Texas Department of Human Services, DAB No. 381 (1983)

GAB Decision 381

June 18, 1986 Texas Department of Human Services; Docket No. 85-226
Settle, Norval D.; Teitz, Alexander G. Garrett, Donald F.

In Texas Department of Human Resources, Decision No. 381, January 31,
1983, the Board upheld a disallowance by the Health Care Financing
Administration (HCFA, Agency) of $178,533 in federal financial
participation (FFP) claimed by the Texas Department of Human Resources
(TDHR, State) under Title XIX (Medicaid) of the Social Security Act
(Act). The State appealed the Board's decision to federal district
court, which remanded the decision for further consideration of HCFA's
basis for the disallowance. Texas Department of Human Resources v.
Heckler, Civil No. A-83-CA-159 (W.D. Texas, August 2, 1985) (Order).
/1/


HCFA disallowed FFP claimed by TDHR in an amount equal to half /2/ of
the funds received by the State from hospitals participating in its
Hospital-Based Eligibility Worker Program (Program). HCFA found that
any funds received by TDHR from the hospitals were applicable credits
under 45 CFR Part 74, Subpart Q, Appendix C, which must be used to
reduce the amount of FFP claimed by TDHR. The Board in Decision No.
381 found that the funds received from the hospitals could not be viewed
as unconditional donations to the State because the hospitals placed
conditions on their participation in the Program, and that, therefore,
the funds were applicable credits which effectively reduced the State's
expenditures for the Program. The Court in its order remanded the
Board's decision for explanation of the concept of "unconditional
donations," a standard which the Court declared was "nowhere to be found
in the applicable regulations."


On remand, the Board gave the parties additional opportunities to
present arguments and to respond to Board (2) questions on the issues
raised by the Court order. Among other things, we discovered that HCFA
had subsequently published a regulation that apparently would now allow
the use of such funds as the state share. After fully considering all
of the arguments made in light of the Court's concerns, we find that
HCFA never articulated a policy prohibiting funds such as those at issue
here from being used as the state share of Medicaid expenditures and
that TDHR reasonably concluded that the funds could be used as part of
its state share. Accordingly, based on this finding, which is derived
in part from arguments and evidence not presented in the earlier appeal,
we reverse the disallowance.

Background

The Medicaid program was conceived as a cooperative federal-state
venture to provide payments for "necessary medical services" rendered to
certain "needy individuals whose income and resources are sufficient to
meet the costs of these services." Section 1901 of the Act. States are
not required to institute a Medicaid program, but if they choose to do
so, they must submit a satisfactory state plan which fulfills all
requirements of the Act. Once the state plan is approved, the state
becomes entitled to grants of federal funds in reimbursement for a
portion of the expenditures which it makes in providing specific types
of medical assistance to eligible individuals under the plan in
accordance with certain conditions. Section 1903 (a) of the Act.

In 1978 TDHR proposed to expand its Hospital-Based Eligibility Worker
Program, by placing its own employees in hospitals to determine the
Medicaid eligibility of patients. As a result of discussions between
TDHR and representatives from hospitals, some public and private
hospitals agreed to contribute toward the cost of the Program's
expansion. TDHR developed a formula whereby participating hospitals
would pay one-half of the salaries of the eligibility workers who in
turn would be stationed in the hospitals. TDHR executed agreements with
the hospitals, detailing the functions of the workers, their employment
status and working conditions, and identifying the amount of funds to be
provided by the hospitals. The hospitals forwarded the amount to TDHR,
and TDHR paid the workers from its general funds. /3/ The (3) Program as
a whole benefited the hospitals since it enabled their claims to be
processed more expeditiously.


