Georgia Department of Medical Assistance, DAB No. 882 (1987)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  Georgia Department of Medical Assistance

Docket No. 86-234
Decision No. 882

DATE:  July 15, 1987

DECISION

The Georgia Department of Medical Assistance (State) appealed a
determination by the Health Care Financing Administration (HCFA or
Agency) disallowing $1,379,889 in federal financial participation (FFP)
claimed for the period July 1, 1984 through March 31, 1985.  The amount
disallowed represents the difference between the State's claims for
costs at the 75 percent rate available for operation of a mechanized
claims processing and information retrieval system called a Medicaid
Management Information System (MMIS), and the 50 percent rate available
generally for administrative costs.

The Board granted Georgia's request that we address preliminarily
whether, as a matter of law, HCFA exceeded its legal authority in
denying the State's claim at the 75 percent rate for operation of a MMIS
for the period in question.  For the reasons stated below, we find that
HCFA acted within its legal authority in denying the State's claim at
the enhanced rate.y 1/

I.  Applicable law, regulations and guidelines

Under section 1903(a)(3)(B) of the Social Security Act (Act), FFP is
available in the costs of a mechanized claims processing system at the
rate of 75 percent for costs attributable to the operation of a system
approved by the Secretary; otherwise, administrative costs are
reimbursed at 50 percent under section 1903(a)(7) of the Act.

In 1980, section 1903(r) was added to the Act.  Pub. L. No.  96-398.
That legislation requires each state with a Medicaid program, with
certain exceptions not applicable here, to have an approved MMIS
"operational" before established deadlines and, if the state fails to do
so, prescribes FFP reductions by increments in the funding available
under sections 1903(a)(2) and (7) of the Act.  (Those sections provide
75 percent FFP for compensation and training of skilled professional
medical personnel (SPMP) and support staff and 50 percent FFP for
general administrative expenditures.)  Specifically, subsections
1903(r)(1)(A), (B) and (C) require a state's MMIS to be operational by a
specified deadline or be subject to a reduction in those FFP rates.
Similarly, subsections 1903(r)(2)(A) and (B) require a state's MMIS to
be initially approved by the Secretary within one year from the date the
Secretary determines the system became operational or be subject to a
reduction in the FFP rates for SPMP compensation and training and for
general administrative expenditures.  Finally, and central to the
dispute at issue here, subsection 1903(r)(3)(A) provides that when a
state's MMIS is initially approved "the 75 per centum Federal matching
provided in subsection [1903] (a)(3)(B) [which provides for 75 per cent
FFP for operation of an approved MMIS] shall become effective with
respect to such systems, retroactive to the first quarter beginning
after the date on which such systems became operational. . . ."

The Agency regulation at 42 CFR 433.111 (1980)y 2/ defines operation of
an MMIS, as follows:

       "Operation" means the automated processing of claims, payments,
       and reports.  "Operation" includes the use of supplies, software,
       hardware, and personnel directly associated with the functioning
       of the mechanized system.

The regulations at 42 CFR 433.113 set forth the conditions which must be
met in order for a state to receive FFP at the 75 percent rate for
operation of a MMIS approved by HCFA.  The regulation provides that the
Administrator of HCFA will approve the system operation if the
Administrator determines among other things that the system is likely to
provide more efficient, economical, and effective administration of the
State plan, the system meets the system requirements and performance
standards in Part 7-71-00 of the Medical Assistance Manual, and the
system has been operating continuously during the period for which FFP
is claimed.  42 CFR 433.113(b), (c) and (d).

The regulations are supplemented by Chapter 11 of the State Medicaid
Manual (SMM or Manual).y 3/  The Manual provisions are important in the
analysis here.  Section 11110 E of the Manual defines "Certification
Review" as follows:

       . . .  the approval process by which HCFA determines if a State
       satisfies the approved APD [Advanced Planning Document], and/or
       if a State's title XIX mechanized claims processing and
       information retrieval system is operational and continuously
       meets requirements for FFP, as defined in section 1903(a)(3) of
       the Act, 42 CFR 433 Subpart C and Part 11 of the State Medicaid
       Manual.

