was
merely part of his description of certain types of institutions which
exist. In describing institutions which would qualify for Medicaid
funding, Senator Bellmon stated that their primary objective would be to
provide health or rehabilitative services. Indeed, this is the language
used in the statute, which does not refer to educational activities at
all.
(8) Contrary to the State's assertion, we do not think that the
Senator's remarks are the only relevant legislative history. The
provisions for funding ICF services, including those provided in ICF/
MRs, were originally proposed as part of a broader legislative package,
which was considered as early as 1970 and ultimately became the Social
Security Amendments of 1972. The House and Senate reports on the
original provisions contain report language substantially the same as
that introduced into the Congressional Record on the date of Senator
Bellmon's remarks. SEN. REP. 1431, 91st Cong. 2d Sess. 147 (1970); H.
R. REP. 231, 92d Cong., 1st Sess. 111 (1971); 117 Cong. Rec. 44721
(1971). This speaks of ICF care as being for patients in need of
"health-related supportive institutional care." No mention is made
of
educational activities.
We think it is important to note also that Senator Bellmon's remarks
go to the question of what type of institutions would qualify for
funding. The statutory description of an ICF/MR establishes conditions
under which public institutions for the mentally retarded will received
Medicaid funding, as opposed to describing the costs in which the
federal government will participate. Considerable discretion is given
to the Secretary in establishing standards for ICF/MRs and in defining
what services will be reimbursed. As the State pointed out, Agency
regulations on ICF/MR standards do require qualifying institutions to
provide services which aid in the "intellectual development" of the
mentally retarded, including some "training and rehabilitative services"
which are in one sense "educational." See, 42 CFR Part 442, Subpart
G
(1978). The state reads these provisions too broadly, however, in
suggesting that they must cover all educational activities. Moreover,
to the extent that these regulations do require services which may
include activities which are "educational," they must be read with
section 441.13(b), which specifically limits payments for covered
services by providing that costs of "educational activities" may not
be
reimbursed. /2/
This regulation is a longstanding interpretaton of the statute, and
the legislative history does not indicate a Congressional intent which
is inconsistent with the regulation. Moreover, we do not think that
Senator Bellmon's statement in 1980 amounts to "legislative action."
In
context, the Senator's 1980 remarks carry very little weight regarding
Congressional intent in 1971, particularly since they were not
accompanied by any legislative proposal to change Agency policy and were
a direct response to this disallowance. See, U.S. v. United Mine
Workers of America, 330 U.S. 258, 282 (1946); Regional Rail
Reorganization Act Cases, 419 U.S. 102, 132 (1974). Thus, we conclude
that, to the extent the disallowance (9) here is a correct application
of the regulatory prohibition on Medicaid funding for educational
activities, it is consistent with Congressional intent.
This conclusion is supported by several additional considerations.
ICF/MR services are an exception to the general Medicaid rule that
services in public institutions (other than medical institutions) are
not to be reimbursed. See, section 1905(a) of the Act; 42 CFR 435.1008
(1978). Thus, there is a reason to interpret the provision narrowly
when considering whether activities which are normally considered a
local government's responsibility will be funded. Moreover, Congress
specifically expressed in section 1905(d)(3) an intent to enhance
services to ICF/MR residents through Medicaid funding and not to replace
funding from non-federal sources. The relevant report language stated,
"The purpose here is to improve medical care and treatment of the
mentally retarded rather than to simply substitute Federal dollars for
State dollars." 117 Cong. Rec. 44721 (1971). We also note that Congress
has specifically provided, in other legislation, federal funding for
educational services to residents of state institutions. See, Pub. L.
89-313.
Thus, we conclude that, on its face, the regulation is consistent
with Congressional intent and well within the Secretary's discretion
under the Act. Below, we consider how the regulation should be applied
and whether, as applied by the Agency, it is consistent with
Congressional intent.
B. The regulation denies Medicaid funding for all costs of
"educational activities," not just those covered by federal education
funds.
The State argued that 42 CFR 441.13(b) does not prohibit federal
matching for any "educational" service but merely prohibits
reimbursement of the same expenditure under two different federal
programs. In support of this interpretation, the State relied on
Senator Bellmon's statements and on statements made in an action
transmittal issued by the Agency. HCFA-AT-78-104 (MMB), dated November
29, 1978. In discussing 42 CFR 441.13(b), the action transmittal
states: "This limitation (on reimbursement of expenditures for
educational activities) was included in the regulation to assure
non-duplication of Federal funds." HCFA-AT-78-104, Attachment B, p. 2.
