GAB Decision 648
May 17, 1985
New Jersey Department of Human Services;
Settle, Norval D. (John); Teitz, Alexander G. Ford, Cecilia Sparks
Docket Nos. 84-191, 85-62
The New Jersey Department of Human Services (DHS, State) appealed a
decision by the Division of Cost Allocation (DCA) disapproving the
portion of the State's revised Cost Allocation Plan (CAP) that provided
for 75% federal financial participation (FFP) for statewide and
department-wide indirect costs allocated to the State's Medicaid
Management Information System (MMIS) under Title XIX of the Social
Security Act (Act). DCA, after consulting with the Health Care
Financing Administration (HCFA), found that the normal administrative
50% FFP rate applied to such costs rather than the enhanced 75% FFP rate
for costs "attributable to the operation" of the MMIS. (Docket No.
84-191) HCFA then disallowed $41,157 for the quarter ending March 31,
1984 as the difference between reimbursement at the enhanced 75% FFP
rate and the 50% FFP rate. (Docket No. 85-62) Both parties agreed that
these cases should be joined for decision; our decision is based on the
written record. There is no dispute that the statewide and
department-wide indirect costs in question here are allowable and
properly allocated to the State's MMIS. The only issue is whether FFP
in these costs is available at the enhanced 75% rate for costs
"attributable to the operation" of the MMIS or at the normal 50%
administrative rate under Title XIX of the Act. The Agency relied on a
policy clarification which is not an adequate statement of a policy to
preclude 75% FFP for such costs, in light of prior policy statements and
the applicable cost principles. In essence, if the Agency intended such
a policy, it neglected to clearly inform the State. As explained below,
we determine that these costs are properly "attributable to the
operation" of the MMIS and thus subject to enhanced FFP. We reverse
both the Agency's disapproval of the CAP revision and the $41,167
disallowance. APPLICABLE AUTHORITY The Medicaid Program was enacted in
1965, under Title XIX of the Act, and is administered by each state
according to an approved state plan. In New Jersey, the State's Medicaid
program is administered by the Department of Human Services. In 1972,
Congress amended Title XIX of the Act to include enhanced rates of FFP
for administrative costs for, inter alia, the operation of a MMIS.
Section 1903(a) (3) (B) of the Act provides for reimbursement of:
75 per centum of so much of the sums expended during such quarter as
are attributable to the operation of (MMIS) systems . . . A MMIS is a
mechanized claims processing and information retrieval system, and is
defined as:
a system of software and hardware used to process Medicaid claims,
and to retrieve and produce utilization and management information about
services that is required by the Medicaid agency or Federal Government
for administrative and audit purposes. 45 CFR 433.111 Section 433.113
of 42 CFR (1983) is the applicable regulation and simply repeats the
availability of 75% FFP for "expenditures for operation" of an approved
MMIS. Before 1981, the Medical Assistance Manual, PRG-31, issued on June
10, 1974, and Action Transmittal, HCFA-AT-78-33, issued on April 3,
1978, set forth Agency policy concerning the types of costs that were
eligible for 75% FFP. The Medical Assistance Manual required that a
state claim in accordance with an approved CAP (Sec. 7-71-38) and
contained a brief summary of costs covered by the "75% operational FFP,"
such as "forms, system hardware and supplies" (Sec. 7-71-50). (Agency's
Appeal File, Tab A, page A6) Action Transmittal, HCFA-AT-78-33, stated,
in part, that:
. . . all costs - direct and indirect - benefiting the operation of
an approved MMIS are reimbursable at the 75% Federal matching rate.
(State's Appeal File, Tab 14, page 51a) In July 1981, the Agency issued
Part 11, Medicaid Management Information System of the State Medicaid
Manual (State Manual). The State Manual specifically noted that it
replaced the Medical Assistance Manual and other Medicaid instructions
(including the Action Transmittal noted above). The State Manual was
headed "Clarification -- Effective Date: Not applicable" and provided
that it:
. . . constitutes a major restructuring and updating of Sections
7-71-00 through 7-71-60, Medicaid Assistance Manual and other Action
Transmittals, Information Memoranda, Policy Interpretation Questions,
and other specifically related material. No substantive changes in
language or content of this material has been made. (emphasis added)
Section 11270 of the State Manual required states to "document costs in
a cost allocation plan approved by (HCFA)" and Section 11275.21 stated
that:
Appropriate costs, including overhead costs for the direct costs
attributable to the operation of the system are also payable at . . .
75 percent FFP . . . . Section 11275.23 contained the summary of costs,
such as "forms, system hardware and supplies" covered under 75% FFP.
