Utah Department of Health, DAB No. 893 (1987)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  Utah Department of Health   

Docket No. 85-47
Audit Control No. 08-40152
Decision No. 893

DATE:  August 31, 1987

DECISION

The Utah Department of Health appealed a determination by the Health
Care Financing Administration (HCFA) disal- lowing $3,270,109 in federal
Medicaid funding claimed under Title XIX of the Social Security Act.
The claims were for services provided by the Utah State Training School,
a State-owned intermediate care facility for the mentally retarded
(ICF/MR), during the period July 1, 1979 to June 30, 1983.  HCFA
determined that, in calculating the Medicaid rates for the services, the
State had failed to exclude the costs of educational activities, as
required by HCFA regulations at 42 CFR 441.13 and the Medicaid state
plan.

On appeal, the State argued that HCFA's definition of educational
activities conflicted with the Medicaid statute, and that the definition
was being applied to Utah in an arbitrary manner.  The State also
asserted the defense of equitable estoppel, alleging that it had
received advice from a federal employee which caused it to restructure
State funding for services in the ICF/MR and to adopt a definition of
"education" which it thought would permit funding of those services by
Medicaid. Finally, the State argued that the disallowance should be
reduced to eliminate costs associated with services to adults, costs
associated with "developmentalists" providing services to deaf/blind
residents of the ICF/MR, and administrative costs associated with each
of these categories of cost.  In response to this last argument, HCFA
reduced the disallowance by $211,432 ($131,522 for the
"developmentalists" and $79,910 for associated admin- istrative costs).

As explained below, based on a prior decision, we reverse the
disallowance for costs of services provided to adults, and associated
administrative costs (to be determined on remand in accordance with this
decision), as inconsistent with applicable HCFA policy.  We uphold the
disallowance of costs of services provided to children as an educa-
tional program, which we find were educational activities under 42 CFR
441.13.

Our decision is based on the parties' written submissions, including
depositions which the parties agreed the Board should use in lieu of
oral testimony to the extent necessary to resolve factual issues, and on
the transcript of an informal conference held on March 6, 1986.  Subse-
quent to that conference, this case was stayed for over a year at the
request of the parties pending a decision in a court case involving a
related issue.  The U.S. Court of Appeals for the First Circuit issued a
decision in that case on March 31, 1987 in Commonwealth of Massachusetts
v. Secretary of Health and Human Services, Nos. 86-1109, 86-1118 (1st
Cir. March 31, 1987), and denied a motion for rehearing on June 2, 1987.
The parties then requested the Board to proceed to decision in this
case.  The Board granted that request and permitted the parties an
oppor- tunity to comment on the effect on this case of the First Circuit
decision in Massachusetts, which held basically that an overly expansive
definition of "educational activities" had been used there.

Below, we first provide general background information on the Medicaid
program, ICF/MR services, and the regulatory prohibition on
reimbursement for the costs of "educational activities" in ICFs/MR.  We
then discuss prior Board decisions on this issue and the Massachusetts
decision. We next set out the facts of this case concerning services
provided at the Utah State Training School.  In light of those facts, we
discuss the legal issues raised by the State.  We explain why we affirm
HCFA's position that Congress did not intend Medicaid to fund the costs
of special education services provided to children residing in ICFs/MR.
We also explain why we reject HCFA's position here concerning the
allowability of the services provided to adults.  Finally, we discuss
why we reject the State's arguments that the disallowance should be
reversed either because the State relied on HHS actions to its detriment
or because HCFA is treating Utah in a manner inconsistent with how HCFA
is treating other states.

I.  Background

In this section, we provide background information on the Medicaid
program, the educational activities prohibition, and special education
programs, defining the key terms necessary to understand the issues
involved in this appeal.

    A.  Relevant statutory and regulatory provisions

Title XIX of the Social Security Act (Act) establishes a grant program
(Medicaid) under which each state with an approved state plan receives
federal financial participa- tion (FFP) in expenditures for "medical
assistance" to needy individuals.  Under the Medicaid program, covered
"medical assistance" may include payment for "intermediate care facility
services" for persons who, because of their physical or mental
condition, require institutional care and services above the level of
room and board.  Section 1905(a)(15).  The term "intermediate care
facility services" also may include "services in a public institution
(or distinct part thereof) for the mentally retarded or persons with
related conditions" if certain requirements are met.  Section 1905(d).
Medicaid funding is available only if the institution's primary purpose
is "to provide health or rehabilitative services for mentally retarded
individuals," the institution meets standards prescribed by the
Secretary of Health and Human Services, and the individual for whom
Medicaid payments are made is "receiving active treatment."  Sections
1905(d)(1) and (2).  In addition, any state claiming Medicaid funds for
ICF/MR services must have agreed generally to maintain non-federal
expenditures for services to ICF/MR patients. Section 1905(d)(3).

The provision covering ICF/MR services (enacted in 1971) is an exception
to the general Medicaid rule that services in public institutions (other
than medical institutions) are not to be reimbursed.  See section
1905(a) of the Act; 42 CFR 435.1008 (1978).  The legislative history
indicates that the purpose for including ICF services in public
institutions for the mentally retarded was to improve "medical care and
treatment of the needy mentally retarded rather than to simply
substitute Federal dollars for State dollars."  H.R. REP. No. 231, 92d
Cong., 1st Sess. 111, 112 (Ways and Means Report on H.R.1).

Pursuant to authority delegated under the Act, the Secretary promulgated
regulations to implement the ICF/MR program under Medicaid.  Section
1102 of the Act; section 1905(d) of the Act.  Specifically, these
regulations defined "active treatment" and set standards for ICFs/MR. y
1/

The ICF/MR standards require, among other things, that professional and
special programs and services be provided to each resident based upon
the individual's need for such services.  42 CFR Part 442, Subpart G
(1979); 42 CFR 442.454.  Besides services such as dental services, food
and nutritional services, and physical and occupational therapy, the
facility must provide to all residents "training and habilitation
services" which are included in the individual's plan of care and have
been formulated on the basis of an individual evaluation of the
resident. 42 CFR 442.457; 42 CFR 442.465; 42 CFR 442.486; and 42 CFR
442.463.

The Medicaid regulations provide at 42 CFR 440.2 that FFP is available
under the state plan for ICF/MR services "except as specifically limited
in Part 441."  Section 441.13(b) provides:

    Prohibitions on FFP:  Institutionalized Individuals

                          *  *  *

    (b)  Payments to institutions for the mentally retarded or persons
    with related conditions . . .  may not include reimbursement for
    vocational training and educational activities.

The regulations do not define "educational activities." As discussed
next, however, two Agency interpretative documents provided further
guidance on the effect of the funding prohibition.

    B.  Relevant Agency guidance on prohibition

On September 30, 1974, the Agency issued a program regulation guide
(MSA-PRG-33) which discussed the prohibition against Medicaid funding of
educational activities found in the earlier version of the ICF/MR
regulations. y 2/  This guide explained why these costs are not fundable
under Medicaid:  "These are not medical care costs (services) as defined
under title XIX and are assumed to be financed by other Federal agencies
or to be a traditional service of the State for all appropriate
population groups."  MSA-PRG-33, September 30, 1974, p. 4 (emphasis in
original).  The guide further stated: "Educational activity here means
formalized classroom programs.  It excludes training such as toilet
training, feeding, dressing, etc., provided to patients by the staff of
the IMR. . . ."  Id.