The Manual further provides the basis at section 11260 for retroactive
75 percent FFP.  The Manual states:

       A.  General.  Section 1903(a)(3) provides for an effective date
       of July 1, 1971 and section 1903(r)(3) further defines
       retroactive payments.  A claim for retroactive FFP may be made
       for systems operations begun during any period on or after July
       1, 1971.  The State can obtain increased operational FFP
       retroactive to the first quarter beginning after the date
       established by the Secretary that the system became operational.
       HCFA will conduct a certification review prior to authorization
       of retroactive FFP.  The State in making a claim for retroactive
       FFP must submit a written statement to the effect that its system
       operations have been reviewed by HCFA and meet all requirements
       in section 11210 and 11215, which include the system requirements
       and performance standards of Chapter 3 of this manual.  The
       identity of the reviewer and date of review must be stated.  This
       statement must include the following:

            1. The date the complete system was officially accepted as
               operational;

            2. The dates of the period of operations claimed;

            3. Certification that the requirements have been met for the
               entire period for which 75 percent is being claimed; . .
               . .

(Emphasis added.)

The Manual also specifies at section 11255 that there is a transition
period of funding a MMIS system from the 90 percent FFP rate available
under section 1903(a)(3)(A)(i) for design, development, or installation
of a MMIS and 75 percent FFP rate and that "FFP at the 50 percent level
is available for operation of any subsystem from that point that 90
percent FFP ceases until the complete system is fully operational and
meets the requirements of section 11210 of the SMM."  Section 11255 C.
of the SMM (emphasis added).  Paragraph D of that section further
provides that 75 percent FFP is available once the complete approved
system is determined to be fully operational and meets all requirements
as defined in section 11210 of the SMM.

II.  Statement of Case

Georgia originally began operating a MMIS in March, 1976, that was
certified in August, 1977.  In March, 1983, Georgia submitted an APD to
HCFA detailing the State's intention to replace its old system with a
new MMIS system to be operated by a private contractor as the State's
fiscal agent.  Appellant's Appeal File, Exhibit (Ex.) 1.  HCFA approved
the State's request for proposal for the MMIS fiscal agent contract in
June, 1983.  Appellant's Appeal File, Ex. 2.

Meanwhile, Georgia's original MMIS system continued to operate and
receive 75 percent operational funding.  In fact, HCFA notified the
State on October 1, 1984 that its old system was reapproved through June
30, 1984.  Appellant's Appeal File, Ex.  8.  In that same letter, HCFA
acknowledged that effective July 1, 1984, the old system had been
replaced with a new MMIS.  HCFA stated that "until that new system is
approved you may claim Federal financial participation at only the 50
percent level." HCFA indicated, however, that should the State choose
after October 1, 1984 to reinstate the discontinued system, the FFP
available for its operations, since already approved, would be at the
full 75 percent rate.

In November, 1984, HCFA notified the State that upon review of the
State's claim for expenditures for the quarter ended September 30, 1984,
HCFA had determined that the State claimed all of its MMIS costs at the
75 percent rate.  HCFA notified the State that:

       Since your Department's new fiscal agent . . . commenced
       operations on June 30, 1984 your MMIS must be recertified to be
       eligible for 75 percent FFP. . . .

Appellant's Appeal File, Ex. 10.

Similar letters for subsequent quarters were sent to the State by HCFA
in March, 1985, June, 1985 and September, 1985.  Appellant's Appeal
File, Exs. 11, 12 and 13.  Georgia made a formal request for
certification review of its new MMIS on May 3, 1985. Appellant's Appeal
File, Ex. 14.  On December 16, 1985, HCFA transmitted to the State the
results of its certification review in accordance with the State's
request for FFP for operation of its MMIS retroactive to June 30, 1984.
After identifying problems with the State's system, HCFA stated that
"the Georgia MMIS is approved with an operational date of March 31,
1985."  As a result, HCFA indicated that the State could claim FFP at
the 75 percent operational rate for the replacement system effective
April 1, 1985.  HCFA indicated that the approval, however, was
contingent upon the shortcomings in the report being corrected within a
reasonable time.  Appellant's Appeal File, Ex. 15.  In accordance with
HCFA's instructions, the State submitted a corrective action plan to
HCFA on March 11, 1986 (Ex. 16), and HCFA acknowledged receipt of the
plan on May 1, 1986, indicating that HCFA would require verification
from the State after the completion of the scheduled changes that the
corrections had been made to the system and that all outstanding issues
had been completely resolved.  Appellant's Appeal File, Ex. 17.  On the
basis of such a verification, HCFA notified the State on July 22, 1986
that "the contingencies for certification approval are satisfied and the
Georgia MMIS is approved for enhanced funding effective April 1, 1985."
Appellant's Appeal File, Ex. 18.

