Ohio Department of Public Welfare, DAB No. 257 (1982)

GAB Decision 257

February 23, 1982 Ohio Department of Public Welfare; Docket Nos.
80-173-OH-HC, 80-179-OH-HC, 81-25-OH-HC, 81-81-OH-HC 81-89-OH-HC,
81-166-OH-HC, 81-197-OH-HC Ford, Cecilia; Garrett, Donald Settle,
Norval


The Ohio Department of Public Welfare (State) appealed seven
dissallowances issued by the Health Care Financing Administration (HCFA)
in connection with the State's Managed Care Coordinated Demonstration
Project. The disallowances cover a three year period and represent a
total of $1,481,066 in federal financial participation (FFP) claimed by
the State for medical and administrative costs associated with this
project. The State claimed FFP for these costs even though HCFA had
rejected the project and denied a related waiver of requirements under
the State's approved Medicaid plan. The time periods and costs
disallowed in individual cases are outlined in an Appendix to this
decision. The issues raised by these disallowances are similar and the
appeals were considered jointly by agreement of the parties.

For reasons discussed below, we conclude that the State has failed to
show that we should overturn HCFA's decision to disapprove the State's
project and to deny the Medicaid waivers requested by the state.
Further, the State has not shown that its costs for administrative
functions at the project sites were necessary for the proper and
efficient administration of its approved Medicaid plan. Therefore, we
uphold the disallowance in full.

I. Background

On April 13, 1978 HFCA announced the availability of funds for
research and demonstration projects under several provisions of the
Social Security (Act) (43 Fed. Reg. 15594). The stated purpose of this
program was to "assist in the resolution of major health financing
policy and program issues and to assist in developing new methods for
the administration of HCFA programs." Interested nonprofit or public
organizations and institutions were invited to (2) submit proposals for
projects in any one of 17 designated priority areas. The proposals were
reviewed on a competitive basis by panels from the HCFA Office of Policy
Planning and Research (OPPR), which assessed each proposal and made
recommendations to the Associate Administrator for OPPR.

On August 28, 1978 the State submitted its proposal for a
demonstration project under section 1115 of the Act. The project's goal
was to coordinate Medicaid and non-Medicaid services provided to
Medicaid eligible individuals, leading to the development, where
appropriate, of alternatives to institutional care for such individuals.
The State did not seek discretionary grant funds for the project, but
sought a waiver of certain Medicaid requirements, so that the State
could claim, as Medicaid costs, project expenditures which otherwise
would not be allowable under Medicaid.

On March 28, 1979 HCFA published a notice (44 Fed. Reg. 18626) which
superseded the April 1978 announcement. This new notice clarified that
"Waiver-Only" project applications would be subject to the same review
process as other grant applications. On April 12, 1978 OPPR rejected
the State's project.

A panel of experts from OPPR had reviewed the proposal and
recommended disapproval on the basis that the project was not
sufficiently different from projects previously funded. The panel
determined that the project did not have a well-developed methodological
structure and demonstration design or a satisfactory evaluation plan.
The panel also voiced concern about the proposal's failure to describe
the qualifications which the State would require for the staff at
project sites and the State's failure to include an adequate budget with
the proposal.

The state requested that OPPR reconsider the proposed project but the
HCFA Administrator denied this request. In spite of the HCFA decision
to reject the proposal and, consequently, deny the requested waiver, the
State implemented the project at eight designated sites.

The State's approved Medicaid plan provided for FFP payments to
participating facilities based upon the level of care offered at each
facility. But under the unapproved project, the State claimed and
received FFP based upon the level of care of each patient, rather than
the level of the facility. This method of reimbursement resulted in a
claim higher than the amount the State would have received if it had
claimed FFP in accordance with its approved Medicaid plan. HCFA
disallowed the excess FFP. HCFA based these disallowances on section
1903(a)1 of the Act, which allows FFP only for medical assistance
provided in accordance with an approved state plan.

