Shenandoah Professional Standards Review Foundation, DAB No. 652 (1985)

GAB Decision 652

June 5, 1985

Shenandoah Professional Standards Review Foundation;
Ford, Cecilia Sparks; Settle, Norval D. (John) Teitz, Alexander G.
Docket No. 84-147

Shenandoah Professional Standards Review Foundation (Appellant, PSRO)
appealed a final determination by the Health Care Financing
Administration (HCFA, Agency) to disallow the employer's share of the
Federal Insurance Contributions Act (FICA) tax refund of $24,000,
including interest, paid to the employees by the PSRO. The basis for
the determination by HCFA was that the employer's share of the refund
must be returned to the Agency either as a refund of taxes or as an
applicable credit under the cost principles. We sustain the disallowance
except for the portion of the refund which pertained to FICA payments
made while the PSRO was funded under a contract rather than a grant. We
have no jurisdiction over the refund which pertains to the use of the
contract funds. Background

Professional Standards Review Organizations (PSROs) were established
under amendments to the Social Security Act in 1972 (Pub. L. 92-603).
The purpose of the PSRO program was to see that health care services
funded under the Medicare, Medicaid, and Maternal and Child Health
programs were medically necessary, conformed to appropriate professional
standards, and were delivered in the most effective, efficient, and
economical manner consistent with quality care. 42 U.S. C. Sec. 1320c.
PSROs were ordinarily funded entirely by the federal government. PSROs,
although non-profit corporations, as employers paid FICA taxes for both
the employer's share and the share collected from employees. This
payment was based on HCFA advice and Internal Revenue Service (IRS)
rulings. Certain PSROs (including appellant) litigated payment of FICA
taxes with the IRS and were eventually successful in obtaining a
determination that PSROs were entitled to an exempt status under section
501(c) (3) of the Internal Revenue Code. This exemption was
retroactive, and permitted PSROs to recover FICA taxes paid by them from
the time of their incorporation, within the period of the statute of
limitations on refunds. The exemption was not (2) automatic, however
and had to be claimed by a PSRO on behalf of those employees who opted
out of Social Security. /1/

There were 27 PSROs which elected to ask for their refunds. When they
received these, all returned the employees' share to the employees who
had made the FICA contributions. There was never any question about
these refunds. Disputes did arise over the disposition of the
employers' shares of the refunds. In Area IX Oakland-Macomb PSRO,
Decision No. 528, April 9, 1984, we held that the employer's share of
the FICA refund was returnable to the Agency as a refund of taxes or an
applicable credit under the cost principles. The interest which had
accrued on the employer's share was not treated separately, but was to
be returned to HCFA with the principal amount of the refund. I. THE
PERMISSION GIVEN BY HCFA TO OTHER PSROS TO USE THE REFUND FOR EMPLOYEE
BENEFIT PLANS HAS NO RELEVANCE HERE. The Board learned, while this case
was pending, that in another case before us HCFA had approved
reinvesting the employer's share of the refund in an employee benefit
plan. San Joaquin Area PSRO, Board Docket No. 84-168. Also in the San
Joaquin case the brief submitted by HCFA indicated that approximately 15
PSROs were permitted to retain the employer's share of the FICA refund
for investment in a pension plan. The Board thereupon invited the
parties in this case (and in two other PSRO appeals then pending) to
supplement their briefing "to address the application and relevance of
HCFA's approval of San Joaquin Area PSRO's plan to reinvest the
employer's contribution in an employee benefit plan." Board letter,
January 2, 1985.