Shortly after this letter was sent, HCFA sent a program memorandum to
all Regional Administrators dated July 25, 1986 to inform them that HCFA
would be discontinuing its practice of conducting an on-site
certification review of replacement systems.  Appellant's Appeal File,
Ex. 19.  HCFA indicated that, with elimination of the on-site
certification review, a state's MMIS will be approved or disapproved on
the basis of the annual Systems Performance Review.  HCFA further stated
that the ongoing rate for FFP for operation for the replacement system
will be the rate for the replaced system.

On November 7, 1986, HCFA issued a final decision disallowing the
State's claim for retroactive FFP at the 75 percent operational rate for
the period July 1, 1984 through March 31, 1985.  HCFA indicated that the
State's MMIS was conditionally determined to be operational and
certifiable beginning April 1, 1985 inasmuch as the certification
reviewers determined that the State's MMIS did not meet the conditions
for certification for the period July 1, 1984 through March 31, 1985.
Accordingly, the Agency allowed the State's claim for this period only
at the 50 percent general administrative rate.

III.  Discussion of the State's Arguments

a.  Whether HCFA exceeded its statutory authority.

The central argument made by the State was that HCFA exceeded its
statutory authority and violated the provisions of the Social Security
Act when it denied the State's retroactive claim for this period.

The State contended that under the provisions of sections 1903(a)(3)(B)
and 1903(r)(3)(A), the State was entitled to 75 percent funding as of
July 1, 1984, the beginning of the calendar quarter after the system
allegedly became operational.  The State disagreed with the operational
date of March 31, 1985 established by HCFA and made the following
arguments:

       *  The operational date is established at the time the APD is
          approved by HCFA; it is not the date established by HCFA in
          its certification review.

       *  Under section 1903(r) of the Act, the date a system becomes
          operational is not determined by the standards used to
          determine whether a system is approved.

       *  The date an MMIS becomes operational is the date  it starts
          processing claims in accordance with the definition of
          operation in 42 CFR 433.111.

       *  The state would not have risked the 75 percent it was already
          receiving for its old system unless it believed that it would
          still receive 75 percent upon start-up of the replacement
          system.

       *  The legislative history to section 1903(r) shows that HCFA's
          action was contrary to the intent of Congress.

We do not agree with the State that the statute here mandates that as a
matter of law the State should receive FFP at the 75 percent operational
rate retroactive to July 1, 1984.  Acceptance of the State's position
would require the Board to ignore the clear import of the applicable
statute, regulations, and Manual provisions.

The State argued that the operational date of the MMIS is established at
the time the APD is approved.  The statute, however, clearly provides
that the Secretary determines when a State's MMIS becomes operational.
Section 1903(r)(2)(B). Consequently, the prospective date specified in
the approved APD as the date a system becomes "operational" or the date
the State indicated the system "commenced operations" is not necessarily
the date the system becomes "operational" under the statute.y 4/ The APD
is only the State's written plan of what it intends to do in the future.
Thus, while an APD which was approved by HCFA may specify a date for the
system to be operational, this does not mean that the State actually had
a system entitled to enhanced funding by that date.  Similarly, the
State's claim that its MMIS commenced operations on a specific date does
not mean that all aspects of that system were working satisfactorily on
that date so that the system was "operational" within the meaning of
section 1903(r) of the Act.  If we were to accept the State's argument
that the operational date is established at the time the APD is
approved, the Agency could pay an enhanced FFP rate for systems which
are clearly deficient.

