GAB Decision 249
January 29, 1982 New York Department of Social Services; Docket No.
79-34-NY-HC Ford, Cecilia; Settle, Norval Teitz, Alexander
The New York Department of Social Services (State) appealed a
decision of the Director of the Medicaid Bureau (Agency) disallowing
$334,263 in federal financial participation under Title XIX (Medicaid)
of the Social Security Act. The disallowed amount consisted of funds
claimed by the State for costs of certain services provided in
Westchester County, New York (County). The disallowed amount
represented allocation to the Medicaid program of expenses of the
County's family court, district attorney, sheriff, and probation
department. The expenses were related to determining support liability
of parents and spouses.
The Board conducted a hearing in this case. Both parties, and the
County, submitted written briefs before and after the hearing. The
County had representatives at the hearing, but did not participate as a
party in this case.
The basic issues in the case were whether the costs in question were
allowable under Medicaid and, if so, whether they should have been
treated as direct or indirect costs.
The Board has concluded (1) that the Agency erred in determining that
the costs were unallowable per se; (2) that is was not unreasonable to
characterize the costs as indirect; but (3) that the basis used to
allocate costs to Medicaid ("head count") was suspect and should be
reexamined. The Board also has concluded that the disallowance was
defective because the record indicates that certain costs may have been
disallowed in error or on some basis unrelated to the issues in this
appeal.
The effect of this decision is to allow the State's claim to the
extent the State can provide a better alternative to (or further
justification of) the "head count" allocation basis used to distribute
the costs to Medicaid.
I. Background.
The Agency's argument essentially was that the costs were unallowable
under Medicaid during the time in question (similiar costs were
allowable under another contemporary HHS program and later under
Medicaid), and that, even if they were allowable, the costs should have
been treated as direct costs (they were claimed as indirect costs).
(2) The State's original presentation was conclusory and
unenlightening (as, indeed, the Agency's disallowance letter had been),
prompting the Board to issue an Order to Show Cause why the Agency
decision should not be upheld based on the State's failure to make a
persuasive case that the costs were properly charged to the Medicaid
program. In briefing submitted in response to the Order, and in
subsequent briefing and a hearing, both parties (and the Company)
presented more comprehensive evidence and arguments.
Our analysis below deals first with the question of allowability,
then with the question of how the costs should be characterized, and
finally with issues concerning the allocation basis and computation of
the disallowance.
II. Allowability.
The Agency's argument at the culmination of this appeal in
post-hearing briefing (there had been some ambiguity and shifting of
positions reflecting confusion about the concepts of allowability and
allocability of costs) essentially was that nothing in Title XIX
specified the allowability of the costs in question here, and that one
should infer from other circumstances, discussed in the two paragraphs
below, that the costs in question were not payable under Medicaid.
A. Whether the costs were unallowable because the services were not
provided by the County's social services agency.
We note at the outset that the Agency appeared to have conceded in
its post-hearing memorandum that, but for one missing factor, those
costs could be allowable:
There is no dispute that WCDSS' (the County's social services
component) own staff involved in seeking reimbursement was reimbursable
as an administrative expense. However, administrative costs for seeking
and enforcing medical support obligations by other local governmental
agencies, such as the probation, sheriff, district attorney and court
departments were not allowable. (p. 4).
The State noted, as did the County, that this argument (which was
alluded to at the hearing but specified for the first time after the
hearing, and appeared inconsistent with earlier Agency argument) would
render the costs in question allowable if only the State or County had
established some duplicative bureaucratic structure.
On its face, the argument also appeared inconsistent with applicable
cost principles, which include the general proposition that "costs"
incurred by the local government in connection with (federal programs)
are allowable whether incurred by the local government agency which
receives the federal award or (3) by another local government agency
which provides support services to the recipient agency. /1/
The basis for the Agency's position was not entirely clear, but it
apparently was related to an earlier Agency argument that the costs in
question, even if otherwise allowable, could have been paid only if the
County's social services arm had written cooperative agreements with the
other County agencies which provided the services. This Agency position
in turn was based on its allegation that for similar costs to be paid
under Title IV, Parts A and D of the Act, and under a later Medicaid
program related to certain collection incentive payments, a written
cooperative agreement was required. The Agency's position appeared to
be that the lack of such a requirement for the Medicaid program was
evidence of a lack of intention to pay for such costs; /2/ and, in any
event, implied that such agreements should be required as a basis for
payment here. Transcript (Tr.), pp. 130-131.
We do not find the Agency's position persuasive.
