DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State Department of
Social Services
Docket No. 86-21
Audit Control No. 02-50217
Decision No. 837
DATE: February 17, 1987
DECISION
The New York State Department of Social Services (State) appealed
a
decision by the Deputy Assistant Secretary for Management Analysis
and
Systems (Agency) disallowing $14,706,302 in federal funding for
costs
related to the State's Welfare Management System (WMS) incurred
during
the period October 1, 1975 through March 31, 1982. The Board
stayed the
case at the parties' request to permit the parties to
negotiate. When
the parties informed the Board that they had reached an
impasse on an
issue concerning the proper rate of reimbursement under the
Medicaid
program for certain training costs, the Board set a briefing
schedule on
that issue; the Board dismissed the case on the remaining issues
without
prejudice to the parties to return to the Board if they cannot
resolve
those issues on their own.
With respect to the training costs issue (involving a disal- lowance
of
$243,347 under Medicaid), the State first requested a summary
decision
based on the Board's decision on training costs in New York
State
Department of Social Services, Decision No. 788, September 19,
1986.
Subsequently, however, the State sought and obtained permission
to
submit additional arguments based on evidence not submitted in
the
previous appeal. Essen- tially, the State argued that its
evidence
showed a policy to reimburse the training costs at issue at a 90%
rate
of federal financial participation (FFP) or, alternatively, a 75%
rate
of FFP, rather than the 50% rate the Agency allowed. Based on
our
analysis in Decision No. 788 (which we incorporate by reference
here)
and our analysis below, we conclude that, under the appli-
cable
regulations, the State should have an opportunity to show to what
extent
these costs are allocable to training of persons directly engaged in
the
operation of the WMS, and therefore reimbursable at the 75% rate; to
the
extent that the State cannot show this, the costs are reimbursable
only
at the 50% rate of FFP. Accordingly, we uphold the
disallowance,
subject to reduction if the State can make the requisite
showing.
What we held in Decision No. 788
Under Title XIX of the Social Security Act (Medicaid), FFP is available
in
the costs of a mechanized claims processing system at the rate of 90%
for
costs attributable to the design, development, or installation of
the system
and at the rate of 75% for costs attributable to the
operation of the system.
Sections 1903(a)(3)(A) and (B).
In Decision No. 788, the Board upheld a disallowance of
$291,645
representing the difference between the State's claims for
training
costs associated with WMS at the 90% rate available for
design,
development, and installation and at the 50% rate available for
general
administrative costs. The disallowance was based on
regulations
promulgated by the component of this Department responsible
for
administering Medicaid (for most of the relevant period that
component
was the Health Care Financing Administration, referred to as
HCFA).
Regulations in effect beginning in November 1977 specifically provided:
For personnel engaged in the design, development, or
installation
of mechanized claims processing and
information retrieval systems,
the rate is 50
percent for training . . . .
42 CFR 432.50(b)(3). 1/
The State did not deny that the costs at issue in Decision No. 788
were
the costs of training such personnel. Rather, the State argued
that the
regulations in effect at the time the State's advanced planning
document
for its WMS was approved (in 1976) did not so limit the costs and
that
the State did not have adequate notice of a change. The Board
rejected
this argument, finding that it was logically implicit in the
previous
version of the regulation that training of such personnel
was
reimbursable
only at the 50% rate. The Board also rejected the State's argument
that
the regulations were inconsistent with the Social Security Act or
with
approval of the State's advanced planning document for its WMS
system
and of its cost allocation plan for WMS costs. 2/
The issues here
In the present appeal, the State incorporated by reference its
arguments
in the case leading to Decision No. 788, but provided no
additional
analysis on which we could alter our conclusion that what was
explicitly
stated in the HCFA regulations at 42 CFR 432.50(b)(3) was
logically
implicit in the earlier version: training costs for personnel
engaged
in design, development, or installation of the WMS were
reimbursable
only at 50%. Nor did the State rebut our conclusions about
why this
interpretation of the statute was reasonable. Indeed, the
State said
here that it agreed with HCFA that it would be counterproductive
to
train people to design the system. State's reply brief, p. 6.
Rather, the State relied here on the following allegations:
� The State said that the costs here were "trainer" costs,
which the
State described as "funds expended for the
individuals responsible
for the training of the
staff involved in the operation of WMS."
State's
brief submitted November 3, 1986. The State said that
it
"claimed 90% FFP for the costs of training that,
while occurring
during the design, development and
installation phase, was
undertaken for the
preparation of trainers who would train others
to
operate the system." State's reply brief, p. 6.