On November 29, 1978, the Agency issued an action transmittal
(AT-78-104) which discussed the relation- ship between Medicaid services
in ICFs/MR and federally funded education services.  The purpose of the
transmittal was to clarify issues concerning Medicaid coverage of
habilitation services in light of the Education for All Handicapped
Children Act.  The transmittal is not a model of clarity.  As we discuss
below, however, the Board has previously found this transmittal
sufficiently clear to give notice that "special education" mandated
under federal education programs would not be reimbursable under
Medicaid.

AT-78-104 states that the purpose behind the prohibition on Medicaid
reimbursement for "educational activities" is to "assure non-duplication
of Federal funds."

    C.  Education programs for handicapped children

When Medicaid funding was authorized for ICF/MR services, federal
funding for education of handicapped children (including the mentally
retarded) in public institutions was already available under Title I of
the Elementary and Secondary Education Act of 1965.  (Prior to the 1978
revisions to Title I discussed below, the relevant provision was
codified at 20 U.S.C. 241c-1.)

Education provisions for handicapped children were substantially
expanded in the Education for All Handi- capped Children Act of 1975,
Public Law 94-142, which amended the Education of the Handicapped Act
(EHA).  The amended Act provided federal funding to states to assist
state and local agencies in educating handicapped children.  The
legislative history indicates that the impetus for the Act was two
"landmark court cases establishing in law the right to education for all
handicapped children." y 3/  S. REP. No. 168, 94th Cong., 1st Sess. 5
(1975); see, also, H.R. REP. No. 332, 94th Cong., 1st Sess. 2 (1975).

These cases recognized that it was a state's traditional obligation to
provide education appropriate to each child's needs.  Thus, Congress
provided that, in order to qualify for federal funding under EHA, a
state must demonstrate that it has in effect a policy that assures all
handicapped children the right to a free appropriate public education.
20 U.S.C. 1412(1) (1975).

EHA was not intended as an invitation to states to substitute federal
dollars for state dollars.  Rather, the Act provides (in recognition
that the costs of providing special education to the handicapped may be
expensive) that in order for a state to receive EHA funds it must
demonstrate that it has spent the same average amount on its handicapped
children as it does for its non-handicapped children.  Once this is
established, a state may then receive federal funds under EHA to meet
the excess costs of providing special education and related services.
20 U.S.C. 1402(2); 20 U.S.C. 1414(a)(1); and 45 CFR 121a.183, 121a.184,
and 121a.1866 (1977).

The EHA regulations define "special education" as "specially designed
instruction, at no cost to the parent, to meet the unique needs of a
handicapped child, including classroom instruction, instruction in
physical education, . . . and instruction in hospitals and
institutions." 45 CFR 121a.14(a)(1). y 4/  "Special education" also
includes "speech pathology, or any other related service, if the service
consists of specially designed instruction, at no cost to the parents,
to meet the unique needs of a handicapped child, and is considered
'special education' rather than a 'related service' under State
standards." 45 CFR 121a.14(a)(2) (emphasis added).  The regulation
defines "related services" as "transportation and such developmental,
corrective and other supportive services as are required to assist a
handicapped child to benefit from special education, and includes speech
pathology and audiology, psychological services, physical and
occupational therapy, recreation. . . ."  45 CFR 121a.13(a).

In 1978, the Title I provisions for funding education for the
handicapped in public institutions were revised and made compatible with
the EHA provisions.  Pub. L. 95-561. Under the revised Title I program,
state educational agencies could receive federal funding for a
percentage of the average per pupil expenditures multiplied by the
"number of such handicapped children in average daily attendance . . .
at schools for the handicapped operated or supported by the State
agency, including schools providing special education for handicapped
children under contract or other arrangement with such State agency. . .
."  20 U.S.C. 2771.  Payments under this provision could be used only
for programs to meet special educational needs, and the state agency had
to assure that each child counted for purposes of determining the amount
of the Title I grant would be provided with an educational program
commensurate with his special needs.  20 U.S.C.  2772.  Children who
were counted for purposes of Title I funding for the handicapped could
not be counted for purposes of funding under the EHA.

II.  Relevant Board and court decisions

     A.  Prior Board decisions

In Oklahoma Department of Human Services, Decision No. 367, December 17,
1982, this Board concluded that, under the action transmittal, the costs
of "related services" under EHA are not generally considered costs of
"educational activities" under 42 CFR 441.13(b), even though these
services are part of a free appropriate public education and are
included in a child's Individual Education Plan (IEP).

The Board further determined that the action transmittal clearly implied
that "special education," as defined under EHA, is an "educational
activity" within the meaning of 42 CFR 441.13(b).  The Board also noted
that the action transmittal set up exceptions to the general rule that
"related services" are fundable under Medicaid, where (1) a state
included related services within its definition of special education;
and/or (2) a state, by state statute, extended the responsibility for
payment of specific health services to the education agency. y 5/

In Massachusetts Department of Public Welfare, Decision No. 438, May 31,
1983, and Decision No. 638, March 29, 1985, the Board also was faced
with the question of whether certain services provided to ICF/MR
residents were "educational activities."  In those cases, however,
Massachusetts law defined "special education" as including "everything
which is required to be provided to a child in need of special education
pursuant to the IEP . . . for such child."   Massachusetts I, p. 4.  The
Board concluded that these services could not be funded under Medicaid
since state law made them part of "special education." y 6/

Finally, in Pennsylvania Department of Public Welfare, Decision No. 777,
August 20, 1986, the Board affirmed a disallowance of costs incurred by
a Pennsylvania ICF/MR to the extent that the costs were for special
education or for vocational training mandated by federal programs, but
reversed the disallowance to the extent the costs were for services
provided to adults, qualifying as ICF/MR services under Medicaid
regulations and not so funded.

     B.  The First Circuit decision

After the Board had issued its Pennsylvania decision, the First Circuit
issued its decision in Massachusetts, supra. The First Circuit upheld
the district court decision reversing the disallowance of costs of
services provided by the Massachusetts Department of Education (DOE) to
ICF/MR residents.  The First Circuit concluded that (1) the Education
for All Handicapped Children Act did not modify the Medicaid Act to
prohibit funding of special education services; (2) HHS was incorrect in
arguing that the Massachusetts DOE was a liable "third party" with an
independent obligation under state law to pay for the services in
question; and (3) the blanket exclusion of Medicaid reimbursement for
"special education" violates the Medicaid Act because it excludes from
reimbursement services which the Medicaid Act requires the Secretary to
reimburse.

The First Circuit stated that the relevant question is whether the
services are "medical assistance," which the Court said includes, under
section 1901 of the Social Security Act, "services to help . . .
individuals attain or retain capability for independence or self care."

The First Circuit did not invalidate the regulation at 42 CFR 441.13
prohibiting FFP in the costs of educational activities.  The First
Circuit said:

     Making an inquiry into whether a particular service is
     "educational" does seem to be a fair way to decide whether, on the
     whole, it is medical assistance.  What most people think of as
     education (what the district court below referred to as
     "traditional academic education") is not "medical assistance" under
     Medicaid.  But the reasonableness of this inquiry depends on the
     meaning the Secretary gives to the word "education."  If the
     concept of "education" is expanded to include, for example,
     teaching a severely retarded child to control the rate at which he
     is fed so that he does not get food into his lungs (one of the
     "special education" services at issue in this case), then the
     exclusion goes beyond statutory authority.

