GAB Decision 721
February 6, 1986
New York State Department of Social Services;
Settle, Norval D.; Teitz, Alexander G. Ballard, Judith A.
Docket No. 85-173
The New York State Department of Social Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $412,136 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance was
based on a review of the State's cash management procedures and
quarterly expenditure reports for Medicaid claims. HCFA determined that
$412,136 represented interest which had been earned by the State on
federal funds but which had not been credited to HCFA.
The major issue presented is whether HCFA can disallow an amount equal
to
the federal share of interest earned by the State on Medicaid
payments which
were placed in special accounts after being withheld from
Medicaid providers
or collected in fraud and abuse recoveries. In a
previous decision
involving the same issue, the Board upheld HCFA's
disallowance. New
York State Department of Social Services, Decision
No. 588, October 31,
1984. The State conceded that this appeal did not
present any material
issues of fact distinguishable from those
considered by the Board in Decision
No. 588, but argued that a
subsequent federal court case has rendered
Decision No. 588 null and
void. For the reasons discussed below, we
find that the cited court
case has no relevance to the facts of this
appeal. Accordingly, we
sustain the disallowance based on the reasoning
of Decision No. 588.
The holding of Decision No. 588
At issue in Decision No. 588 was the interest the State earned from
an
interest-bearing account, into which the State had placed:
Medicaid
payments withheld from Medicaid providers suspected of fraud and
abuse
activities; and collections made pursuant to voluntary
restitution
agreements which were entered into by Medicaid providers
determined to
have received overpayments as a result of proscribed activities
on the
part of the providers. The Board found that such interest gave
rise to
an overpayment(2) to the State within the meaning of section
1903(d)(2)
of the Act. The section provides that the Secretary's
quarterly
payments to a state for the Medicaid program shall be --
. . . reduced or increased to the extent of any overpayment
or
underpayment which the Secretary determines was made under this
section
to such State for any prior quarter. . . .
The Board determined that the State had received an overpayment in
the
amount of the federal share of the interest since the interest
amounted
to an applicable credit, as described in 45 CFR Part 74, Appendix
C,
Part I, C.3 (1979), which should have reduced the State's claim
for
Medicaid expenditures. /1/ Since there was no reduction on the
State's
part, the State in fact received more Medicaid funds than it was
due,
resulting in an overpayment. The Board based its holding on a
previous
Board decision, North Carolina Department of Human Resources,
Decision
No. 361, November 30, 1982, /2/ where the Board looked to the source
of
the interest:
We are not persuaded by the argument that the interest was
generated
by the State's investment activities rather than by the
Medicaid
program. The Medicaid recoveries directly supplied capital
for
investment; the interest in dispute would not have been earned if
the
State had not recovered money from its Medicaid providers. . . .
Since the interest was attributable to the Medicaid program,
it
should have been credited against program expenditures. pp. 8-9.
In finding that there was thus a regulatory basis for the determining
that
the interest should have been offset(3) against further Medicaid
claims, the
Board held in Decision No. 588:
(The) State was not required by federal statute or regulation
to
place the withheld and recovered Medicaid payments in an account
that
earned interest. Once the State did so, however, the federal
government
became entitled to share in that interest. The ultimate
source of a
portion of these funds was federal monies and the federal
government is
entitled to a pro rata share of the interest those funds
earned. This
interest, if not applied as an applicable credit, results
in an
overpayment within the meaning of section 1903(d)(2). p. 7.
The Board also concluded that the funds were not held
"pending
disbursement" and, therefore, the exception in the
Intergovernmental
Cooperation Act allowing states to retain interest on
federal funds
"pending disbursement" did not apply.
The Perales decision is not relevant to the facts of this appeal.
The State's primary argument here is that Perales v. U.S., 598 F. Supp.
19
(S.D. N.Y. 1984), aff'd, 751 F.2d 95 (2d Cir. 1984), requires
reversal of
Decision No. 588 and the disallowance at issue here. /3/
Perales concerned
the(4) operation of the Food Stamp Program in the
State of New York.