Discussion

When this appeal was first before the Board, the parties centered their
arguments on whether the funds received from the hospitals should be
considered unconditional donations, as TDHR contended, or contract
proceeds, as claimed by HCFA. The Board in Decision No. 381 accordingly
termed the characterization of the funds as the threshold issue in the
appeal. The Board noted that its inquiry into the nature of the funds
was necessitated by HCFA's concession, without reference to any policy
guide, regulation, or statute, that a donation to a state's Medicaid
agency was permissible and could be used as part of the state share for
Medicaid matching purposes only as long as the donation was made
unconditionally. Decision No. 381, p. 5, fn. 2.

On remand the Board asked the parties to address the concerns expressed
in the Order. HCFA repeated its prior position that the key issue
before the Board was the characterization of the funds from the
hospitals. According to HCFA, the funds were payments made pursuant to
contractual agreements in return for a service. Even if the funds could
be viewed as donations, HCFA argued, TDHR could not use them as the
state share for matching purposes under Agency policy. TDHR on the
other hand, argued that the funds were in fact donations that qualified
for use as the state share. In discussing the scope of the Order, TDHR
argued that the Court did not remand the case to the Board to find a
particular definition of "unconditional" donation, but rather to
determine what HCFA's policies and standards were in relation to what
funds could be used by a state as its share for Medicaid matching
purposes and whether those policies and standards were fairly applied in
this disallowance.

I. How does the applicable credits rule apply here?

HCFA's disallowance found the funds received from the hospitals to be
applicable credits which must be used to reduce TDHR's claim of FFP. In
45 CFR Part 74, Subpart Q, Appendix C, C.3.a., applicable credits for
Department grantees are referred to as "receipts or reduction of
expenditure-type transactions." In order for costs to be allowable under
a grant program, the costs must be net of all applicable credits.

(4) HCFA set forth the following reasonable description of how the
applicable credit provision applied here:

If the subject funds are eligible to be included as part of the
state's matching share, the funds are not subject to the cost principle
requirements (of 45 CFR Part 74, Subpart Q, Appendix C). If the funds
are not eligible to be included in the state's matching share, they must
be deducted from total program costs as "applicable credits."

HCFA's January 16, 1986 Response, p. 4

There must therefore be an examination of whether the types of funds at
issue can be used as the matching share. Under HCFA's analysis, with
which we agree, if the funds here qualify as the matching share, they
would not be subject to the applicable credit requirements.

II. What types of funds can be used as the state share of matching
funds?

Parties' arguments.

TDHR contended that it had never received adequate notice of HCFA's
policies and restrictions regarding the permissible sources of state
funds nor the circumstances under which those policies would be applied.
TDHR stated that it reasonably inferred that Medicaid policy allowed the
use of donated public and private funds as the state matching share even
though there was no specific regulation on this issue. As an example of
the lack of a coherent HCFA policy on what funds could be used for the
state share, TDHR submitted a 1980 letter from a HCFA regional official
(State Ex. B), which, TDHR claimed, approved funds, expended by other
Texas public agencies for genetic counseling and certified to TDHR, as
eligible for the state share of Medicaid matching funds. TDHR therefore
maintained that the disallowance cannot be sustained on the basis of
policies now claimed by HCFA to have been applicable during the relevant
time period unless it can be shown that those policies were properly
promulgated and made known to TDHR.

HCFA admitted that, other than a reference to the use of donations at 42
CFR 432.60, the Medicaid statutes and implementing regulations did not,
prior to December 1985 when 42 CFR 433.45 was promulgated, address the
subject of whether public or private donations could be used by a state
as part of its matching share of program costs. (As we explained below,
42 CFR 433.45 apparently now allows the use (5) of donated funds in
issue here as the state matching share.) Section 432.60 (formerly
codified as 42 CFR 446.185) permitted donated funds from public sources
to be used as the state share of training expenditures under specific
conditions; donated funds from private sources could also be used,
providing that the funds were donated without any restriction as to
their use for particular individuals or at particular institutions.