                         Slip op., p. 18.

Thus, the court concluded, HHS must inquire into the nature of the
services, not just into what they are called or who provides them.

On the basis of our analysis below of the statutory language and the
facts of this case, however, we conclude that the disallowance here does
not constitute an overly expansive reading of the statute simply because
it includes special education services which are not "traditional
academic education" and which are of the same general nature as services
reimbursable as "habilitation" when provided by living unit staff as
institutional care in an ICF/MR.

As the First Circuit recognized, federal funding under Medicaid is
controlled by the scope of "medical assis- tance" as defined under the
Act.  Contrary to what the court apparently thought, however, the
specific statutory definition of "medical assistance" does not include
all services with a goal of independence or self-care.  Under HCFA's
authorized regulations, "habilitative" services having that goal are
covered in some circumstances, but not in others.  Specifically, they
are not covered in the circumstances here where the services are part of
a child's "special education" provided by teachers in a classroom
setting; this limitation is consistent with other limitations in the
statute, which are not based on the nature of the services alone but
also on factors such as the nature and qualifications of the provider,
the age of the recipient, and the availability of other funding sources.
Here, also, there was duplication of funding, a factor which we think
was also present in Massachusetts although the court did not appear
aware of it.  Finally, we note that the court was perhaps influenced by
a concern that HCFA's interpretation would lessen services provided to
ICF/MR residents and require states to pay for services which Medicaid
had previously covered -- concerns which we also share.  However, these
concerns are not warranted on the facts of this case.  The services must
be provided and the issue is solely what share the State must pay; our
result simply requires the State to continue to pay its share for
services for which it has received federal education funds and for which
it previously appropriated its own education funds.

We do not base our decision here on a rejection of the First Circuit's
conclusions that the EHA amendments did not modify the Medicaid statute
and that DOE was not intended to be a liable "third party" under the
Act; these conclusions are not inconsistent with our own, which the
court apparently misunderstood.

The analysis on which we base our conclusions regarding services to
children is more fully explained in section V.  below.  First, however,
we set out the facts of this case and dispose of the issue of services
to adults.

III.  The facts here

During the period July 1, 1979 through June 30, 1983, Utah received
about $42.9 million in federal Medicaid funding for services provided in
its one State-owned ICF/MR, the Utah State Training School (USTS).  USTS
is operated by the Utah Department of Social Services; the Medicaid
program in Utah is administered by the Utah Department of Health,
Division of Health Care Financing.

USTS was reimbursed through a per diem rate, developed using Medicare
principles of reimbursement.  Auditors from the HHS Office of Inspector
General performed an audit of the costs included by Utah in calculating
the per diem rates for USTS for the fiscal years 1980 to 1983. The
auditors recommended and HCFA adopted a disallowance of $3,270,109 in
FFP representing reductions in the per diem rates to eliminate costs
which the auditors found were related to prohibited educational
activities. The auditors also found that these costs violated the
Medicare reimbursement principles, which state that costs attributable
to vocational, scholastic, or similarly oriented training activities are
unallowable.  (As noted above, HCFA subsequently reduced the
disallowance for costs of "developmentalists" providing services to deaf
and blind residents of USTS.)

Most of the disallowed costs had been allocated by USTS to a cost center
labeled "education." y 7/  The auditors did not question costs incurred
by "supportive services" departments at USTS for services which the
auditors found were "related services" under federal education
provisions, including the following:  psychology, recreation therapy,
speech and hearing, social services, physical therapy, and occupational
therapy.  Utah did not allege that any of the costs remaining
constituted costs of related services.

The following undisputed findings are relevant to the nature of the
remaining services at issue:

o  Utah statutes require mandatory special education for all handicapped
   children aged 5 through 21. Section 53-18-2 U.C.A. 1953 (this
   provision has been in effect since at least 1969).  A goal statement
   issued by the Utah Board of Education specifies that children served
   will include all homebound and hospitalized children, including
   severely multiply- handicapped children.  o  Children participating
in the "education program" operated by USTS attended classes taught by
   instructors with college degrees in the fields of education or
   liberal arts with emphasis on child development and special
   education.  These individuals were part of an "Education Department"
   at USTS and were referred to as "teachers," "program instructors," or
   "teachers' aides."  The programs were provided in a building known as
   the "Education Building."  (Some programs were also provided in
   classrooms in the residential facilities, but these were provided by
   "developmentalists," whose costs are not now included in the
   disallowance.  See Tr., p. 83.)

o  USTS received funds for the program in question under Titles I and IV
   of the Elementary and Secondary Education Act, as well as deaf/blind
   grants.  All costs of the program, minus federal funds actually
   received by USTS, were charged to Medicaid.

o  Children at USTS were counted for purposes of determining the amount
   of Title I funds Utah received.  In addition, Utah received funding
   under EHA for this time period.

o  USTS had an "Educational Service Curriculum" guide expressing the
   philosophy of USTS that "education is a process to bring about
   positive changes in an individual's behavior."  HCFA appeal file, Ex.
   IV.  The goals include providing "direct educational services" to
   give each resident "an opportunity to benefit from formalized,
   structured programming appropriate to his intellectual capacities,
   but concentrated and sustained so that the educational experiences
   rendered are equivalent to that provided by free public education to
   normal children."  Id.

o  The guide also explains that, to determine the appropriate placement
   of the student in one of the "basic education programs" (pre-school,
   primary, transitional class, intermediate, multiply handicapped
   school, or deaf-blind), the teacher will administer the "Educational
   Performance Profile and Placement Screening" test and other tests to
   make "educational recommendations."  These recommendations are then
   considered at a meeting of the team which formulates the Individual
   Education Plan (IEP).  The ultimate goal of the programming is
   placement in the Public School Education program.  (Apparently about
   5 USTS residents were in local public schools during the period in
   question.)

o  Prior to fiscal year 1978, school programs at USTS were funded with
   appropriations from the Uniform School Fund to local school
   districts, which then transferred funds to USTS.  In 1977, however,
   Utah law was changed so that funds from the general treasury were
   appropriated directly to USTS.

Utah maintained that the 1977 legislative change was based on advice
from an HHS official that this change, as well as a change in the
definition of "education" agreed to by various Utah Departments, would
permit funding of the USTS program by Medicaid.  We discuss our findings
on this issue in section VI. below.

IV.  Services to adults

Utah alleged that the education cost center included (for the last two
years in question) costs from a "day activity center" (DAC), which was
providing services primarily to adult residents of USTS.  Utah provided
an affidavit attesting that DAC services to adults represented $303,110
of the disallowance.  Utah argued that the disallowance should at least
be reduced by this amount since services to adults were not considered
part of "special education" and were otherwise not within the scope of
the prohibition on funding educational activities.  Utah further
asserted that DAC services qualified as "habilitation" under the ICF/MR
regulations.

HCFA did not contest the figure provided by the State's affiant.  HCFA
argued essentially that the regulatory prohibition on educational
activities did not distinguish between children and adults and that
AT-78-104 referred only to services to children because it was limited
to discussing the relationship of the prohibition with the EHA.

We considered and rejected these arguments by HCFA in Pennsylvania.  We
concluded that habilitative services to adults were not encompassed
within the prohibition, absent a showing that the State had a
traditional responsibility to provide the services as education or that
they were mandated by another federal program. y 8/  We further
concluded that HCFA's position to the contrary is inconsistent with its
own guidance, conflicts with the ICF/MR regulations, and is not
necessary in order to effectuate the purposes of the prohibition.