The Food Stamp Program is administered nationally by
the Department of
Agriculture's Food and Nutrition Service (FNS). FNS
initiated a policy
of charging interest on all debts over 30 days old
owed to FNS by, among
others, state agencies charged with the local
administration of the Food
Stamp Program. The debts at issue in Perales
arose from a FNS
determination that persons had received food stamps on
the basis of expired
eligibility cards. FNS billed New York for the
amount of the improperly
issued food stamps and assessed interest on
this amount.
The court in Perales found that FNS has no authority, either by
common
law or regulation, to impose interest against a state agency.
The court
found that, unlike other federal programs, there is no provision
for
interest in the Food Stamp Act and that state agencies had never
before
been liable for interest under the Food Stamp Program. Citing
Pennhurst
State School and Hospital v. Halderman, 451 U.S. 1 (1981), the
court
stated:
The terms and conditions upon which State agencies participate
in the
Food Stamp Program were clearly articulated by Congress, and cannot
be
expanded by administrative action. In the administration of
cooperative
federal-state programs, state governments assume only those
obligations
that are explicitly imposed by statute.
587 F. Supp. at 24.
The court concluded that the absence in the Food Stamp Act of a
provision
authorizing the assessment of interest precluded FNS from
claiming interest
from New York.
According to the State, the interest denied by the Perales court
is
identical to the interest at issue here. The State contended
that
without express authority from Congress a federal agency, be it FNS
or
HCFA, may not charge a state agency interest on overdue
claims.
Although the funds in question in Perales were labeled a "penalty,"
the
State reasoned, they amounted to nothing more than the charging
of
interest on a debt owed to the federal government, similar to
the
Medicaid funds collected or withheld from providers. The State
argued
that Perales mandates the proposition that regulations are not
an
adequate substitute for explicit congressional approval of
interest
assessment and that Congress has not authorized the payment by
states of
interest on Medicaid funds.
We believe that the State has misread the meaning of Perales
and
overstated its scope. The court in Perales was concerned with
the
question of whether a federal agency,(5) having determined that a
state
agency owed it a debt, could assess interest on that debt
without
statutory authority. Moreover, the action that gave rise to the
debt
was an action (issuing food stamps to persons whose eligibility
cards
had expired) for which Congress had authorized a federal remedy
without
specifically authorizing interest.
Here, it is not a question of assessing interest on a debt owed to
the
Federal Government, but of determining whether the State
properly
reported program expenditures. The gist of our holding is that
the
interest (actually earned) was income to the program which should
have
been applied to reduce program expenditures under the applicable
cost
principles of which the State had notice. Since the State did not
apply
the interest to reduce its claimed expenditures, it claimed and
received
FFP in an excess amount equal to the federal share of the
interest.
Thus, we are not holding here that HCFA can assess interest on a
debt
owed by the State, but rather, that the State owes a debt in the
amount
of the interest because the State did not reduce its
reported
expenditures to account for the interest as an applicable
credit. This
is an important distinction.
The statute authorizes FFP only to the extent a state has
actually
incurred an expenditure; the interest income here must be
applied to
reduce the State's expenditures and, consequently, to reduce the
amount
of FFP to which the State is entitled. The fact that the
applicable
credit to be applied to reduce program expenditures here
constitutes
interest is wholly incidental.
Furthermore, the court in Perales limited its inquiry to the Food
Stamp
Act, wherein it found no provision for the payment of interest.
The
court specifically contrasted the Food Stamp Act with the Medicaid
Act,
where, at section 1903(d)(5), a state is liable for retroactive
interest
on disallowed Medicaid funds if its appeal of the disallowance
is
unsuccessful. Although the cited authority for the recovery of
interest
here is the overpayment adjustment provision at section 1903( d)(2)
of
the Act rather than section 1903(d)(5), we find it relevant and
damaging
to the State's position that the court in Perales drew this
distinction,
thus confining its holding to the Food Stamp Act.