We begin with the observation that there simply was no requirement
for such agreements applicable to the costs in question here, whether or
not such a requirement might have been applicable to similar costs in
other program areas. And concerning the latter, we conclude that it
would be unreasonable to draw the implication the Agency pursued.
Title IV, Part A of the Act, Aid to Families with Dependent Children
(AFDC), contained provisions related to accounting for resources
available to AFDC recipients, including establishment of a single
organizational unit in the State or local AFDC agency to establish
paternity, secure support, and enforce support orders. Section 402(a).
During part of the period in question in this appeal, section 402(a)(
18) provided for "cooperative arrangements" betweeen the administering
agency and "appropriate courts (4) and law enforcement officials"
to
assist in pursuing support obligations. /3/ An implementing regulation
approved FFP in costs of these activities "under plans of cooperation
approved by the Single State agency" (45 CFR 220.61(f)(4)(v) (1974 and
1975)). Another reguation (45 CFR 220.48 (1974)) required, "with
respect to childrens receiving AFDC," that the administering agency have
a program to establish paternity and secure support for illegitimate and
abandoned children. This regulation also required cooperative
arrangements with appropriate courts and law enforcement officials,
including written agreements to reimburse for such assistance.
While it is thus true that the IV-A statute and regulations contained
provisions describing support enforcement and agreement requirements,
and Title XIX did not at the time require agreements, we do not conclude
that this is a resonable basis for holding that the costs in question
here are unallowable per se in the absence of an agreement such as the
IV-A program might have required. The absence of such agreements, of
course, can be a matter of evidentiary concern (in the sense that such
as agreement might provide a better basis than we have in this case for
determining the amount properly chargeable to Medicaid), but the absence
of such agreements cannot reasonably be characterized, in and of itself,
as precluding allowability under Medicaid of the costs involved. Basing
a disallowance on the implication of one program's requirements for
another is tenuous and speculative; the apposition of the Title IV
requirements with the lack of a requirement for the Medicaid program can
as easily support the State's position as the Agency's.
The Agency also argued that the need for cooperative agreements was
implied from certain statutory and regulatory provisions relating to
enforcement and collection of third party liability under the Medicaid
program. Section 1902(a)(25) of the Act, added in 1967, requires a
State plan for medical assistance to provide that the administering
agency "will take all reasonable measures" to determine the liability
of
third parties for medical costs, and must treat the liability as a
resource of the individual receiving the services based on which the
administering agency will seek reimbursement from the liable third
party. During the period in question here, this provision was
implemented in regulations at 45 CFR 250.31 (1974, 1975 and 1976). The
regulations did not mention written agreemetns; they simply stated an
obligation to "take reasonable measures to ascertain any legal liability
of third parties" for medical care and services. Section 250.31(a)(1).
Substantially the same language remains in effect as part of 42 CFR Part
433, Subpart D (1980) (see, sections 433.137(a) and 433.138). But
Subpart D now also contains provisions dealing specifically with
cooperative agreements, based on section 1912 of the Act, which was
effective in 1978. Section 1912 provides (5) that "for the purpose of
assisting in the collection of medical support payments and other
payments for medical care," a State plan "may provide for these actions:
mandatory assignment by assistance recipients to the State of rights to
payment for medical care from third parties and cooperation in
establishing paternity (section 1912(a)(1)); and --
. . . entering into cooperative arrangements (including financial
arrangements), with any appropriate agency of any state. . . and with
appropriate courts and law enforcement officials, to assist the agency
or agencies administering the State plan with respect to (A) the
enforcement and collection of rights to support or payment assigned
under this section and (B) any other matters of common concern. Section
1912(a)(2) (emphasis added).
The way in which this was implemented in regulations is instructive.
While the general continuing responsibility to determine third party
liability is described as what the State plan and administering agency
"must" do (42 CFR 433.137(a) and 433.138), the regulations state that
"a
plan may provide for assignment of rights to benefits and, if it does,
for cooperative agreements and incentive payments for collection. . .
." 42 CFR 433.137(b) (emphasis added). 42 CFR 433.151 states further
that:
If a plan provides for cooperative agreements it must provide that
the specific agreement requirements in Sec. 433.152, and the incentive
payment requirements in Secs. 433.153 and 433.154 are met. (emphasis
added).
