GAB Decision 779
August 21, 1986
Hawaii Department of Social Services and Housing;
Docket Nos. 85-143; 85-216; 86-9; 86-82
Ballard, Judith A.; Settle, Norval D. Teitz, Alexander G.
(1) The Hawaii Department of Social Services and Housing (State or
DSSH) appealed the decision of the Health Care Financing Administration
(HCFA or Agency) disallowing a total of $11,685,273 in federal financial
participation (FFP) claimed by DSSH under Title XIX (Medicaid) of the
Social Security Act (Act). The amounts disallowed represented the
federal share of State excise taxes reimbursed by DSSH as part of the
costs incurred by providers in rendering medical services. The
disallowances were based on HCFA's view that payments for the tax were
not actual expenditures by the State within the meaning of applicable
federal law because the State collected the tax from the providers. /1/
We conclude that federal law was ambiguous concerning whether
State
income from excise taxes paid by Medicaid providers had to be
deducted
from DSSH's payments to the providers in determining the amount
of
expenditures eligible for FFP. We also conclude that the
State's
interpretation of applicable law was reasonable under the
circumstances
of this case where: (1) the approved State plan in effect
during most
of the disallowance period clearly provided for reimbursement of
the
excise tax; (2) program regulations supported the
State's
interpretation; and (3) HCFA had paid FFP for DSSH's full
payments to
providers including excise taxes for 18 years. Thus, the
Agency was
unreasonable in attempting to apply a(2) different
interpretation
retroactively. Accordingly, we are compelled to overturn
most of the
disallowances. /2/
Nothing in this decision contradicts the Agency's position
that
generally expenditures claimed for FFP must be "net" of any
applicable
credits. Furthermore, we emphasize that nothing in this
decision
precludes HCFA from promulgating a rule or issuing formal
policy
guidance giving notice of HCFA's intent to prospectively
and
specifically require states to apply excise taxes received
from
providers as credits against Medicaid payments to those providers.
This decision is based on the written record, including comments
received
in response to a draft decision issued in this case. While we
have
revised the draft decision for clarity and to respond to those
comments, our
final decision is substantially the same as the draft.
Background
Hawaii has had a Statewide general excise tax in effect throughout
the
State's participation in the Medicaid program. This tax is imposed
on
the gross receipts of all businesses (with few exceptions not
relevant
here) for the privilege of doing business in the State. The
providers
involved in this case, like all other businesses in Hawaii, paid
this
excise tax on their gross receipts as an expense of operating in
the
State. Hawaii's State Medicaid plan did not specifically provide
that
State taxes, per se, would be reimbursed. However, the plan in
effect
for most of the period in question did specify that providers'
costs
would be reimbursed in accordance with Medicare principles
of
reimbursement. (See State Brief, p. 2) Under Medicare principles it
is
clear that the State could use excise taxes as a provider cost
in
calculating provider reimbursement rates. Hawaii used the
Medicare
principles from the inception of the Medicaid Program in 1966;
the
State excise tax was in effect throughout that period, and during
this(
3) entire period providers in Hawaii have always been reimbursed
for
excise taxes under both Medicare and Medicaid. During both the
entire
period in question here (i.e., 1979 to 1986) and the prior period
not
involved in this disallowance (i.e., 1966 to 1979), Hawaii included
the
amount of the tax as a provider cost item in calculating the
Medicaid
reimbursement rate and claimed FFP in the amount it paid
providers.
Until the first deferral notice in these cases, HCFA always paid
the
State's claims for FFP for amounts paid providers for medical
services
without questioning the inclusion of excise taxes in the
State
reimbursement.
In December 1984, HCFA notified DSSH that a portion ($424,101) of
the
amount shown on the State's Medicaid expenditure report for the
quarter
ending September 30, 1984 was being deferred. On June 17, 1985,
the
State received a disallowance letter which informed the State that
HCFA
had disallowed not only the $424,101 for the July through September
1984
quarter, but an additional $9,786,211 in previously
allowed
expenditures, making a total disallowance of $10,210,312 for the
period
from July 1, 1979 through March 31, 1985. Thereafter, in
separate
disallowance letters, HCFA notified DSSH of the disallowance of
an
additional $1,474,961, bringing the total to $11,685,273 (the amount
in
dispute here) for the period from July 1, 1979 through December
31,
1985.
I. Did "federal law" mandate the disallowances here?
HCFA based the disallowances on its view that "federal law" (i.e.,
section
1903(a) of the Act and Office of Management and Budget Circular
A-87)
required the disallowances. As explained below, section 1903(a)
and the
Circular simply are not that specific; while HCFA's
interpretation is
not necessarily inconsistent with them (and thus might
reasonably be imposed
through a regulation or guideline), it is
unreasonable to conclude that the
Act and the Circular themselves
required the disallowances.
A. The statute did not mandate the disallowances.
The disallowance letters themselves cite only the statute as
authority.
Section 1903(a)(1) of the Act provides that a state with an
approved
Medicaid plan may receive:
An amount equal to the federal medical assistance percentage . .
.
of the total amount expended during such quarter as medical
assistance
under the State plan. . . . (emphasis added)
(4) After citing this provision, the disallowance letters conclude:
Payment of a State excise tax is not an actual amount expended
by the
State since the State collects the tax. Since no actual
State
expenditure has occurred, HCFA is precluded by Section 1903(a)
from
reimbursing such taxes.
Throughout these cases, HCFA has persisted in arguing that
the
disallowances were mandated because the statute is unambiguous on
its
face in meaning that only "actual" or "net" expenditures are
eligible
for FFP, and that the amounts disallowed were not actual or
net
expenditures.