From this language, the State concluded that the regulation was merely
meant to ensure that, given the potential overlap between programs,
federal matching under Medicaid would not extend to services reimbursed
by federal education funds. The State provided evidence that there was
no duplication of federal funding here, arguing that this required
reversal of the disallowance under a proper reading of the regulation.
See, generally, Appendix to State's Brief. (10) We think that the
State's reading of the regulation is too narrow. The plain language of
the regulation is consistent with the Agency position that it prohibits
Medicaid funding in any "educational" activity, whether or not other
federal funds have already paid for that activity. Neither the
legislative history nor the action transmittal requires a different
reading. As discussed above, we do not discern any legislative intent
to require the Secretary to fund "educational activities" under
Medicaid. The State reads too much into the mere reference to
educational services in Senator Bellmon's statement. The State also
reads too much into the action transmittal. The Agency could "assure
non-duplication" either by prohibiting funding for services actually
funded through another federal program, or by prohibiting funding for
any activities potentially covered by another program. Section 441.13(
b) takes the latter approach.
We also disagree with the State's position that its reading of the
regulation is preferable because it "resolves any conflict between the
apparent prohibition of funding of 'educational' activities and the
Medicaid regulations that require ICF/MRs to provide training and
habilitation services to all residents." State's Brief, p. 19 (footnote
omitted). We do not think that the provisions conflict. As discussed
above, the conditions which a facility must meet to qualify as a
Medicaid provider are not necessarily equivalent to services for which
Medicaid funding will be provided. Moreover, if there were no potential
overlap between the programs, there would be no need for a regulation to
avoid duplication.
Thus, even if the costs here were for Medicaid-required services, for
which the State received no federal education funds, this alone would
not require reversal of the disallowance.
C. The action transmittal interprets the regulation to prohibit
reimbursement for costs of "special education" but permit reimbursement
for "related services."
Having determined that a prohibition on Medicaid funding for
educational activities is consistent with legislative intent and means
more than just a denial of duplicate funding, we now turn to the issue
of what are "educational activities" covered by the regulation. /3/
The
Agency first based its disallowance on the fact that the costs were
allocated to a cost center labeled "educational" and were, therefore,
within the regulatory prohibition. The Agency did not cite to its own
action transmittal, nor explain how it applied to the facts of this
case. In (11) the course of Board proceedings, the Agency took the
position that the crucial factor was that the services provided in
Oklahoma's ICF/MRs were the "responsibility of the local school
districts." Agency Response to Report, pp. 3-4. The Agency pointed to
Appendix A of the action transmittal, describing the reqirements of
federal education programs for the handicapped (including the mentally
retarded). These programs require a state seeking federal funding to
provide to the handicapped a "free appropriate public education,"
which
meqns "special education and related services." The Agency argued
that
this "imposes the obligation to provide such services upon the
educational authorities." Agency Response to Report, p. 5.
We agree with the Agency that it is the responsibility of a state
receiving federal funds for the handicapped to provide a "free
appropriate public education." However, the question here is not whether
the services must be provided, but whether Medicaid can pay. In
answering this question, the Agency disregarded certain statements in
its own action transmittal.
The action transmittal contains as an attachment an informal
memorandum on the relationship between Medicaid services in ICF/MRs and
federally funded education services under Pub. L. 94-142 (the Education
for All Handicapped Children's Act) and Pub. L. 89-313 (authorizing
federal financial assistance on behalf of children in state-operated and
state-supported schools for handicapped children). The memorandum
recognizes there is an overlap between the programs and states, "The
actual service provided to these children in ICFs/MR can either be
defined as special education or a related service in accordance with 45
CFR, section 121a.13 and 121a.14 or as Medicaid habilitative services in
accordance with 42 CFR Part 442 Subpart (G) . . ." p. 1. The memorandum
then goes on to address the question whethr "related services" provided
to the mentally retarded in ICF/MRs as part of a free appropriate public
education must be paid for out of education funds. The answer given is
that federal education provisions do not require that an education
agency bear all of the cost of related services, and, thus, "if a State
determines that certain specified services to a Medicaid-eligible child
in an ICF/MR facility are reimbursable under Title XIX, the cost of such
services may be reimbursed under the Federal-State Medicaid program,
even though they are also considered to be 'related service' needs in
the child's Individualized Educational Program." p. 2.
Since the action transmittal also cites to 42 CFR 441.13(b), the
clear implication of this statement is that costs of "related services"
are not generally considered costs of "educational activities" under
the
regulation, even though they are part of a "free appropriate public (12)
education." /4/ Indeed, the action transmittal later mentions physical
and occupational therapy, which are "related services", as examples
of
costs which may be funded under more than one program. HCFA-AT-78-104,
Attachment, pp. 4-5.