In the alternative, while the State did admit that even if the Secretary
has authority under the statute to determine when a system becomes
operational under section 1903(r)(2)(B), it argued that the Secretary
does not have authority to apply the same standards for determining the
operational date as the standards for initial approval under section
1903(r)(5).  Transcript, p. 19.  The statute, by specifically providing
that the Secretary should determine when a system becomes "operational,"
implies that HCFA, using some sort of standards, must make a
determination as to how the system is working.  Section 1903(r) does
refer to two dates, namely the date a system is determined operational
and the date the system is initially approved.  We, however, do not
accept that the logical conclusion here is that the Act then compels
different standards to be used.  As the State conceded, the statute does
not specify that the Secretary develop separate standards for
determining when a MMIS is operational.  The use of two dates simply
recognizes that certification review would not normally take place
immediately after a system is operational.  Indeed, the statute
contemplates performance standards which assess "systems in operation"
(section 1903(r)(6)), which could not be applied immediately upon
operational status.  Moreover, since FFP is available under section
1903(a)(3)(B) only for operation of an approved system, it makes sense
to read the provisions together to mean that the 75 percent rate is
available only from the time an approvable system is fully operating.
Thus, what the Agency did here is consistent with the statute, read as a
whole, and best effectuates its purposes.

Moreover, the State had notice of HCFA's interpretation. Although the
State chose to ignore the SMM, the SMM is a contemporaneous
interpretation not only of section 1903(a)(3)(B) but also section
1903(r).  Section 11260 of the SMM provides specific information and
instructions for claiming 75 percent FFP pursuant to section 1903(r)(3)
of the Act.y 5/  The provisions set forth clearly and unambiguously just
how a state may claim retroactive FFP, what is required to receive
enhanced funding and what standards should be used in determining
whether a system is operational.  The SMM provides that a state can
obtain 75 percent FFP for operations of a MMIS "retroactive to the first
quarter beginning after the date established by the Secretary that the
system became operational."  Emphasis added.  The SMM provisions quoted
above make it clear that the date which the Secretary will establish as
the date the system became operational will be the date on which the
conditions for approval were met and that the State may claim
retroactive FFP at the operational rate of 75 percent only from that
date forward.

These SMM provisions also explain what is implicit in the Act: that the
same standards are used for determining when a system is operational as
are used for initial approval because the Secretary's determination of
when a system became operational is necessarily made retroactively.
When a state asks HCFA to perform a certification review so that it may
receive FFP, it must already have an operating system.  Thus, the Act,
in allowing for retroactive FFP, allows the Secretary to make a
retroactive determination as to when a system meeting the requirements
of 1903(a)(3)(B) of the Act, 42 CFR 433.113 and Part 11 of the SMM
became operational.  As a result, the SMM provisions support the
conclusion that the Agency used the correct standards in determining
when the State's system became "operational."

The State contended that the date an MMIS becomes operational is a
matter of fact; it becomes operational when it starts processing claims.
The State based its arguments on the definition of "operation."  The
SMM, however, indicates that 75 percent FFP for operation of a MMIS is
not automatic; it does not become available by merely turning on the
system.  The SMM sets forth that the State must first notify HCFA that
the system has been tested and is ready for certification review in
order to receive operational FFP.  Section 11237 D of the SMM.  Next,
HCFA performs its three-stage certification review, consisting of:
preliminary evaluation of State-furnished information and system
documentation; HCFA on-site observation of on-going system operations;
and post-site evaluation report of the findings of the review team.
Sections 11240 and 11241.  The SMM also suggests at section 11255 that
there may be a period after the system is designed, developed, and
installed but before the system is fully operational when the State may
only receive FFP at the 50 percent rate.  This provision explains that
90 percent FFP for design, development, and installation terminates on
the date the system is fully tested and accepted by the State.  Thus,
the SMM provides that "FFP at the 50 percent rate is available for
operation of any subsystem from the point that 90 percent ceases until
the complete system is fully operational and meets the requirements of
section 11210 of the SMM."  These provisions then must be read together
with the definition of "operation" in 42 CFR 433.111 as well as the
regulation at 42 CFR 433.113 providing for 75 percent FFP for
operations.  As a result, we cannot agree with the State that
"operation" for purposes of 75 percent retroactive FFP means when the
system first begins to process and pay claims.  The regulation at 42 CFR
433.111 merely provides a definition of operation of a system.  That
definition, however, does not set forth the conditions which must be met
in order to receive 75 percent FFP for operations.  Those are clearly
set forth at 42 CFR 433.113.  Thus, the date a system begins "operation
in fact" is not necessarily the same as the date a system becomes
"operational" for purposes of 75 percent retroactive FFP.