The Act does not define "expended" or "expenditure," nor have we
been
referred to any legislative history for an interpretation. /3/
The
everyday meaning of "expend" is "pay out." (See Webster's Third
New
International Dictionary (1976)) Furthermore, Black's Law
Dictionary
(5th ed.) defines "expenditure" as "spending or payment of
money; the
act of expending, disbursing, or laying out of money;
payment."
Clearly, the State did in fact pay out money, to providers of
"medical
assistance," which included reimbursement for excise taxes.
While we would, nevertheless, agree with the Agency that a
reasonable
interpretation of the term "expenditure" would be "net
expenditure," and
that, in determining the "total amounts expended" by the
State, certain
income or credits to the State should be offset or netted
against
amounts paid out, this does(5) not ineluctably lead to the
conclusion
that there was no "net expenditure" here. The key issue is
whether the
excise taxes paid by the providers into the State's general
treasury had
to be offset against the payments by DSSH to the providers for
medical
services rendered by the providers. The statute simply does not
address
this question.
Indeed, the Agency, in its briefing, did not rely solely on the
statute
for the proposition that there has been no "net expenditure" when
the
State reimburses a provider for an amount including an excise tax.
The
Agency argued also that the payment of the tax must be considered
an
"applicable credit" within the meaning of OMB Circular A-87.
We
consider this argument at some length below. It is, however, a
far
different argument from the Agency's contention that the statute
itself
unambiguously requires that FFP is available only in "net
expenditures"
and that what we have here is not a "net expenditure."
If the statute were clear and unambiguous, and covered the
particular
situation before us, we would of course uphold the
disallowances. But
we must reject the Agency's position that the mere
use of the term
"expended" in section 1903(a) conclusively requires the
result here.
B. The OMB Circular did not mandate the disallowances.
HCFA argued that the disallowances in this case were required by the
cost
principles for state and local governments set out in Office of
Management
and Budget (OMB) Circular A-87. /4/ Under A-87, costs
incurred by states must
be "net of all applicable credits." (OMB
Circular A-87, Attachment A, Item
C.1.g.) The Agency argued that the
excise taxes paid by the providers to the
State should have been
considered credits against the State's reimbursements
to the providers
for the excise taxes. HCFA argued further that an
underlying principle
of A-87 was that states were not meant to make a profit
on their
programs and allowing Hawaii to receive FFP when it had no
"net"
expenditure did just that.
(6) The Circular does not provide the clear and affirmative
answer
needed to support HCFA's retroactive disallowance. The Circular
simply
is not definitive. It was neither clear that these taxes had to
be
considered "applicable credits" under A-87, nor that the State had to
be
viewed as making a profit, prohibited under A-87. These
Circular
provisions may support a prospective rule requiring that excise
taxes be
netted against Medicaid payments in claiming FFP, but the provisions
are
not sufficiently clear to mandate a retroactive disallowance. /5/
The definition of "applicable credits" in A-87 gives specific
examples
of what is meant by the term. The definition refers to such
things as
"purchase discounts; rebates or allowances, . . . and
adjustments of
overpayments or erroneous charges." (Attachment A, Item
C.3.a.) There is
a direct link, or nexus, between the credit in those
situations and the
amount to which it must be applied. For example, if
the State received
a discount or rebate on the purchase of a desk for its
Medicaid program
it could not seek FFP on the full retail price.
Similarly, the State
would have to subtract from its Medicaid expenditures
amounts it
recovered from a provider where it originally paid the provider
in
error.
Under a reimbursement rate system, the relationship is more remote.
The
rate is not simply a shorthand summary for costs which are
themselves
directly claimable as Medicaid expenditures. The State's
expenditures
are payments for medical services rendered by the
providers. None of
the providers' costs, including the excise taxes,
would themselves be
directly claimable as Medicaid expenditures. It is
only because
Congress has permitted a cost-related system of reimbursement
to
providers that the providers' costs become significant. The way
in
which they become significant is through their use in calculating
a
reimbursement rate -- i.e., they become a measure of the amount
the
State will pay the provider under the State plan for rendering
services.
The rate is, however, not simply an accumulation of all of a
provider's
costs, but reflects application of a method of determining
"allowable"
provider costs (applying principles different from A-87
cost(7)
principles) and, sometimes, subjecting those costs to
limitations.
Moreover, when a prospective reimbursement system is used, the
costs
used to calculate the rate are not the actual costs of providing
the
medical services but are historical costs, usually adjusted
for
inflation. Many of the provider's costs might arise from payments
the
provider makes to a State agency (for example, for a license fee),
which
the provider would have to make irrespective of whether the provider
was
rendering any services to Medicaid recipients.
Unlike the examples in the "applicable credits" provision, the right
of
the State to receive funds from the provider (here, excise taxes)
does
not arise out of the transaction of the State paying the
provider.
Thus, the provision does not clearly inform the State that it has
to
treat the excise tax as an "applicable credit" to offset
Medicaid
expenditures.
With regard to "profits," A-87 merely states as a general policy
for
determining allowable program costs that "(no) provision for profit
or
other increment above cost is intended." (Attachment A, Item A.1)
The
Agency's view that the State, in effect, obtained a "profit or
increment
above cost" because it received the full tax from the provider, as
well
as federal funds for a percentage of the amount of the tax, has
merit
only if one considers one part of the transaction in isolation.
There
is nothing in the provision which requires an examination of
offsetting
income and expenditures at this level. From the perspective
of the
entire transaction (i.e., the payment of the full rate to the
provider
-- in a substantial part from State funds -- and the provider's
payment
of a small percentage of that amount as an excise tax) or from
the
perspective of the State's Medicaid program as a whole, the State had
a
net outlay of funds, not a profit.
Furthermore, A-87 itself contains language which reasonably could have
led
the State to believe that excise taxes were allowable costs.
Attachment B at
Item B.25 contains a provision specifically stating:
In general, taxes or payments in lieu of taxes which the
grantee
agency is legally required to pay are allowable.