HCFA further explained that the earliest statement of its policy
regarding contributions to the Medicaid program that could be discovered
was a June 10, 1974 departmental General Counsel opinion. The subject
of that opinion was whether funds contributed by counties could be used
as the state matching share in view of section 1902(a) (2) and its
legislative history. The opinion stated:

The normal definition of "State funds" generally utilized by States,
is funds over which the State legislature has unrestricted power of
appropriation. Moreover, since the legislative history of Sec.1902(a)
(2) has reference to local funds provided by a local governing body (See
Cong. Rec., supra at 15221), State funds must thus refer to State and
over which the State legislature has unrestricted power of
appropriation. This would include funds donated by a county only when
such donations were made to the State on a totally unrestricted basis.
Any restrictions by county donors, even the broad restriction that the
funds be used for Medicaid or even general welfare purposes, would
vitiate the dominion by the State required before the funds could be
considered "State funds." (Emphasis added by HCFA)

HCFA's January 16, 1986 response, pp. 2-3

HCFA thus asserted that the departmental policy of permitting only
unconditional donations to be used as a part of the state matching share
was articulated as early as mid-1974 and was consistent with its
interpretation of section 432.60 that the only instance of where
donations could be used as a state's share of Medicaid costs was in the
area of training because that is the sole place in the Medicaid
regulations where the subject of donations is raised.

Analysis

We reject HCFA's contention that it had a stated policy during the
period in question of what type of funds could be used as the state
matching share outside of the training (6) context. Rather, we find
that there was a policy vacuum and that under the particular
circumstances of this case TDHR could reasonably expect to use the
donations as part of its share of Medicaid expenditures.

HCFA Policy

HCFA did not allege that the 1974 General Counsel opinion had been
formally adopted by the Agency as its policy or that the states had been
notified of any such policy arising from the opinion. In the absence of
these prerequisites for implementation of a policy, we cannot view the
opinion as binding on the states. /4/ Moreover, the position reflected
in the opinion is inconsistent with a subsequent regulation (42 CFR
432.60) published after the opinion in 1978 concerning possible sources
of the state share for program funding of training expenditures. That
regulation permits public funds and private donated funds to be used as
the state share for training expenditures under prescribed
conditions.Neither public nor private funds need to be donated on a
totally "unconditional" basis in order to qualify as the state share for
training expenditures under the regulation. We also note that an
"unconditional donation" standard as such has never been adopted by the
Department in regulations for any other program which the Agency cited
in its briefs on remand. All of the regulations cited by the Agency
contain broader, more detailed, standards for determining which
donations may qualify as the state share for program funding and, thus,
do not rest on whether a donation is entirely "unconditional."


In addition to relying on the General Counsel opinion, HCFA argued that
the Medicaid training regulation discussed above also precluded the
State from applying the funds here as its state share. The Agency
argued that the regulations authorized the State to use donated funds as
its share for training expenditures under specific conditions, and that,
therefore, the regulations effectively precluded the State from using
public or private funds as its share for other program expenditures.
The difficulty with the Agency's position is that it creates a rule by
implication where the regulations are in fact silent. The Agency's
position was one possible reading of the effect of the regulations, but
(7) only one, and the Agency at no time advised the State of that
interpretation in a policy issuance so that it would be binding on the
State, nor did the Agency ever advise the State of how the state share
would be defined in the absence of rules such as those applied to
training expenditures. When the Agency adopted the training rules, it
provided no explanation of why they were being adopted. The Agency did
not explain, for example, that the training rules represented an
exception to a program-wide prohibition on the use of public or private
donated funds as part of the State share nor did it indicate why such an
exception would be advisable.