On the other hand, nothing in the action transmittal indicates that
Medicaid funds can be used for costs of "special education," and the
clear implication is that such costs must be borne with education funds.
Thus, while it does not do so in explicit terms, the action transmittal
can fairly be read to set up a distinction under which "special
education" is considered an "educational activity" but "related
services" may be funded by Medicaid. Interpreting the regulation this
way makes sense. The terms "special education" and "related services"
are defined in the education regulations, cited in the action
transmittal. /5/ This provides guidance as to whether an activity is
within the scope of the Medicaid prohibition. Also, while a state
education agency has some responsibility for both "special education"
and "related services," the latter are those "supportive services
as are
required to assist a handicapped child to benefit from special
education." 45 CFR 121a.13(a). Thus, they may be considered peripheral
to the educational instruction itself and, in a sense, outside the area
of educational expertise. Where such supportive services are also
health or rehabilitative services, using Medicaid funding would further
Medicaid goals in a way that funding the actual instruction would not.
(13) We do not reach the issue here of whether the Agency may have
reasonably interpreted the regulation to include both "special
education" and "related services." Both may be "educational"
in a broad
sense, are the responsibility of educational authorities, and include
the types of activities the State itself allocated to an "Academic and
Vocational Education" cost center. We do hold that the interpretation
advanced in this appeal by the Agency was inconsistent with the Agency's
action transmittal, which provided that "related services" could be
funded by Medicaid. Below, we examine whether an interpretation of the
regulation to distinguish between "special education" and "related
services" is consistent with those parts of the action transmittal which
the State relied on to support its arguments.
D. The action transmittal does not provide the kind of flexibility
regarding funding sources that the State says it does.
The State relied on several parts of the action transmittal, in
addition to the statement concerning "non-duplication of federal
funding" (discussed in Section B. above), to support its argument.
Considered in context, however, the statements relied on by the State
are consistent with our view, expressed above. Basically, the State's
arguments were that (1) the action transmittal gave the State the
flexibility to charge Medicaid for the costs here, and (2) the action
transmittal set out principles for allocating costs which were met by
the State's contracts with the local school districts. We discuss the
first argument in this section, and the second argument in Section E.
below.
The State contended that the action transmittal provided considerable
flexibility to states in deciding what funding sources to apply to what
activities. The State described the action transmittal as follows:
The document does not purport to be a set of absolute requirements.
Instead it states that its purpose is to 'help' states to determine the
'most equitable and effective means' of financing services to children
in ICF/MRs. The Action Transmittal acknowledges that the guiding
principle for such determinations should be the 'maximation of services'
available to children residing in ICF/MRs. The Action Transmittal does
not require that a state's determination take any particular form, but
merely suggests possible ways a state 'may' or 'might' proceed. The
document acknowledges that there are services that could be supported
under either the Medicaid program or a federal education program. The
Action Transmittal does indicate that 'some' services may be clearly
identified as either a Medicaid or an educational responsibility. But
even 'educational services in a traditional classroom setting by (14)
trained specialists' are only 'usually' treated as an educational cost,
not always.
State's Response to Order, pp. 8-9 (footnotes omitted).
From this view of the action transmittal, the State argued that,
since the State had followed the principles of the action transmittal by
combining funds from various sources to maximize the services to
children in the ICF/MRs, the Board should reverse the disallowance. In
effect, the State was arguing that the State's treatment of particular
costs was determinative in considering whether they were educational
costs, so long as broad guidelines set out in the action transmittal
were met.
We are not persuaded by this argument. The action transmittal must
be read in light of the mandate in the regulation itself. While the
action transmittal does give states some flexibility in determining
funding sources, it also establishes certain limits. A statement of
funding sources for services to children in ICF/MRs must include the
methodology and reasoning used. While the action transmittal suggests
possible criteria, /6/ it also states that "the decision as to whether
a
specified service should be treated as reimbursable under another source
will depend upon a careful assessment of Federal requirements and State
and local factors." HCFA-AT-78-104, Attachment, p. 4. The action
transmittal then mentions physical and occuational therapy as examples
of services which can be supported under either federal Medicaid or
educational programs, referring to Appendix A, which lists these as
"related services" under the free appropriate public education
requirement.