(3) HCFA also disallowed FFP claimed as administrative costs for
payments to contractors allegedly incurred solely for the administration
of subprojects connected with the disapproved demonstration project.
HCFA based these disallowances on section 1903( a)(7) of the Act, which
states that FFP is available only for those administrative costs found
by the Secretary to be necessary for the proper and efficient
administration of an approved state plan.

The State appealed to the Board and asked that we reconsider the HCFA
decision not to approved the project. The State claimed that the
project was rejected under guidelines not clearly applicable to the
proposal when it was submitted. The State also argued that, even if the
project was properly disapproved, the FFP for administrative costs was
improperly disallowed because those costs were necessary for the
administration of the approved State plan.

II.The Decision to Disapprove the Project

As we discussed in an Order to Show Cause issued in these cases,
there is a preliminary question whether the Board has jurisdiction to
review the disapproval of the State's project. From one perspective,
the disapproval was a discretionary decision tantamount to a pre-award
denial of funding over which the Board has no jurisdicion. /1/ From
another perspective, the disapproval was an integral part of a
post-award process resulting in a disallowance which is subject to Board
jurisdiction. The State argued, and we agree, that from this
perspective the issue is one of the scope of our review rather than
jurisdiction. In any event, the State has not shown that review of the
HCFA's action here would provide a basis for reversing the disallowance.


The HCFA action which the State seeks to challenge is a highly
discretionary one. Under section 1115 of the Act, an approvable
Medicaid demonstration project is one "which, in the judgment of the
Secretary, is likely to assist in promoting the objectives" of Title
XIX. In connection with a project which meets this test, the Secretary
"may waive compliance with any (State plan) requirements . . . to the
extent and for the period he finds necessary to enable such State or
States to carry out such project . . . ." The secretary (4) has
delegated to HCFA the functions of project approval and granting of a
corresponding waiver because, as the administering agency, HCFA has the
programmatic expertise required to exercise such discretion. Regarding
similar discretionary actions, the courts have determined that the scope
of review was very narrow and have upheld agency action so long as it
was reasonable and consistent with the underlying statute, and not
procedurally defective. Grassetti v. Weinberger, 408 F. Supp. 142 (N.D.
Ca. 1976); Legal Services Corp. of Prince George's Co. v. Ehrlich, 457
F. Supp. 1058 (D. Md. 1978); Clark v. Richardson, 431 F. Supp. 105 (D.
N.J. 1977); see, also, Apter v. Richardson, 510 F. 2d 351 (7th Cir.
1975). /2/


Adopting this approach, we discuss below the substantive basis for
the rejection of the State's project and the process by which the HCFA
determination was made.

A. The Substantive Basis for Rejection of the State's Project

The October 30, 1978 letter to the State concerning the review
panel's recommendation of disapproval states:

A primary reason for the panel's decision was that the application
was not sufficiently different from demonstration projects previously
funded, which will provide similar information. In this regard, it
would have been very helpful if the application had included a review of
past work in the field to show how the proposed work differed from other
efforts and how it would contribute to the state of the art, and to HCFA
programs.

Attachment to Application for Review,

Docket No. 80-173-OH-HC

The State did not contend that this was not, in fact, a primary basis
for disapproval of the State's demonstration project, nor that it was
incorrect. Rejection on the basis that a project is essentially
duplicative is reasonable. Moreover, it is consistent with the
statutory test of whether a project is likely to assist in promoting
program objectives.

If this were the sole basis stated for the rejection, our inquiry
would end here. As discussed below, however, HCFA gave other reasons
which the State challenges on procedural grounds.

(5) B. The Fairness of the HCFA Process

The October 30 letter and the subsequent HCFA letters to the State
concerning disapproval of the project refer to "technical deficiencies"
in the project application. In evaluating the application, HCFA
apparently applied the standards set out in its April 13, 1978 grant
announcement notice. /3/ The notice addresses the need for a
well-defined and scientifically valid methodology, a demonstration
design, an evaluation plan, a statement of staff qualifications, and a
detailed budget. (43 Fed. Reg. 15596) Defects in each of these areas
were mentioned in one or more of the Agency's letters concerning the
State's proposal.


