Tennessee Department of Health and Environment, DAB No. 921 (1987)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT: Tennessee Department of Health  and Environment

Docket No. 87-19
Decision No. 921

DATE:  December 2, 1987

DECISION

The Tennessee Department of Health and Environment appealed a
determination of the Health Care Financing Administration (HCFA)
disallowing $5,428,178 in federal Medicaid funding claimed under Title
XIX of the Social Security Act.  The State's claim was for the costs of
"educational services" provided by state-owned intermediate care
facilities for the mentally retarded (ICFs/MR), during the period
November 1, 1981 through May 31, 1986.  The State made one retroactive
claim, covering the services provided in this entire period, in its
quarterly expenditure report for the quarter ending June 30, 1986.  The
Agency disallowed the part of the State's claim relating to the period
November 1, 1981 through June 30, 1984, amounting to $2,917,773 in
federal funding, because the Agency alleged the claim had not been
timely filed and thus was not eligible for funding.  Also, the Agency
disallowed the entire claim because it found that the services covered
by the claim were prohibited from reimbursement under Medicaid.

As explained more fully below, we find that the two bases asserted by
the Agency for the disallowance were correct and uphold the entire
disallowance.

I.    The claim for expenditures from November 1, 1981 through June 30,
      1984 was not timely filed.

A.    Relevant Statutory and Regulatory Provisions

Section 1132(a) of the Social Security Act prohibits the payment of
federal financial participation (FFP) for any expenditure that has not
been claimed within two years after the calendar quarter in which the
state made the expenditure, except that this section is not to be
applied so as to deny payment with respect to any expenditure "involving
court-ordered retroactive payments or audit exceptions, or adjustments
to prior year costs."

The statutory provisions were implemented by 45 C.F.R. Part 95, Subpart
A.  The regulation provides definitions of several significant terms
used in the statute.  "Adjustment to prior year costs" is defined as:

       an adjustment in the amount of a particular cost item that was
       previously claimed under an interim rate concept and for which it
       is later determined that the cost is greater or less than that
       originally claimed.

"Audit exception" is defined as:

       a proposed adjustment by the responsible Federal agency to any
       expenditure claimed by a State by virtue of an audit.

45 C.F.R. 95.4.

The statute and regulations also provide that payment may be made to a
State beyond the two-year time limit if the Secretary determines there
was good cause for the State's failure to file the claim within the time
limit.  In order to qualify for a waiver of the two-year filing limit,
the State must show that the reason for the late filing was due to
circumstances beyond the State's control.  Neglect or administrative
inadequacy on the part of the State is not considered a circumstance
beyond the State's control.  The regulation provides that a request for
a good cause waiver must be made in writing as soon as the State
recognizes that it will be unable to submit a claim within the
appropriate time limit and the request for waiver must include a
specific explanation of why the claim will be late.  45 C.F.R.  95.25
and 95.28.

B.    The State's Arguments

The State admitted that it had not claimed the education costs within
the two-year limit.  The State argued, however, that it met two of the
exceptions to the filing limit.  First, the State contended that the
claim in issue involved audit exceptions.  The State argued that it was
a federal audit which made the State aware initially that "educational
costs" might be claimed.  The State pointed to HHS Audit No. 04-60220,
dated December 9, 1985, which concluded that certain costs were not
reimbursable because they were "related" to "educational costs," but
recommended that no financial adjustment be taken.  HCFA never took a
disallowance action for the costs reviewed in this audit.  Unlike the
costs disallowed here which we find to be "special education" costs, the
audit reviewed costs for salaries and fringe benefits of aides providing
"related services" such as physical and occupational therapies, speech
and hearing and other such "related" services provided as part of a
child's Individual Education Plan.  Audit Report 04-60220, Appellant's
Appeal File, Tab 3, p. 7.