In
February 1982, the Agency issued Transmittal No. 2 of the State Manual,
section 11275.26, entitled "List of Reimbursable Costs For State
Systems." This Transmittal also had no effective date, and stated that
the purpose was to "clarify policy already stated" in Part 11 of the
State Manual. Section 11275.26 stated, in part, that:
(I)ndirect costs, when directly attributable to the MMIS will be
funded at the higher FFP from 1903 (a) (3) funds.
. . . Indirect costs not directly attributable to the MMIS cost
center, such as personnel, finance, etc., will be funded at 50 percent.
Section 11275.26 also provided a list of allowable costs showing the
rate of reimbursement available for each type of costs. DISCUSSION On
September 28, 1983, the State submitted a revised CAP to the Director of
the DCA, Region II. The State was notified, on March 9, 1984, that the
CAP was disapproved because it provided for the allocation and claiming
of statewide and department-wide (DHS) indirect costs allocated to MMIS
at the enhanced 75% rate instead of the normal 50% rate. On April 10,
1984, the State appealed under the informal appeal procedures at 45 CFR
Part 75. On September 26, 1984, the State appealed to this Board the
decision under Part 75 to uphold DCA's disapproval. /1/
The record shows that HCFA and DCA had approved prior CAPs, on five
different occasions, which included the claiming of 75% FFP for the
costs now being disallowed, and that the disapproved CAP had been
prepared in accordance with OMB Circular A-87. /2/ The State's CAP
provided a methodology for claiming costs. The CAP stated, in part,
that:
State-wide and Department-wide indirect (A-87) costs will be
separately identified and distributed to . . . MMIS - 75% . . . based
upon the percentages obtained in the previous step. (State's Appeal
File, Tab 10, page 26a)
The CAP also provided for 75% FFP for indirect costs allocated to the
MMIS that were generated by the DHS, Division of Medical Assistance and
Health Services (DMAHS). The MMIS is a cost objective within DMAHS.
The Agency did not disapprove this aspect of the plan. The parties
agreed that the CAP methodology is not at issue. There is no question
that these costs are allowable Medicaid administrative costs which are
properly allocable to the State's MMIS. The Agency, however, now draws
a distinction between types of indirect costs, concluding that some
indirect costs are "directly attributable" to the operation of the
MMIS
while others are not. The State asserted that there is no basis for
this distinction: the State considered it a contradiction in terms to
characterize only some properly allocated indirect costs as "directly
attributable." The Agency relied on the 1982 State Manual clarification
as the basis for the distinction as explained in an affidavit from the
Director of Budgets and Grants, Division of Financial Operations, HCFA.
The Agency has submitted no evidence, other than the affidavit, to show
that such a distinction should be made. The Director noted that her
staff was responsible for reviewing proposed CAPs and that she was
familiar with HCFA's policy on the allowance of overhead and indirect
costs for the MMIS. The affidavit provides an explanation of the
"step-down" process; the process by which overhead costs from all
organizational levels are allocated to the MMIS. The affidavit
explained that:
The step-down process is a procedure in cost accounting that permits
the inclusion of costs that are generated in a non-productive or service
function of an organization in the total costs determined for a
productive unit or cost center. The goal is to reflect all costs
attributable to a cost objective to assure full identification and
"recovery" of expenditures. Further, the affidavit explained how
indirect costs were generated at the statewide and department-wide (DHS)
level and stated that statewide and department level overhead costs
allocated to the MMIS are reimbursed at 50% FFP as indirect costs not
directly attributable to the MMIS. The Agency characterized such costs
as "remote." (Agency Brief, p. 10) However, the affidavit did agree
that
"indirect costs generated at the Division of Medical Assistance and
Health Services (DMAHS), that are allocable to the MMIS are reimbursed
at the enhanced 75% FFP rate as indirect costs directly attributable to
the MMIS." The affidavit drew a distinction between indirect costs
generated at the DMAHS and other indirect costs at the statewide and
department-wide level; the affidavit distinguished indirect costs based
on where they originated. The Agency argued that the 1982 clarification,
section 11275.26 of the State Manual, although not a regulation,
reflected the Agency's interpretation of the term "attributable" as
applied in the CAP disapproval, so that the Board should defer to the
Agency's interpretation because the section was promulgated based on the
Agency's expertise and policy-making authority. The Agency argued
further that section 11275.26 was intended as a clarification of
existing policy and restatement of the Agency's original interpretation
of the statutory term published in 1974. The Agency reasoned,
therefore, that the section should be considered contemporaneous with
the enactment of the legislation and promulgation of the original
regulations in 1974. The Agency also argued that the CAP disapproval
was proper and not barred by the prior CAP approvals. The Action
Transmittal, HCFA-AT-78-33, stated quite broadly that all benefitting
indirect costs were subject to 75% FFP. The Agency transmittal of the
State Manual stated that "no substantive changes had been made." The
State Manual provided for 75% FFP for "overhead costs for the direct
costs" of operation (Sec. 11275.21). The Agency did not argue that the
1982 State Manual clarification stating that the 75% rate applied to
"directly attributable" indirect costs was a change in policy.