The State argued, in effect, that this was procedurally unfair since
only the later notice of March 28, 1979 clarified that the standards
applied to "Waiver-Only" projects, the State had already submitted some
relevant information which was not considered, and the State could have
easily overcome the deficiencies by submitting other information which
it had available. /4/


Although it is unfortunate that the State had more complete
information available which it did not submit with its project
application, we are not convinced that this failure was due to HCFA's
action rather than the State's own inaction. Nor are we persuaded that,
if HCFA had given the State an opportunity to submit this information,
it would have led to project approval.

(6) HCFA's original grant announcement notice is not as unclear as
the State would have us believe. While it did not specifically state
that it applied to "Waiver-Only" projects as well as projects requiring
an award of funds, it did state that it applied to demonstration
projects under section 1115 of the Act and referred to waivers in
connection with such a project.The State itself has described its
project as a demonstration project and section 1115 waivers are
contingent on approval of a project under that section. The State has
pointed to nothing in the notice which would affirmatively mislead the
State into determining that the requirements of the notice did not apply
to "Waiver-Only" projects. /5/


In addition, while the later clarification does indicate that there
might have been some confusion on the part of some applicants, it does
not necessarily lead to the conclusion that there was confusion
regarding what was to be in a project application. The clarification is
more limited in scope. It clarifies merely that "Section 1115
"Waiver-Only' projects are subject to the same formal review process as
are all other grant applications." (44 Fed. Reg. 18626) The stated
purpose of using the formal process for all projects was to "assure that
all HCFA decisions on waivers reflect our needs and priorities and so
that we can properly analyze the results of such projects . . . ." We do
not think the State was prejudiced by HCFA using a formal process,
involving panels of experts, and weighing priorities consistently with
statutory objectives, merely because the State might have thought that a
less formal process would be used.

Even if the State were misled by the notice, or by other Agency
action, into believing the technical requirements for grant applications
set out in the notice did not apply to its project, however, we do not
think that the action amounts to a procedural unfairness which would
mandate either retroactive approval of the project or reconsideration of
the State's application, including additional information.

The State claimed that, if it had known that it should submit more
information, it could have submitted materials it had available (7)
which would have overcome the noted defects. /6/ Yet, the October 30,
1978 letter clearly notified the State that the review panel's
recommendation of disapproval was based, in part, on deficiencies in the
information provided. The letter also informed the State that it could
contact a specified HCFA official if it had any questions about the
panel's recommendation. The State has neither shown nor alleged that it
took any action based on this letter. Instead, the State waited until
it received the formal rejection letter over five months later to
question whether it should be permitted to submit further information.
/7/


Even more important, though, the State has not shown with respect to
the question of project methodology and demonstration design that the
further information which the State would have provided would have cured
the noted deficiencies. HFCA's rejection letter of April 12, 1979,
indicates that a major problem which the reviewers had with the State's
proposal was the State's "plan to allow the nine separate programs to
develop their own designs" and the reviewers felt that this was not the
most effective research procedure. /8/


(8) While the State defended its plan before the Board, arguing that
it was effective and allowed for uniform assessment for all project
sites, the State did not show that the panel misunderstood the State's
methodology and that this would have been cured if the State had had the
opportunity to submit more information. /9/ It is unlikely, therefore,
that such an opportunity would have resulted in project approval.


Thus, even if there had been some lack of procedural fairness in the
State's project being considered deficient based on the notice
requirements for project applications (and the State has provided no
persuasive evidence of this), we are not convinced that failure to meet
these technical requirements was the sole basis for rejection of the
project. HCFA determined also that the project lacked substantive merit
due to a defective methodology and research design and this was a
reasonable basis for disapproval of the demonstration project.