In its supplemental briefing the PSRO admitted that the "major
difference" between this PSRO and the San Joaquin situations is that
this PSRO "did not use the employer's portion of the FICA refund as an
initial contribution to the pension plan to fund past service costs."
Appellant's Supplemental Brief, p. 2. Instead, it "paid the employer's
share directly to the employees." Id. We find this difference to be
critical. We have already held in Oakland-Macomb that the employer's
share of the FICA refund could not be paid to the employees but had to
be returned to HCFA. We find no reason advanced to change this
holding.(3) Although the PSRO stated that it did adopt a pension plan
with Metropolitan Life Insurance Company because its employees would no
longer be covered by Social Security, this was not funded by the
employer's share of the refund, which was returned to the employees.
The situation is thus factually different from the situation in the San
Joaquin case, where HCFA approved the PSRO's investment of the FICA
refund in an employee benefit plan. In those cases where the PSRO paid
the refund over to the employees to use as they saw fit, the problem of
whether HCFA has followed a consistent policy did not arise. While the
PSRO argued that it paid over the employer's portion to enable its
employees to use it to provide for their own retirement from the years
in question, the employees were not restricted in their use of the
refunds. We believe that there is a significant difference between an
employer using its refund to fund a pension plan of a type approved by
HCFA and an employer turning over the refund to the employees to use,
possibly for their own retirement planning, or for any worthwhile or
foolish use they chose. Appellant in its notice of appeal repeated many
of the arguments advanced by the PSRO in Oakland-Macomb, but in its
original briefing relied on only two grounds: the jurisdiction of the
Board over contract funding of a PSRO, and equitable estoppel. On the
merits not argued, our decision is based on Decision No. 528, which we
incorporate. II. THE GRANT APPEALS BOARD DOES NOT HAVE JURISDICTION OVER
DISPUTES UNDER FEDERAL PROCUREMENT CONTRACTS.

Appellant's first funding was under a negotiated cost reimbursement
contract effective February 2, 1977. (Appellant's Ex. A) The contract
specifies that it was "negotiated pursuant to 41 USC 252(c) (15) and PL
92-603." The latter is the statutory authority for the PSRO program.
Section 252 is in Chapter 4 of 41 U.S.C., which is headed "Procurement
Procedures." The chapter pertains to purchases and contracts for
property or services. Funding was changed to a grant award beginning
December 31, 1978. (Appellant's Ex. B) The parties do not dispute that
appellant was awarded procurement contracts which covered the time from
February 2, 1977 to December 31, 1978, and that a portion of the amount
of FICA tax which was refunded and distributed to the employees was paid
under the procurement contracts. The disallowance letter relied on the
cost principles in 45 CFR Part 74, Appendix F (1980). Reference was
made in the disallowance (4) to Section G41(2) (c), "Taxes," and Section
B.5, "Applicable Credits." Appellant pointed out that, while Part 74 was
generally applicable to all "grants" (45 CFR 74.4), the definition of
"grant" in 45 CFR 74.3 excluded any procurement contracts. Appellant
then argued that this Board did not have jurisdiction over the refunds
of taxes paid under a contract, since the payments received by appellant
for taxes paid during 1977 and 1978 were not received pursuant to a
grant. (Appellant's brief, pp. 5-7)

Respondent answered that the cost principles in Part 74 applied to
"cost-type contracts" as well as grants, citing 45 CFR 74.170, and the
heading to Appendix F, "Principles for Determining Costs Applicable to
Grants and Contracts with Non Profit Institutions." (1973) (Respondent
Agency's brief, pp. 2-3) A second argument advanced by respondent was
that the cost principles in effect when the refund was received apply,
and not those when the FICA taxes were paid. The refund was received in
December 1979 when the PSRO was clearly under a grant. We said in
Oakland-Macomb that the distribution of the tax refund was subject to
the cost principles in effect when the PSRO received the refund (p. 4).
/2/ Therefore, argued respondent, distribution of the refund here was
similarly received when appellant was under a grant and should be
subject to the cost principles then in effect.

These arguments by the Agency lose sight of the significant factor in
this case. The issue is not which cost principles apply to the refund,
/3/ but whether we have any jurisdiction over this part of the dispute.