The Agency argued that this provision did not mean excise taxes
were
allowable costs here since it was the providers, not the grantee
agency
(DSSH), that had to pay the tax. While technically we might
agree with
the Agency, the important point is that the provision created
further
ambiguity regarding whether taxes had to be considered an
"applicable
credit" under A-87. While the State was not obligated to
pay the tax
directly, it was obligated under its State plan to pay a rate
calculated
by including the tax.
(8) Moreover, the record reveals that even certain Agency officials,
when
faced with this provision, were confused. On August 18, 1981
the
Regional Administrator, Division of Financial Operations, HCFA,
stated
in a letter to the Director, California Department of Health
Services,
that FFP was available for State reimbursement of a California
sales
tax. (See California Appeal File, Exhibit L, California
Department of
Health Services, Board Docket Nos. 85-156, et al.) On December
8, 1981,
the Regional Administrator asked the Regional Attorney, Region IX,
for
advice regarding FFP for sales tax. The Administrator's
letter
specifically cited in full the A-87 provision (then 45 CFR Part
74,
Subpart Q, Appendix C, Part II, Section B (25)) and noted that it
was
the provision "governing sales tax." The Regional Attorney
responded
that FFP was available. /6/ (See California, supra, Exhibit J)
II. Was the State's interpretation reasonable under the
circumstances
of this case?
In addition to the ambiguity and mixed message in A-87, there are
other
factors which set a context in which the State reasonably
determined
that it did not have to treat the excise taxes as an "applicable
credit"
offsetting its payments to the providers for medical services.
We
discuss these factors below.
A. The State plan as support for the State's interpretation.
HCFA did not dispute that Hawaii's approved State plan applicable
during
most of the disallowance period provided for reimbursement of
Medicaid
providers in accordance with Medicare principles of
reimbursement. HCFA
did not dispute that under Medicare principles the
excise taxes in
question were costs which could properly be(9) considered in
calculating
Medicare reimbursement rates. /7/ HCFA argued, instead, that it
was not
reasonable to apply Medicare rules in a Medicaid context.
HCFA
explained that Medicare was designed as an insurance program
(the
federal government assumed the entire cost of medical services),
whereas
Medicaid was designed as a matching program (the state and
federal
governments shared the cost of medical services).
In response, the State argued in effect that the Agency should be
bound
by the State plan provision which it approved. The State pointed
out
that the State Medicaid plan applicable during most of the
disallowance
period stated that a cost incurred by a provider was
reimbursable if
that cost was reimbursable under Medicare, and since
providers' costs
for excise taxes were reimbursable under Medicare they were
also
reimbursable under Medicaid.
We conclude that under the circumstances of this case, the State
plan
supports the State's argument. While Hawaii is wrong to suggest
that
approval of a state plan provision means so much that a state can
ignore
clearly applicable rules and regulations, we cannot agree that
approval
of a state plan provision means so little that the Agency
can
unilaterally and retroactively disavow that to which it has
clearly
agreed.
Agency approval of the State plan here cannot reasonably be construed
as
anything other than approval of the use of Medicare principles
of
reimbursement for Medicaid; thus, it was approval of the use of
excise
taxes paid by providers in the State's calculation of the
reimbursement
rate to be paid to providers. This approval does not mean
that the
State can ignore other applicable provisions if they clearly
require
that excise taxes paid by the providers be netted against
amounts
reimbursed under the rate. Stated differently, the fact that
the tax
paid by(10) the provider may be an allowable cost in its rate does
not
automatically mean the State is entitled to FFP on the tax portion
of
the reimbursement to the provider.
Since it was not clear that the use of Medicare principles for purposes
of
Medicaid reimbursement contravened A-87 (or any other HCFA issuance),
we
conclude that the Agency cannot now attempt to give retroactive
effect to its
newly developed position. Under the circumstances here,
HCFA cannot
unilaterally disavow the plan provision to which it agreed.
HCFA attempted to shift the burden to the State by arguing that
the
State's blanket adoption of Medicare principles (rather
than
specifically stating its intent with regard to excise taxes) was
the
reason for approval, and that, at the time of approval of the
State
plan, HCFA did not fully realize the impact of the Medicare
principles.
Nevertheless, as the administering agency, HCFA must be held
responsible
for knowing what it approves. Moreover, we note that HCFA
administered
both the Medicare and Medicaid programs and was responsible
for
developing the Medicare reimbursement principles.
Finally, we note that the Agency did not deny that it had provided FFP
for
rates calculated using an excise tax for 18 years. While the
Agency
claimed that it was unaware during that period that it was providing
FFP
for taxes, the Agency should have known that taxes were included
in
calculating the rates since the Medicare cost principles were
being
used. In these circumstances, a reasonable implication of such
a
practice for such a long period is that at least some responsible
Agency
officials knew that FFP was being paid and thought that FFP
was
available under federal law.
B. The program income regulations as support for the
State's
interpretation.
The State argued that 45 CFR 74.41 specifically provided that taxes
need
not be considered in determining the net amount of a
state's
expenditure. The State argued that 45 CFR 74.41 and 74.42
governed what
program income had to be recognized in determining the net
amount of a
state's expenditure for purposes of FFP. The State argued
that while
"program income" was to be deducted, taxes were excluded from
"program
income," except when "earmarked" for use in the program. The
state
concluded that since no part of the excise tax was
specifically
earmarked for use in Medicaid, the taxes should be included in
the net
amount of Hawaii's expenditure for purpose of FFP.
(11) The Agency responded that 45 CFR 74.41 and 74.42 did not apply
here
because the rationale behind the disallowances was not that the
receipt
of taxes constituted "program income," but rather that it constituted
an
"applicable credit" under A-87. The Agency argued further, that,
even
if the Board concluded that 45 CFR 74.41 and 74.42 were applicable,
the
taxes should not be excluded since the taxes were specifically
earmarked
for use in the Medicaid program by the State plan.
