GAB Decision 105
June 17, 1980 Florida Department of Health and Rehabilitative Services;
Docket Nos. 79-68-FL-HC, 80-88-FL-HC Przybylinski, Donald; Woodruff,
Robert Dell'Acqua, Frank
The Florida Department of Health and Rehabilitative Services appealed
two determinations, made by the Health Care Financing Administration
(HCFA), disallowing a total of $1,255,087 in Federal financial
participation (FFP) claimed under Title XIX of the Social Security Act
for payments for certain pharmaceutical services rendered during the
period ended March 31, 1977. The basis stated for the disallowances was
that the payments were "duplicate" payments because FFP had previously
been claimed and allowed for premium payments to Paid Prescriptions,
Inc. (PAID), under an insurance-type contract requiring PAID to cover
the costs of services rendered during the period in question. The
appeals have been considered jointly upon the request of the State and
without objection by HCFA.
There are no material issues of fact in dispute. We have, therefore,
determined to proceed to decision based on the written record and
briefs. We conclude that, for the reasons stated below, the
disallowances should be upheld.
Background
In administering a Medicaid program under Title XIX, pursuant to an
approved State plan, a State may enter into contracts with entities
called "health-insuring organizations," which, in exchange for a premium
or subscription charge paid by the State, pay for services provided to
eligible Medicaid recipients and assume an underwriting risk.
Under such a contract, PAID had administered the Florida Medicaid
drug program from July 1, 1974 to June 30, 1976. Apparently, PAID
sustained certain deficits during this period because of removal for a
time of a $20 "cap" on the cost of certain drugs. The parties were
requested to explain the temporary removal of the $20 limit, but have
not done so.
In June 1976, after a competitive bidding process, the Florida
Department of Health and Rehabilitative Services awarded to PAID a new
three-year contract under which the State paid a monthly insurance
premium to PAID totaling approximately $27 million annually. From this
premium, PAID was required to pay pharmacists who provided drugs to
eligible Medicaid recipients. The 1976 contract specifically provided
that PAID could not use the new contract premiums for obligations
incurred prior to June 1976.
In violation of this provision, PAID used approximately $3.2 million
in 1976 contract premiums to pay prior contract obligations. On January
12, 1977, upon learning of PAID's misuse of funds, the State gave PAID a
Notice of Contract Termination. Pursuant to the contract, the State
allowed PAID a 60-day period to cure contract deficiencies, including
the use of premiums for payment of prior contract obligations and the
failure to provide a performance bond. PAID was unable to cure these
deficiencies within the 60-day period, and the State terminated the
contract effective April 1, 1977. The State claimed and received FFP
for premium payments to PAID for periods prior to the contract
termination.
As of March 31, 1977, PAID owed approximately $3.2 million in
provider claims and administrative costs. The State initiated suit
against PAID and an affiliated organization in the Circuit Court for
Leon County, Florida, seeking to force PAID to fulfill its contractual
obligations. The Florida Pharmaceutical Association, Inc., on behalf of
the providers to whom PAID owed money, intervened in that lawsuit and
obtained an injunction on May 19, 1977, ordering the State to process
and pay Medicaid drug claims incurred prior to March 31, 1977, and
subrogating the State to any and all claims of Florida pharmacists
against PAID.
Subsequently, the State made the court-ordered payments, through a
fiscal agent, for drug services which were covered by the premium
payments to PAID. The State's claim for $1,085,672 in FFP for these
services was disallowed by the Director, Medicaid Bureau, HCFA, by
letter dated March 9, 1979 (Docket No. 79-68-FL-HC). An additional
claim for $169,415, also for services which should have been covered by
the contract with PAID, was disallowed by letter dated April 14, 1980,
signed for the Director, Bureau of Program Operations, HCFA (Docket No.
80-88-FL-HC).
Payments Pursuant to Court Order
The State concedes that its claim is, in essence, a claim for
duplicate payments but asserts that FFP is nonetheless available,
relying primarily on the terms of 45 CFR 205.10(b)(3), 38 FR 22007,
August 15, 1973. That section provides --
(b) Federal financial participation is available for the following
items:
(3) Payments of assistance within the scope of Federally aided public
assistance programs made in accordance with a court order.
The State's position is that the disallowed amount represents
payments made pursuant to the court order obtained against it by the
Florda pharmacists, and the plain meaning of the words used in Section
205.10(b)(3) controls. The State cites the case of Caminetti v. U.S.,
242 U.S. 470 (1917), as holding, "In the absence of ambiguity or
conflict, the plain meaning of a statute or regulaton will not be
disturbed."
The State's argument that this section applies to the court-ordered
payments here is unpersuasive for several reasons. First, the argument
is based on the premise that the meaning of the section is clear and
unambiguous. Ambiguity may arise, however, where a provision of
otherwise seemingly broad application is placed in a context which
indicates that it was intended to be read more narrowly. Section 205.10
deals with requirements for providing fair hearings to applicants for,
or recipients of, assistance who are aggrieved by State agency action.It
allows, for intance, for FFP in court-ordered payments to an individual
applicant even though a state had initially determined that the
individual was ineligible under the state plan. Given this context,
Section 205.10(b)(3) is ambiguous, and, according some deference to
HCFA's interpretation, we conclude that the section was not intended to
apply in the circumstances of this case. The court proceeding here was
not an appeal of an agency determination denying benefits but a
contractual dispute, caused by PAID's default, in which the court
subrogated the State to the rights of the providers.