(5) The dispute pertains in part to refunds of taxes which were paid
during a period when the PSRO was funded by the federal government under
a federal procurement contract. Disputes under federal contracts are
now governed by an extensive procedural scheme established pursuant to
the Contracts Disputes Act. 41 U.S.C. Sec. 601-613. The Board has no
jurisdiction over disputes arising under such contracts, as appellant
points out. 45 CFR Part 16, Appendix A. We could not have considered
any dispute between the parties under the contract when the FICA taxes
were paid. Neither can we adjudicate any dispute between the parties as
to the disposition of any refunds of taxes paid from funds provided
under those contracts. /4/

It is therefore clear that the contracts under which the PSRO was funded
until it came under a grant were procurement contracts, and the Board
has no jurisdiction to resolve disputes under such contracts. There has
been no final decision over which we have any jurisdiction on appeal.
/5/

III. THE AGENCY IS NOT ESTOPPED FROM RECOVERING THE FICA REFUND.
Appellant argued that respondent both impliedly and explicitly approved
the distribution of the FICA refund to the employees by the PSRO, so
that the Agency is now estopped from asserting that such distribution
was improper. As the law now stands appellant's claim of equitable
estoppel cannot be enforced against the government.

A. The facts on estoppel. The evidence presented by the PSRO
indicates that the Agency did not object to the proposed distribution of
the FICA refund to the employees when the PSRO informed the Agency of
its plans in writing. The PSRO also relied on specific oral approval by
an Agency official. The PSRO did not claim specific written
approval.(6) The writing was all one-sided. On November 30, 1979 the
Executive Director of the PSRO wrote the Supervisory Grants Management
Specialist in HCFA's Project Grants Branch in Baltimore that the PSRO
expected to receive a refund of all FICA taxes paid. (Ex. F) The writer
stated that he intended to place the employer's share in an escrow
account until December 28, 1979, at which time the funds would be
disbursed to the appropriate employees. The letter went on to say that
the refund had been brought to the Agency's attention approximately two
months before, when possible alternatives regarding the disbursement of
the refunds had been discussed, and no reply was ever received from the
Agency. In addition, the Executive Director stated in an affidavit that
he received specific oral approval of the refund disbursement proposed
in his letter from a federal employee in the office of the Grants
Management Specialist. In fact, the affidavit states that the Executive
Director was advised that written confirmation was not necessary, as his
letter had asked for a written reply only if the proposed distribution
was not proper. (Ex. O) The Agency stated that it could not contradict
the affidavit, since the person the PSRO stated gave the oral approval
no longer worked for the federal government and could not be located.

In the absence of any evidence to the contrary, we accept the version of
the facts given in affidavit form by the PSRO as true. We have
therefore a failure by the Agency to object to a proposed distribution
submitted in writing, and evidence of a specific oral approval of the
distribution before it was made.

B. The law on estoppel. As appellant pointed out, there have been
federal district court and court of appeals decisions supporting
estoppel against the government in particular circumstances. The
Supreme Court, however, has never permitted an estoppel as such,
although it has refused to say a situation could never arise where
estoppel might be appropriate. Heckler v. Community Health Services of
Crawford County, 104 S. Ct. 2218, 2224 (1984). /6/

(7) The principle that there can be no estoppel against the federal
government was stated in the clearest language in Federal Crop Insurance
Corp. v. Merrill, 332 U.S. 380 (1947). /7/ In Merrill a private person
relied on the misrepresentation of a government agent as to the coverage
of a federal crop insurance policy. The Court said that under those
circumstances a private insurance carrier would have been estopped, but
the same principles did not apply to dealing with the federal
government. Published regulations were binding upon all, even though a
government agent purported to say otherwise. Ignorance of the law,
whether the law was in a statute or a published regulation, was no
excuse.

Thereafter the Supreme Court's position on estoppel has been to some
extent ambivalent: (1) it appears possible under some circumstances to
estop the government; but (2) the case before us is not that type of
case. The Court's view has been that we will know a true estoppel when
we see one.

In Montana v. Kennedy, 366 U.S. 308 (1961), an immigration case, the
Court for the first time admitted that there could be facts which would
justify estoppel against the government. For the first time the Supreme
Court used a word which has been as close to a guideline in estoppel
cases as it has ever come. The word was misconduct; the action by the
government official, said the Court, fell "far short of misconduct"
which might have prevented the United States from enforcing the
particular provision of the immigration laws. Id., at 314-15.