� The State argued that these costs were part of
development since
they were necessary to assure that
the system could be utilized
once it became
operational. The State relied for its view
that
these costs were development costs on a meeting
agenda sent to the
State by an HHS official
referring to the costs as "systems
development"
costs and stating that HHS policy was that "trainer"
costs were reimbursable at 90% FFP.
� The State also argued in effect that a HCFA Action
Transmittal
showed that the regulations HCFA
relied
on (42 CFR 432.50 and its predecessors) were not
appli- cable to
the costs in question here and that
all costs related to a
mechanized claims processing
system were reimbursable either at the
90% or 75%
rate.
� The State argued in the alternative that, even assuming
that the
Agency could show that these costs were
related to operations and
not to development, the
State would then be entitled to 75%
reimbursement
rather than the 50% allowed.
The State's allegations here concerning the nature of the costs
in
question raise several issues not addressed in Decision No.
788. In
that case, the State did not dispute the audit finding that the
costs in
question were for training "personnel engaged in the
design,
development, or installation of a mechanized claims processing
system,"
within the meaning of the regulation at 42 CFR 432.50(b)(3).
Here, the
State on the one hand argued that the individuals in question
were
engaged in "development" of a mechanized system (an argument which,
as
discussed below, is based on an improper use of that term), and, on
the
other hand, described the costs in a manner arguably inconsistent
with
that position. The State said that the training here, while
occurring
during the development phase, "was undertaken for the preparation
of
trainers who would train others to operate the system." State's
reply
brief, p. 12. If these costs were related to persons who were
being
trained, they logically could be considered "trainee" costs, yet,
the
State said that the costs were "trainer" costs because they
were
expended for persons "responsible for the training of staff engaged
in
the operation of WMS." State's brief submitted November 3, 1986.
We do not here resolve questions regarding the precise nature of the
costs
at issue, but resolve the legal issues raised by the State,
providing
guidance about what the State would have to show in order to
receive enhanced
funding for these costs (which, we conclude, could be
no more than the 75%
rate). 3/ The effect of the"newly discovered
evidence"
The State alleged here that newly discovered evidence showed that the
HCFA
position upheld by the Board in Decision No. 788 was inconsistent
with HCFA's
previous policy regarding training costs. That evidence is
a meeting
agenda dated September 28, 1982, which states in pertinent
part:
Please be prepared to discuss the State's position
regarding a
methodology for distributing New York
City WMS development and
operation costs.
* * *
-- Under any cost allocation methodology which
the State proposes,
the
following HHS policies apply to specific
systems
development
costs:
* * *
-- Trainer costs are
fundable at the development FFP
level
(i.e. IV-A 50%; XIX 90%).
-- Trainee costs are
fundable only at the administrative
FFP
level of 50% FFP for IV-A and XIX.
State's appeal file, Ex. 1.
The State submitted an affidavit by a State Deputy Commis-
sioner
attesting that an HHS official in the Division of State Systems
had
telefaxed the agenda to him prior to a meeting on September 29,
1982,
and that at that meeting and in other discussions "the issue of 90%
FFP
for trainers during the development phase was discussed by the
operating
division representatives as HHS policy." State's appeal file,
Ex. 2.
The State also presented evidence that the question of training
costs
was not included in later discussions as an unresolved issue.
Id., Ex.
3. The State relied on this evidence for two
propositions: (1) that
all training costs are "developmental," and (2)
that, in any event, HHS
policy was that at least trainer costs are
reimbursable at 90 percent.
We conclude that the meeting agenda and oral discussions the State
relied
on here do not provide a basis for disregarding the plain terms
of HCFA
regulations regarding training costs. The State made too much of
the mere
reference to these costs as "systems development" costs.
Clearly, the author
of the meeting agenda was not using this term in the
technical sense used in
HCFA regulations. As we noted in Decision No.
788, the State's WMS
system was intended to serve other programs as well
as Medicaid and documents
relating to the system use the terms
"development and implementation" without
tracking the terminology in the
HCFA regulations. (See our discussion
at page 7 below.) Moreover, the
State's own evidence shows that the State
under- stood, at least with
respect to "trainee" costs, that the HHS position
was that they were not
development costs. State's appeal file, Ex. 3,
p. 20.
With respect to "trainer costs," the statement in the meeting
agenda
regarding HHS policy is (to the extent it applies to Medicaid costs)
in
conflict with the plain terms of HCFA's regulation on training
costs,
which clearly includes as "training expenditures" costs such
as
instructors' salaries and costs of training materials. 42
CFR
432.55(b)(1978). The State did not explain how it could reasonably
rely
on a statement about HHS policy in conflict with the regulations,
nor
even allege that it did rely on that statement (in fact, the meeting
was
held after the time period in question here).