The only evidence provided by the Agency concerning the effect of the
existing regulations (42 CFR 432.60) is the preamble to the 1985
regulations revoking the regulations at section 432.60 and implementing
new rules for the use of public and private funds as the state share for
program expenditures. 50 Fed. Reg. 46652, November 12, 1985. The
preamble states that the regulations "clarify policy to permit public
and private donations to be used as a state's share of financial
participation in the entire Medicaid program, instead of only for
training expenditures." 50 Fed. Reg. 46652. The preamble also indicates
policy reasons for not previously extending the training rules to other
types of program expenditures. The difficulty with relying on the
preamble as evidence of Agency policy is that it was published after the
period in question and thus cannot be viewed as any kind of
contemporaneous indication to the State of what Agency policy was.
Moreover, while the preamble indicates that the regulations were limited
to the training context, it nowhere describes what Agency policy was for
defining state share outside of the training context nor does it
indicate how states would have had notice of such a policy through
regulations or policy issuances. /5/


Accordingly, we find that the training regulations cannot be viewed as
evidence of Agency policy in contexts outside of training when the
regulations themselves are completely silent on the issue and the Agency
never provided a contemporaneous explanation of its position by
interpreting the regulations or by issuing a policy transmittal.(8)

The State's Interpretation of State Share

In the absence of any disclosed policy based on the 1974 General Counsel
opinion, the training regulations, or other authority, the sole
remaining question is whether TDHR reasonably interpreted state share as
contemplated by the statute and program regulations to include funds
donated by the hospitals here. We find that the State's interpretation
was reasonable for the following reasons.

* The State's interpretation was not precluded by applicable statutory
provisions, regulations, or policy issuances. Subsequent regulations,
effective in 1985, appear to expand the definition of state share to
include these funds. While the Agency decided not to give the 1985
regulations retroactive effect, it did not state what policy was in
effect under regulations or policy issuance prior to its 1985
"clarification." /6/


(9)

* The Agency argued that the State has a duty to inquire about what
rules would apply for the period of the disallowance since the
regulations defined state share in another context (training) and since
other Department programs under different titles of the Act contained
definitions of state share. The record here demonstrates, that in 1978
the Agency knew generally of the State's proposals for the Program and,
indeed, had given the State an informal approval during the early stages
of the Program's development. Tr. 111-112. In any event, the Agency
did not clarify its policy concerning the issues raised by the Program
until the 1985 regulations and never notified the State of any
comprehensive policy issuances defining state share before that time.

* When the Agency adopted the 1985 regulations, it discussed the reasons
why there were limitations in the previous regulations applicable only
to training. The preamble stated that the Agency was particularly
concerned that "a 'kickback' situation could result from private
donations made by a proprietary organization, such as a long-term care
facility or data processing company, in return for Medicaid business."
50 Fed. Reg. 46657. The preamble noted, however, that experience had
shown no abuse of public or private funds through conditional donations
or kickbacks. Moreover, the Agency has never alleged and there is no
evidence in the record to suggest that the arrangement here led to abuse
of funds.

* The Agency has steadfastly argued that the funding represented a quid
pro quo arrangement and therefore was not even a donation in the first
place. We find that the funds qualify as a donation even though they
were given by agreement with a restriction effectively insuring a
benefit to the donor. The Agency has cited no program definition
anywhere that places the arrangement outside the scope of a "donation."
Indeed, the previous training regulations implied that private funds
"donated" with restrictions as to their use at a particular facility
would nevertheless be a donation even if such funds could not qualify as
the state share. The current regulations even permit private donations
with such restrictions. The only benefit the facilities received from
their donations was that their claims were processed more expeditiously
since the eligibility workers were on site. The Agency conceded,
moreover, that the facilities received only those claims-processing
services that they would otherwise have been entitled to receive.
Finally, with respect to the public funds at issue, the regulations do
not even speak in terms of a "donation" of funds per se.(10)

* The State stressed that the purpose of the Program was the improvement
of its administration of the Medicaid program by increasing the
availability to clients of Medicaid eligibility staff and that all
providers of Medicaid services benefited from this improvement, not just
the participating hospitals. State's February 12, 1986 Brief, p. 11.
According to the State, the Program enabled TDHR to employ more
eligibility workers which resulted in faster reimbursement throughout
its Medicaid program, but not preferential treatment of the
participating hospitals.