Furthermore, there is every indication here that the State was aware of
the difference.  As early as October 1984, the State knew that until its
replacement system was certified, it could receive FFP at only the 50
percent level.  Appellant's Appeal File, Ex. 8.  The record shows that,
consistent with the SMM and repeated notice from HCFA as outlined above,
the State on May 3, 1985 requested that HCFA perform a certification
review of the State's new system.  On June 28, 1985, HCFA notified the
State that the on-site certification review was scheduled and reminded
the State of the purpose of that review.  HCFA stated:

       As you know the purpose of the on-site review is to determine if
       the Georgia MMIS meets the minimum requirements of the MMIS
       General Systems Design (GSD) and Part 11 of the State Medicaid
       Manual, and to verify that the system is operating in compliance
       with current regulations and policy.  In order to qualify for
       retroactive certification the State must produce documentation
       showing evidence of the operational status of the MMIS since the
       operational date claimed (i.e., June 30, 1984).  This means that
       the documentation presented must demonstrate that the entire
       system (all subsystems and claim types) has been fully functional
       from that date forward.

Respondent's Appeal File, Ex. 2.  This letter proceeds to provide the
State with specific information about the review, including what
information the State should furnish and what State personnel should be
available during the review.

The State did not deny that it had notice of the SMM provisions.
Moreover, as the record indicates, HCFA notified the State countless
times that the State's MMIS needed to be certified in order to receive
75 percent for operation of the MMIS and that, in order to qualify for
retroactive FFP, the State must demonstrate that its MMIS was fully
operational from the operational date claimed.  Otherwise, reimbursement
would be at the 50 percent general administrative rate.  In addition,
the State did not deny that the provisions of the SMM were intended as a
contemporaneous interpretation not only of section 1903(a)(3)(B) but
also of section 1903(r), which was enacted in October, 1980.  The Board
has held previously that actual notice of the Agency's policy
interpretation, if reasonable, is sufficient to bind a state to its
terms.  See Maine Department of Human Services, Decision No. 712,
December 11, 1985; New York State Department of Social Services,
Decision No. 520, February 29, 1984; and Social Service Board of North
Dakota, Decision No. 166, April 30, 1981.  The State has not shown why
this should not be true here.

The State argued that it would not have risked the 75 percent FFP it was
receiving for its old system unless it believed it would receive 75
percent FFP upon start-up of the new system.  The record, however, shows
that when the State first submitted its APD for a replacement system in
March, 1983, its old system was in a "non-approved status" for fiscal
year 1983.  Thus, in order to maintain an approved MMIS and to avoid
funding reductions, the State determined it was necessary to replace the
old system to resolve these problems.  Appellant's Appeal File, Ex. 1,
p. 2. Therefore, the record does not support the State's contention,
because at the time it submitted its APD in 1983, the State was not
certain of receiving 75 percent FFP.

The State also contended here that the SMM provisions render section
1903(r) of the Act meaningless in that the SMM provisions take away the
states' incentive to get their MMIS operational. The State contended
that under section 1903(r)(2)(B) states have a grace period of a year
from the date the system is determined operational before the system
must receive initial approval, during which time the states could
receive full FFP at the operational rate without penalty.