Thus, the language in the action transmittal about providing some
flexibility to states must be read in light of the statement discussed
in section C. above, concerning "related services." While the action
transmittal does recognize that there is some confusion between
educational and habilitative services, it clarifies the relationship by
indicating that it is with respect to services which are reimbursable
under Medicaid and also qualify as "related services" required as
part
of a free appropriate public education that certain funding choices may
be made. Further, the action transmittal considers allocation of
funding to involve other questions, such as whether state or local
governments should pay and what state standards and laws apply. The
criteria set out in the action transmittal cannot be viewed, therefore,
as conditions which, if met, are sufficient to authorize Medicaid
funding for any costs. Instead, they are guides for determining the
(15) nature of costs, for deciding which level of government should pay,
and for deciding how to allocate these costs which fall into the narrow
area of services which can be funded under more than one program.
Accordingly, we do not think that the activities in question here are
reimbursable simply because a combination of State, local, and federal
funds was used to "maximize" services to the ICF/MR residents.
E. The State's contracts do not allocate costs in a manner
consistent with the action transmittal.
In its report to the Board following negotiations with the Agency,
the State urged that the contract between DHS and the local school
district was the means by which financial responsibility for the Hilltop
School program was apportioned, and that this was a reasonable approach
to allocating costs, consistent with the principles set out in the
action transmittal. According to the State, this contract "presumably
qualifies as an 'interagency agreement' of the sort suggested at page 3
of the 1978 Action Transmittal." State's Report, p. 16. The State
argued that, by requiring the school district to apply all available
sources of funding to operating costs of the Hilltop School program, the
parties to the contract recognized that the school district has the
primary statutory responsibility to educate children who reside at the
ICF/MR. On the other hand, the State argued, the school district
exceeds its legal obligation by providing services in an institutional
program with special features that the regular public school program
does not have. /7/ The State argued that, in light of the respective
responsibilities of DHS and the school district, the special features of
the Hilltop School program, and the available financial resources, it
was appropriate for DHS to agree to cover operating costs which were not
met by the other available sources of funding and to provide and
maintain the Hilltop School facilities. According to the State, this
was an equitable way of allocating financial responsibility between the
two agencies, far preferable to an approach which requires advance
categorizing of each individual activity.Under the latter approach, the
State argued, the school district would have probably paid less,
resulting in a loss of benefits to the children and to the Medicaid
program, and DHS would have incurred additional administrative expense
in making the classifications.
(16) There are several flaws in this argument. The issue here is not
whether the State's approach was generally equitable, reasonable, or of
benefit to the children and the Medicaid program. Rather, the question
is whether the result is to properly allocate costs to comply with
federal requirements, including 42 CFR 441.13(b). That regulation
prohibits Medicaid reumbursement of the cossts of educational
activities. The action transmittal narrows that prohibition so that
"related services" are not generally within the scope of prohibited
costs. Thus, the State's contracts are not consistent with the action
transmittal to the extent they allocate to the Medicaid program some
costs which are for "special education." The State's arguments tend
to
obscure the fact that this is indeed what happened.
The costs involved here are primarily depreciation costs of the
school buildings. A generally accepted method used to allocate such
costs to activities taking place in the buildings is to determine the
percentage of the total space associated with each activity. Here, all
of the depreciation costs were charged to the Medicaid program,
regardless of the nature of the activities which took place in the
building. The State admits that some of the activities were part of the
local school district's responsibility to provice a free appropriate
public education and it is clear that some of the activities were not
merely for "related services," but would come within the scope of
"special education" as defined in the federal education program
regulations. See discusssion below.
The action transmittal speaks of interagency agreements regarding
funding sources for services to ICF/MR residents, but we do not think
that the DHS contracts are such agreements. Not only were these
contracts in existence in basically the same form prior to some of the
funding provisions (see, e.g., Appendix to State's Brief, Affidavit of
the former Hilltop School Principal, p. 3), but they fail to contain the
reasoning and methodology referred to as part of interagency statements
under the action transmittal.
The State may be correct that, if it had engaged in a process of
classifying costs, this would have resulted in Medicaid being charged
for some activities which were paid for out of education funds. The
fact is, however, that these costs were paid for out of education funds.
Thus, even if it might have been permissable for the State to have
charged the costs of some activities to Medicaid initially, having
covered the costs with education funds, the State cannot now allocate
those costs to (17) Medicaid in substitution for other unallowable
costs. /8/ Thus, it is irrelevant that education funds paid a high
percentage of the total costs of the school programs. The question
before us is whether those costs which were charged to Medicaid were
non-educational and were otherwise reimbursable under Medicaid.