* Even if we were to accept the Agency position that the state share
must consist of funds derived from the state legislature's
appropriations process, we find that the State has satisfied that
requirement here. As noted in footnote 3 of this decision, the Texas
legislature during the period in question enacted general appropriations
acts to allow funds donated to a state agency to be viewed as state
funds passing through the appropriation process to the donee agency.

* TDHR submitted evidence suggesting that HCFA acted inconsistently with
its own stated policy. In January 1980 the HCFA Regional Medicaid
Director gave written approval to the use of certified expenditures by
public medical schools for genetic counseling as the state share for
obtaining Medicaid matching funds. State Ex. B. This approval
effectively viewed the medical schools' expenditures to be an
expenditure of the state Medicaid agency for purposes of the state
matching share. This approval contradicts HCFA's assertion that its
policy precluded the use of public or private funding from being used as
the state share in a context outside of training. HCFA has never
clarified to the Board why such approval could have been granted in that
instance and not for the Eligibility Worker Program. HCFA merely
alluded to the fact that no actual transfer of funds occurred between
the medical schools and the state Medicaid agency. However, the current
regulations defining the sources of state share (42 CFR 433.45) permit
either the transfer of public funds directly to the state Medicaid
agency as in a donation or the certification of expenditure of funds by
another public agency. The previous regulations on training contained
the same flexibility.

Accordingly, based on the foregoing considerations, we believe that the
State could reasonably have included funding from the Program as part of
its state share of program expenditures.(11)

Conclusion

For the reasons stated above, we find, in the circumstances and during
the period here, that the hospital funding qualified as the state share
of program expenditures and that the applicable credit provisions
therefore did not apply. Accordingly, we reverse the disallowance. /1/
The State of Texas has since changed the name of its department
to the Texas Department of Human Services. /2/ The rate of FFP
relevant here was 50%. /3/ During the periods in question Texas
General Appropriations Acts authorized acceptance of donated funds to
state agencies and appropriated them to the donee state agency for use
as state funds. State's Appeal File in Docket No. 82-56-TX-HC, Ex. B.
/4/ The Agency did even submit the entire opinion to the Board for the
record but merely provided a quotation from the opinion. /5/ The
preamble does suggest that states generally were using a narrow
definition of "state funds," that excluded any form of restricted
donation but does not identify the source of that conclusion. On the
other hand, the preamble states that questions had arisen concerning the
Agency policy and that states increasingly had looked to alternative
sources of funding for their program share. 50 Fed. Reg. 46657.
/6/ The 1985 revision eliminated the language of the section 432.60
provision that private funds could not be donated with any restriction
as to their use for particular individuals or at particular
institutions. It appears, therefore, that funding under the Program
would satisfy the requirements of the 1985 revision. When the Agency
adopted the 1985 regulations, it noted that the changes would "remove
unnecessary requirements in the regulations" and "improve program
administration." 50 Fed. Reg. 46652. In particular, the preamble noted
that questions had arisen regarding the use of public and private
donations as sources of states' share of financial participation. The
preamble added: "As State fiscal budgets have become more austere,
State legislature have looked increasingly to alternative sources for
funding a larger portion of the Medicaid program." 50 Fed. Reg. 46657.
The 1985 revision, while deleting the "restriction" requirement,
retained a requirement from the training regulations that public funds
may not be used as the state share if they are federal funds. The State
here noted that the funding agreements with the facilities "were
intended to meet(that) requirement," and therefore did not permit
donations of federal funds. The State added that a separate
disallowance on this basis would have been appropriate if funding from
the program was, in fact, determined to be federal. State's reply
brief, Docket No. 82-56-TX-HC, pp. 7-8. If any of the public funding at
issue here can indeed be identified as authorized funding from another
federal program, this decision would not preclude a separate
disallowance on that basis.

MARCH 28, 1987