The legislative history shows that section 1903(r) was enacted for the
purpose of ensuring that states install MMIS systems by specific
deadlines and that MMIS systems continue to operate effectively once
installed, by establishing penalties for failure to do so.  126 Cong.
Rec. 19490 (July 24, 1980) (remarks of Senator Schweiker).  The
enactment of this section was meant to respond to two perceived
problems.  First, some states had not yet taken advantage of the
enhanced FFP rates provided by sections 1903(a)(3)(A)(i) and (B) to
develop and operate MMIS systems.  Second, several states were abusing
these incentives by pledging in APDs to install MMIS systems within a
short period of time, yet years later still did not have an operational
MMIS but continued to receive FFP at the 90 percent rate for their
alleged efforts.  The means Congress chose to provide an incentive was
to reduce funding for states which did not meet the specified deadlines
and other requirements.  Nothing in the statute or legislative history
indicates that the provision on retroactive FFP was intended to be an
incentive to move from developmental to operational status, as the State
contended here.  The SMM provisions do not take away the states'
incentives to get their MMIS operational.  The mere fact that a state
would suffer a reduction in funding if the system is not operational by
a specified date is reason enough to make sure the system is
operational.  The SMM then only makes clear what the statute provides:
that operational FFP, whether retroactive or not, is available only from
the date the Secretary determines the system is operational; otherwise,
reimbursement is only at the 50 percent rate.

After a careful consideration of all these factors, we conclude that
HCFA acted within its statutory authority in determining when the
State's MMIS became operational.

b.    Whether HCFA's action was contrary to its announced policy.

The State argued that before HCFA rendered a final decision on Georgia's
replacement system, HCFA had issued a policy memorandum to all HCFA
Regional Administrators.  This memorandum, dated July 25, 1986,
implemented HCFA's policy of discontinuing its practice of conducting an
on-site "certification review" of a replacement system.  The memorandum
also stated that the "ongoing rate of Federal financial participation
for operation of the replacement system will be at the rate for the
replaced system." The State contended that the disallowance here is
contrary to HCFA's announced policy, because the announced policy would
grant Georgia 75 percent FFP for its replacement system.

Contrary to the State's arguments, there is no reason to apply this
policy statement retroactively to the State's MMIS.  In the instant
case, the State's system had already undergone the on-site certification
review and the Agency had found defects in the State's system.  Also,
there is nothing on the face of the policy statement to suggest that
where a certification review had already been performed, the Agency
should overlook that review. If that were the case, the Agency could be
required to overlook serious defects in a state system.  Thus, HCFA's
action was not contrary to its announced policy.

c.    Whether the disallowance involves a reduction in FFP under section
      1903(r)(4)(B).

The State argued that the Agency was attempting to impose a 25 percent
penalty on Georgia's right to receive operational reimbursement for its
improved MMIS.  The State argued that since its old system received
approval for 75 percent operational funding, the replacement MMIS was
also entitled to receive 75 percent funding.  The State then contended
that under section 1903(r)(4), HCFA may not reduce FFP from the existing
75 percent level to the minimum level of 50 percent, but is restricted
to a maximum reduction of 10 percent for any four-quarter period.  The
State contended that the since the old MMIS was fully approved, the new
MMIS was subject only to annual reapproval reviews, for which the
statute restricts reductions in FFP in the event of disapproval to a
maximum of 10 percent in any year.

The situation here is a question of whether the State was entitled to
the enhanced rate of 75 percent FFP for operation of a MMIS, as opposed
to the 50 percent administrative rate generally available.  The Board
has held that where a State is claiming reimbursement of costs at a rate
higher than the 50 percent rate generally available for expenditures
necessary under section 1903(a)(7) of the Act, the State has the burden
to show that the costs claimed are entitled to the higher rate of
reimbursement.  See Missouri Department of Social Services, Decision No.
395, February 28, 1983, p. 6, and cases cited therein.  The State has
not shown that this principle is not controlling here.  The disallowance
letter indicates that the Agency denied the State's claim of enhanced
FFP at the 75 percent rate for operation of its MMIS for the period July
1, 1984 through March 31, 1985; it instead allowed the costs at the
general administrative rate of 50 percent.  Thus, HCFA did not impose a
penalty; rather, the State had not shown that it was entitled to the
enhanced rate of 75 percent FFP during the period in question for
operation of its new MMIS.