Only part of the State's argument really considers the specific
nature of the costs we are concerned with here, i.e., the costs of the
school buildings on the ICF/MR campus. The State alleged that the
school district was not required to provide such facilities, adapted to
the special features of the ICF/MR program, and, if DHS had not funded
them, the school district merely would have served the ICF/MR residents
in existing school facilities or in the residential cottages of the
ICF/MR. The State also implied that, but for the Medicaid requirements,
these facilities would have been unnecessary.
As pointed out by the Agency, however, some of the features of the
program are not non-educational merely because specially adapted for the
ICF/MR residents. Special education must be designed to meet the unique
needs of the handicapped child, and includes instruction in
institutions. See, 45 CFR 121a.14(a). Special features of such an
instructional program may enhance Medicaid-required services, burt, if
they are "educational activities," they are not reimbursable under
Medicaid. The local school district was required to provide special
education at some facility, and we doubt that it could have met this
responsibility without incurring some costs. Perhaps the State could
have avoided some of the costs by not providing such elaborate
facilities for educational activities. Perhaps, too, if the facilities
had not already been built, some additional costs would have had to be
incurred to provide non-educational Medicaid services. Certainly,
however, this alone does not make all of the costs reimbursable under
Medicaid. We also note that the State had built most of the school
facilities prior to the time that Medicaid funding was provided for
ICF/MRs. Thus, we find it difficult to believe that nature of the
facilities is solely attributable to Medicaid requirements.
Therefore, we conclude that the contracts between DHS and the local
school districts are not a proper means of allocating the costs of the
school buildings, for they do not apply reasons and a method consistent
(18) with the action transmittal, to charge Medicaid only for
non-educational costs. We next consider how the costs should be
allocated.
F. The record is insufficient as a basis for applying the
regulation.
The disallowed amounts here are associated with costs which the State
itself allocated to a cost center labeled "Academic and Vocational
Education." While we agreed with the State that this is not
determinative of the allowability of the costs, we agree with the Agency
that it is fair in these circumstances to require the State to show that
the costs were not for educational activites. Moreover, as we have held
in previous decisions, the burden is generally on the states to
demonstrate the allowability of costs. See, e.g., California State
Department of Health, Decision No. 55, May 14, 1979, p. 4.
Here, the State presented evidence of the types of activities which
took place in the school buildings, providing some information about
specific items of cost. The State used this evidence and information,
however, in support of its contentions addressed above, analyzing the
activities primarily from the viewpoint of whether they could be
considered "habilitative," since the State took the view that this
was
sufficient to demonstrate allowability. Much of the State's
presentation is in general terms, discussing the program acitivities
without sufficiently relating them to the depreciation charges.For
example, some of the activities which the State described probably took
place in the gymnasium at Hilltop School, but the record is insufficient
to permit us to determine whether they were associated with the 30
percent of the gymnasium that was allocated to the "Academic and
Vocational Education" cost center. (It appears that the remaining 70
percent may have been charged to a "recreational therapy" cost center,
allocated to Medicaid. State's Report, Exhibit D.) Also, neither party
submitted information concerning applicable State standards for special
education. /9/
Thus, there is no basis in the current record on which we can
determine how the standard set out in the action transmittal applies and
what portion of the depreciation (and housekeeping supplies) is properly
charged to Medicaid. However, the Agency position in this case was
inconsistent with the action transmittal and failed to sufficiently
address the specific items of cost. Accordingly, we think that the
State should be given a further opportunity to show that some of the
costs were not special education costs and were otherwise reimbursable
under Medicaid. (19) Although, without further information, we cannot
give definitive guidance on what the nature of the showing should be, we
have provided below some considerations which should be taken into
account.
* Under education program regulations, whether a particular service
is considered part of "special education" or merely a "related
service"
is determined by state stadards. 45 CFR 121a.14(a)(2). The State
should provide copies of State laws and regulations regarding special
education, applicable during the relevent time period. /10/ The State
should then identify what services, provided as part of the school
programs, are not within the scope of "special education" under State
standards.
* The State would provide more specific evidence concerning how the
various school program activities are associated with the depreciation
costs claimed. Allocation of the depreciation costs to the activities,
can be in accordance with any generally accepted accounting principle,
and the Agency should cooperate with the State to determine what
reasonable method would be least burdensome.
* The record indicates that particular scrutiny should be given to
some costs which the State claimed were not educational but which appear
to be within the "special education" definition. For example, the
State
characterized physical education and training in sensorimotor skills as
habilitative and not educational, but the education regulations
specifically define "special education" to include "instruction
in
physical education," further defining the latter term to include
development of motor fitness and fundamental motor skills and patterns.