III. Medical Costs

In spite of the knowledge that HCFA had rejected its project, the
State not only unilaterally implemented the project, but also claimed
FFP for costs incurred as a result of the project. The State justified
its actions with the circular logic that if the project had been
approved, the costs in issue would be allowable. The State has never
claimed, however, that absent approval and the consequent waiver, these
costs were allowable under the State plan.

Therefore, since the medical costs were not incurred under the
approved State Medicaid plan, nor as the result of a waiver granted in
accordance with section 1115, they were properly disallowed.

IV. Administrative Costs

The costs discussed below represent administrative expenses incurred
by the State when it put the disapproved project into effect. Section
1902(a)(30) of the Act requires that all state Medicaid plans provide
methods and procedures to safeguard against unnecessary utilization of
care and services. Applicable guidelines are set out in 42 CFR Part 456
- Utilization Control. The State claimed that the administrative costs
in issue were the result of utilization control activities.

(9) Section 1903(a)(7) of the Act allows FFP for most administrative
costs only in those amounts found necessary by the Secretary for the
efficient administration of the State plan. HCFA disallowed the State's
claims for FFP based upon its finding pursuant to 1903(a)(7). The State
contended that the costs for which it sought reimbursement should not
have been judged solely in connection with the demonstration project.

HCFA maintained several bases for the disallowances:

-- While the overall goal of the unapproved project related to the
utilization of Medicaid services, the project also entailed numerous
non-Medicaid services and the State failed to allocate costs between
those project activities which might have benefitted Medicaid
utilization and those which did not.

-- Even assuming proper cost allocation, FFP for administrative costs
is available only for those services performed under an approved State
plan or an approved section 115 project and the costs claimed here were
incident to the disapproved project and not within the established State
plan structure.

-Finally, the State did not prove that the administrative costs in
issue resulted from activities undertaken as part of the State's
established utilization control program mandated under 42 CFR Part 456.

HCFA did not deny that a purpose of the project was to reduce
inappropriate institutionalization or that the activities in question
were marginally related to mandated utilization functions. HCFA
maintained that the contracts to provide utilization services under the
project were not entered into pursuant to Part 456. HCFA noted that
neither the project proposals, nor the ultimate contracts demonstrated
that these activities were federally mandated. Further, HCFA argued
that Professional Standard Review Organizations (PSROs) at most of the
project sites had assumed mandated review responsibilities in lieu of
the State. /10/ In support of this position, HCFA relied upon the
language of 42 CFR 463.27(a) which states:

(1) PSRO review activities under Section 1155(a) of the Act shall be
in lieu of the medical, utilization and independent review activities
(10) requirement under sections 1902(a)(26), 1902(a)(30) . . . of the
Act.


Thus, HCFA concluded, the State was precluded by regulation from
claiming FFP for utilization control activities where PSROs were already
performing those functions. (HCFA Brief, pp. 24-27)

The State contended that these costs should not be judged solely in
connection with the project. The State argued that the administrative
expenditures were not only necessary for the proper and efficient
administration of the State plan, but were also legitimate components of
the State's measure to achieve compliance with federally mandated
utilization control and review responsibilities. (Brief, p. 10)

The State disputed HCFA's position that the "in lieu of" language in
section 463.27(a) precluded a state from claiming FFP for utilization
control activities at facilities where PSROs are already performing
utilization functions. The State contended that the regulation did not
prohibit states from undertaking such activity, it merely relieved them
from the responsibility of doing such activity. The State argued that
the contractors in question built on and, in some instances, extended
PSRO activities. HCFA, the State added, had submitted no evidence to
demonstrate that the efforts of PSROs had been duplicated. (Brief, pp.
15-16)

We find the State's argument and evidence insufficient as a basis for
overturning HCFA's determination that the costs were not necessary for
the proper and efficient administration of the State plan.