In INS v. Hibi, 414 U.S. 5 (1973), another immigration case, the Court
added "affirmative" to the word "misconduct" used in Montana v.
Kennedy, as indicating what might in some circumstances justify
estoppel. Id., at 8. The next Supreme Court case, Schweiker v. Hansen,
450 U.S. 785 (1981), gave no more definite guidance. Here claimant
inquired of a social security representative whether she was entitled to
certain mother's insurance benefits under the Social Security Act. The
representative erroneously told her that she was not eligible, and she
left without filing a written application, a prerequisite to receiving
benefits. In fact, the Claims Manual required the government employee
to tell a claimant to file a written application in any doubtful case.
Once more the Court said it had previously declined to decide whether
even affirmative (8) misconduct would estop the government, and clearly
there was no affirmative misconduct in the case before it. Id., at
788-89. /8/

C. The application of estoppel principles in this case. Appellant in
its reply brief argued that in any event equitable estoppel may be
invoked against the United States "in respect of acts done in its
proprietary, or private capacity, as opposed to acts done in its
sovereign capacity." (Reply Brief, p. 3) Appellant admitted that it is
not always easy to distinguish the two different capacities, but argued
that here it is obvious that the appellant dealt with the government in
its proprietary capacity. This conclusion is hardly obvious if one
examines the purpose of the PSRO program as set out in the statute
authorizing it. The purpose was to see that health care services funded
under the Medicare, Medicaid, and Maternal and Child Health programs
were "medically necessary," and "to promote the effective, efficient and
economical delivery of health care services of proper quality." 42
U.S.C. Sec. 1320c. The Medicare and Medicaid functions of the
government are certainly today considered functions which the (9)
government funds in its sovereign rather than in its proprietary
capacity. Therefore granting money to a PSRO to oversee certain of
those functions is similarly a sovereign function of government.

In any event, as long ago as Merrill the Supreme Court repudiated the
sovereign-proprietary distinction. The crop insurance there could
certainly have been provided through a private insurance company. In
fact, the decision assumed that recovery could have been had against a
private insurance company, but it was different with the federal
government. Anyone dealing with the federal government took the risk of
accurately ascertaining that the government agent stayed within the
bounds of his authority, "(W)hatever the form in which the Government
functions." See Merrill, 332 U.S. at 384.

In Community Health Services the Supreme Court said that the
requirements for proving estoppel against a private person were not
present, let alone proving it against the government. We should
therefore first see here if there would be an estoppel against a private
person in similar circumstances. These requirements are stated in
Community Health Services. They include that the party claiming the
estoppel must have relied on its adversary's conduct in such a manner as
to change its position for the worse, and the reliance must have been
reasonable. (104 S. Ct. at 2223) In Community Health Services the Court
said that the reliance was neither reasonable nor detrimental. The
misleading statement was made by an insurance company which was a
"fiscal intermediary" in handling Medicare reimbursement. The Court
stated that the insurance company was therefore a mere conduit upon
whose advice the health service organization had no right to rely. Here
the advice given was by a government employee in the Grants Management
Office, with whom the PSRO normally dealt in such matters. However, this
in itself is not determinative on whether the reliance on the advice
given the PSRO was reasonable.

The Supreme Court in Community Health Services said that the reliance
must have been reasonable "in that the party claiming the estoppel did
not know nor should it have known that its adversary's conduct was
misleading." (104 S. Ct. at 2223) Here the PSRO knew, or at least should
have known, that the advice it was given was misleading.

The grant stated that it was subject to 45 CFR 74, which includes the
cost principles. The cost principles pertaining to applicable credits
and refund of taxes were not ambiguous. Under either one, the employer's
refund was to be returned to the grantor (HCFA) to decide what to do
with the money. It was not reasonable for (10) the PSRO to assume that
any government employee could vary the provisions of a published federal
regulation. /9/ Therefore it was not reasonable for the appellant to
rely on the advice it obtained by phone. By finding that it was not
reasonable to rely on the government employee's advice we need not
decide the question of whether a government employee can ever have
"apparent" authority to make representations at odds with a published
requirement.