The State contended that on the basis of district court decisions
reversing an earlier Board decision involving educational activities
(Commonwealth of Massachusetts v. Heckler, 616 F.  Supp. 687 (D.C. Mass.
1985) and Commonwealth of Massachusetts v.  Heckler, 622 F. Supp. 266
(D.C. Mass. 1985)) and the issuance of HCFA State Medicaid Manual
Transmittal No. 16 (September, 1985) concerning the educational
activities prohibition, it concluded that it could make a retroactive
claim for these educational costs.  The State reasoned that the
subsequent retroactive claim is part of the State's continuing attempt
to resolve the issue initially raised in Audit No. 04-60220, so that the
expenditures at issue are "expenditures involving . . . audit exceptions
. . ." which qualify for the exception to the two-year filing period.

The State also argued that it met a second exception to the two-year
filing period, namely that the claim constitutes "adjustments to prior
year costs" under section 1132(a) of the Act and 45 C.F.R. 95.19.  The
State argued that it is requesting an adjustment to prior year costs
which had previously been interpreted to be unallowable costs but which
were now permissible.  The State contended that, although the Board has
previously stated that the classic example of this exception is an
adjustment under a retrospective rate reimbursement system, other forms
of adjustments to prior year costs may also qualify. The State argued
that its reimbursement system contemplates the use of per diem rates
which are subject to adjustment.  According to the State, the per diem
reimbursement rate is not a final payment but is instead an interim rate
subject to adjustment and, consequently, any adjustment under the system
would be consistent with the definition of "adjustment to prior year
cost" in 45 C.F.R. 95.4.

Finally, the State contended that the facts of this case established a
basis for a good cause waiver of the two-year time limit.  Therefore,
the State requested that the Board remand this matter back to the
Secretary for a determination of good cause.

C.    Analysis

We find initially that the retroactive claim here did not result from a
proposed adjustment by the responsible federal agency to an expenditure
claimed by the State arising out of an audit.  The special education
costs presently claimed are unrelated to the costs reviewed in the 1985
audit.  The audit report could not have discussed these costs since the
State originally did not claim the educational costs now sought
retroactively.  Instead, the State until July 1986 purposely "backed out
the cost of education" based on its interpretation of the statute,
regulations and Medicaid policy.  Affidavit of Ray D. Wilson,
Appellant's Appeal File, Tab 3, Ex. 2, p. 2.  As the State admitted, the
motivating factor for its claim was not the audit but the Massachusetts
decisions reversing earlier Board decisions.  Nevertheless, as we
discuss below with reference to a waiver, the State delayed a
considerable amount of time (over a year) from the first district court
Massachusetts decision before filing its claim.  The record also shows
that the 1985 audit recommended that no adjustments be made and HCFA in
fact made no adjustments based on this audit.  Consequently, the
critical element of the definition of "audit exception" is missing;
there is no proposed adjustment by the Agency based on an audit.

We conclude, therefore, that the State's retroactive claim did not
result from an "audit exception" as that term is defined in the
regulation.

The record also does not support the State's contention that its
retroactive claim is an "adjustment to prior year costs" and thus exempt
from the two-year filing limit.  The "interim rate" exception is limited
to the "state's interim and final cost settlement process."
Pennsylvania Dept. of Public Welfare, DGAB No. 703 (1985) at 1; Ohio
Dept. of Public Welfare, DGAB No. 622 (1985) at 6.  The definition of
this exception is narrow so as to prohibit a state from reopening long
closed cost years based on a change of law or other variable not related
to an interim cost reimbursement scheme.  Such a limit is consistent
with the purposes of the two-year requirement, which were to limit the
Department's liability for costs incurred by states years earlier and to
allow the Department to plan its budget.  See New York State Dept. of
Social Services, DGAB No. 521 (1984) at 8.

While the State contended that it has a per diem reimbursement scheme
which is subject to adjustment, it failed to show that the costs at
issue were claimed under this reimbursement system.  The affidavit of
Roy D. Wilson indicates that the retroactive claim was based on the
Massachusetts court decisions, rather than on a final cost settlement
process.  The State in effect turns the interim rate exception on its
head by suggesting that if an interim rate is used, then a retroactive
claim can be made at any time in the future even if that adjustment is
not related to the interim rate process.  The State's interpretation
completely circumvents the purpose of the statutory two-year limit and
conflicts with the interim rate exception which was intended to allow
the states to reconcile estimated costs based on past history with
actual costs incurred.