We conclude that, while the program income regulations may not have
been
part of the narrow basis on which the Agency fashioned
its
disallowances, they are related to the general issue of how a
government
grantee should treat a receipt of funds in the operation of a
grant
program; they serve as further evidence that the law was not as
clear
as the Agency would have us believe.
The program income regulations directly address the question of
whether
there must be an offset for taxes in calculating a state's
net
expenditures under a program such as Medicaid. Section 74.42(c)
sets
out the general rule that "program income" should be excluded from
"net"
expenditures. The regulation states:
. . . the maximum percentage of Federal participation is applied
to
the net amount determined by deducting the (program) income from
total
allowable costs. . . .
Section 74.41(c)(1) sets out the specific exclusion of taxes from
program
income (thus allowing taxes to be included in net expenditures).
That
provision states:
(c) The following shall not be considered program income:
(1) Revenues raised by a government recipient under its
governing
powers, such as taxes, special assessments, levies, and
fines.
(However, the receipt and expenditure of such revenues shall be
recorded
as a part of grant or subgrant project transactions when such
revenues
are specifically earmarked for the project in accordance with the
terms
of the grant or subgrant.)
While the Agency argued that the more general applicable credit
provision
is the basis for the disallowance, its rationale is weakened
by the very
presence of what we consider to be the more specific program
income
provision.
Moreover, we find no merit in the Agency's alternative argument that
the
existence of the Medicaid plan meant that the taxes were(12)
earmarked
for the Medicaid program. The Medicaid plan here did not
"earmark" the
taxes for the Medicaid program. The Agency did not
dispute the State's
assertion that the taxes went into the general
treasury.
The State argued that 45 CFR 74.41 bars prospective as well
as
retrospective application of HCFA's present interpretation.
Appellant's
Supplemental Brief, April 23, 1986, p. 5. The State's
argument implied
that the only way for the Agency to change policy was by
issuing a new
regulation.
We do not agree with this conclusion. First, 45 CFR 74.41 does not
bar
the Agency's action any more than OMB Circular A-87 mandated it.
The
Board does not conclude that the program income regulation dictates
a
decision for the State; the program income regulation is simply
one
factor supporting the State's interpretation. The Agency, of
course, is
free to adopt another reasonable interpretation; it merely
cannot
impose that interpretation retroactively under the circumstances
here.
Moreover, a formally adopted regulation is not necessarily the
only
mechanism available for announcing a new interpretation.
III. Additional arguments.
The parties made several additional arguments which, while
not
dispositive, must be addressed. We discuss them below primarily
because
the parties devoted significant briefing to them.
A. Sham taxes.
Strictly speaking, we are concerned only with the tax at issue in
these
disallowances, and, more particularly, with HCFA's
retroactive
implementation. However, we have considered HCFA's concern
that
allowing FFP for expenditures on rates calculated using excise
taxes
would encourage states to create sham taxes. We believe HCFA's
fear is
an insufficient basis to justify a result other than that which we
are
compelled to reach based on all the considerations discussed in
sections
I and II above.
The Agency could issue an action transmittal or promulgate a
regulation
stating that reimbursement by a state of any taxes paid by a
provider to
any state or local governmental unit would not be eligible for
FFP,
rather than crafting after-the-fact legal arguments to support a
newly
announced interpretation of a federal statute. Moreover, the
Agency's
argument assumes Machiavellian machinations on the part of states
which
appear unlikely and certainly are not present in this case. The
record
reveals that the State here simply followed the provisions of
its
approved State(13) plan and the applicable Medicaid regulations.
The
reality of the situation appears to be that, given the complex nature
of
the interplay between the State plan and Medicaid regulations,
neither
the State nor the Agency fully appreciated until recently that
there
might be a problem. Furthermore, the tax here clearly was not
devised
as a sham, insofar as it was already in effect at the time Medicaid
was
adopted in Hawaii.
B. The donated funds analogy.
The parties cited certain Board decisions dealing with donated funds
to
support their conflicting claims about whether FFP was available
where
there was no net outlay of State funds. The donated funds analogy
is a
bit far-fetched; but in any event, we conclude below that while
the
decisions are not directly relevant, on the whole they tend to
support
the result we reach here.
The State argued that certain Board decisions dealing with donated
funds
established that there can be FFP for a payment to a provider
even
though there is an offsetting contribution to the State by the
provider,
and thus no net outlay of State funds. The State cited New
Mexico Human
Services Department, Decision No. 382, January 31, 1983, and
Michigan
Department of Social Services, Decision No. 352, September 30, 1982,
to
support its position. In effect, the Agency argued that this was
true
only for an unconditional donation of funds, and that the State
taxes
here were more like conditional restricted donations for which FFP
was
not available under past Board decisions. The Agency cited
Texas
Department of Human Resources, Decision No. 381, January 31, 1983,
as
support for its position. HCFA argued that this case involved
a
conditional donation since there was a written document, the
Medicaid
plan, which provided that excise taxes were to be reimbursed to
the
provider. Further, HCFA argued that New Mexico did not support
the
State's position. HCFA did not address Michigan.