We therefore find that the PSRO did not meet the requirements for
estopping a private person. The Supreme Court tells us that the
requirements for estopping the federal government are much stricter.
These additional requirements show that even if the PSRO met the
requirements for estoppel against a private person or organization, it
would fail in such a claim against the government.

The Supreme Court has said that if there were ever to be estoppel
against the government, it would have to be based on "affirmative
misconduct." The Court has never defined "affirmative misconduct" or
outlined its essentials. But from the cases it appears to require
something more than negligently giving wrong advice. Thus, in Schweiker
v. Hansen the government employee advised claimant she was not eligible
for benefits although she in fact was eligible on the information she
gave the employee. In addition, the employee did not follow the Claims
Manual's direction to give a claimant an application to fill out and
file in any doubtful case. Yet the Court said that these errors fell
"'far short' of conduct which would raise a serious question whether
petitioner (government) is estopped from insisting upon compliance with
the valid regulation." (450 U.S. at 790) The conduct here can be classed
similarly as falling far short of affirmative misconduct, being no more
than giving erroneous advice. /10/

(11) There is still one more reason why the PSRO cannot prevail in
proving estoppel here, and that is because the only specific advice it
received approving the distribution before it was made was oral advice.
In Schweiker v. Hansen the majority intimated that whether there was a
written agreement might make a difference in finding an estoppel against
the government. See 450 U.S. at 788, n. 4. In Community Health
Services the Court was much more definite: The appropriateness of
respondent's reliance is further undermined because the advice it
received from Travelers was oral. It is not merely the possibility of
fraud that undermines our confidence in the reliability of official
action that is not confirmed or evidenced by a written instrument.
Written advice, like a written judicial opinion, requires its author to
reflect about the nature of the advice that is given to the citizen, and
subjects that advice to the possibility of review, criticism and
reexamination. The necessity for ensuring that governmental agents stay
within the lawful scope of their authority . . . argues strongly for the
conclusion that an estoppel cannot be erected on the basis of the oral
advice. . . .

104 S. Ct. at 2227. The Court does not come out and say that oral advice
can never per se be the basis of an estoppel. But combined with the
absence of any affirmative misconduct, such as fraud or deliberate
misrepresentation, we believe that the facts here do not establish an
estoppel against the government. Appellant also relied on written
approval, though after the distribution of the refunds. There was
correspondence between the PSRO and various federal officials, beginning
in May 1980, pertaining to failure of the PSRO to show the refunds on
its financial statements. The PSRO replied that it did not need to show
the refunds, since it was not money which accrued to the benefit of the
PSRO, but was distributed directly to the employees. Eventually the
Acting Director of the Office of Management and Budget wrote in October
1980 that "no action is required since the FICA money was returned by
IRS to the employees who contributed it and did not increase your PSRO's
revenue." See Exhibit M, and Appellant's Brief, pp. 3-4.

This written approval cannot be the basis of an estoppel since the PSRO
could not have relied on it when it distributed the refunds some 10
months earlier. It is doubtful if in any event the October (12) 1980
letter would be sufficient to base an estoppel upon even if it had
preceeded the distribution to the employees. The Office of Management
and Budget merely said that the PSRO did not have to include the refunds
in its financial statements because it paid out the money it received.
OMB apparently accepted the PSRO's theory that it acted only as a
conduit for the refunds from IRS to the employees. This was not the way
it actually worked out. The PSRO had to make the application for the
refunds. When it received them, it held the money for several months
while it tried to get a definite response from HCFA on the proper
dispositionof the refunds. Whatever OMB approved on a financial
statement could not in any event change the requirements of the cost
principles as to the proper disposition of the refunds.