Section 433.152 specifies details for what must be in agreements
(including a required provision that the Medicaid agency will reimburse
Title IV-D agencies for functions they perform).Sections 433.153 and 154
implement section 1903(p)(1) of the Act -- also effective in 1978 --
which provides generally that the collecting agency is entitled to keep
15% of amounts collected under section 1912. Section 1903(p)(1)
specifically requires a cooperative agreement for this special incentive
program, which was apparently designed to encourage greater use of the
section 192 assignment and collection procedures.
Even putting aside our misgivings concerning the relevance of the
later law and 1980 regulations, one may see that the implication the
Agency would have us draw from section 433.135-433.154 is not supported
by an examination of the provisions. It appears that the requirement
for cooperative agreements was added because it was specifically
required by statute for the special new incentive payment program, and
one arguably may even read the regulations not to require cooperative
agreements for enforcement and collection efforts except where related
to the process under sections 1903 and 1912 for assignment of rights and
incentive payments from related collections. /4/
(6) The Agency also argued that the absence of a requirement for
cooperative agreements in 45 CFR 250.31 (the Medicaid provision) did not
imply that the questioned costs could be treated as allowable; rather,
reference to cooperative agreements was unnecessary because the costs
were unallowable in the first place. This argument is inconsistent in
view of the Agency's alternative position that the costs were only
unallowable because there were no agreements; in any event, the
argument is not persuasive since we conclude that the costs are
allowable. /5/
B. Whether the costs are otherwise unallowable.
The Agency argued, from the legislative history of section 1912 of
the Act and other provisions related to fraud and abuse which were added
to the Act at the same time, that Congress intended for Medicaid
agencies to avoid establishing new and separate systems for collection
and enforcement apart from the child support enforcement programs
already established in states under Title IV of the Act. Agency
Posthearing Memorandum, p. 6. Presumably, the Agency would have us
infer that Congress intended collection and enforcement costs to be
unallowable under Medicaid. Again, this would be too speculative an
inference to draw from later requirements and apply to earlier
circumstances. Furthermore, the legislative history cited by the Agency
simply did not provide an answer to the question whether payment under
Title XIX was precluded for those costs of collection and enforcement
related to Title XIX. This argument of the Agency could as easily
support the State's argument that it would be improper to read the law
to require a duplicate collection mechanism.
This Agency argument, and some others discussed in paragraph (A),
have a patina of reasonableness only when viewed as collateral to a
primary argument which the Agency appeared to have discarded in
post-hearing briefing by acknowledging allowability if the costs were
incurred by the County's social services agency: the argument that the
costs were unallowable altogether, so that the obligation to pursue
third party liability was an unfunded obligation.
There is no question that the obligation to identify and pursue third
party liability was a mandatory obligation of the administering state or
local Medicaid agency. Section 1902(a)(25) of the Act; 45 CFR 250.31
(1974, 1975 and 1976). Section 1903(a)(6) of the Act provides that the
Secretary "shall pay" 50% of ". . . amounts . . . found necessary
by
the Secretary for the proper and efficient administration of the State
plan." The Agency did not argue that the Secretary had made no finding
that the costs of pursuing and enforcing third party liability are
unnecessary to the proper and efficient administration of the State
plan; such a finding would appear to be unlikely (and unreasonable)
since the statute made this activity a specific plan (7) requirement.
In any event, the Agency appeared to have conceded the point in its
post-hearing brief. See, p. 2, above. /6/
The Agency at one point had argued that the Act's reference to the
responsibility to pursue liability meant it was the responsibility of
the Medicaid agency itself, and did not imply authority to do so through
other agencies. We do not find this argument persuasive; Congress was
describing substantive responsibilities in the Act, and did not appear
to be specifying precisely how the responsiblities would be met.
Another argument of the Agency which one could infer from the
Agency's presentation, although not articulated precisely, is that the
costs were not allowable because they were not allocable to Title XIX.
The cost principles state that to be allowable, a cost must be
"necessary and reasonable for proper and efficient administration of the
grant program, (and) be allocable thereto under these principles. . .
." OASC-8, p. 32. A cost is "allocable" to an objective ".
. . to the
extent of benefits received by such objective." Id. A cost may not be
shifted to other federal grant programs ". . . to overcome fund
deficiencies, avoid restrictions imposed by law or grant agreements, or
for other reasons." Id.