For these reasons, as explained more fully in the Pennsylvania decision
(which we incorporate by reference here), we reverse the disallowance of
the $303,110 related to DAC services to adults.  We further reverse the
disallowance of administrative costs associated with these services in
an amount to be determined by the parties on remand.  In calculating
this amount, however, we find that the appropriate method to be used is
that used by HCFA in calculating administrative costs associated with
the "developmentalists."  Utah proposed a method which would first
eliminate costs of specific personnel the State identified as not
associated with the educational program. That method would provide
inconsistent treatment of costs, however, since costs specifically
identifiable with the categories of cost for which we uphold the
disallowance have not been similarly removed from the pool of
administrative costs to be allocated.

The discussion which follows applies only to the remaining services,
provided by USTS to children.

V.  Services to children

    A.  The statutory intent

Utah argued, and we agree, that the primary issue here is whether the
disallowance of these costs is consistent with the Medicaid statute.
Utah did not argue that the regulatory prohibition was invalid; Utah
conceded that an interpretation of the regulation to simply cover "those
services that are actually reimbursed by another federal program" would
be consistent with the Medicaid statute. Tr., pp. 21-22.  Further, Utah
conceded that, in the context of services to the mentally retarded, it
would be difficult to identify what services could be considered
"traditional academic education."  Tr., p. 20. y 9/  Utah contended,
however, that it was also difficult to deter- mine what constituted
special education since special education admittedly overlapped with
habilitation.  Utah also argued that the "active treatment" requirement
was being applied in such a way as to require states to substantially
expand their services in the ICFs/MR and that it was inconsistent with
the concept of grant funding to apply the "stick" of the active
treatment requirement, without also making available the "carrot" of
federal funding for services to meet that requirement.

At the outset, we note that Utah has not pointed to any language in
Title XIX or its legislative history which expressly states that
Congress intended to fund educational activities in ICFs/MR or even that
Congress intended that any "habilitative" services are to be
specifically funded by Medicaid. y 10/  Section 1901 of the Act states
the general purposes of the Title, but does not define the scope of
Medicaid covered services; rather, the relevant inquiry is whether the
services are "medical assistance."  This is so because funding is
provided under section 1903(a) of the Act only for services which are
"medical assistance" within the definition of that term in section
1905(a) (and for associated administrative costs).

Section 1905(a) of the Act nowhere refers to "habilitative" services,
and certainly does not specify that "habilitative" services must always
qualify as "medical assistance" under Medicaid.  That section provides
optional coverage for ICF services (including services in an ICF/MR if
certain conditions are met), but leaves it to the Secretary to delineate
standards for such services.  In the regulations promulgated pursuant to
this authority (and his general authority under section 1102 of the Act
to promulgate rules and regulations "not inconsistent with" the Act),
the Secretary provided that ICF/MR services should include "training and
habilitation," but this requirement is qualified by the regulation
prohibiting reimbursement for educational activities.  This prohibition
was interpreted in HCFA guidance, of which the states had notice, as
meaning "special education."  The expressed purposes of the prohibition
were:  to limit funding because of the non-medical nature of the
services and to assure non- duplication of federal funding.  As we
discuss more fully below, both of these purposes are fully consistent
with the Act in general and as applied in the circumstances of this
case.

The key points here are that nothing in the Medicaid statute mandates
coverage of all habilitative services and the coverage provided in the
ICF/MR regulations is specifically limited--it is available only to the
extent such services are not special education.  Contrary to what the
State argued, the fact that special education and habilitative services
may "overlap" does not mean that special education costs cannot
reasonably be distinguished from the costs of allowable habilitation; as
we discuss below, the record here provides a sufficient basis for
determining that the services in question here are the costs of special
education provided to school-aged children.

Moreover, we conclude that the result here is not inconsistent with the
statutory provision on "active treatment."  The wording of the provision
supports our conclusion that it simply establishes a condition on which
Medicaid will provide funding otherwise unavailable for services in
public institutions.  The wording of the provision, that individuals in
the facility must be "receiving active treatment," is significant.  If
Congress had intended to fund every element of active treatment as a
Medicaid cost, it could have easily worded the provision to require
active treatment as a covered ICF/MR service or to require such
facilities to "provide" active treatment. We also note that section
1905(d) of the Act requires that, to qualify as an ICF/MR, a facility
must have a "primary" purpose of providing health or rehabilitative
services.  This wording suggests that Congress understood that such an
institution might have other purposes as well.

As HCFA pointed out, this conclusion is not inconsistent with the basic
concept of how a grant program operates. The State here received (even
after deducting the disallowance amount) about $40 million in Medicaid
funds during the disallowance period which it would not have received
but for the ICF/MR provisions.  This is surely a sufficient incentive
(i.e., "carrot") for the State to meet the active treatment requirement.
Moreover, although the State's services provided as an educational
program may help the facility to qualify as an ICF/MR, those services
were mandated by EHA and, indeed, by the State's own pre-existing
education laws. y 11/

The Supreme Court has found that conditions on receipt of federal funds
which may cause a state to expend its own funds to meet requirements
without participation by the federal government must be clearly stated.
Pennhurst State School and Hospital v. Halderman, 451 U.S. 1 (1981). The
Supreme Court has not ruled such conditions invalid when clearly stated,
however.  Grant programs often state such conditions.  See 1 R.
Cappalli, Federal Grants and Cooperative Agreements, section 1:09
(1982).  The State's position, which is essentially that Medicaid must
participate in all of the costs of active treatment solely because
Medicaid requires it as a condition of federal funding, is unsupported.
The Supreme Court's ruling in Harris v. McRae, 448 U.S. 297 (1980), on
which the State relied, simply indicates that Congress did not intend a
state participating in Medicaid "to assume the full costs of providing
any health services in its Medicaid plan."  448 U.S. at 100 (emphasis
added).  Here, we are concerned with whether, in encompassing some
training and habilitation within ICF/MR services, the Secretary becomes
bound to provide Medicaid FFP for all such activities, even when they
are required educational activities.

Moreover, we do not agree with the State that Medicaid funding must
necessarily be provided for all active treatment simply because HCFA has
recently taken a more aggressive stance in reviewing state facilities to
ensure active treatment is being provided.  Congress established receipt
of active treatment as a condition for a public institution qualifying
as an ICF/MR, and HCFA is simply enforcing the requirement.

    B.  The duplication of funding

Utah itself recognized that the educational activities prohibition
served a legitimate function to the extent it prohibits FFP in services
"which are covered and actually paid under another federal program."
Tr., pp. 84-85. Like other states raising this issue, however, Utah felt
that it had complied with this purpose by subtracting federal education
funds actually received by the facility in any year from the total costs
used to calculate the Medicaid per diem rate.

The flaw in this position is that it fails to recognize how federal
grant programs operate in general, and specifically how the education
provisions operate here. Federal reimbursement is not provided for 100%
of a program's costs; the federal government generally funds only a
percentage of costs, requiring the grantee to share in the program
costs.  In addition, many grant programs have provisions requiring that
federal funds be used solely to supplement, not supplant, state funds or
that the state maintain its previous effort in the program area.  Title
I funds, which the State received here based on counting USTS children,
were awarded for a percentage of the State's costs of providing services
to these children and the program contains a "no supplant" provision.
Moreover, under EHA, for which the State also receives funds, the State
must generally first spend on each covered child what it would spend on
non-handicapped children, before receiving federal funds.  This
recognizes the State's traditional obligation to educate its children,
including the handicapped.  This obligation was recognized in Utah at
least since 1969, and, indeed, until fiscal year 1978, the educational
program at USTS was funded from the Uniform School Fund, through the
local school districts.