First, we note that, while association with the State's proposed
project may not render the costs unallowable per se, it does raise
certain questions as to the relationship of the costs to the State
Medicaid plan. The scope of the proposed project went beyond the State
Medicaid plan. The State's Request for Proposals clearly indicated that
the project would entail "new methods for the delivery of medical care .
. . through the provision of social and supplemental services not
otherwise available to Medicaid eligible recipients." These services
included Medicare (Title XVIII), Food Stamps, and social services under
Title XX. HCFA noted, and the State has not denied, that no cost
allocation was made between Medicaid and other programs which may have
benefitted under the project.

On the whole, the State's evidence relating to the contractors'
activities is insufficient to support a decision to reverse the
disallowances. In spite of ample opportunity to do so, the State has
failed to present concrete evidence pertaining to the specific (11)
nature of the contractors' actual activities in connection with the
project. Instead, the State has engaged in a lengthy presentation of
the project's goals as well as those of the various contractors. While
we are impressed with the State's concern for inappropriate
institutionalization of Medicaid patients, the question before us
relates to the propriety of the FFP claimed in connection with actual
project costs. The State simply has not demonstrated that these costs
were proper utilization control expenditures.

The State's evidence is also insufficient to overcome the HCFA
allegation that the contractors' activities duplicated PSRO activities.
The State argued that HFCA submitted no evidence to support the claim
that the contractors duplicated the PSROs' efforts. The State's
argument, however, is substantially weakened by its own failure to
demonstrate exactly what activities the contractors were performing in
comparison with the activities of the PSROs. HCFA has indicated, and
the State has not denied, that PSROs were performing review functions at
the project sites under the State Medicaid plan and that those functions
were likely being duplicated by the contractors. In other words, HCFA
has, in the absence of convincing evidence from the State, demonstrated
a reasonable basis for the conclusion that the utilization review
efforts of the contractors duplicated the ongoing PSRO activity.
Duplication alone may be a basis for disallowance here regardless of the
effect of the utilization control regulations. /11/


Even if we were to accept the State's position that the contractors'
activities did not duplicate PSRO activities and that the regulations
did not preclude the State from supplementing the PSRO activities, we
would not be convinced that the costs should be allowed. Section 1903(
a)(7) does not requie reimbursement of all costs related to the
administration of a state's Medicaid plan, but only those "found
necessary . . . for the . . . efficient administration" of the plan.
The State's evidence does not compel such a finding. To the contrary,
there is a substantial question here both as to the necessity of the
costs and as to whether they promoted efficiency.

The existence of a savings benefit to Medicaid does not necessarily
lead to the conclusion that the costs were incurred in the
administration of the State Medicaid plan.For example, providing Title
XX social services could conceivably result in decreased Medicaid costs,
(12) yet the Title XX program is not within the scope of the State
Medicaid plan. Thus, the costs incurred in connection with providing
those services could not be labeled Medicaid costs.

The State would have us equate activities which may have resulted in
a savings to Medicaid with activities required for the administration of
the State Medicaid plan. To adopt the State's rationale, as presented
to the Board, would be to substantially eviscerate HCFA's judgment as to
what is necessary and efficient. Based on the evidence, there was a
reasonable basis for the HCFA's finding that these costs were not
necessary for the efficient administration of the State Medicaid plan.

V. Accuracy of the Disallowances

The State has questioned the accuracy of HCFA's calculations
regarding FFP disallowed for medical costs. The State asserted that the
formula applied to calculate that portion of the disallowance was unfair
in that it failed to reflect the savings generated by the project.
(Brief, p. 2) It is our opinion that HCFA was not obliged to take into
consideration the cost savings generated by the project. In the absence
of an approved section 1115 project, HCFA was obligated by regulation to
calculate the FFP due the State based upon the approved Medicaid plan.
The claims for FFP submitted by the State were the result of a project
outside the scope of the approved Medicaid plan. Thus, the State's
argument on this point is without merit.