As discussed above, we have already determined that costs of the type
in question here could be "necessary and reasonable", since they were
directly related to carrying out a specific statutory responsibility to
pursue third party liability. Although pursuing third party liability
might have benefited other HHS programs, such as the Title IV-A program,
there is no question that such activity also could have benefited the
Medicaid "cost objective." /7/ The record contained an allegation
that
some costs here were shifted to Medicaid (8) to avoid a fund deficiency
elsewhere; but this is conjectural and, since we conclude that such
costs properly could be charged to Medicaid, such shifting would in any
event not be fatal. We read the cost principles' preclusion of shifting
to apply where collateral factors such as a fund deficiency were the
only substantial bases for attempted allocation to another program;
where a cost was of a type payable under two separate programs, the fact
that one or the other had a fund shortage is a coincidence which merely
calls for caution in reviewing how fairly the costs were divided or
allocated between the programs considering the benefit to each. /8/ As
we discuss below, we believe that this legitimate concern can be
accomodated by examining the evidentiary basis of the claimed beneift to
Medicaid in determining how to allocate the costs in question here.
Based on the foregoing, we have concluded that the type of costs we
are dealing with here were allowable during the period in question. We
now turn to the question of whether the costs should have been treated
as direct or indirect costs and, in that context, the reasonableness of
the particular cost claim.
II. Allocation of the costs.
The cost principles applicable to costs of state and local government
appear to allow considerable flexibility in classifying a cost as direct
or indirect. "Direct costs are those that can be identified
specifically with a particular cost objective", while indirect costs are
those --
. . . (a) incurred for a common or joint purpose benefiting more than
one cost objective, and (b) not readily assignable to the cost objective
specifically benefited, without effort disproportionate to the results
achieved." OASC-8, p. 33. /9/
OASC-8 also states that Circular A-87 "does not specify a particular
form of organization, management technique, or method of accounting, as
a condition of cost reimbursement under Federal grants. . . ." Id. at p.
1. See, also, the quotation from OASC-8 on page 2 of this opinion. (9)
The State and County argued that the costs were classified as indirect
in accordance with the cost princples, because there was benefit to more
than one cost objective (i.e., federal program) and it would have been
extremely difficult to separately charge the programs directly at the
time.
The Agency argued that since the Title IV-A program required that the
costs of liability enforcement be directly charged, such costs should
not be indirectly charged for another program, because that would be
inconsistent accounting treatment (generally unacceptable under the cost
princples) leading possibly to unfair over- or undercharges to one or
another program. The Agency also essentially argued by analogy that
direct charging of these costs for the IV-A program showed the
reasonableness of direct charging the costs for Medicaid.
However, we find nothing in the Title IV-A statute or regulations
cited by the Agency which specified direct charging of these kinds of
costs. And Agency Exhibit A, an Agency "Program Instruction" dated
November 12, 1974, does not specifically mandate that such costs had to
be direct charged; rather, it simply describes "methods of computing
direct costs of law enforcement agencies" (including using a proportion
of total cases handled, or a unit cost rate multiplier) and contains a
provision stating that "indirect costs of law enforcement agency may be
allocated and claimed for FFP pursuant to the conditions specified in 45
CFR 74, Appendix C." The latter material was the codification in the
Code of Federal Regulations of the cost principles.
The State claims, without dispute from the Agency, that "both IV-A
and XIX costs for paternity and support enforcement were claimed
indirectly." State's Supplemental Statement and Posthearing Reply
Memorandum, p. 6.
Even if the Program Instruction had clearly required that IV-A costs
had to be claimed directly, it would have done so only for a portion of
the disallowance period; and even for that period, it was unclear at
what point the State and the County reasonably could have been charged
with knowledge of the instruction. We note an implication that
transmittal of the information in the document to the County was
substantially delayed (see, County's Response to Agency's Posthearing
Memorandum, Attachment 1, p. 10); and the State witness who prepared
the County's cost allocation plan testified he had not seen the document
before the hearing. Tr., p. 93.
Thus, the Agency's argument fails because its premise -- that the
IV-A program specified direct charging of enforcement costs --
apparently was incorrect for at least a substantial part of the period
in question here, was a questionable proposition for the remainder of
the period, and might have been irrelevant anyway, since the State
insists the IV-A costs were claimed on an indirect cost basis during the
period notwithstanding the Program Instruction. The further
extrapolation from the Agency's premise -- that consistency with the
IV-A program required treatment of the costs as direct costs under
Medicaid -- thus does not follow.