The statement regarding "trainer" costs is a mere reference to a
supposed
policy; it does not appear in an Agency policy issuance nor
otherwise purport
to be establishing policy. Moreover, it provides
absolutely no
explanation of what is intended to be included in the
terms "trainer" and
"trainee." Thus, we conclude that the statement in
the meeting agenda
cannot bind the Agency to a policy in conflict with
the regulations.
Having determined this however, we must address the
State's argument about
whether the regulations were applicable.
The applicability and relevance of the training regulations
Although the regulations on which the Agency relied directly address
the
question of availability of enhanced reimbursement for training
of
persons engaged in the design, development, installation, or
operation
of a mechanized claims processing system, the State argued that
the
regulations governing reimbursement for training associated with
the
various stages of WMS are those providing generally for enhanced FFP
for
mechanized claims processing systems. See 42 CFR Part 433, Subpart
C.
The State said that the regulations at 42 CFR 432.50 on training
and
other personnel costs "were adopted subsequent to the WMS
regulations
and without notice to the State and have no relevance to the
costs at
issue herein." State's reply brief, p. 4. In support of this
argument,
the State submitted a HCFA Action Transmittal (HCFA-AT-78-33, April
3,
1978), which the State said "indicates that 'all costs',
including
training, are reimbursable with enhanced federal funding."
State's
reply brief, p. 3. The State also
noted that the Action Transmittal states that the regulation
now
codified at 42 CFR 432.50 (then codified at 42 CFR 446.175)
"pertains
only to staffing for administration of medical assistance
programs."
The State apparently implied from this that the regulation did not
apply
here. Finally, the State said that the Action Transmittal
indicated
that "the assignment of a reimbursement rate of 75% or 90%
was
determined by whether the costs benefit the operation, or the
design,
development or installation of the automated system." State's
reply
brief, p. 3.
At the outset we note that the State did not explain what in the
general
regulations in Subpart C of Part 433 of 42 CFR on mechanized
claims
processing systems indicates that the costs in question here should
be
reimbursed at a 90% rate. As we indicated above, these regulations
use
the term "development" in a much more narrow sense than the State
uses
that term in reference to its WMS system. These regulations
define
"development" as "the definition of system requirements, detailing
of
system and program specifications, programming, and testing . . . ."
42
CFR 433.111. We fail to see how preparation of persons who would
train
others to operate the system falls within this definition. As
we
concluded in Decision No. 788, the mere fact that costs might have
been
incurred during the development phase is insufficient to show that
the
costs are the types of costs for which 90% FFP is available. In
any
event, however, we find the State's arguments to the effect that
we
should ignore HCFA's regulations specifically addressing enhanced
rates
for training to be wholly without merit.
As we discussed in Decision No. 788, the State's argument that it did
not
have sufficient notice of HCFA's policy on training in the
regulations is
based on the unsupported view that that policy changed in
1977; in fact the
regulatory policy has been consistent. The State's
argument based on
the Action Transmittal is equally unfounded. The
subject of the Action
Transmittal is "Applicability of Federal Matching
Rates of 90% and 75% to
MMIS Costs other than Salary, other
Compensation, Travel and Training."
State's appeal file, Ex. 5
(emphasis added). 4/ The
Action Transmittal addresses the question of whether states may
receive
reimbursement for both direct and indirect costs of all
expenditures "allocable to an operational MMIS at 75% or to
design,
development, and installation of a MMIS at 90%" in view of the fact
that
the regulation at 42 CFR 446.175 (now 432.50) "appears to
limit
allowable costs to salary and other compensa- tion, travel
and
training." Ex. 5. In context, the statement in the Action
Transmittal
that the regulation "pertains only to staffing for administration
of
medical assistance programs" simply means that that regulation does
not
cover all costs of a mechanized system. The statement certainly
cannot
reasonably be read as meaning that the regulation does not
cover
training costs of a mechanized system when it explicitly does
so.
Moreover, the training costs in question here are clearly staffing
costs
claimed for the administration of a medical assistance program.
See
section 1903(a) of the Act; 42 CFR 432.1, 433.15(b)(4).
The statements in the Action Transmittal about the applicable rate
being
determined by whether costs "benefit" an MMIS system do not
conflict
with our holding in Decision No. 788. Indeed, part of our
rationale
there was that the enhanced rate of 90% was available under the
statute
only in costs "attributable to" design, development, or installation
and
that HCFA reasonably determined that it would not benefit the system
to
train persons performing these functions, but would be
coun-
terproductive and cause delay. We also note that claiming for
costs of
a system is subject to general cost principles of reasonableness
and
necessity. See section 1903(a) of the Act; 42 CFR
433.112(b)(7)
(incorporating requirements in Appendix C to 45 CFR Part
74).