CONCLUSION We therefore sustain the disallowance except for that
portion of the FICA refund which pertained to the period when the PSRO
was funded under a contract rather than a grant. We leave to the
parties the proper determination of the excluded share of the refund.
/1/ All PSROs became subject to paying FICA taxes beginning
January 1, 1984, through an amendment to the Social Security Act. /2/
The particular question raised here did not arise in
Oakland-Macomb since the three-year limitation on refund of taxes meant
that all the FICA tax refunds in Oakland-Macomb pertained only to years
when the PSRO was being funded under a grant. /3/ Since we find
that we have no jurisdiction over the refund of FICA taxes where the
taxes were paid during the time period when the PSRO was funded by
contract, we do not reach the issue of which cost principles do govern.
Presumably the same principles would apply in any event. The
supplemental agreement to the original negotiated contract (Ex. A, p.
2) refers to "General Provisions, HEW Form 315A (rev. 7/76) negotiated
cost-reimbursement type contract with nonprofit institutions other than
educational institutions." HEW Form 315A (rev. 7/76) provides that
allowable costs shall be determined by the contracting officer to be
allowable in accordance with 45 CFR Part 74 Appendix F for non-profit
institutions. See 41 CFR Sec. 3-16.950-315A, 4.(a) (1) (i) (1979). /4/
There is nothing to prevent the parties from agreeing to have
the Board's decision apply to the entire amount in dispute. The
appellant can choose to abide by the Board's decision for the contract
funds as well as for the grant funds. /5/ Presumably the final
decision on the disputed refunds under the procurement contract would be
by the contracting officer, and appealable to the Armed Services Board
of Contract Appeals or the U.S. Claims Court in accordance with the
Disputes Clause of the contract and the Contracts Disputes Act. /6/ In
Community Health Services the Court intimates (p. 2224, n. 12)
that two of the Court's earlier decisions have allowed the government to
be estopped. Justice Rehnquist in his concurring opinion points out
that these were not traditional estoppel cases. One was a criminal
prosecution. In the other, the Court stated it was relying on the
absence of a waiver and not on estoppel. Id., at 2228. /7/
Merrill is still presumably good law, being cited in both the majority
and concurring opinions in Community Health Services. (See 104 S. Ct.,
p. 2226, n. 17, and p. 2228) /8/ Appellant somewhat surprisingly
relied on the case of Coty v. Harris, 495 F. Supp. 452 (W. D. Va.
1980). Appellant referred to it in its Reply Brief (p. 4) as a case
where "the government was estopped to deny the eligibility of a social
security claimant who had relied to her detriment upon the incorrect
advice of a Social Security Administration employee," facts very similar
to those in Schweiker v. Hansen. Appellant made the statement that,
pursuant to Coty v. Harris, "the government may be estopped in the
Western District of Virginia." Coty v. Harris was decided based mainly
upon the opinion of the Court of Appeals for the Second Circuit in
Hansen v. Harris, 619 F.2d 942 (1980), which was summarily reversed by
the Supreme Court in Schweiker v. Hansen. Even in Virginia, the Court
of Appeals for the Fourth Circuit has stated that "estoppel against the
government is in any event not favored," citing Community Health
Services. See Vance v. Tennessee Valley Authority, 738 F.2d 1418, 4th
Cir., p. 1422, n. 6 (1984). The dissenting opinion in Vance refers to
the "line of decisions which have indicated that the government may not
be estopped except possibly in the most extreme instances," citing
Community Health Services and Merrill. (p. 1424, n. 4) /9/ We
are not told the title of the person who gave the PSRO the oral approval
to pay the employer's share of the FICA refund to the employees. She is
identified only as an employee in the Office of the Grants Management
Specialist. While there is a provision in 45 CFR for "deviations" from
Part 74, a deviation may be made only when authorized by the head of the
granting agency or other officials "if designated in or pursuant to
formal deviation control procedures established by the Agency." 45 CFR
74.6( c). No such designation appears in this case. /10/ The
mere delay in replying to appellant's requests for how to treat the
refunds is clearly not ground for estoppel. Mere inaction is not
affirmative misconduct. See INS v. Miranda, 459 U.S. 14 (1982).

AUGUST 08, 1985