Besides, the reductions specified in section 1903(r)(4)(B) apply only
when a MMIS has been approved and then subsequently disapproved for
failure to pass an annual systems performance review.  While the State
argued that HCFA cannot reduce FFP from the 75 percent level because of
the limitation on reduction of FFP in section 1903(r)(4)(B), the State
has failed to show any legal authority which was in effect either during
the time period in question or at the time of the certification review
to indicate that the State's new replacement MMIS was entitled to 75
percent FFP simply because the State's old system had received approval
for 75 percent operational funding.  In the absence of such authority,
there is no basis to conclude that the provisions of section
1903(r)(4)(B) are applicable here.  Consequently, the record does not
support the State's contention that HCFA was imposing a 25 percent
penalty on the State's right to receive FFP at the 75 percent
operational rate for its new MMIS.

d.    Whether this disallowance is affected by the Consolidated Budget
      Reconciliation Act of 1985.

The State argued that because section 9518 of the Consolidated Budget
Reconciliation Act of 1985 (COBRA) extended the deadline for states to
have an operational MMIS until September 30, 1985, the states under
section 1903(r)(2) are not required to have such a system initially
approved until September 30, 1986.  The State then argued that, under
the literal terms of the statute, the State is not subject to any
reduction in the 75 percent rate because the State met the deadlines
established by COBRA.

The COBRA amendments are not relevant to this dispute.  Those amendments
merely extended the deadline by which states must have their MMIS
operational in order to avoid percentage reductions in FFP under section
1903(r).  The COBRA amendments, however, are not relevant to the
question of whether the State system is entitled in the first instance
to 75 percent reimbursement for operation of an MMIS.  The Agency has
not questioned that the State's system was operational by the required
deadline.  Thus, we conclude that the COBRA amendments have no effect on
this dispute.

Conclusion

For the reasons stated above, we find that HCFA acted within its legal
authority in denying the State's claim at the 75 percent operational
rate for the period July 1, 1984 through March 31, 1985.  Further
proceedings will be discussed in separate correspondence.

 

                            _____________________________ Judith A.
                            Ballard


                            _____________________________ Alexander G.
                            Teitz


                            _____________________________ Norval D.
                            (John) Settle Presiding Board Member

 

1.     In granting the State's request to separate the issues, the Board
indicated that if the Board ruled against the State here, the State
would be allowed to present further arguments on the issue of whether
Georgia in fact met HCFA's standards.  The next steps in this case will
be discussed in separate correspondence.

2.     The regulations at 42 CFR Part 433, Subpart C, were amended in
1985 to include specific provisions applicable to new systems intended
to replace old systems.  The final rule was published July 30, 1985 with
an effective date of August 29, 1985.  Since the amended regulations
became effective after the time period in dispute (July 1, 1984 through
March 31, 1985) and after the certification review was performed, the
parties agreed that the amended regulations were not applicable to this
dispute. Thus, our analysis here is based on the statute, regulations
and State Medicaid Manual provisions in effect during the time period in
question.

3.     The regulation at 42 CFR 433.110 (1980) explicitly made the
provisions of the Medical Assistance Manual applicable in implementing
the regulations.  The Medical Assistance Manual was replaced by the
State Medicaid Manual in July 1981.  Chapter 11 of the Manual covers
mechanized claims processing systems.

4.     The State contended that HCFA had acknowledged in correspondence
with the State that the MMIS commenced operations on June 30, 1984.  As
an example, the State quotes the following language from a November 30,
1984 letter from HCFA to Georgia which states:

     Since your Department's new fiscal agent, The Computer Company
     (TCC), commenced operations on June 30, 1984, your MMIS must be
     recertified to be eligible for 75 percent FFP.

Appellant's Appeal File, Ex. 10.  This language, however, clearly shows
that the Agency was not recognizing that the system was operational
within the meaning of the statute; rather, the statement merely
recognized that TCC as fiscal agent began to run the MMIS in lieu of the
State at that time.  This conclusion is supported by the remainder of
the letter which states:

     Since your Department's MMIS is new and has not been approved by
     the Administrator, it is only eligible for 50 percent FFP.

Ibid.

5.     As indicated above, the regulations at 42 CFR 433.110 made the
provisions of the SMM applicable also to these