Thus, in Utah, the educational program provided to the school-aged
residents was in fact covered by federal education funds; the services
were required to be provided to the children, and would have been
provided irrespective of any requirement in the statute for active
treatment or in the regulations for training and habilitation services.

Because this duplication of funding occurred, we conclude that the
disallowance here is consistent with the Medicaid statute, for several
reasons:

o  Congress stated in the legislative history of the ICF/MR provisions
   that the purpose was not to substitute federal for state dollars.
   What the State did here has that effect.

o  Traditionally, Medicaid funding for services in public institutions
   was limited since these services were considered a traditional state
   obligation; it is highly unlikely that in removing that limitation
   for certain services in qualified ICFs/MR, Congress intended to
   expand Medicaid coverage to costs previously covered by state
   education funds.

o  Under Medicaid, there are a number of provisions indicating that
   Congress did not intend that Medicaid would cover services which
   could be paid from other resources or which were not necessary to
   efficient operation of the program.  See, e.g., sections 1902(a)(25)
   and 1903(a)(7) of the Act. y 12/  Although the Massachusetts decision
   rejected HCFA's argument that a state education agency could be a
   liable third party under section 1902(a)(25), from which the state
   would be required to seek reimbursement prior to charging Medicaid,
   certainly this provision is some support for a finding that the
   prohibition is consistent with the Medicaid statute. y 13/

o  Since the State was required to provide these services under the
   State law and federal education programs, denial of Medicaid funding
   will not lessen services to the residents.  Thus, the result here is
   consistent with the purpose statement in section 1901 of the Act,
   regarding enabling individuals to attain a capability for
   independence and self-care.  Indeed, permitting Medicaid funding for
   these services might provide a disincentive to the State to move
   residents out of the ICF/MR to a less restrictive setting where the
   State would necessarily pay a higher share of the costs of special
   education.

We note, moreover, that in discussing the relationship between the EHA
and the educational activities prohibition, AT-78-104 recognized that
some related services were of a type which had traditionally been
covered by Medicaid, such as occupational therapy and physical therapy
provided by health professionals.

We also point out that the First Circuit misunderstood our previous
decisions as interpreting the EHA as a modification of the Medicaid
statute, which the court found was inconsistent with the legislative
history of the EHA.  The court indicated that this legislative history
evidenced an intent that services mandated by EHA could be funded by
other programs already providing such services, including Medicaid. y
14/  We first note that Utah was providing an educational program at
USTS, as required by State statute, prior to enactment of the EHA.  Utah
provided no evidence that the specific services in question here were
previously funded by Medicaid and added to the educational program as a
result of the EHA. Thus, in Utah at least, there is no evidence that
HCFA's disallowance has the effect of deleting from Medicaid coverage
services which were covered by Medicaid prior to the enactment of EHA.

Moreover, even if Utah expanded its definition of special education as a
result of the EHA to provide services which were training and
habilitation services of a type previously provided only by residential
living staff or health professionals and funded by Medicaid, the point
is that Utah chose to receive education funds which covered those
services when provided as part of the special education program and
cannot also receive Medicaid funds for those services.

This interpretation simply effectuates the purpose of the funding
prohibition, which predated EHA.

    C.  The nature of the services

The services at issue here are part of formalized programs for
school-aged children, provided by teachers and their aides during normal
school hours. y 15/  The services were provided in an Educational
Building in rooms called classrooms.  Placement was based on educational
testing. In addition,  many of the programs involved skills such as
reading, writing, and counting, which would fall within the concept of
"traditional academic education."  Other programs such as increasing
attention span, teaching sorting skills, color recognition, and the like
typically take place at the pre-school or kindergarten level of any
local public school.  Thus, even applying the First Circuit's standard
of "what most people think of as education," we do not think that the
disallowance here represents an overly expansive reading of the
educational activities prohibition.

We further conclude that the services here are not "rehabilitative"
services.  The longstanding definition of that term as used in the
Medicaid program is "any medical or remedial services recommended by a
physician or other licensed practitioner of the healing arts, within the
scope of his practice under State law, for maximum reduction of physical
or mental disability and restoration of a recipient to his best possible
functional level." 42 CFR 440.130.  While special education teachers may
qualify as "qualified mental retardation professionals" under ICF/MR
regulations, this does not make them "licensed practitioners of the
healing arts."

The First Circuit appeared to have believed that section 1901 of the Act
establishes a definition of rehabilitative services as any service which
helps an individual to attain or retain capability for independence or
self- care. y 16/  The wording of section 1901 clearly does not mandate
this result, however; it simply refers to "rehabilitation and other
services" directed at these goals.  Utah argued that the services in
question here were within the common person's understanding of what is
meant by "rehabilitation," and thus Congress must have been thinking of
this type of service when it enacted the provision requiring that
ICFs/MR be primarily providing "health or rehabilitative services."  To
the contrary, where the term "rehabilitative" has a specific meaning in
the context of the Medicaid program, that meaning should be used.
Moreover, the "common understanding" is not necessarily what Utah says
it is.  Webster's New Collegiate Dictionary defines "rehabilitate" as
"to restore to a condition of health or useful and constructive
activity."

Moreover, since "rehabilitative" services are covered as a separate
category of service under section 1905(a)(13) of the Act, even when not
provided in an institutional setting, the effect of equating
habilitative services with rehabilitative services would be to expand
Medicaid funding across the board for such services.  As noted in
Pennsylvania, in connection with enacting provisions for home and
community-based services Congress indicated that a waiver of Medicaid
requirements would be necessary in order to provide habilitative
services in a non- institutional setting.  Pennsylvania, p. 15, n. 7. y
17/ This further supports the view that the Medicaid statute does not
contemplate that services will be reimbursed simply because they are
habilitative in nature.

The key point of our analysis in Pennsylvania was that, in providing
coverage of habilitative services in an ICF/MR, the regulations permit
such coverage only to the extent that the service is not an educational
activity.  Thus, since the statute itself does not include habilitative
services within the definition of "medical assistance" under section
1905(a) of the Act and since coverage in ICF/MRs is limited, a
habilitative service which is an educational activity is simply not
"medical assistance."

In Massachusetts, the First Circuit concluded that the Board was
unreasonable in stating in our Pennsylvania decision that the services
at issue there were "within the scope of Title XIX" and yet not
reimbursable.  Under section 1905(a) of the Act, however, the definition
of "medical assistance" clearly makes Medicaid coverage dependent not
only on the nature of the service itself, but on other limiting factors,
such as the nature and qualifications of the provider and the age of the
recipient.

The primary limitations under section 1905(a) are that FFP is not
generally available in services provided in non-medical public
institutions or in institutions for mental diseases or defects.
Moreover, most services are required to be provided by licensed
practitioners of the healing arts, or at least under their direction.
The statutory provision on ICF/MRs is an exception to the first
limitation.  Congress indicated in the legislative history of that
provision that it intended to expand medical care and treatment of the
mentally retarded and not to simply substitute federal for state
dollars.  The regulatory prohibition on funding educational activities,
and the HCFA interpretation in its action transmittal that this
encompassed special education, is consistent with this intent and with
the general intent to provide funding under Medicaid for services of the
nature specifically described in section 1905(a).