(10) The Agency also argued that since the County admitted that these
kinds of costs were to be directly charged as of July 1, 1975 under the
IV-D program (as the County did, indeed, admit; see, County's response
to Agency's Posthearing Memorandum, Attachment 1, p. 9), and since the
IV-D program allegedly was a continuation and an expansion of a former
IV-A activity, there is the implication that these costs earlier should
also have been classified as direct costs, or at least that this is
further evidence of the unreasonableness of paying for these costs on an
indirect cost basis under Medicaid during the period in question. But
these suppositions are too speculative and insubstantial to provide
reasonable support for a disallowance. The argument also is tied into
the premise that Title IV-A had required such treatment, which, as
explained above, the Agency was unable to prove.
The fact that the County was able to direct charge enforcement costs
under Title IV-D beginning in July, 1975, does not, in and of itself,
lead to the conclusion that such costs before that time should have been
so charged. Once the County was required to directly charge such costs,
it had no choice but to develop a method for doing so. Id. Prior to
that time, the County appeared to have been within its rights under the
cost principles in charging the costs indirectly; and the Agency has
not been able to make a persuasive case that the way the costs were
charged was unreasonable at that time.
The Agency also argued that the costs "are not indirect costs because
the services. . . were specific, not support, functions." Agency
Posthearing Memorandum, pp. 11-12; see also, Agency Reply Memorandum,
p. 3. This argument appeared to relate to the manner in which the costs
were entered on claim forms when the claim for FFP was submitted to the
State or the Agency, and the implication is that the costs were
characterized incorrectly. Id. A State witness argued extensively to
the contrary. Tr., pp. 31-71; see, in particular, pp. 65-66. It is
unclear how, if at all, this argument should impact on the determination
involved here; if the County or State originally erred in how they
described the claimed costs, they have made it clear early and
throughout this appeal what their claim was. If the argument was
intended to portray the costs as direct because they were identified
with specific County offices or activities, rather than general
"overhead" activities, it was insufficiently related to the basic
standards of the cost principles, under which the fundamental question
is whether the costs are identified with a "particular cost objective"
(i.e., either the IV-A or XIX programs) or benefit both programs. The
argument is also flawed by a certain circularity, in that is has
underpinnings related to two other perceived failings in the County's
methodology: the misuse of a "head count" as the allocation basis
(discussed below) and the alleged unallowability of the costs (discussed
above). (See, e.g., Tr. pp. 130-132, 147).
The State tied much of its argument to the State-developed "Bulletin
143b", which is a thick compendium of transmittals containing great
detail on matters related to administrative cost allocation under social
services programs. Among other things, Bulletin 143b implemented OASC-8
and Office of Management (11) and Budget Circular A-87. Bulletin 143b
apparently was approved by the Agency. Tr., 157-158. At the hearing,
an Agency witness, Tom Rowan, was asked "what chapter and verse in 143b
prohibits the use of an indirect cost pool." Tr., p. 140. The witness
did not testify that use of such a pool was prohibited; rather, the
witness gave an ambiguous description of types of overhead pools that
could be established, culminating in the statement that the types of
costs here simply were not indirect costs in the witness' personal
opinion; he said, "my definition of indirect cost is the true, or
overhead cost like a county commission or a county function like a
personnel function. They are providing support functions, as opposed to
providing a direct type of function like sheriff. . . ." Tr., pp.
141-142. Rowan then testified that the costs of the sheriff guarding
the whole social services department could be put in an indirect cost
pool, whereas costs of the sheriff pursuing support liability could not,
"because, one is an overhead function that is benefitting the entire
program. It is an indirect cost in nature, whereas opposed to providing
a specific type of function like tracking down a missing father." Tr.,
p. 142. The witness then moved into a discussion of the inequitability
of using "head count" as an allocation basis of the costs in question
(Tr., pp. 143-147) and in that context, appeared to mix the allegedly
erroneous claiming action with his view that "you shouldn't have
allocated on a head count basis" (Tr., p. 147).
We, too, have problems with using "head count" as an allocation
basis
in this case, as discussed below. Aside from that, however, we find
little probative value here concerning the alleged requirement that the
costs should only have been claimed as direct. The testimony was
conclusory and somewhat confusing, and arguably wrong in that the
so-called "direct function" of the sheriff could also easily be
characterized as benefiting more than one program. The cost principles,
on their face, appear to accommodate the classification of the costs in
question here as indirect.
In its post-hearing brief, the Agency alleged that the County
misclassified the costs under Bulletin 143b, paragraphs 1.4.1 and 4.2.
Aside from our earlier observation that misclassification per se does
not provide a basis for our upholding the disallowance, we do not read
the cited provisions as providing much support for the Agency's case.
