DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Missouri Department
of Social Services
Docket No. 86-133
Decision No. 826
DATE: January 15, 1987
DECISION
The Missouri Department of Social Services (Missouri/
State) appealed a determination by the Health
Care Financing Administration
(HCFA/Agency) disallowing $613,977 in federal financial participation
(FFP)
claimed by the State under the Medicaid program for fiscal years
1983-1985. HCFA based the
disallowance on alleged overpayments for
fiscal agent services provided by General American Consultec
(GAC) under
Missouri's Medicaid Management Information System (MMIS). HCFA asserted
that the
overpayments resulted from Missouri's implementation of an
unauthorized payment methodology for its
fiscal agent, GAC. During the
course of these proceedings, HCFA reduced the disallowance to $603,019.
Based on the following analysis, we uphold the revised
disallowance subject to possible further
recalculation as provided below.
Background
On October 6, 1981 Missouri prepared a
Request for Proposal (RFP) for the fiscal agent services needed to
operate
the State's MMIS. HCFA approved the RFP on November 24, 1981. The
State circulated the RFP
to 123 prospective offerors and received three firm
offers. In January 1982, Missouri awarded a three-year
contract to GAC
to provide fiscal agent services beginning July 1, 1982.
On June
4, 1982 Missouri submitted for HCFA's approval a contract amendment (amendment
six) which
altered the method of payment between the State and GAC from that
originally outlined in the RFP. The
RFP originally called for payment
to the fiscal agent to be based on the number of claims processed.
Amendment six revised that methodology to provide for a fixed payment rate
for each year of the contract.
On June 28, 1982, HCFA rejected
amendment six. The Agency reasoned that the amendment altered "the
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entire complexion of the contract," to such an extent that
unsuccessful offerors may have submitted
different offers had this new
payment methodology been included in the RFP. See HCFA Ex. C.
Nevertheless, throughout the life of the contract Missouri paid GAC under
the methodology outlined in
amendment six. Consequently, on June 16,
1986, HCFA disallowed $613,977 in FFP for the fiscal years
1983-1985 based
on overpayments resulting from Missouri's use of the amended payment
methodology.
Missouri offered four general arguments for reversing
the disallowance -- (1) HCFA's disapproval of
amendment six was arbitrary,
capricious, and unreasonable; (2) even if HCFA acted reasonably in not
approving the amendment, the disallowance should have been based on cost
data and estimates available
at the time of the disapproval of the
amendment; (3) the defense of laches bars the disallowance; (4) in the
alternative, HCFA's computation errors require an $18,030.62 reduction in
the disallowance. We discuss
each of these arguments below.
Analysis
I. Missouri was required to
obtain prior approval of amendment six and HCFA's disapproval of that
amendment was reasonable.
A. Amendment six
required prior approval.
HCFA maintained that applicable
regulations required that the State obtain .prior approval for
amendment
six. Specifically, HCFA cited 45 CFR 95.611(a) (1980), which requires a
state to obtain prior
written approval from HCFA when it plans to acquire
Automatic Data Processing (ADP) equipment or
services that it anticipates
will cost $100,000 over a twelve-month period, or cost $200,000 in total.
HCFA Brief, p. 3.
Missouri did not deny that the services
obtained from its fiscal agent were ADP services, nor argue that
the
requirement for prior approval was inconsistent with the statutory authority for
the Medicaid
program.1/ Instead, Missouri argued that ". . . Amendment 6
must be treated as a separate event . . .
because it was negotiated and
1/ We think it is consistent with HCFA's responsibility in
administering Medicaid to require prior
approval for such acquisitions,
which not only entail a significant commitment of federal funds but also
substantially affect the operation of the program.
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entered into after the MMIS contract had been awarded to
GAC, and not as a part of that process. This . .
. eliminated any need
for its prior approval by HCFA." Missouri Reply Brief, p. 1. Additionally,
Missouri
noted that since it anticipated that the amendment would save the
State approximately $500,000 over the
life of contract, the prior approval
requirements of 45 CFR 95.611(a) did not apply. Missouri Brief, pp.