Since we have determined that the State did not meet either of the
claimed exceptions to the two-year filing limit, the only other avenue
open to the State to circumvent the filing time limit here is to request
a good cause waiver from the Secretary. The regulations, however,
prescribe specific requirements for such requests.  The regulation
requires that the request be made in writing as soon as the State
recognizes that it will be unable to submit a claim within the
appropriate time limit; that the request be made to the HHS agency
administering the program; and that the request provide a specific
reason showing that the circumstances for the late filing were beyond
the State's control.  It also provides that neglect or administrative
inadequacy is not a circumstance beyond the State's control.

The State here has not shown that it met these requirements. First, the
State failed to show that it made a written request for a waiver to
HCFA.  Second, the State did not show that it made a request as soon as
it recognized that it would be unable to make the claim within the
appropriate time limit.  We agree with the Agency that Tennessee was
required to seek its good cause waiver, at best, no later than in 1985
when the Massachusetts district court decisions were rendered and
Transmittal No. 16 was published, since the State claimed that it was
the occurrence of these two things which made it aware that the costs
might be allowable.  The State, however, did not file its claim until
after the end of the June 30, 1986 quarter. Moreover, in filing its
claim, the State gave no explanation for the delay in submitting the
retroactive claim, nor did the State submit a request for a waiver
showing circumstances beyond the State's control.  Thus, it appears that
the State also failed to meet the other requirements set forth in the
waiver regulation.

Therefore, we conclude that the State failed to meet the two-year filing
limit and, thus, may not be reimbursed for FFP for expenditures made
during the period November 1, 1981 through June 30, 1984.

II.    The entire claim may be disallowed because the services claimed
       were for educational activities prohibited from reimbursement by
       program regulations.

A.    General Background

The disallowance was taken because the State claimed federal funding for
educational costs which were unallowable in accordance with 42 C.F.R.
441.13(b).  Based on a review of the State's documentation, the Agency
determined that these costs were incurred for special education services
which were provided during specific time periods of a normal school day
to resident children under 22 years of age.  See Affidavit of Hugh
Webster, Respondent's Appeal File, Tab B.  The State did not refute the
Agency's finding.

The Medicaid regulations provide at 42 C.F.R. 440.2 that federal funding
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:  Institutional Individuals

                            *   *   *

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

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. 1/  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 relationship 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 which amended the Education of the Handicapped Act (EHA).
The transmittal gave 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."

B.  Analysis

1.    The Statutory and Regulatory Basis of the Disallowance.

The State's primary argument was that the denial of FFP here is improper
since at least some of the activities were "habilitative" in nature, and
the statute contemplates reimbursement of habilitative activities even
if they are also covered by the regulatory prohibition for educational
activities. The State argued that the same position was taken by the
First Circuit in Commonwealth of Massachusetts v. Secretary of Health
and Human Services, 816 F.2d 796 (1st Cir., March 31, 1987), rehearing
denied June 2, 1987, which upheld the two 1985 district court decisions
previously discussed.  The State argued that the First Circuit decision
constituted controlling precedent which the Board was bound to follow.

We conclude that the Agency's position that funding is prohibited for
the State's claim is supported by both the statute and the regulations.
2/  In a recently issued decision, the Board considered and rejected
arguments similar to those that the State raised here.  Utah Dept. of
Health, DGAB No. 893 (1987).  We summarize below the reasons why we
reject the State's arguments, relying, in part, on our analysis of the
issues in the Utah case.

o  The State misinterprets the effect of both the statute and the
regulations with respect to habilitative services.  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
services in an ICF/MR if certain conditions are met but leaves it to the
Secretary to delineate standards for such services.  The Secretary by
regulation 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."  AT-78-104, November 29, 1978. 3/  The
expressed purposes of the prohibition as identified in the Agency
transmittals were:  to limit funding because of the non-medical nature
of the services and to assure non-duplication of federal funding.