Paragraph 1.4.1 simply contains a description of the A-87 Cost
Allocation Plan. Paragraph 4.2 deals with classification of non-salary
administrative expenditures (the relevance of which is not entirely
clear); we note, however, that the provision excludes from this
specific classification "allowable indirect expenditures charged to the
District Social Services Department by another county agency" (emphasis
added), implying both that such costs amy be payable elsewhere, and that
they may be charged indirectly. In any event, Bulletin 143b is a State
document, and the State disagreed with the Agency interpretation. The
Board generally will give deference to a State's interpretation of its
own administrative restrictions. California Department of Health
Services -- San Joaquin Foundation, Decision No. 182, May 29, 1981, p.
12.
On balance, we find the State's testimony at the hearing more
persuasive than the Agency's concerning this issue.
(12) One State witness testified that when the State sought court
orders relating to absent parents or spouses, "our request always was
for income maintenance expenditures as well as for medicaid." Tr., p.
28. Another State witness -- apparently the person responsible for
preparing the County's cost allocation plan /10/ -- stated that "it was
very difficult at that time" to separate the costs, and that it "would
have taken a tremendous amount of effort, and a tremendous amount of
allocation and structuring records which were not created for that
purpose" to directly charge the costs here, "for a degree of precision
that is not required for claiming purposes by the old regulation." Tr.,
pp. 43, 64, 67. He also testified that on June 4, 1973, he contacted an
HHS official responsible for cost allocation matters, who told him the
costs could be claimed as indirect "since the nature of the cost
incurred did benefit more than one program." Tr., p. 45; see also, pp.
44, 59.He testified that this advice was confirmed by the same
individual about six weeks prior to the hearing. /11/ He testified that,
in the particular circumstances here, there likely would have been
little difference in the amount ultimately charged to the Medicaid
program whether a direct or indirect method was used, and at the time,
direct charging might even have resulted in the County receiving more
funds; but direct charging was simply an additional expense and
impractical. Tr., pp. 68-70.
The State witness also observed, reasonably we believe, that the
purpose of the principles related to consistency of treatment of costs
and the cost allocation requirements is --
. . . not to dot an i or cross a t. It is to distribute cost of
programs on a fair and equitable basis, and if you can demonstrate that
you have done it, there should be no question as to whether or not. . .
the cost should be paid. Tr., p. 125.
In summary, we conclude that the County's use of an indirect cost
method was not precluded for Medicaid and was reasonable under the cost
princples. The Agency's attack on the use of an indirect cost rate,
based largely on reference to another program, had incorrect premises
and, overall, was unpersuasive. (13)
III. How the indirect costs were measured.
Having determined that the costs were allowable in principle, and
that allocating them on an indirect cost basis was not unreasonable, the
next question is whether the distribution method was reasonable. The
Agency did not specifically argue this point in its briefing, but an
Agency witness testified as part of his opposition to the use of an
indirect cost rate that "just allocating on a head count basis is not a
good basis of determining the cost to each of the programs", because
"there is no relationship to the type of services being rendered by
these different agencies." Tr., p. 143; see also, pp. 146-147.
The State witness, who had prepared the County's allocation plan
testified that Bulletin 143b required --
. . . that the proper distribution of indirect costs to programs
crossing purposes for joint objectives would be the head count of the
number of personnel with each of the departments within the Social
Services Department. . . . Tr., p. 58; see also, pp. 45, 56 and 146.
(emphasis added).
But neither this witness, nor other witnesses or representatives of
the State and County, specified any provision of Bulletin 143b which
required use of a head count, particularly for agencies outside the
social services arm of the County. The foregoing witness related the
requirement to allocation of costs "within the Social Services
Department." The record also contains another indication that the
charges were not handled on head count basis until already allocated to
the County's social services department. Tr., p. 146.
An Agency witness indicated that Bulletin 143b might have required
allocation on a head count basis of central service overhead costs, but
not these extradepartmental costs. Tr., p. 136. This witness also
testified that there were other allocation bases reasonably available
under 143b (Tr., pp. 136-138), and that a case count method of
allocation probably would be more reasonable. /12/ Tr., pp. 138-139.
The record also indicates that but for the perception that 143b
required the use of head count in the circumstances here, the County
might have used some different basis which was "traditionally done."
Tr., p. 58.