There is a further policy reason for not applying Section 205.10(b)(
3) here. Adopting the State's reading of the section would allow a
state to receive FFP for any payments pursuant to court order regardless
of the lack of statutory basis for the payments and the state's role
before the court. It would reduce the states' incentive to seek full
reimbursement from a defaulting contractor or other party which should
bear the costs, rather than settling for a lesser amount and claiming
FFP in the loss.
In reaching the conclusion that Section 205.10(b)(3) is innaplicable
in the circumstances of this case, we do not imply, however, that HCFA
is correct in its argument before the Board that the payments in
question were not within the scope of Title XIX because they were
payments to providers rather than to applicants or recipients. Medicaid
assistance is provided generally through payments to providers, and the
Board might find, in another case, that Section 205.10(b)(3) applied to
such payments, where made pursuant to a court order following a Section
205.10 hearing.
Requirements for Contracts with Health-Insuring Organizations
Medicaid regulations require that state plans provide for certain
types of provisions to be included in contracts with health-insuring
organizations. The contract with PAID entered into in June 1976 appears
to have been subject to 45 CFR 249.82, as published at 34 FR 3873,
February 27, 1971. Amendments to this section were published on May 9,
1975 (40 FR 20516), but their effective date was delayed until August 9,
1976 (42 FR 51583, September 29, 1977). Section 431.512(a)( 5)(i) of 42
CFR, cited in the HCFA disallowance letter, was not dated until
September 29, 1978 (43 FR 45188). (See, also, redesignation at 42 FR
52857, September 30, 1977.)
Section 249.82(a)(1) of the 1971 regulations, defining "arrangements
with health-insuring organization," includes as a characteristic of such
an arrangement that --
(The) State agency would not pay for any loss incurred by the
contractor from claims exceeding premiums paid or from increases in
administrative costs of the contractor during the covered period . . .
.
Section 249.82(b)(1)(iii) requires that State plans under Title XIX
must provide that contracts with health-insuring organizations, as a
minimum, will --
Provide that the premium payment constitutes full discharge of all
responsibility by the State for costs of covered medical care and
services provided to covered eligible recipients during the contract
period.
The State complied with the literal requirements of this section by
including in its contract with PAID a clause which provides that --
Payment of the premiums to Contractor for the Contract period
constitutes the full discharge of all responsibility of State Agency for
costs of covered benefits . . . .
Agency Record, TAB 1, p.20.
As discussed in the Order to Show Cause issued in this case, it would
seem, however, that the purpose of the regulatory requirement is not
merely that contracts pursuant to the state plans contain such
provisions, but that the states, and thus, indirectly, the Federal
government, should be effectively released from further liability where
they bear premium costs adjusted to reflect the risk which the
contractor has assumed.
The Order directed the State to show cause why the disallowance
should not be upheld on the ground that the purpose of Section 249.82(
b)(1)(iii) is to preclude FFP in "duplicate" payments such as the
amount
claimed here. The State, in response, did not specifically address this
issue. HCFA, on the other hand, merely responded to the Order with a
conclusory statement that the regulations must be read to release the
Federal government from further liability once it has participated in
premium payments. In the absence of any showing by the State that
HCFA's reading is incorrect, however, we will apply the Agency's
interpretation that the regulation was not intended merely to require
inclusion of the release clause in the contract but also to have the
effect of prohibiting FFP in payments which should have been covered by
the premiums.
Other Considerations
The court's order, resulting from concern that, if the providers were
not paid, some would go out of business or refuse to serve Medicaid
recipients and the program beneficiaries would therefore suffer,
undeniably placed the State in a difficult position. The State had to
pay costs which should have been covered by the contract. The State
will, according to information provided by the State, recover from PAID
and its affiliates only after protracted litigation and, even then, will
not recoup the entire amount. Nonetheless, the State's general argument
that the Federal government and the State are "partners in the medicaid
venture" is not a sufficient basis on which to provide FFP in the
State's loss. The Federal government's partnership in the Medicaid
program is circumscribed by the applicable statutory and regulatory
provisions. Moreover, while it appears that the State did monitor the
contract carefully, it also appears that the State was aware, when it
entered the second contract with PAID, that PAID had sustained deficits
during the previous contract period and might have some difficulty
meeting its obligations. Placing the burden on the State to deal only
with reliable contractors is consistent with the procurement standards
for grantees in 45 CFR Part 74, Subpart P, as in effect at the time the
1976 contract was awarded to PAID (See, 38 FR 26285, September 19,
1973), and with general principles of grant law.
We are also not persuaded that the Federal government should bear
part of the loss based on the State's representation that HCFA officials
agreed that the Federal government would participate in the State's
loss.
Even if the record supported this contention, which it does not, it
is questionable whether Federal officials can obligate the Federal
government to pay for costs not authorized by the statute or the
implementing regulations.
Conclusion
For the reasons stated above, we have determined to uphold HCFA's
disallowances in the amounts of $1,085,672 (Docket No. 79-68-FL-HC) and
$169,415 (Docket No. 80-88-FL-HC), claimed for payments to providers of
pharmaceutical services which should have been covered by premium
payments to PAID.
OCTOBER 04, 1983