3-
4.
We disagree. The facts support a finding that
amendment six was not a separate event outside the prior
approval
requirements. Thus, we conclude that the State was required to obtain
prior approval for the
amendment. Throughout its argument before the
Board, the State placed strong emphasis on the
importance of the price
factor in evaluating the offers of the prospective fiscal agents. Price
was, in fact,
the most heavily weighted factor in the State's evaluation
process. Missouri Brief, p. 1.
It is fair to say that the
modification worked a radical change on the nature of the procurement. The
modification changed the payment methodology from a fixed price per claim to
a flat fee per year
regardless of the number of claims processed. This
was a substantial change affecting how the contractor
would have to account
for its services. Thus, it is clear that the State's modification went to
the essence of
the agreement, and was tantamount to a new procurement, both
in terms of its consequences for the
parties and its potential financial
impact on federal liability in the project.
The fact that Missouri
anticipated a cost savings of $500,000 is largely irrelevant, to the central
issue
here, i.e., whether prior approval was required by federal
regulations.2/ The amendment by which the
State hoped to generate a savings
of $500,000 was but a subpart of a larger contract. Since the contract
required prior approval and amendment six worked an essential change upon
the contract, the logical
conclusion is that Missouri was required to obtain
prior approval of the amendment.
Missouri also argued that section
ll.d., of 45 CFR Part 74, Appendix G (also referred to as Attachment 0
of
Office of Management and Budget Circular A-102 and made applicable by 45 CFR
74.161), allows the
State to engage in noncompetitive negotiation for
procurement of services when traditional competitive
bidding proves
inadequate.
2/ The State's estimate of a cost savings was far from accurate,
but this is not the basis for the
disallowance.
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inadequate. Specifically, the regulation provides that
a contract may be awarded by noncompetitive
negotiations where -- (1) the
item is available only from a single source; (2) in cases of public emergency
which would not permit a delay; (3) the federal agency authorizes
noncompetitive negotiation; (4) after
solicitation of a number of sources,
competition is determined inadequate.
This regulation addresses
those limited situations where a contract may properly be awarded outside the
competitive bidding process, not modification of a contract which has
already been awarded through the
competitive process and approved as
required by federal regulations. By its own admission the State
awarded the contract after a competitive process. The State waited
until after the contract had been
executed to alter its essential element,
the payment methodology. See Missouri Brief, p. 2. Moreover,
even if this regulation was applicable, it would not benefit the State as --
(1) fiscal agent services were
clearly available from more than one source
before Missouri decided to alter the contract; (2) there has
been no
evidence of a public emergency necessitating a noncompetitive negotiating
process; (3) HCFA did
not authorize a non-competitive negotiating process;
(4) the competitive process was not inadequate as
Missouri awarded the
contract as a result of that process.
Additionally, the State
Medicaid Manual (which is routinely sent to all states) provides clear support
for a
finding that Missouri was required to obtain prior approval for
amendment six. Section 11269 of the
Manual specifically states,
"contract modification proposals will be subject to prior approval. . . ." See
HCFA Ex. Q. Finally, Missouri's active pursuit of approval for the
amendment belies its current
argument that prior approval was not
required. Missouri clearly requested approval for the amendment on
June 4, 1982, and engaged the Agency in a course of correspondence, after
HCFA's initial rejection of the
amendment, aimed at securing its
approval. See HCFA Ex. B; Missouri Exs. E-J.
B. HCFA's
disapproval of amendment six was reasonable.
The State contended
that HCFA acted unreasonably in not approving amendment six. Missouri
noted that
it received only three offers in response to the RFP (out of a
pool of 123 potential bidders) and that among
the actual offerors GAC's was
the lowest by a wide margin. Thus, Missouri reasoned that "there was no
real possibility of open and free competition affecting the awarding of this
contract amendment." Missouri
Brief, p. 6.