(14) On balance, we find that the Agency has shown a reasonable basis
for concern that use of head count was an improper means of allocating
the costs in question here, although we believe the Agency erred in
using this as a basis for attacking the use of an indirect cost rate per
se. We therefore uphold the disallowance to the extent that the costs
claimed are attributable to the head count basis (although not as to the
amount; see, discussion under IV below), subject to the right of the
State to justify the claim. The State and County, therefore, should, if
they choose to do so, reexamine their records and present the Agency
with either a different claim and supporting cost basis, or a more
complete justification of the reasonableness of the cost claim here. We
note that subsequent to July, 1975, the County was able to account for
these type of costs on a direct cost basis, and it may be possible to
either use that methodology retroactive extrapolation from post-1975
data. We urge the parties to cooperate in finding a mutually
satisfactory basis. In the event the subsequent claim, if any, is
denied by the Agency, the State may seek Board review if appeal is taken
within 30 days of such denial. /13/
IV. The amount in dispute.
At the hearing, it became clear that there was confusion among the
parties, and certainly on the part of the Board, concerning the amount
in dispute. Tr., pp. 51-55. The State's witness testified that the
only costs in issue were those incurred prior to the effective date of
Title IV-D, /14/ because after that time, the costs were charged as
direct costs as the Agency had wished.Tr., pp. 52-55. Counsel for the
State thought there were "wind-down" costs allowed after that time.
Tr., p. 54.
The Agency's post-hearing memorandum identified $86,650 as disallowed
for 1976, $122,037 for 1975, and $125,576 for 1974 (p. 9). The Agency
charged that the State witness at the hearing apparently did not know
that the County had, in fact, claimed such costs after July, 1975. Id.
(15) The State's post-hearing memorandum stated:
The (State) is not aware of any claims made on the (County's) behalf
for paternity and support collection activities rendered after July 1,
1975. To the extent that such claims are before the (Agency), the
(State) admits to the right of the (Agency) to disallow such claims. p.
4.
However, in its subsequent supplemental brief, the State noted that
"the county has discovered that in computing the disallowance in issue
the Regional Officials disallowed gross amounts rather than identifying
the particular costs attributable to the rationale referenced in the
original disallowance letter . . . ." p. 1.
The County's response to the Agency's post-hearing memorandum stated:
The costs disallowed by the (Agency) . . . represent the total
indirect costs incurred . . . in implementing Title XIX requirements .
. . .From July, 1975 through the end of the disallowance period, the
(County) did not include any costs (of the type in question) in the
indirect cost pool. Therefore, the types of costs which the (Agency)
questions do not even appear in the 1976 disallowance of $86,650.
Additionally, we did not charge any of the disallowed costs for the
period July, 1975 through December, 1975. Secondly, 40% of the
disallowance . . . for the period January, 1974 to June, 1975
(represents) costs of County central service departments which should
not be at issue. Accordingly, only approximately 60% of the disallowed
costs for this period are for the operating departments being
questioned. p. 2.
It is clear that there is a substantial question about the validity
of the disallowance amount, which the Agency has not answered. Even if
we had upheld the Agency on the issues of allowability and direct/
indirect costs, we would have been compelled to overturn (or at least
explore futher) the disallowance amount. And the issue amy still not be
moot, if the State or County chooses to appeal an adverse Agency
determination concerning any further claim based on a revised allocation
basis. We therefore urge the Agency, if that event occurs, to assure
that the amount of the disallowance is examined carefully in light of
the County's assertions.
V. Conclusion.
As discussed above, we overturn the disallowance insofar as it held
the costs in question unallowable and improperly allocated on an
indirect cost basis, and to the extent that it disallowed costs
unrelated to the issues here. However, we uphold the disallowance to
the extent that the claimed amount was determined from use of head
counts. The State may revise the claim using a (16) more reasonable
allocation basis or further evidence of the reasonableness of the head
count basis. If the Agency rejects the revised claim, the State (or
County, as discussed above) may appeal. We urge the Agency to reexamine
the amount of the disallowance in the event of any appeal, since, as
discussed above, the amount cannot be supported by the record in this
case. /1/ OASC-8, p. 2; see also, OASC-10, p. 1. The cost principles
for state and local government agencies, which contained guidance and
requirements applicable to, among other things, indirect costs and cost
allocation, were found in a document of government-wide application
known at various times as Office of Management and Budget Circular A-87
and Federal Management Circular 74-4 (the labeling difference was
primarily attributable to where in the federal bureaucracy the process
was managed under different administrations). The U.S. Department of
Health, Education, and Welfare (HHS' predecessor) published the
substance of the circulars both as regulations (45 CFR Part 74, Appendix
C, first published in 1973) and as part of "A Guide for State and Local
Government Agencies," which added some explanatory material and sample
forms. At some points during this appeal, the parties referred to
provisions of a December, 1976 version of the guide called OASC-10, but
the version applicable during the time period relevant here was OASC-8.