In New Mexico there was a specific statutory provision which stated
that
funds involved could be considered as State funds for purposes of FFP
as
long as they were donated without restriction to the State. In
Michigan
the Board concluded that the Agency simply failed to prove its case
and
implied that in another context it might interpret
"expenditure"
differently. The Board's conclusions in both cases were
sufficiently
narrow so that they do not control when applied generally by the
State
here. However, the treatment of unrestricted donations adds yet
another
reason why the State may have thought that unrestricted tax payments
did
not have to be offset against Medicaid reimbursements before
claiming
FFP.(14) In Texas the State Medicaid agency (DHR), in order to meet
a
deadline, sent its employees to certain hospitals to assist
in
determining the Medicaid eligibility of patients. The hospitals
agreed
to pay part of the workers' salaries. DHR and the hospitals
entered
into written agreements specifying, among other things, how much
the
hospitals would pay DHR for the workers. DHR paid the workers out of
its
general funds, which contained the payments from the hospitals.
The
Board concluded that the payments from the hospitals were
applicable
credits against DHR's expenditures under 45 CFR Part 74, Subpart
Q,
Appendix C (now A-87; see n. 4). The Board's analysis turned
on the
fact that the agreements were "quid pro quo" agreements (work
in
exchange for pay). /8/ The Agency argued that the excise taxes paid
by
the providers here were analogous to these "conditional" agreements
and
therefore, should be considered applicable credits under OMB A-87.
We cannot agree. Texas did not involve the calculation of FFP for
State
expenditures in accordance with an approved Medicaid reimbursement
rate.
This case does. Moreover, we do not agree that the providers'
payments
of excise taxes were equivalent to conditional donations. The
Medicaid
and Medicare plan provisions stating that the excise taxes
were
reimbursable provider costs are not analogous to the written
agreements
in Texas. The excise taxes were not in any way a quid pro
quo. The
taxes were not paid in exchange for the Medicaid
reimbursement.
C. Resolution of State budget Officers.
The State of Hawaii formally submitted into the record a resolution of
the
National Association of State Budget Officers. The State argued
that
the resolution supported its position that the HCFA policy was
new,
disruptive of established government relationships, and should not
be
applied either retroactively or prospectively. HCFA submitted into
the
record the Secretary's response to the resolution. The Secretary
stated
that the tax issue was before the Board and that the HCFA policy in
no
way affected the State's authority to formulate its own tax policy.
We
have noted the resolution and find it to be unpersuasive in most of
the
respects for which it was offered by the State.
(15) The resolution itself was simply a declaration which: (1)
urged
Congress and the Administration to take legislative or
administrative
action to prevent the Department from withholding FFP for
state
expenditures for taxes; and (2) argued that the Department's
action in
withholding FFP for taxes diminished the states' power to tax.
The State did not explain how this declaration supported the
State's
arguments and the resolution itself contained no basis for
the
assertions made. The document did indicate that many people
apparently
considered the position taken in the HCFA disallowances new, but
that
does not change our analysis. Further, we do not see how the
Agency's
interpretation of 1903(a) (1) of the Act can be said in any way
to
diminish the State's power to tax. In any event, that question is
not
before us. Our decision concerns whether FFP was available, not
whether
the State could tax.
IV. Notice.
In this section, we discuss why we conclude that the Agency has
not
provided sufficient notice to the State of an interpretation of
section
1903(a) (1) which would mandate disallowing costs of the type
claimed
here. This conclusion is based not only on the nature of the
Agency
documents which informed the State of the proposed Agency action,
but
also on what we perceive as a lack of any consistent and
fully-developed
policy specifying when taxes must be netted against
Medicaid
expenditures for services.
A. The documents.
In the cover letter to the draft decision the Board noted that if
the
Board's initial conclusions were adopted as the final decision, then
FFP
would be available to the State until such time as the State had
actual
notice of the Agency's present interpretation. The Board noted
that
actual notice was required before a party could be adversely affected
by
a change in Agency policy. /9/ (See Alabama Department of Pension
and
Security, Decision No. 128,(16) October 31, 1980; Oregon Department
of
Human Resources, Decision No. 129, October 31, 1980; Utah Department
of
Social Services, Decision No. 130, October 31, 1980; New Mexico
Human
Services Department, Decision No. 382, January 31, 1983; and see
5
U.S.C. 552(a) (1) (D) and (E)) The Board asked the parties to brief
the
question of which, if any, of the following Agency actions should
be
considered to be actual notice:
(1) receipt of the first deferral letter, dated December 20, 1984;
(2) receipt of the first disallowance letter, dated June 12, 1985;
(3) receipt of the notification dated August 6, 1985, that
the
proposed Hawaii State Plan Amendment (85-7) would not be approved
unless
the excise tax provision was excluded.
1. Arguments.
The Agency argued that the earliest actual notice was the receipt of
the
deferral letter. The Agency argued simply that the deferral
letter
informed the State of the policy underlying the disallowances.
(17) The State argued that the earliest action that could be
considered
actual notice would be the final decision of the Board. The
State
argued that it was unaware of any instance in which deferral letters
are
used to announce new policy. The State argued that deferrals
merely
point out that the Agency has a question about a cost and frequently
the
questions are resolved in the State's favor without a disallowance
ever
being taken. The State noted that the deferral letter in this
case
stated that the questioned claims were "for sales tax." The State
argued
that words such as these could not serve as actual notice of such
a
fundamental change in policy as the Agency proposed here. Further,
the
State indicated that it interpreted the first deferral letter to be
a
misunderstanding as to the nature of the tax since the tax was, in
fact,
an excise rather than a sales tax.
The Agency did not address the question of whether the first
disallowance
letter or the letter refusing to approve the State plan
amendment should be
considered actual notice. The State argued against
either action being
considered actual notice.
First, the State argued that the disallowance letter could not
be
considered actual notice. The State's premise was that the Agency
was,
in effect, attempting to impose a policy of general applicability;
the
State argued that the appropriate mechanism for such an action
was
through a regulation or action transmittal, not a disallowance
letter.