It is also important to note what the nature of ICF services
encompasses; essentially, such services are institutional in nature, to
be provided only to individuals who, because of their physical or mental
condition, require health-related care and services above the level of
room and board.  In light of this, we think it is reasonable of HCFA to
find that Medicaid funding is available for training in activities of
daily living (such as toilet training) when provided by staff of the
living units in an ICF/MR, who are in a care-taking role, or by health
professionals such as occupational or physical therapists, but not to
fund such services when provided by teachers in a classroom environment
to fulfill the State's role as special educator.  In special education,
there is a recognition that, for a handicapped child's program to
succeed, reinforcement of basic skills must occur in the child's living
environment as well as at school, but this does not mean that the school
system must pay for the education that occurs in a child's home.
Similarly, teachers in the classroom environment in an ICF/MR may be
working on some of the same skills as other ICF/MR staff members, but
this should not automatically result in the availability of Medicaid
funding.

Although Utah did not here allege that it provided in its educational
program the specific services referred to by the First Circuit, such as
training in eating food to avoid choking, it is not out of the question
from the State's general description of its program that it might
provide this or an equivalent service as part of special education if
the need arose. y 18/  Nevertheless, in the absence of a statutory
provision which mandates the funding of this service in the context of
an educational program, we find that HCFA's policy excluding the
services along with others that more obviously involve traditional
academic skills is fully reasonable.  In addition to the factors already
identified in support of the policy, we think HCFA is entitled to
consider administrative convenience in implementing the prohibition.
Medicaid exists in virtually every state in the country and each state's
institutional program may vary according to the needs of the residents
and the state's philosophy. HCFA's approach in AT-78-104 was to carve
out a category of activities that can be readily identified as "educa-
tional" even though they may share elements of what has otherwise been
defined as habilitation.  On the other hand, AT-78-104 authorized
funding for certain other activities which it views as medical
assistance even though there may be a definite nexus between a free
appropriate public education and the activities.  Drawing the line in
this way enables HCFA to implement the prohibition without onerous and
time-consuming case-by-case evaluations in individual state programs.

Moreover, as Utah recognized, the distinction between "traditional
academic education" and habilitation is virtually impossible to draw in
the ICF/MR context.  A program teaching "survival words" to a resident
involves the academic skill of reading, but it has a habilitative goal
of independence.  There is unavoidably an overlap here, which HCFA has
dealt with in a reasonable way.

VI.  The equitable estoppel argument

The State's equitable estoppel argument was based on the following
allegations:

o  That in 1977 an HHS (then HEW) official had advised the
   superintendent of USTS that the State could receive Medicaid funding
   for the services which were being provided as an educational program
   to USTS residents if it changed its method of appropriating funds and
   its definition of education.

o  That, as a result, the superintendent had proposed a change in the
   method of appropriating funds, which was adopted by the State
   legislature for funding beginning in fiscal year 1978, and that the
   various State agencies had agreed to a definition of "education" at
   USTS to mean "the pursuit of skills such as reading, writing and
   calculation and/or the pursuit of knowledge in an academic discipline
   or a technical area such that a certificate, license, diploma or
   degree may be obtained."

o  That it had thought that its arrangement among State agencies to use
   this definition of "education" at USTS meant that the State was
   complying with federal policy in AT-78-104 since that action
   transmittal refers to interagency agreements.

o  That, in 1981 when an independent audit by the firm of Main Hurdman
   questioned the allowability under Medicaid of USTS costs related to
   the educational program, the State sought guidance from the regional
   office and was told that allowability depended on State law so that
   the State Attorney General would be the one to ultimately decide the
   issue.

o  That the State Attorney General's opinion concluded that all USTS
   services were "habilitative" and therefore reimbursable under
   Medicaid.

o  That confusion on the part of HCFA regional officials concerning the
   educational activities prohibition caused delay in the State
   receiving clarification of the prohibition.

o  That the State relied to its detriment on HHS actions because
   otherwise it could have received education funding for its program.

The State did not dispute that under the Supreme Court case of Heckler
v. Community Health Services of Crawford County, 467 U.S. 51 (1984), it
is clear that for estoppel to apply against the federal government, the
private party must at least demonstrate that the traditional elements of
estoppel are present.  These elements are that (1) the estopped party
must have made a definite misrepresentation of fact to any other person
having reason to believe that the other will rely upon it, (2) the party
asserting the estoppel must have reasonably relied upon it and (3) must
have changed his position in reliance upon the misrepresentation, and
(4) must have suffered a detriment as a result.  The State argued,
however, that this case was distinguishable from Community Health
Services because in that case the Supreme Court found no detrimental
reliance, but here the State changed its position in reliance on HHS
advice so that it could claim funds under Medicaid and, by doing so,
"lost the opportunity to claim available education funds."  State's
reply brief, p. 9.

The State's evidence shows that the superintendent received oral advice
from an individual who was not in the program division responsible for
administering the federal Medicaid program, but who worked for the
Developmental Disabilities (DD) Program.  This individual did have a
role of assisting states in obtaining federal funding for their programs
for the developmentally disabled, including the mentally retarded, and
acknowledged that he had suggested to the superintendent that he explore
the possibility of obtaining increased Medicaid fundng at USTS.  The DD
official testified, however, that he had warned the superintendent that
the services must be health-oriented, not education-oriented, and that
his advice should not be relied on as far as Medicaid funding was
concerned, since he had no authority to speak for the Medicaid program.
The superintendent did not remember receiving any warning.  He
acknowledged, however, that he had consulted with an individual within
the State's division of Health Care Financing and that this person was
the one responsible for consulting with regional office officials
administering the Medicaid program.  Deposition of Paul S. Sagers, pp.
24-26.  The State did not present any testimony from this individual, or
from any Medicaid officials, about whether this individual in fact had
sought advice on the proposed changes.

The record here is inconclusive on the issue of whether the advice the
DD official gave misrepresented the effect changes in state
appropriations and the definition of "education" would have on the
availability of Medicaid funding.  But in any event the State has not
met its burden of establishing that its reliance on that advice was
reasonable.  The advice was oral, not written.  The Supreme Court
indicated in Community Health Services that oral advice could not form a
basis for estoppel. Moreover, even if the superintendent was not
explicitly warned about the limits of the DD official's authority, the
fact that the superintendent consulted with the appropriate state
official indicates that the superin- tendent was aware that the
responsibilities for Medicaid funding lay elsewhere.  The
unreasonableness of the State's reliance is also pointed up by the
nature of the changes which were undertaken.  The funding was
appropriated from the general treasury rather than the Uniform School
Fund due to the changes made, but the amended section still refers to an
"educational program" at USTS.  State's appeal file, Ex. D.  The
definition of "education" adopted by USTS (apparently only through some
informal, unwritten agreement between State agencies) appears to have
had no functional purpose other than to be an attempt to qualify the
services for Medicaid funding; USTS continued to refer to the services
provided as "educational" even though they did not lead to a
certificate, license, diploma, or degree. y 19/