On the other hand, as we discuss next, given the State's description
of
the costs in question here, some of the costs may be attributable
to
operation of a system, even if they are not reimbursable at 90% FFP.
Costs of operation
In the case leading to Decision No. 788, the State did not contest
the
audit finding that the costs in question were for training
personnel
engaged in the design, development, or installation of a
mechanized
system. The State did not directly contest a similar audit
finding
here. The State did raise, however, an argument that the costs
should
at least be reimbursable at the 75% operational rate, rather than
the
50% allowed, and said that its costs were for preparing persons
who
would train personnel engaged in the operation of the WMS system.
The regulations provide for reimbursement at the 75% rate for
training
"personnel engaged directly in the operation of mechanized
claims
processing and information retrieval systems, . . . ." 42
CFR
432.50(b)(2). The regulations also state that rates of
reimbursement
are determined on the basis of the individual's position and
that rates
of FFP in excess of 50% are applicable only to those portions of
an
individual's working time devoted to the kinds of positions or
duties
that qualify for the enhanced rate. 42 CFR 432.50(a), (c). It
would
appear that the individuals described by the State here would not
be
"engaged directly" in operation of the WMS. Yet, as the Agency
pointed
out, "training expenditures" include costs that would reasonably
fit
within the concept of "trainer" costs, such as salaries of
staff
development personnel assigned full-time training functions, salary
of
experts engaged to conduct special programs, instructors' salaries
for
field instruction, and teaching materials. 42 CFR 432.55(b).
In view
of the fact that the State did not fully describe its costs until
its
reply brief, the Agency has not directly addressed whether the
costs
here could be reimbursable at the 75% rate as training expenditures
for
persons directly engaged in operation of the WMS. Thus, we
have
determined that the State should have a brief opportunity to show
that
part or all of the costs in question here are reimbursable under
the
regulations at the 75% rate.
We note, however, that, contrary to what the State implied here, the
State
has the burden of documenting that it is entitled to the enhanced
rate of
FFP. See, e.g., Missouri Department of Social Services,
Decision No.
395, February 28, 1983. Moreover, since the State was told
previously
that it should be prepared to document the nature of its
costs, we uphold the
disallowance, subject to reduction only if the
State submits its
documentation to the Agency within 10 days after
receiving this decision, or
within such longer time period the Agency
may permit.
Conclusion
For the reasons stated above, we uphold the disallowance, subject
to
reduction if the State can show in accordance with the regulations
and
our decision that part or all of the costs are reimbursable at the
75%
rate of FFP. If the parties cannot resolve this on their own, the
State
may return to the Board
within 30 days after receiving an Agency decision on whether the
costs
are reimbursable at a 75% rate.
________________________________
Cecilia
Sparks Ford
________________________________
Alexander G. Teitz
________________________________
Judith
A. Ballard Presiding Board Member
1. The regulation governing rates of FFP for costs of
staff involved
in design, development, or installation of a system was first
codified
at 45 CFR 250.120 (1974). This regulation was later
redesignated as 42
CFR 450.120. See 42 Fed. Reg. 52827 (September
30, 1977). The Agency
later decided to bring together in one regulation
all the Agency's
policies on staffing and training costs applicable to the
Medicaid
program. Thus, 42 CFR 450.120 was deleted and 42 CFR Part 446
was
amended by adding a new section 446.175(b)(3). See 42 Fed. Reg.
60564
(November 28, 1977). In the preamble to the publication of 42
CFR
446.175(b)(3), the Agency stated that there were no substantive
changes
made to the then current policies in 42 CFR 450.120. This
regulation
was later redesignated as 42 CFR 432.50(b)(3). 43 Fed. Reg.
45199
(September 29, 1978).
2. The State requested reconsideration of Decision
No. 788, based in
part on the arguments raised here. The Board denied
that request in a
ruling dated February 6, 1987.
3. After the State had informed the Board that it
intended to
present arguments that HHS policy was to at least reimburse
"trainer"
costs at 90%, the Board asked the parties to explore whether they
could
stipulate whether the costs at issue were in fact "trainer"
costs. HCFA
was unable to determine whether it could agree to such a
stipulation
prior to the time the State's brief was due. The Board
informed the
State that it agreed with HCFA that the State has the burden
generally
to document the nature of its costs, but did not require the State
to
submit the documentation after HCFA declined to stipulate that the
costs
were "trainer" costs. It was not clear that this would make
a
difference, and the Board did not wish to delay this case any longer.
4. The acronym "MMIS" stands for "Medicaid Management
Infor- mation
System," a prototype claims processing and information
retrieval system
used in the Medicaid program. The State's WMS is not
itself an MMIS
system, but provides eligibility data for the recipient
subsystem of the
State's