45 CFR 121a.13(b)(2). Physical education also includes development of
aquatic skills and this should be considered when the allowability of
any costs related to the Hilltop School swimming pools is
examined.Further, the State claimed that the horticulture classes were
not educational, but the teacher was admittedly paid from vocational
training (DDSA) funds and "special education" includes vocational
education under some circumstances. 45 CFR 121a.14(a)(3); see, also, 42
CFR 441.13(b).
* The State alleged that it was not required to provide a summer
school program as part of its education requirements. The State should
be prepared to show this and to provide evidence of how these activities
can be reasonably related to the depreciation costs.
In taking the approach we have taken here, we are mindful that the
State has spent considerable time and effort in presenting its case to
the (20) Board without clear guidance at an earlier stage as to how the
action transmittal applied. However, the State itself tried to use only
those parts of the action transmittal which suited its purposes,
ignoring certain key portions, and originally addressed the activities
only in very general terms.
We also note that the State objected to any retroactive imposition of
new Agency standards. State's Response to Order, p. 18. However, the
standards we are using is that of the regulation as interpreted by the
action transmittal, not a new standard. Although the action transmittal
was not issued until 1978, and the costs we are dealing with were
incurred in an earlier period, we do not think the State is prejudiced
by our use of the action transmittal, which the State itself relied on.
The plain meaning of the term "educational" is very broad, so that
the
State benefits by application of a more limited definition.
G. The costs of supplies and equipment later paid for by the school
district were improperly included in the reimbursement rate.
The costs of supplies and equipment amounting to $10,105 were charged
to the "academic and vocational education" cost center for Pauls Valley
during the period January through June 1977. During negotiations with
the Agency, the State discovered the DHS had subsequently received
reimbursement from the local school district for approximately $8400 of
these costs. State's Report, p. 26.The State claimed that the $8400
reimbursement was recorded as a credit in a later cost reporting period,
offsetting costs in that period and resulting in a lower Medicaid rate
for the related payment period. Consequently, the State argued, the
disallowance for this amount was inappropriate because "in effect no
Medicaid reimbursement was claimed for the costs." State's Report, p.
26.
If, indeed, the State can show that it had costs which it could have
properly included in determining the Medicaid reimbursement rate for a
later period, and that would have entitled it to claim additional FFP,
the Agency may wish to consider adjusting the disallowance accordingly.
However, the fact that the State may have applied the credit in a manner
which ultimately reduced its Medicaid claim does not require reversal of
the disallowance. The $8400 was improperly included in determing the
1978 rate because the payment by the local school district should have
been applied to offset the costs for which it was made.Pauls Valley had
$8400 less in allowable, unreimbursed expenditures than reported for the
period January through June 1977. This resulted in an inflated 1978
rate and an overclaim for federal funds.
Applying the credit in a later period to reduce reported costs would
not necessarily result in a correspondingly lower claim for federal
funds in the later period. Since the rates are determined on a
prospective basis, the actual claim for FFP is dependent not only on the
rate but on the number of patient days in any payment period.Thus, a $2
per diem overcharge in the 1978 rate would not be fully offset by a $2
undercharge (21) in the 1979 rate if more patient days were claimed in
1978 than in 1979. Other steps which could affect the relevant
calculations include determining the median of costs for the three
ICF/MRs during each cost reporting period, and applying the federal
medical assistance percentage rate, which may differ from year to year
and is used to determine the federal share of Medicaid payments.
Thus, we uphold the disallowance to the extent it results from
excluding $8400 of the supplies and equipment costs in determining the
reimbursement rate. The payment from the local school district should
have been applied to these expenditures as a credit.
H. The State has not shown that certain supplies and equipment
"ordered by ICF/MR staff" were not for the school program.
Excluding the $8400 reimbursed by the local school district leaves
"about $1700" in supplies and equipment costs charged to the "Academic
and Vocational Education" cost center. State's Report, p. 26.Besides an
unidentified amount related to housekeeping supplies, this figure
includes what the State has characterized as "miscellaneous items
ordered by the ICF/MR staff, rather than by school district employees."
State's Report, p. 26. The State submitted an affidavit by the
Comptroller and Chief Financial Officer for DHS, who supervises
preparation of DHS claims for Medicaid expenditures, including those
related to the three ICF/MRs. The Comptroller described the items in
question as follows:
Items ordered by the ICF/MR staff probably include books or
periodicals ordered for the institutional library at Pauls Valley State
School (which serves as a resource for the professionals on the staff of
the ICF/MR), magazines for use in the residential cottages, or film
rentals by the recreation department. These costs would have been
assigned to the 'academic and vocational education' cost center by a
clerk in the business office of Pauls Valley State School at the time an
invoice was received.