In its initial submissions to the Board (Requests for Reconsideration
docketed 80-173-OH-HC and 80-179-OH-HC, as well as briefing submitted
February 4, 1981 (Feb. Brief)), the State contested the rates used by
HCFA to determine the disallowances at two facilities, Oaks Convalescent
Center and Clifton Care Center. The State charged that HCFA employed an
improper profit factor in those rate calculations which resulted in
excessive disallowances of FFP. (Feb. Brief, pp. 11-12) In response to
this claim, HCFA argued that the information used by its auditors was
provided by the Bureau of Fiscal Review of the Ohio Department of Public
Welfare.(Brief, p. 23)

In spite of this discrepancy, both parties have indicated a
willingness to attempt a negotiated settlement of this issue. Thus,
while we uphold the disallowances currently before us, we direct the
State to submit evidence on this issue to HCFA within 30 days of the
date of this decision. We direct HCFA to re-examine its calculations,
in light of this evidence, and make any adjstments to the disallowances
warranted by the facts.

(13) If the parties are unable to reach agreement on the issue raised
in the preceding two paragraphs, the State may further appeal any
disallowance related to that issue under applicable Board procedures.

VI. Conclusion

For the reasons stated above, we uphold the disallowances presented
in this joint appeal in their full amount, subject to the outcome of the
negotiations prescribed in section V above. /1// HFCA also raised a
question concerning the timeliness of the State's request for
review of the disapproval of the project. We noted in our Order that
the State waited more than nineteen months before requesting review on
the project's rejection (Order, p. 5). The State responded to this
point by stating that it had received no notification of review
opportunities regarding the project (State's Response to the Order
(Response), p. 5). /2/ Review may also be available if a
violation of constitutional rights is alleged. The State has not made
such an allegation here. /3/ The letter sent to the State by the
HCFA Administration in response to the State's request for
reconsideration of the disapproval states that "the application was
disapproved on the basis that it was incomplete as a demonstration
proposal and did not contain the necessary information as required in
HCFA's April 13, 1978 grant announcement." /4/ In some
instances, courts have reviewed agency denial of grant funds where an
applicant alleged procedural irregularities. See, e.g., Grassetti v.
Weinberger, supra at 151. This usually involves an allegation that the
agency did not follow its own application review process. Here, HCFA
followed its review process, but the State is alleging that that process
should not have been applied. We note that the State has not pointed to
any alternative process which should have been applied and under which
the result might have been different. /5/ Indeed, the State has
carefully worded its allegation to state merely that the later Federal
Register notice clarified the earlier notice with respect to its
application to "Waiver-Only" projects. The State did not allege
specifically, and provided no evidence, that it did not understand, at
the time it submitted its application, that the grant announcement
applied to its project. /6/ The State's letter seeking
reconsideration of the project disapproval indicates that the State may
have actually submitted a detailed evaluation plan shortly after
submitting its application but somehow this plan was not considered with
the application. The State has not explained, however, why the plan was
not submitted with the application and the record is unclear as to
whether it was sent to the proper official. /7/ The Agency gave
the following explanation why it did not give the State an opportunity
to submit more information: A review panel can judge the merits of any
proposal only on the completeness of the information offered in the
official application. During competitive grants review process, it would
be inappropriate for a HCFA staff member to communicate directly with
applicants, as this would give them an unfair advantage. (July 3, 1979
letter from HCFA Administrator denying State's request for review of the
project's disapproval) /8/ The State had promulgated a "request
for proposals" in the State and various potential contractors had
responded with proposals as to how they would carry out the
demonstration at a designated site. The proposals which the State
accepted were incorporated into the State's project. /9/ In an
attachment to its letter of May 3, 1979, seeking reconsideration of the
disapproval, the State did claim that its research design "is not
greatly different than what is suggested by your panel of experts." This
implies, however, that there were some differences. /10/ At one
site, review responsibilities were carried out by a Medicaid contractor
under a separate contract. /11/ Thus we need not reach the question of
whether 42 CFR 463.27(a) precludes a state from receiving FFP for
utilization costs at a facility where a PSRO is also performing
utilization functions.

OCTOBER 22, 1983