Disallowance letters, the State noted, issue from the Regional level
and
inform states about the allowability of specific costs; they are
not
central office pronouncements of new policy. The State argued
that
disallowances might well be unauthorized departures from policy by
a
region or interim actions that have not been fully reviewed by
central
office. The State argued that it did not change State policy
upon
receipt of the disallowance because it thought FFP was available
under
the law. The State pointed out that changing
reimbursement
methodologies at the State level was a major undertaking,
involving
administrative rulemaking (notice and hearing) and clearance at
various
State levels including the Governor's office. Furthermore, the
State
noted the major adverse effects on a wide range of businesses
and
professions. The State argued that if, after review of
the
disallowances, the Board rejected the policy underlying
the
disallowances, the State would be unable to restore the relevant
State
plan provisions retroactively; the effect would be to forego FFP
for
its rightful claims.
The State presented essentially the same argument why the letter
refusing
to approve the State plan provision could not be considered
actual
notice. The State argued that the disapproval letter "linked"
the
reason for the disapproval with(18) the disallowances. The State
argued
that it believed that if the disallowances were reversed the
disapproval
action would also be reversed.
The State concluded that the only action that could be considered
notice
in this matter would be the decision of the Board. The State
argued
that the Board's decision would represent final determination on
the
matter by the Department. The State argued that the Agency issued
the
disallowances here specifically for the purpose of obtaining
a
definitive ruling on the policy issue from this Board. The
argument
implied that it would be unfair to impose the policy prior to
that
definitive ruling.
2. Analysis.
We agree that the deferral letter cannot be considered actual notice
of
the Agency's policy. We find it significant that HCFA did not
correctly
identify the tax, thus leaving open the possibility that the
deferral
reflected a misunderstanding, not a new policy. But even if
the letter
had correctly identified the tax, we do not believe that a
deferral
letter is the appropriate vehicle for announcing policy. The
deferral
regulations at 45 CFR 201.15, cited in the letter to Hawaii, state
that
deferral action means "the process of suspending payment . . .
pending
the receipt and analysis of further information relating to
the
allowability of the claim. . . ." Thus, it is clear that the
deferral
was not a final HCFA decision and could not be considered actual
notice
of a policy since HCFA might well reverse its position after
further
review.
For the same reason, we conclude that neither the first nor
subsequent
disallowance letters constituted actual notice of the Agency
policy.
The disallowance letters were not final decisions of the
Department.
Each disallowance letter itself states that the decision "shall
be the
final decision of the Department unless . . . you deliver or mail . .
.
a written notice of appeal to the . . . Board. . . ."
(underlining
added). Thus, the disallowances here could not be
considered notice
since the possibility existed that they would be
reversed.
Moreover, neither the deferral nor the disallowances were part of
the
Agency's general system of providing policy guidance. The
Agency
traditionally has provided policy guidance through such issuances
as
action transmittals and regulations. To conclude here that a
deferral
or a disallowance letter should be considered notice of the
changed
policy would result in an unprecedented departure from Agency
practice.
The deferral and disallowances were Agency assertions that
this
particular grantee misspent(19) money in the past. They were
not
documents having prospective effect. /10/
While this distinction may appear technical, it is an important one.
As
the State pointed out, a disallowance might possibly represent
an
unauthorized departure from national policy by a regional office or
an
interim action that has not been fully considered by central office.
In
this case, for the State to change its reimbursement system based on
a
disallowance letter would involve a complex cumbersome process
which
might well have to be reversed later.
We are here dealing with one series of disallowances for one state
only,
but a national issue. It appears that many states may be
similarly
situated. A federal department's policy in such an instance
ought
reasonably to be articulated nationally, and the fact that the
"policy"
here was not so announced -- particularly when it could so easily
have
been, through an action transmittal -- undermines the argument
that
Hawaii has had notice sufficient to cause it -- and only it --
to
undergo substantial administrative disruption. /11/
(20) We also conclude that the Agency's letter of August 6,
1985
(notifying the State that its plan amendment would not be approved
with
the excise tax provision) was not actual notice. We reach
this
conclusion because the letter clearly was not a final Agency
statement
and not part of the Agency's system of providing policy
guidance. In
fact, the August 6 letter specifically stated that it was
not a final
decision. The letter requested additional information and
noted that
processing of the proposed amendments would be suspended pending
a
review of the information. /12/
B. Agency policy unclear.
Further support for our decision is the fact that it is not clear from
the
record what policy the Agency intended to adopt. The
Agency's
statements and actions before the Board regarding the basis for
this
disallowance are inconsistent in several respects. The State
payments
initially disallowed by the Agency included reimbursements to
providers
calculated under a retrospective rate system that included gross
excise
taxes in calculating the reimbursement rate. Initially the
Agency
argued as a basis for the disallowance that when the State
recovered
excise taxes from the providers and reinbursed the taxes to the
provider
under the rate methodology of the State plan, there was a
circular
movement of funds and no "net" expenditure by the State.
(Respondent's
Brief, November 15, 1985, p. 6) We will refer to this for
convenience as
the "circular rate" theory of the disallowance.
Nevertheless, the Agency's theory in fact appears broader than
the
circular rate theory. The disallowances were calculated by taking
a
percentage of the State's overall expenditures for medical
services,
including some not paid under a rate. There is no evidence
here that
all expenditures for medical assistance were paid under a rate, and
many
normally are not. For example, the Medicare regulations indicate
that
certain services such as(21) physician's services may be paid based
on
"reasonable charges" rather than under a rate calculated using
the
provider's costs (see 42 CFR 405.501 and 405.502), and the State
plan
provided for using the Medicare principles for Medicaid.
While the Agency did not articulate a basis for the disallowance of
costs
not calculated under a rate, clearly a broader theory than the
circular rate
theory must have beeb used. The broader theory would seem
to be based
solely on the circular movement of funds: any time the
State paid a
provider for its costs of providing medical services
(regardless of whether
excise tax was used as a cost item in calculating
a rate), the State received
back (through the excise tax on the
provider's gross receipts) a percentage
of the amount paid out. We
refer to this as the "rebate" theory of the
disallowance (in effect, the
State received a rebate on its payments to
providers).