Contrary to what the State argued, the fact that special education and
habilitative services may "overlap" does not mean that the express
prohibition on reimbursing special education activities would no longer
apply to these overlapping activities. Obviously, if affirmative
authority were altogether lacking in the regulations for reimbursing any
special education costs as medical assistance, there would have been no
need for the prohibition in the first place.  The only reasonable
interpretation of the prohibition is that it bars reimbursement of
special education regardless of whether those activities may qualify or
not under regulatory descriptions of what otherwise may be allowable
"medical assistance."

o  Under section 1905(a), 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
ICFs/MR 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 education 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).

o  The Agency's position furthers the important program purpose that
states be precluded from receiving duplicate federal grant funding for
the same educational activities.  The record here indicates that the
ICFs/MR in question received federal funds for handicapped children
under Public Law 89-313, Title I of the Elementary and Secondary
Education Act.  Appellant's Brief, p. 4 and Audit Report No. 04-60220,
Appellant's Appeal File, Tab 3, Attachment A, p. 1.  Furthermore, even
though federal reimbursement may not be provided for 100% of a program's
costs under Title I, the federal government typically 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.  The
Title I program contains a "no supplant" provision. 4/

Also, contrary to the State's allegation, the fact that the specific
institutions may or may not have received funds directly under the EHA
does not mean the provisions of the EHA are not applicable.  The record
demonstrates that the State receives funds under the EHA, even though
the particular institutions at issue here may not directly receive the
funds.  Under EHA, 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 at the institutions at
issue.  See Utah, supra, pp. 19-22.

o  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.

o  Even if Tennessee had in fact provided the specific habilitative
services referred to by the First Circuit, such as training in eating
food to avoid choking (which has not been demonstrated by the State), 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 "educational" 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, the distinction between "traditional academic education"
(which the First Circuit determined was not reimbursable under Medicaid)
and habilitation is virtually impossible to draw in the ICF/MR context.
A program teaching, for example, "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.

For the foregoing reasons then, we conclude that the State's claim is
for services which are prohibited from reimbursement under the program.

2.  The Effect of the First Circuit Decision.

As we explained in footnote 2, the State has failed to demonstrate that
the services in question here were of the type that concerned the First
Circuit in its decision.  Moreover, in the previous section we explained
why we disagreed with the Court's holding in that decision.  The State
argued nevertheless that this Board is bound to apply as controlling
precedent to this appeal the First Circuit decision.  We reject this
position. As the Agency pointed out, the Supreme Court has recognized
that the United States cannot be bound by a single circuit decision and
cannot be prevented from relitigating an issue of national importance
simply because it has lost one decision at the appellate level.  United
States v. Mendoza, 464 U.S. 154 (1984). In Mendoza, the court held that
application of non-mutual collateral estoppel against the government,
would "thwart the development of important questions of law by freezing
the first final decision rendered on a particular legal issue" and would
prevent the Supreme Court from "permitting several Courts of Appeals to
explore a difficult question before it granted certiorari."  464 U.S. at
164.  Since HCFA cannot appeal an unfavorable Board decision, if we were
bound to apply the First Circuit decision here (even though Tennessee is
not in this circuit), the Agency would be prevented from obtaining a
favorable decision in a different appellate forum.  Appellate courts
disagree; "that is what makes horse races and Supreme Court Cases."
Givens v. United States Railroad Retirement Board, 720 F. 2d 196; 202
(D.C. Circuit, 1983).  Moreover, the authorities cited by Tennessee in
support of its contention that this Board is bound by the First Circuit
decision have no applicability in the instant case.  Unlike Spraic v.
United States Railroad  Retirement Board, 735 F.2d 1208 (9th Cir. 1984),
there is no statute which limits appeals of Board decisions to a certain
circuit's jurisdiction.  Tennessee's reliance on Ithaca College v. NLRB,
623 F.2d 224 (2d Cir., 1980) is similarly misplaced since the court
there merely recognized that a Second Circuit decision would be binding
on a subsequent appeal where that appeal would also be reviewed in the
Second Circuit.