Conversely, the Agency has stated that the 1982 State Manual
clarification should be regarded as the interpretation that has been in
place since 1974. The State, however, characterized the 1982
clarification as stating a "new position requiring indirect costs to be
directly attributable to MMIS" and argued that 75% FFP "would
unquestionably have been permitted" under the prior statements of
policy. (State Appeal Brief, pp. 12-14) Part 74 of 45 CFR and OMB
Circular A-87 cost principles provide that costs, to be allowable for
reimbursement, must be reasonable and necessary for the efficient
conduct of the grant. As the State contends, the cost principles
provide no support for the distinction that the Agency is attempting to
draw; total allowable costs are direct and allocable indirect costs.
Allocable indirect costs are "regarded as resulting from" a particular
cost objective. (State Appeal Brief, pp. 14-18) Under the cost
principles, there is no question that, once properly allocated to the
MMIS, the A-87 costs at issue must be regarded as benefitting the MMIS.
The language of the statute, the 1978 HCFA Action Transmittal, and
section 11275-21 of the State Manual provide no basis for distinguishing
between types of indirect costs; a reasonable reading is simply that
allowable, allocable, and thus "attributable" indirect costs may be
reimbursed at 75% FFP. The 1982 clarification, which by its terms is
not to be regarded as a change in policy, states only that indirect
costs must be "directly attributable" to the operation of the MMIS
in
order to receive 75 percent FFP. There is nothing on the face of the
clarification to explain that some indirect costs are directly
attributable while others are not. Thus, to the extent the Agency
intended to state the policy it explained in the affidavit submitted
here, it did not do so. There was no reason for the State to know that
some indirect costs claimed and reimbursed at 75% FFP, as provided for
in a series of approved CAPs, did not qualify for 75% FFP. The better
reading of the clarification, consistent with prior statements of
policy, is that the A-87 costs, as reasonable and allocable MMIS costs,
are "directly attributable." Moreover, even reading the 1982
clarification as stating such a distinction, the Agency cannot
reasonably apply it since the clarification was not issued as a change
in policy and 75% reimbursement is clearly available based on prior
statements of policy. We do not conclude that the Agency is barred by
its previous CAP approvals. Rather, we regard the approval and payment
of 75% FFP for these costs in prior years to seriously undercut the
reasonableness of the Agency's interpretation. In sum, we find that
there is no basis in the record here for a distinction between indirect
costs "directly attributable" (75% FFP) to the operation of the MMIS
and
those only "attributable" (50% FFP) to the operation of the MMIS.
There
is no evidence in the record to show that the distinction expressed by
the Agency in the affidavit between types of indirect costs is a
distinction that was drawn contemporaneously with the clarification or
any previous statement of policy. Even assuming that the 1982
clarification should be regarded as support for the affidavit, it is
inconsistent with the reimbursement that would be available under the
other statements of Agency policy. Thus we conclude that the Agency
cannot reasonably distinguish between indirect costs that are
indisputably properly allocated based on a non-substantive
"clarification" of its policies which it uses to support a restrictive
interpretation not previously advanced. Conclusion Based on the
foregoing, we reverse the Agency's disapproval of the CAP in Docket No.
84-191, and reverse the disallowance of $41,167 in Docket No. 85-62.
/1/ Part 75 of 45 CFR provides for an informal proceeding before
the HHS Regional Director or his designee. The official conducting the
Part 75 proceeding upheld the DCA's determination on the basis that the
clarification of existing policy in section 11275.26 of the State Manual
precluded reimbursement at 75% and found that it is "the right of the
government and its agencies to give clarification, through regulation
and directive, to the statutes as intended by the legislative body." The
State appealed the decision to the Board. /2/ OMB Circular A-87 is a
guide for state and local government agencies and contains cost
principles and procedures for establishing CAPs and indirect cost rates
for grants and contracts with the Federal Government.
JULY 18, 1985