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The fact that only three proposals were received does not
justify Missouri's reliance on the general
availability of a non-competitive
process. The contract was awarded under a competitive process in which
price (as determined by a specific payment methodology) was a major
factor. The price factor aside, GAC
was ranked only second by the
evaluation committee. HCFA Brief, p. 7; Missouri Ex. M, p. 5.
Additionally, as HCFA noted, price was clearly a concern to prospective
offerors as evidenced by the
dialogue concerning estimated claim volumes at
the pre-bid conference. See Missouri Ex. C, p. 8 of 14,
Questions 79
& 81. Further, in response to a question in the pre-bid conference as
to whether there would
be a negotiation period after the contract was
awarded, Missouri indicated that a "bidders (sic) proposal is
subject to
immediate acceptance without discussion with the bidder." See Missouri Ex. C, p.
8 of 9,
Question 213. Thus, not only did Missouri change the single
most important element of the contract after
the contract had been awarded,
it did so after informing potential offerors that there would be no
opportunity to negotiate contract terms after submitting their proposals.
Missouri also argued that HCFA's rejection of amendment six
violated 45 CFR Part 74, Appendix G,
section 2.a., which provides that
"executive agencies shall not substitute their judgment for that of the
grantee unless the matter is primarily a Federal concern." However, the
record supports a conclusion that
the Agency was not substituting its
judgment for the State's in terms of whether the amendment would be
economically beneficial. Rather, HCFA determined that Missouri's
actions in amending the contract were
in effect a subversion of the
procurement process. This point was made in HCFA's original rejection of
amendment six as well as subsequent correspondence with Missouri including
the actual notice of
disallowance. See HCFA Ex. C; Missouri Exs. F, H,
J, & L. Moreover, it is consistent with the Agency
regulations on
procurement of ADP services, which emphasize open and free competition in
accordance
with Attachment 0 of OMB Circular A-102. See 45 CFR
95.613. Since price was a significant evaluation
factor in the award
of this contract, the change in the payment methodology undermined the
competitive
negotiation process since the other offerors did not have an
opportunity to submit an offer based on the
amended methodology. See
45 CFR Part 74, App. G, section ll.c.
Given these facts, we find
that Missouri was required to obtain prior approval of amendment six and that
HCFA's decision not to approve the amendment was reasonable.
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II. HCFA was not required to calculate the
disallowance based on data available at the time it rejected the
amendment.
Missouri alleged that since HCFA relied on the "prior approval"
concept as a basis for the disallowance,
then HCFA could rely only on
information available at the time of its disapproval of amendment six to
calculate the disallowance. Missouri noted that in the "original HCFA
disapproval letter"3/, HCFA
reserved the right to take the disallowance if
the costs under amendment six exceeded the costs under the
original payment
methodology. However, HCFA also indicated that if the actual cost under
amendment
six was less than the original contract would have paid, federal
reimbursement would be based on the
lower figure. Missouri argued that
under this approach HCFA sought the best of both worlds, waiting to
choose
the payment methodology producing the largest disallowance. Missouri
theorized that this course
of action constituted disapproval after the
fact. Missouri reiterated its argument that since its best
estimate
led it to believe that the amended payment methodology would save $500,000, no
disallowance
should be imposed. Missouri Brief, pp. 9-11.
HCFA's timing and calculation of the disallowance were
proper. From the time HCFA rejected
amendment six (June 28, 1982)
Missouri was on notice that implementation of any payment methodology
other
than that originally approved by HCFA could result in a disallowance.
HCFA's subsequent
communications with the State regarding amendment six
reinforced this point. See Missouri Exs. F, H, &
J.
Additionally, HCFA's reports on Missouri's Quarterly Statement of Expenditures
(HCFA Exs. D-P) for
the period in issue also indicated that Missouri was
incurring potential liability for an overexpenditure of
funds. Thus,
the facts demonstrate that Missouri clearly chose to implement amendment six at
its own
risk, disregarding HCFA's warnings. Moreover, by informing
Missouri that, if it took that risk, it could
claim FFP only in costs
actually incurred, HCFA was merely stating the obvious. We find nothing
improper in HCFA's approach, which, commendably, was clear in informing the
State of the
consequences of its proposed action.