State's Report, Exhibit H, paragraph 12.
The Comptroller also explained the State's accounting categories,
mandated by the Oklahoma Director of Finance and used statewide.
According to the Comptroller, "Department employees generally have
placed costs in the 'Academic and Vocational Education' cost center
because the costs were in some way related to the program conducted by
school district employees (for example, depreciation of the school
buildings) or were related to purchase of items such as books, magazines
or film rentals." Exhibit H, paragraph 8.
The Agency responded that the State had not documented that the costs
were incurred to purchase items for the ICF/MR and not for the
educational program, nor identified what these alleged items were.
Pointing to the word "probably" which preceded the State's description
(22) of the types of items, the Agency took the position that a mere
assertion that costs are probably allowable does not satisfy the
requirement that a State justify and document its cliams.
We agree with the Agency that the question is one of documentation,
but do not think there is a total lack of evidence here. While the
State has not documented the types of costs involved, and this is a
definite deficiency, the State has submitted an affidavit which states,
without qualification, that the supplies and equipment were ordered by
the ICF/MR staff. The affidavit also attests to the fact that the types
of costs described would have been assigned to the "Academic and
Vocational Education" cost center when ordered by the ICF/MR staff. The
Agency has not disputed these points. Thus, the issue is whether this
is adequate to show that the costs were reimbursable. We conclude that
it is not.
Even if we were to find, based on the affidavit, that the supplies
and equipment were ordered by the ICF/MR staff and that some of the
costs may have been of the type described in the affidavit, these
findings would not lead us to overturn the disallowance. According to
the State's affidavit, the school district "requests purchase of
instructional supplies only up the limit of the portion of its Title I
(Pub. L. 89-313) federal grant that is earmarked for supplies." Exhibit
H, paragraph 10. DHS is reimbursed for this amount when the school
district receives the federal funds. A possible implication from this
is that if supplies and equipment are ordered by ICF/MR staff that means
they are not used in the school program. A more likely implication is
that ICF/MR staff order supplies and equipment for amounts over and
above the education grant. The DHS contract with the local school
district specifically provides that DHS will furnish any textbooks over
and above those allocated by the Oklahoma Textbook Committee, and other
supplies and equipment "as needed for the educational benefit of the
children at the institution. . . ." State's brief, Exhibit 6, p. 2. In
addition, ICF/MR staff work closely with the school district employees,
some of them performing similar activities. State's Report, p. 15. The
State did not allege that ICF/ MR staff would never order supplies and
equipment for the school programs, and, in view of the contract
provisions, it is likely that they did. Moreover, the State itself
first described these costs as for "items used in connection with the
Hilltop School program." State's Brief, p. 12. Given these
considerations, and a lack of any documentation that the costs were in
fact the types of costs which the State says they "probably" were,
we do
not think that the State shown that the costs were not for the school
program.
Having determined this, however, we must consider how it relates to
our analysis above regarding school program acitivites. Since we
concluded that some of the school program activities might be
reimbursable under Medicaid, there is the possibility that the costs of
supplies and equipment might be reimbursable, even if they relate to the
school program. (23) Thus, we think that the State should be provided a
further opportunity to demonstrate that these costs are reimbursable.
In order to show this, however, the State will have to show which
specific activities the costs relate to. This will necessitate
substantially the same showing regarding the nature of the costs which
the State failed to make in support of its position that the costs were
not associated with the school program. Thus, the Agency need not give
the State more than a brief additional time period in which to further
document these costs.
I. The general administrative and indirect costs should be allocated
in a manner consistent with our conclusions.
The parties agreed that the treatment of that part of the
disallowance attributable to the Agency's allocating general
administrative and indirect costs to a cost center for unallowable
educational activities ($0.03 of the $0.61 rate reduction) depended on
resolution of the allowability of the other cost items. The State
admitted that the $9,931 in costs covered by the DDSA grant was not
reimbursable. In addition, we have sustained that part of the
disallowance related to approximately $8400 in supplies and equipment
costs later reimbursed. Thus, we also sustain the disallowance of
general and administrative and indirect costs to the extent they are
allocable to these other disallowed costs. In addition, whatever
portion of the general administrative and indirect costs is allocable to
those depreciation and housekeeping costs found to be costs of
"educational activities" under standards we have set out above would
also be nonreimbursable.