Another consideration is that, even if the State's reliance on the DD
official's advice were reasonable in 1977, continued reliance after the
issuance of AT-78-104 is questionable.  The superintendent testified
that he thought that the action transmittal confirmed that funding would
be available for the USTS program because the action transmittal
suggests that State agencies should enter into arrangements about
funding services in ICFs/MR.  As we have noted in previous decisions, we
read the transmittal as suggesting such arrangements only with respect
to services which meet the requirements of more than one program, such
as related services.  But even if the transmittal is read as permitting
such arrangements with respect to the services in question here, the
arrangement here is insufficient to qualify under the transmittal, which
contemplates a written statement supporting the arrangement, including
methodology and reasons used.  As HCFA pointed out, the transmittal also
lists criteria to be considered in such an arrangement, and the services
here would be considered an appropriate educational responsibility under
those criteria. y 20/

During the period after the Main Hurdman audit questioned the costs, the
State did seek some guidance from HCFA regional officials and had some
difficulty receiving definitive advice.  The State alleged that HCFA
should be estopped because its officials were confused, and the State
did not receive a timely answer to its questions. As HCFA pointed out,
reliance on confusion is hardly reasonable.  Moreover, the record simply
does not support the allegation that the State was told that a State
Attorney General's decision would conclusively resolve the issue.  The
letter from the regional HCFA office to the State (following a meeting
where the issue was briefly discussed and reference was made to State
law) explains that the prohibition on Medicaid funding was included in
the regulations to assure non-duplication of federal funds; the letter
then refers to the fact that require- ments for a free appropriate
public education are addressed in each state through implementing
statute. The letter then states:

     The basic question is whether these services are required to be
     provided to all children . . .  without charge.  If the answer is
     no, payment may be made from Title XIX funds if there are no other
     available funds.  Your State Attorney General would be the
     appropriate entity to interpret the State statute. . . .  We must
     await your State Attorney General's decision before we can
     determine if Federal financial participation is available. . . .

                         State's appeal file, Ex. G. y 21/

In spite of this statement, the question which the State posed to the
Attorney General was a different one.  The Attorney General's opinion
(not issued until a year after it was requested) stated the issue as
"whether under Utah law certain activities at the Training School are
educational or vocational in nature rather than habilitative."  The
Attorney General's opinion answered this question solely by reference to
laws governing USTS and the author's view of the services provided,
without any discussion of State laws or standards on education of the
handicapped or how they were implemented at USTS.  The opinion's
conclusion was based in part on the allegedly severe nature of the
retardation of USTS residents at that time and provisions in other
states' laws exempting such children from education.  The Utah education
provision at 53-18-2 U.C.A. 1953, which appears to require special
education for all handicapped children no matter what their abilities,
is not discussed. y 22/

The State could not reasonably rely on the opinion's conclusion, given
that the issue addressed was not the one suggested by the regional
office and given that the regional office letter indicated that the
opinion did not preclude further HCFA review (which is in fact what
occurred).

Finally, we find that the State did not establish detrimental reliance.
The State alleged that it lost other education funds which it could have
obtained but for claiming these costs under Medicaid.  The State
provided no evidence to support this assertion, however, and the record
shows that the State did receive federal funds under three education
programs.  Moreover, as discussed above, the fact that the State counted
the USTS children under Title I precluded it from also counting them for
EHA purposes.  With respect to State funding, we see no real detriment
to the State if it simply pays its share of education costs at USTS from
its general treasury rather than the Uniform School Fund.  Indeed, it is
arguable that the State benefitted here by having the use of federal
Medicaid funds to which it simply was not entitled.

Thus, we find that the State did not meet its burden of establishing the
traditional elements of estoppel.  We note, moreover, that Supreme Court
decisions on estoppel suggest that, if estoppel applies at all to the
federal government, at the very least it requires a showing of
"affirmative misconduct" on the part of federal officials. See, e.g.,
Schweiker v. Hansen, 450 U.S. 785 (1981); INS v. Miranda, 459 U.S. 14
(1982).  The State's evidence falls far short of this standard.

VII.  The inconsistent treatment argument

We also reject the State's argument that it was arbitrary and capricious
of HCFA to proceed with this disallowance in light of a letter from the
Inspector General of HHS to a U.S. Senator, Chairman of the
Labor/HHS/Education Subcommittee.  The State pointed to part of this
letter in which the Inspector General stated that he had asked his
auditors to discontinue auditing of educational activities "until
applicable regulations are clarified" and that "except in the case of
fraud or gross and intentional abuse, we will not audit Medicaid
reimbursement of ICF/MR . . . education services for any period prior to
clarifi- cation of the regulations."  State's appeal file, Ex. A. The
State argued that states such as Utah, which had already been audited,
should receive equal treatment from HHS with states which have not as
yet been audited. In its reply brief, the State further argued that the
Inspector General had acted on his letter since a publica- tion entitled
"All About Medicaid" had reported that an Inspector General audit report
of the State of Missouri had shown that that State had improperly
claimed $6.8 million for the cost of vocational and educational
activities, but that the Inspector General did not recommend a
disallowance.  Utah noted that the audit period was the same in Utah as
in Missouri, arguing that HCFA should not be able to erect a distinction
between states on the sole basis that one state received its audit prior
to another.

In Pennsylvania, we considered the effect of the Inspector General's
letter.  We discussed the fact that the Inspector General is not
responsible for administering the Medicaid program and that his letter
does not represent HCFA policy.  A HCFA policy issuance, HCFA Program
Memorandum No. 85-2 (August 1985), provides that disallowances under 42
CFR 441.13(b) which have been appealed (and are pending in either an
administrative or judicial forum) are being pursued because HCFA had
issued a final determination in those instances.  The Memorandum does
not imply that HCFA will never take similar disal- lowances for those
cases in which no final determination had been issued.  Rather, the
Memorandum states that those cases simply will be suspended until
further notice.

The State argued that, since the Inspector General and HCFA were part of
the same department, under the direction of the Secretary, we should
reject HCFA's argument that the Inspector General is not under HCFA's
control.  We disagree.  The Inspector General is statutorily given
independence because of his special role in the depart- ment.  But he is
not given authority to establish program or disallowance policy.
Moreover, his action in not ."recommending" a disallowance in Missouri
does not, as the State alleged, contradict HCFA's policy to simply
suspend action on cases where there is no final determination. Audit
findings are just that--recommendations.  HCFA may accept or reject them
and indeed may disallow without an audit if there is other evidence to
support a disallowance.

The State's evidence about Missouri is insufficient to establish that
HCFA is applying its program policy in a substantially different way in
the two states; HCFA is not unreasonable in waiting to pursue some
potential disallowances pending final resolution of litigation
concerning its policy.  This does not mean that a difference in
treatment between two states which are identically situated could never
be a basis for reversing a disallowance.  But the record here is
insufficient to establish that this has, in fact, occurred.

Conclusion

For the reasons stated above, we reverse the disallowance of costs of
the "developmentalists" (which HCFA conceded) and of costs of DAC
services to adults, as well as associated administrative costs to be
determined in accordance with our discussion at page 13 above.  We
uphold the disallowance of the remaining costs.

 


                         ________________________________ Donald F.
                         Garrett

 


                         ________________________________ Norval D.
                         (John) Settle

 


                         ________________________________ Judith A.
                         Ballard Presiding Board Member

 

 

1.     "Active treatment" is defined in 42 CFR 435.1009 (1979) as
requiring an individual's participation, in accordance with an
individual plan of care, in professionally designed and supervised
activities, experiences, or therapies.