3/ The amendment was originally disapproved on June 28,
1982. Missouri refers here to a July 14, 1982
letter from HCFA which
was in response to a July 2 letter from the State. See Missouri Ex. F.
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The State argued that "[i]t is legally irrelevant that the
audited results after the fact" did not substantiate
its original estimate
of a cost savings resulting from the amended payment methodology. Missouri
Brief,
p. 8. Far from being legally irrelevant, we find that the
"audited results" used to calculate the
disallowance are considerably more
accurate indicators than Missouri's estimate (and therefore more
equitable
to all parties) in determining actual costs incurred in excess of the approved
amount. As HCFA
noted, it was not clear from Missouri's statements at
the time the State sought prior approval of the
amendment that the revised
payment methodology would result in a cost savings. See HCFA Brief, pp.
8-
9; HCFA Ex. B, p. 2. Here, HCFA waited until the completion of the
contract to assess a disallowance.
HCFA contended that this process
(as opposed to quarterly disallowances) saved the State $57,100 since it
gave the State the benefit of those months where the amended payment
methodology worked in its favor.
HCFA Brief, p. 10. Missouri did
not attempt to refute this argument.
Given the facts and HCFA's
unrebutted assertion that its methodology for calculating the disallowance
benefitted the State, we conclude that HCFA's timing of, and basis for
calculating the disallowance were
proper.
III. Laches is
not a defense against this disallowance.
Missouri argued that the
doctrine of laches is a defense to this disallowance, since HCFA waited four
years to take the disallowance. Missouri maintained that it was harmed
by the delay since during that
period the State had suffered a substantial
turnover in officials who otherwise would have been able to
attest to the
propriety of following the amended payment methodology.
Missouri's
argument is not convincing. As we found in Maryland Department of Human
Resources,
Decision No. 519, February 29, 1984, it is well settled that the
federal government is not subject to the
defense of laches in enforcing its
rights. Decision No. 519, p. 4. See United States v. Summerlin, 310
U.S. 414, 416 (1940). See also Orange-Chatham Comprehensive Health
Services, Inc., Decision No. 749,
April 30, 1986.
Even a
finding that laches could be applied to the federal government, would not avail
the State here. As
discussed above, HCFA's timing of the disallowance
was proper and, in fact, to Missouri's benefit.
Additionally, the
Agency periodically warned Missouri with each review of the State's quarterly
reports
that a disallowance was possible
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based on Missouri's choice of payment methodology. See
HCFA Exs. D-P. However, Missouri knowingly
continued to pay its fiscal
agent in a manner inconsistent with the contract approved by HCFA.
Accordingly, we find that the defense of laches is inapplicable
here.
IV. Calculation of the Disallowance.
Missouri alleged that even if we were to uphold the legal basis
for the disallowance, HCFA's errors in
computing the disallowance entitled
the State to a reduction of $18,030.62 in the disallowance amount.
Missouri Brief, pp. 13-15. HCFA responded to Missouri's position and
reduced the disallowance by
$10,958. HCFA indicated that it could not
ascertain whether certain figures, presented by Missouri,
warranted a
further reduction in the disallowance. However, HCFA did not specifically
preclude this
possibility. HCFA Brief, p. 16.
Neither
party has presented enough information for the Board to make an informed
decision on the
propriety of a further reduction in the disallowance.
Therefore, HCFA should provide the State a
reasonable opportunity to clarify
the confusion over these figures. If the parties attempt to establish
whether an additional reduction of the $7,072.62 in dispute ($18,030.62 -
10,958) is justified and are
unable to do so, they may return to the Board
for our assistance on that limited issue.
Conclusion
Based on our analysis, we uphold the disallowance in the amount of
$595,946.38. With regard to the
remaining amount of $7,072.62 involved
in the calculation dispute, we remand that portion of this appeal
to HCFA in
accordance with our suggestions outlined above in section IV.
________________________________
Judith
A. Ballard
________________________________
Norval
D. (John) Settle
________________________________
Charles E. Stratton
Presiding Board Member