Adding more confusion to what theory the Agency used for its
disallowance
is the December 18, 1984 memorandum from a "high level"
Agency
official. (Respondent's Appeal File, Tab A) The Agency counsel
cited
the memorandum for purposes of establishing that FFP was never
available for
excise tax. (Respondent's Brief, November 15, 1985, p.
20) The
memorandum was an internal Agency document directed to the
Regional
Administrator for Financial Operations, Region X. Its purpose
was to
provide "policy guidance" regarding the availability of FFP for
Hawaii's
excise tax and California's sales tax. The memorandum stated:
The definition of medical assistance does not include sales or
excise
taxes as an "add-on" to the care and services furnished.
Reimbursement
to the State for medical assistance furnished Medicaid
recipients plus
the taxes asserted by the State on providers of medical
assistance would
result in providing excess FFP above that defined as medical
assistance.
. . .
We recommend that you immediately disallow all the claims for
sales
and excise taxes added on to either medical assistance or
administrative
services. . . . (emphasis added)
The term "add-on" creates additional doubt that the Agency had a
clear
theory of the disallowance here. "Medical assistance" includes
the
amount a State pays to providers in accordance with a rate
established
under an approved State plan. (Sections 1905(a) and 1902(a)
of the Act)
Where, under the approved plan, the tax is one of the costs to be
used
in the base for calculating the rate, it makes no sense to call the
tax
an "add-on" to "medical(22) assistance" if the tax is a component
part
of the rate from which "medical assistance" is determined. The
"add-on"
language makes it seem that Agency policy would prohibit FFP for
a
State's payment of tax to itself, but not for a provider's payment
of
tax to the State. For example, where a State buys a desk for use in
its
Medicaid program, and as part of the purchase pays a sales tax to
itself
and later attempts to claim the sales tax as part of its
"medicaid
services," there is indeed an "add-on." However, when the tax is
used as
a cost item in the base for calculating a rate under an approved
rate
methodology, the tax is not an "add-on" but arguably a component
of
"medical assistance." Thus, it is not at all clear that the
policy
espoused in the memorandum even applies to the facts of Hawaii
although
the Agency may have relied on it, at least for the later
disallowances.
We cannot be sure which of the three approaches discussed above the
Agency
intended to adopt. Each approach has its own
practical
ramifications: under the "circular rate" theory an excise tax
would be
disallowed only if reimbursed under a rate; under the "rebate"
theory,
an excise tax would be disallowed whether in a rate or not;
under the
"add-on" theory, the tax would be disallowed only if paid by the
State.
Also, each policy has broad ramifications affecting the
State's
relationship with its providers and its program operations.
We conclude that the State cannot be said to have been given notice of
any
specific Agency policy. Moreover, it is not for the Board to
choose
among the various possible interpretations. Stating policy is
the
Agency's function and such sweeping policy implications as those in
this
case should be addressed through explicit and considered
policy
guidance.
Conclusion
Based on the foregoing, we reverse the disallowances except as
qualified
by the footnote below. /13/
/1/ We use "DSSH," "Hawaii,"
and "State," interchangeably when
referring to the appellant in this
decision. Nevertheless, it is useful
in picturing what happened in this
case to note that, while DSSH paid
the providers for medical services, the
providers did not pay excise
taxes back to DSSH. Rather, the providers
paid excise taxes to the
State Department of Taxation and the tax money went
into the State's
general
treasury. /2/ There may be a
separate basis for
disallowing a certain portion of the claimed costs.
Long-term care
providers were paid for some part of the disallowance period
under a
prospective payment system, with rates not computed under
Medicare
principles, but with a Medicare upper cap. We discuss below in
footnote
13 why we do not decide the part of this dispute pertaining to
these
providers for this
period. /3/ The State argued
that certain
past Board decisions concluded that an "expenditure" is the
amount the
State pays the provider under a rate. (Appellant's Brief, p. 7,
citing
Missouri Department of Social Services, Decision No. 630, March
18,
1985; Illinois Department of Public Aid, Decision No. 467,
September
30, 1983; and New York State Department of Social Services,
Decision
No. 521, March 6, 1984.) This is true, but simply does not resolve
the
question of whether that expenditure has to be reduced to the extent
the
State receives part of it back in the form of taxes. The point of
those
decisions was that A-87 principles do not apply directly to a
provider's
costs (even where the provider is a state facility) because
the
expenditure which is reimbursable under Medicaid is the payment of
the
rate to the provider for services rendered, not the provider's costs
for
supplies, salaries, etc., which are merely used in calculating the
rate,
when permitted by the methodology and cost principles adopted in a
state
plan. /4/ OMB Circular
A-87, issued January 28, 1981 (46 Fed.
Reg. 9548), was previously designated
as FMC 74-4. The cost principles
set out in OMB A-87 had initially been
contained in 45 CFR Part 74,
Appendix C, which has since been removed (45
Fed. Reg. 34274). Part 74
now incorporates OMB A-87 by reference.
See 45 CFR 74.171. /5/
As we
discuss in section IV below, the Agency itself has not been
consistent in how
it has read the "applicable credits" provision,
particularly with respect to
whether all State taxes paid by a provider
must be offset against Medicaid
payments or whether this treatment is
required only when the tax is included
in the rate calculation or added
on to the rate by the State. /6/ We
note that the record also contains
a memorandum written by another Agency official (classified by
the Agency as
a "high level" official) which states that FFP was never
available for such
taxes under Medicaid. The memorandum was written on
December 18, 1984,
only two days before the first deferral in these
cases. The memorandum
does not diminish the fact that other officials
(even if lower or mid-level)
earlier had a different view of the law.