 

2.     The original prohibition on funding under Medicaid educational
activities and vocational training in ICFs/MR was found at 45 CFR
249.10(c)(2) (1974).  This regulation essentially was unchanged when it
was recodified at 42 CFR 449.10(c)(2) and then at 42 CFR 441.13(b)
(1978).

3.     The first case, Pennsylvania Association for Retarded Children v.
Commonwealth, 334 F. Supp. 1257 (E.  D. Pa. 1971) and 343 F. Supp. 279
(1972) (PARC), was a suit on behalf of retarded children challenging the
con- stitutionality of Pennsylvania statutes which excluded such
children from programs of education and training in public schools.
This case resulted in a consent agreement which enjoined Pennsylvania
from denying to any mentally retarded child access to a free public
program of education and training.

The second case was Mills v. Board of Education of District of Columbia,
348 F. Supp. 866 (D.C. 1972), in which the District of Columbia had
excluded handicapped children from its public schools.  The Court held
that a handicapped child, eligible for public education, may not be
excluded from a regular school assignment unless the child is provided
adequate alternative educational services suited to the child's needs.

4.     We cite here to the EHA regulations as codified at the time
AT-78-104 was issued.  The regulations are currently codified at 34 CFR
Part 300.

5.     The first exception refers to the situation where a state may
wish to include a specific related service in its definition of special
education so that a child, who would not normally be considered
handicapped solely because he or she needed this service, would be
considered handicapped under EHA.  (See the comment to 45 CFR
121a.13(a).)  The second exception refers to the situation where the
state has provided, for example, that the state education agency will
provide and pay for a school vaccination program or for eye tests.

6.     The Board's holding, however, was not that anything included in a
child's IEP and provided as part of a free appropriate public education
is always an "educational activity" within 42 CFR 441.13(b).  Indeed, in
Oklahoma, the Board specifically rejected this position when taken by
HCFA because it was inconsistent with the statement in AT-78-104 that
Medicaid funding was available for "related services."

7.     The disallowance also included some costs allocated to "Habit
Training" and "Deaf and Blind" cost centers. The auditors included these
cost centers because USTS had received federal grant funds specifically
designated for the services charged to these centers.  An affidavit by a
USTS accounting officer explained the audit figure used for "Habit
Training" as "a percentage figure based on on-site HHS interviews with
staff to determine the proportion of time spent in 'day treatment,' as
opposed to non-educational residential care."  Clay Affidavit, p. 2.

8.     Our decision does not preclude HCFA from examining these
questions further, nor from examining whether the services in fact met
the standards for "training and habilitation" services in the ICF/MR
regulations.

9.     For example, an ICF/MR resident might have a program to learn
"survival" words.  The skill taught -- reading --is academic, but the
goal is to enable the resident to be independent, i.e., it is
habilitative.

10.     Utah mentioned a statement by Senator Bellmon regarding the
ICF/MR provisions and mentioning "education."   We discussed that
statement in Oklahoma, at pp. 5-8, rejecting that State's position that
the statement was evidence of congressional intent to fund education in
ICFs/MR.

11.     While one State witness testified that, in the late 70s and
early 80s, USTS was shifting to a "developmental" model of services,
USTS provided no evidence that the school program was substantially
different than it had been for individuals with comparable abilities
prior to USTS becoming an ICF/MR or that this change was specifically to
meet the "active treatment" requirement and would not have been required
by the State's own education laws.  Indeed, the explanation appears to
be at least in part simply that the less severely retarded were moving
out of the institution into community placements.  See Deposition of
Paul S. Sager, pp. 9-11.

12.     This general principle is also reflected in rules governing
reimbursement for institutional services, including the Medicare
reimbursement principle cited by the auditors.

13.     As recently as March 6, 1987, the principal Medicaid oversight
committee affirmed that "Medicaid is intended to be the payor of last
resort.  Other available sources, including the legal liability of third
parties to pay, must be used before Medicaid begins payment." Committee
Print WMCP 100-4, Background Material and Data on Programs within the
Jurisdiction of the Committee on Ways and Means, House Committee on Ways
and Means, 100th Cong. 1st Sess., 1987 at 302.

14.     HCFA pointed out that the legislative history of the EHA lists
several other programs from which funding would be available for
EHA-mandated services, but does not mention Medicaid.

15.     The Educational Services Curriculum guide indicates that the
hours of educational programming ranged from 6 hours a day to 2 hours
per week.  The record also indicates that the programs occurred during
the day.  It also appears that the programs did not run for the full
year but only for the number of days equivalent to a school year.  A
"Teacher Contract" at USTS referred to a school year of 182 days.  HCFA
appeal file, Ex. 1, p. 10.

16.     In construing the provisions at issue, the First Circuit invoked
"the general principle that the Social Security Act should be broadly
construed, so as to carry out Congress' intent to provide medical
expense coverage for all qualifying individuals."  Slip op., p. 10,
quoting Mayburg v. Secretary of Health and Human Services, 740 F.2d 100,
103 (1st Cir. 1984).  The issue here does not affect whether or not the
ICF/MR residents receive the services in question, however; the services
are mandated by the EHA and by the "active treatment" requirement. The
issue here is solely one of how the expenses will be allocated between
State funds and federal Medicaid funds. One reason why we do not think
that Congress intended that Medicaid would pay for these services is
precisely because it would deplete Medicaid funds without increasing
services to recipients beyond what they would otherwise receive.


17.     Public Law 99-272, April 7, 1986, added to the home and
community based waiver provisions a definition of "habilitation
services," for individuals discharged from an ICF, as "services designed
to assist individuals in acquiring, retaining, and improving the
self-help, socialization, and adaptive skills necessary to reside in
home and community based settings," including educational services only
if they are not special education and related services otherwise
available through a local educational agency.

18.     The deposition of the superintendent of USTS referred to
teaching such things as sucking on a straw, walking, crawling, speech,
and feeding, but he was referring to what professionals such as
occupational therapists, physical therapists, and speech therapists
would do at USTS because of the "developmental" model which was
followed.  Deposition of Paul S. Sager, pp. 12- 13.  The costs of these
professionals was allowed here, as were the costs of the
"developmentalists" working with the residents in the living units.

19.     Indeed, there is some evidence in the record that an arrangement
with the education authorities provided for attainment of a diploma by
USTS students if they progressed to that point.  HCFA appeal file, Ex.
III, p. 8.  The fact that this may have rarely, if ever, actually
occurred does not change the nature of the services as being ones which
may lead to such a diploma.


20.     There are other reasons for questioning the State's position on
this point.  The mere fact that the superintendent of USTS considered
the action transmittal to support his view does not establish that the
State officials responsible for operating the Medicaid program read the
transmittal the same way.  The opinion by the State Attorney General's
office, produced after the Main Hurdman audit, states that the audit was
performed because questions concerning the costs were raised "as early
as 1978."  State's appeal file, Ex. D, p. 1.  This suggests that the
action transmittal at least raised questions in some minds.

21.     This position is broader than the interpretation in the action
transmittal, which permits Medicaid funding for related services when
not part of special education, but it is sufficient certainly to inform
the state that no FFP would be available for special education.

22.     This provision appears to permit an exception only when there is
a certificate of exemption, issued by an evaluation team, after a
determination that the child is "unstable to the extent he constitutes a
potential hazard to the safety of himself or to others."  53-18-6 U.C.A.