As a result, we conclude that the Board is not bound here by the First
Circuit decision.

3.  Other Issues.

The State also alleged that the Agency denied the claim here because it
was charged to a cost center labeled "education," without considering
the effect of the Agency's own guidance documents.  While the State
alleged that the Agency denied the claim solely because of the label of
the cost center, the State provided no evidence to prove this statement.
Instead, an affidavit submitted by the Agency demonstrates that the
Agency did not disallow the costs on the basis of the label of the cost
center.  The affidavit indicates that the Agency representative reviewed
the State's documentation and sought verification from the State as to
what costs were included in the cost center in question.  During the
course of this investigation, the HCFA representative was told by the
State that the individuals whose salaries and related costs were claimed
under the education cost center performed only special education
services which were required by state and federal law.  Respondent's
Appeal File, Tab B.  The representative was advised that the cost center
contained only costs for special education which was provided to
children under 22 years in a special building designated as a school,
during routine school hours.  Thus, we conclude that the Agency did not
disallow the costs here solely on the basis of the placement of the
costs in a cost center labeled "education."

The record therefore suggests that the costs in dispute clearly relate
to costs of providing special education to school-age children in a
school building during normal school hours, and the State has provided
no evidence to demonstrate that the costs disallowed relate to the
provision of services outside the prohibition under the effective Agency
standards.  While the State here asserted that it would stipulate for
factual purposes only that "some of the services provided are similar in
nature to the 'educational/habilitative' services reviewed in
Pennsylvania and Massachusetts," no evidence was presented from which
the Board could conclude that even some of the activities for which
costs were claimed might be outside of the prohibition. Appellant's
Brief, p. 4.  In fact, the Agency alleged, and the State did not
dispute, that the costs disallowed here do not involve the costs of
providing "related services," which we previously held could be
reimbursable under Medicaid.  Compare Oklahoma Department of Human
Services, DGAB No. 367 (1982). Moreover, the State never suggested that
the costs involved here were for the costs of providing services to
residents of an ICF/MR over the age of 22.  Thus, we conclude that the
State has not documented that its claim here is allowable. 5/

Conclusion

For the reasons indicated above, we sustain the disallowance in the
amount of $5,428,178.

 


                            ________________________________ Judith A.
                            Ballard

 

                            ________________________________ Norval D.
                            (John) Settle

 

                            ________________________________ Donald F.
                            Garrett Presiding Board Member

 

 

1.     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).

2.     At the outset we note that the State here has failed to provide
the Board with any documentation demonstrating the nature of the
services at issue here.  While the State has alleged that some of the
services were "habilitative" in nature under Medicaid regulatory
standards and were of the type that concerned the First Circuit in the
Massachusetts decision, the State simply failed to demonstrate this to
be the case.  The Board has frequently held that "a grantee has the
responsibility of documenting the allowability of its claim for FFP."
Indiana Dept. of Public Welfare, DGAB No. 772 (1986), and cases cited
therein.  Consequently, even if we were to accept the State's arguments
as to the appropriate legal standard (which we do not), the State would
still have to demonstrate that the services it provided met that
standard.

3.     State Medicaid Manual Transmittal No. 16, issued on September,
1985, is not applicable here inasmuch as it was issued after the costs
in dispute were incurred.

4.     The concern about the possibility of duplication of funding in
this context is also consistent with related goals of the Medicaid
program.  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.  Moreover, 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 the operation of the program.  See, e.g., section
1902(a)(25) and 1903(a)(7) of the Act.

5.     The Agency indicated that if the State could identify that any of
the costs disallowed for the period July 1, 1984 through May 31, 1986
are for services provided to residents over the age of 22 or for the
provision of "related services," HCFA would review the evidence and make
an appropriate adjustment, if necessary.