As the Agency pointed out, there is a significant difference in
the
"interest" disapproved of in Perales and the interest at issue here.
In
Perales the interest was in fact a penalty assessed on a debt New
York
owed to FNS. Here the State either collected or withheld payments
from
Medicaid providers. At a minimum, half of the funds placed in
the(6)
account were federal dollars (the lowest rate of federal
participation
in such payments in 50%). Since the State had determined
that the
Medicaid funds could not properly be disbursed to those providers,
the
federal share of those funds was to be returned or credited to HCFA.
Of
its own volition, the State placed those Medicaid funds in
an
interest-bearing account.
It may have been a prudent business practice for the State to place
the
funds in an interest-bearing account (and, of course, the State
is
entitled to retain the interest on its share of the Medicaid
funds).
But, as the Board stated in Decision No. 588, to allow the State
the
interest on the federal share of the funds would be tantamount to
a
windfall for the State. On the other hand, requiring the State
to
account for the interest promotes timely repayment of the federal
share
of the funds once the State determines that they cannot be disbursed
to
the providers. If we were to accept the State's argument, each
state
would then be in a position to claim Medicaid funds in excess of
what
was properly due, invest those funds pending return of the
federal
share, and then retain all the interest. This would be the
equivalent
of the federal government giving the states interest-free
loans. We do
not think that Congress intended such a result when it
enacted the
Medicaid Act.
The State argued that, since Congress had specifically authorized
the
recovery of interest in the Medicaid program only in section
1903(d)(
5), it necessarily follows that such recoveries are extraordinary
in
nature and not otherwise authorized under the Medicaid Act. The
State
concluded that, if Congress had intended to allow for such recoveries
of
interest as the one at issue here, it could have provided
appropriate
and specific legislation.
We disagree. As discussed above, the question of how to treat
interest
actually earned on federal funds is different from the question
of
whether specific authority is needed before a federal agency can
assess
interest on a debt owed by a state.
Unlike the court in Perales, the court in North Carolina, supra,
examined
specifically the question of interest earned on Medicaid funds
held in a
special account, under circumstances similar to those here,
and found the
Federal Government entitled to a pro rata share of the
interest. We
consider that decision to be the definitive ruling on this
question. We
find that Perales is simply not relevant to the questions
raised here and
that the Board's Decision No. 588 is still controlling
on the subject.(7)
Conclusion
For the reasons stated above, we sustain the disallowance in the amount
of
$412,136. /1/ Although Appendix C was deleted from 45 CFR Part 74
on
May 22, 1980 (45 Fed. Reg.
34274), its provisions had been
adopted from Office of Management and Budget
(OMB) Circular A-87. OMB
Circular A-87, formerly designated FMC 74-4,
is made directly applicable
to states at 45 CFR
74.171. /2/ The Board's decision
was upheld
in State of North Carolina v. Heckler, 584 F. Supp. 179 (E.D.
N.C.
1984). /3/ In its Notice of Appeal the State requested that
the
disallowance be reversed on the basis of Perales, or,
alternatively,
that the Board issue a summary decision based on Decision No.
588. In a
subsequent telephone conference, the State, in response to a
Board
question, declared that, in addition to arguing that the disallowance
be
reversed because of Perales, it would also in its brief reiterate
the
arguments previously made in the appeal that resulted in Decision
No.
588. The State thus argued here that the grounds for the
disallowance
cited by HCFA were inapplicable to the assessment of interest
on
recouped or withheld Medicaid funds. In its disallowance
determination,
HCFA cited sections C(3)(a) and (b) of Office of Management
and Budget
Circular A-87, 45 CFR 74.47(a), and section 2555.2E of the
State
Medicaid Manual as authority for the disallowance. The Board
considered
and rejected the State's arguments on these points in Decision No.
588.
The State has not presented anything new in this appeal that would
lead
us to re-examine the Board's holdings on these matters and
we
accordingly adopt them here.
MARCH 28, 1987