Again, the point is that the law was
not clear. /7/ The
HCFA
Medicare Provider Reimbursement Manual (HIM-15) provides at
section
2122.1 that "the general rule is that taxes assesses against
the
provider in accordance with the levying enactments of the several
states
. . . and for which the provider is liable for payment, are
allowable
costs." The only exception to the rule is for taxes measured by or
based
on net income, which are essentially taxes on profit. See, e.g.,
Humana
of Kentucky v. Harris, CCH Medicare/Medicaid Guide section
31,610. The
Hawaii tax is not a net income tax; it is payable by
providers even if
they operate at a
loss. /8/ Texas was remanded to
the Department
by the United States District Court for the Western District
of Texas by
Order dated August 2, 1985. The remand does not affect our
analysis here
since we distinguish Texas. Moreover, the Board's amended
decision on
remand was not based on the "applicable credit" provision.
(See Texas
Department of Human Services, Remand of Decision No. 381, June
18,
1986.) /9/ The Agency
argued in earlier briefing that there was
no change in policy since the
Agency never had a formal written policy
on the issue. The Agency argued that
FFP for State expenditures for such
taxes was paid "inadvertently" and that
its present position on excise
taxes was an initial interpretation of the
Act. (Agency Response Brief,
p. 21) The fact that the Agency allowed
the State to include the tax in
its rate calculation without question for 18
years seriously undermines
the argument, however. The Agency, in effect,
admitted that actual
notice was required when it asserted that its
pronouncement on excise
taxes constituted an interpretative rule.
(Agency Reply Brief, pp.
18-19) Section 552(a) (1) (D) of 5 U.S.C. (the
Administrative Procedure
Act) specifically identifies "statements of general
policy or
interpretations of general applicability," as well as substantive
rule
changes, as among the Agency actions requiring publication in
the
Federal Register or actual notice before a party can be
adversely
affected. Thus, notice was required here whether the new
interpretation
was an initial interpretation (as the Agency argued) or a
changed
interpretation (as the State argued). Even if the Agency policy
were
considered an "interpretative rule," exempted from notice and
comment
rulemaking procedures under 5 U.S.C. 553(b) (A), actual notice would
be
required before the State could be adversely affected. See
section
552(a) (1). /10/ This
does not mean that the Agency need be
hamstrung by the Board in its rightful
function of interpreting statutes
or regulations. In this case, for
example, HCFA could have gone forward
at the time of issuing of the first
disallowance letter with a
simultaneous action transmittal setting forth its
policy. /11/ The
record in
the related California cases, originally joined with
this case but later
severed, contains an internal memorandum of February
1983 from an attorney in
the Office of the General Counsel pertaining to
a Georgia sales tax on
pharmaceutical products furnished Medicaid
patients. (See California
Department of Health Services, Docket No.
85-156, Appellant's Exhibit E)
After giving an opinion that FFP was not
available for this sales tax, the
writer went on to say that while the
"new policy" of not paying for sales
taxes arguably constituted an
interpretive rule (not subject to the notice
and comment provisions of 5
U.S.C. 553(b) (A)), given the uncertain state of
the law, notice and
comment was the appropriate action. The opinion
continued: "Further,
since Section 552 of the APA takes the position
that effective notice be
accomplished either by publication in the federal
register or by actual
notice, we believe that actual notice of this new
policy be given to all
jurisdictions that participated in the Medicaid
program." HCFA was
advised to "proceed along both avenues, addressing the
problem in the
short term by actual notice, and, in the long run, by
publication." (p.
5) /12/ We emphasize that the Board is not deciding that
all
disallowances and other actions short of rules or action
transmittals
(and the like) are insufficient notice under the
Administrative
Procedure Act. This is a matter which we find neither
fully developed
in the record nor necessary to reach here. We have
determined only that
in the peculiar circumstances of this case, the
disallowances were
insufficient legally to bind
Hawaii. /13/ A State is entitled
to
FFP only for expenditures made in accordance with its approved
State
plan. (Arkansas Department of Human Services, Decision No. 357,
November
15, 1982, p. 9; section 1903(a) of the Act) In this
case, State plan
amendment 85-1, approved by the Agency, deleted the
provision proposed
by the State to include gross excise tax as a cost in the
base used to
calculate the provider reimbursement rate for long-term care
facilities
under a prospective payment system. Thus, it appears that
from the
effective date of that provision, FFP attributable to gross excise
taxes
reimbursed to long-term care providers would be unallowable as not
in
accordance with the State plan. Although the plan amendment shows
an
"effective date" of February 1, 1985, it is not clear from the
record
what date actually should be considered the "effective date." The
record
indicates that a restraining order issued on January 25,
1985
(incorrectly noted in Appellant's letter as 198 6) by the
Federal
District Court for the District of Hawaii postponed implementation
of
the reimbursement methodology adopted under plan amendment
85-1.
(Appellant's letter, June 30, 1986, p. 2; Respondent's letter,
June 30,
1986, p. 1) Furthermore, the record also indicated that a
settlement
agreement between the parties which precipitated dismissal of
the
restraining order on June 4, 1985 apparently further
postponed
implementation of the methodology contained in plan amendment
85-1.
(Appellant's letter, June 30, 1986, p. 2) It is not clear from
the
record what was stated in either the restraining order or the
settlement
agreement. It is also not clear whether the agreement was
incorporated
into a court order dismissing the restraining order, so as to
have the
effect of the court order. We therefore do not decide whether to
uphold
or reverse the disallowance pertaining to long-term care providers
under
the prospective payment system of plan amendment 85-1. We leave
it to
the parties to resolve this question. If they are unable to do
so, they
may return to us on this one issue.
APRIL 25, 1987