/2/ The Agency had also argued earlier that the costs were unallowable
altogether because they should be paid under Title IV-A; We discuss
this below. /3/ Under Pub. L. 93-647 and 94-46, this and related
provisions of Title IV-A were repealed effective on August 1,
1975, and a new program, Child Support and Establishment of Paternity,
was established as Title IV, Part D of the Act. /4/ We mention
this for illustration purposes only, and take no position on whether or
not this is so. /5/ There is also testimony from a State witness
which, while not dispositive, is somewhat supportive of the conclusion
we reach here. The State's position was that (1) unlike the arm's length
relationships one might find in a large bureaucracy or between a state
and local agency, the County was a cohesive entity whose units reported
to one "boss" and were close organizationally and geographically;
and
(2) there were relevant internal memoranda and directives tantamount to
agreements which covered matters in issue here. Tr., pp. 76-81. /6/
However, we do not agree with the position of the State and the
County that 45 CFR 250.31(b) specifies FFP in these costs. That
provision appears merely to provide that FFP for medical assistance to
individuals must be offset by amounts which were, or should have been,
recovered from third parties; it does not say whether administrative
costs of pursuing liability are allowable. /7/ The agency argued
that the primary benefit was to other programs such as the Title IV-A
program, so that any benefit to Medicaid was purely incidental and not
deserving of treatment as a separately allocable cost. Although the
record indicated that the majority of benefit may have been to the IV-A
program (Tr., pp. 192-193), the State and County nonetheless argued that
the benefit to Medicaid was more than incidental, and they proffered
specific examples of substantial benefit to the Medicaid program. See,
e.g., State's "Memorandum in Support of Petitioner's Position", May
23,
1981, p. 7; County's Response To The Board's Order To Show Cause, March
23, 1981, pp. 21-25; Tr., pp. 75-80. We have concluded from the face
of the statute that as a general matter pursuing third party liability
related to medical paymentsun questionably could have benefited the
Medicaid program, and the State's and County's presentations supported
that conclusion. Since we have concluded below that the extent of
benefit here should be measured more accurately, the ultimate amount
allowed should adequately reflect actual benefit. /8/ State's
Exhibit 2 is a May 30, 1980 memorandum of the HHS Office of General
Counsel which, while it does not reach the specific interaction between
Titles IV-A and XIX at issue in this case, does hold that cost allowable
under Titles IV-A and XX can be claimed under either of those titles,
and so too with costs allowable under both Titles XIX and XX.
/9/ This is somewhat different from the cost princples applicable to
non-profit organizations, which appear to state a more affirmative
presumption favoring direct costing. See, discussion in Florida
Farmworkers, Council, Inc., Decision No. 202, July 31, 1981, p. 5.
/10/ This witness was a representative of a major consulting firm which
had considerable experience in cost allocation matters under A-87, and
had prepared these type of plans for 35 counties in New York as well as
for others elsewhere in the United States. Tr., p. 35. /11/ The
Agency also offered hearsay evidence attributed to this HHS official,
who was reported to have agreed with the description of the Agency's
position when contacted a few weeks prior to the hearing! Tr., p. 134.
Thus, the contradictory hearsay evidence was not very useful to either
party, except as rather limited support for the proposition that at the
time the cost allocation plan was prepared in 1973, the County relied on
an HHS representation that the indirect cost allocation methodology was
proper. /12/ Counsel for the State asserted that "the
overwhelming majority of these claims deal with probation department
claims, which are not claims of law enforcement officials." Tr., p.
117. A County witness testified that, based on a sample in 1978, he
judged that 90% of collections involved were attributable to a Title IV
program. Tr., pp. 192-193. /3/ Under the Board's new rules
(section 16.16(a)), the Board will permit a real party in interest to
present the case on appeal "after consultation with the parties and if
the appellant does not object." Apparently, the County received the
funds in question in this appeal. Therefore, if there is further review
in this case, the Board would entertain a motion to allow the County to
present the case. /14/ The original effective date of the
revocation of statutory provisions underlying the IV-A collection
program (including section 402(d)(18) of the Act), which was July 1,
1975, was extended by statute to August 1, 1975 (Pub. L. 93-647, 94-46),
but it is not clear what effect this delay had on the effective date of
the IV-D provisions which effectively replaced the revoked provisions.
OCTOBER 22, 1983