Conclusion
For the reasons stated above, we conclude that the State improperly
included the following costs in determining the 1978 Medicaid rate for
ICF/MRs:
* The $9,931 is costs covered by the federal vocational grant.
* The "approximately $8400" in costs of supplies and equipment for
which the State received reimbursement from the local school district.
* General administrative and indirect costs associated with these
costs.
Accordingly, we uphold the disallowance of FFP in excess payments
made as a result of including these costs in the rate. The parties
should cooperate in calculating what part of the disallowance this
represents. (24) With respect to the remaining costs, we remand to the
Agency to provide the State an opportunity to demonstrate what amount
was properly included in the rate, under the standards set out above.
/1/ In support, the Agency cited the following: United States
v. Shreveport Grain & Elevator Co., 287 U.S. 77, 84 (1932); Canada
Packers, Limited v. The Atchison, Topeka and Santa Fe Railway Company,
et al., 385 U.S. 182, 183-84 (1966). /2/ The State argued
briefly that there is "some doubt" whether 42 CFR 441.13(b) applies
to
ICF/MRs at all, since the regulation uses the term "institutions for the
mentally retarded." State's Brief, p. 17, n. 15. We have no doubt,
however, that the term used in the regulation is a broader term which
clearly encompasses public institutions qualifying as ICF/MRs. See, 42
CFR 435.1009. /3/ No explanation of the term was included either
with the notice of proposed rulemaking, 38 Fed. Reg. 5974 (1973), or
when the regulation (then designated as 45 CFR 249.10(c)(2)) was
published as a final rule, 39 Fed. Reg. 2220 (1974). /4/ The
action transmittal qualifies this slightly by stating that health or
supportive services which are made the responsibility of an education
agency by state statute cannot be paid for by Medicaid. HCFA-AT-78-104,
Attachment, pp. 2, 5. /5/ Section 121a.14(a)(1) of 45 CFR
defines "special education" as "specially designed instruction,
at no
cost to the parent, to meet the unique needs of a handicapped child,
including classroom instruction, instruction in physical education, . .
. and instruction in hospitals and institutions." Section 121a.13(a)
defines "related services" and "transportation and such developmental,
corrective, and other supportive services as are required to assist a
handicapped child to benefit from special education, and includes speech
pathology and audiology, psychological services, physical and
occupational therapy, recreation . .. ." Section 121a.14(a)(2) clarifies
that, in some circumstances where a related service is considered part
of special education under state standards, it is also considered part
of special education under federal standards. These regulations were
published in final form on August 23, 1977, 42 Fed. Reg. 42476.
Sections 121a.14( a)(1) and 121a.13(a) track the statutory language at
20 U.S.C. 1401(16) and (17), added by the Education for All Handicapped
Children Act of 1975, Pub. L. 94-142. /6/ These criteria
include: (1) the physical locaton of the services delivered; (2) the
qualifications of professional and paraprofessional furnishing the
service; (3) the general mission of the agency providing the service;
(4) the time period in which the service is provided (i.e. during normal
school hours as opposed to during other periods of time). /7/ As
examples of this, the State mentions that the school district provides a
two-month summer program at Hilltop School, but not at other schools in
the district, and also offers swimming instruction solely at Hilltop.
State's Report, p. 17. The State also pointed out that, unlike teachers
in the other schools, Hilltop School teachers and administratorss spend
time coordinating their program efforts with thosse of the ICF/MR staff,
and the school district pays higher salaries to the teachers at Hilltop
School in order to attract more qualified teachers to the ICF/MR.
State's Report, p. 18. /8/ It appears that some of the local
funds here were revenue from various types of fees or taxes which may
not have been earmarked for specific purposes. Arguably, if any of
these funds were applied to costs which could have been funded by
Medicaid as a non-educational service, the State could, by a mere
accounting procedure, cover those costs with Medicaid funds in place of
the unallowable portion of depreciation costs. However, the record is
unclear as to the nature of these revenues, and, furthermore, such a
reallocation might be inconsistent with the contract with the school
district. /9/ The Agency did submit a copy of a portion of the
"Oklahoma Annual Bulletin for Elementary and Secondary Schools" (Exhibit
A to Agency's Response to State's Report), but this discusses special
education only in general terms, referring to another bulletin for
specific laws and regulations. /10/ Exhibit A to the Agency's Response
to State's Report indicates at page 19 that these laws and
regulations are contained in the special education bulletin, "A Program
of Education for Exceptional Children in Oklahoma."
OCTOBER 22, 1983