Joint Consideration: IMD, DAB No. 436 (1983)

GAB Decision 436

May 31, 1983 Joint Consideration: IMD

Admission/Discharge Issue;

Docket Nos. 82-115, 82-230, 83-43,
82-173, 82-234, 83-51,
82-200, 82-236, 83-61,
82-215, 82-250, 83-62,
82-220, 83-24, 83-90

50:Ford, Cecilia; Garrett, Donald Settle, Norval


The States of Delaware, New York, Pennsylvania, Ohio, and New Jersey
appealed a series of decisions by the Health Care Financing
Administration disallowing federal financial participation (FFP) claimed
by the States under Title XIX (Medicaid) of the Social Security Act. We
considered the appeals jointly without objection by the parties.

Statement of the Issue

These appeals involve claims for FFP in payments made at the per diem
rate for inpatient psychiatric services provided to an individual
between the ages of 22 and 64 during the month the individual was
admitted to or discharged from an institution for mental diseases (IMD).
Services to individuals in this age group in IMDs are generally excluded
from the statutory definition of "medical assistance" in which federal
funding is available. However, the Agency has provided by regulation
that, under certain conditions, a state may receive FFP in expenditures
for services, provided during the month of admission to or discharge
from an IMD, when rendered to an individual in this age group who is
otherwise eligible for Medicaid services. This provision resulted from
a policy of permitting states to consider persons who meet Medicaid
eligibility requirements for only part of a month as eligible for the
whole month, as a matter of administrative convenience.

The parties agreed generally that the partial month eligibility
provision permits FFP only in services covered under a state plan for
Medicaid. The Agency took the position, however, that, as a result of
how the statutory IMD exclusion is written, state plans cover inpatient
psychiatric services in an IMD only in certain circumstances when
provided to individuals 65 years of age or over or under age 22, and,
consequently, such services to individuals between those ages in an IMD
are never a covered service.The Agency would give effect to the (2)
partial month provision by participating only in the costs of services
separately identified in a state plan.

The States contended that their state plans did cover IMD services
although the States did not deny that these services were defined by age
limits. According to the States, the IMD exclusion is merely a question
of eligibility of individuals, who, when receiving IMD services, are
ineligible solely because of age. In effect, the States interpreted the
partial month eligibility provision as permitting them to disregard not
only the institutional status, which would otherwise render the
individual ineligible, but also to disregard the age limits on IMD
services. The States argued that it was longstanding Agency policy to
allow FFP in payments made to IMDs at the per diem rate for inpatient
psychiatric services during partial months and that the States had
relied on that policy to their detriment.

The Agency denied that it had such a longstanding policy and pointed
to regulations on covered services as evidence of its interpretation
that the IMD exclusion limits covered services and is not merely a
question of individual eligibility.

Summary of Our Conclusions

For reasons stated below, we conclude that the Agency's
interpretation is supported by the statutory scheme as a whole and by
the Agency's regulatory scheme. No formal policy issuance by the Agency
contains a different interpretation. During part of the time period
involved here, there was a difference of opinion between regional and
central office Agency officials concerning whether FFP was available
during partial months for inpatient IMD services. Certain letters to
the states which may have suggested an interpretation that such claiming
was permissible are not entirely clear, however, and, in context, we do
not think that the States reasonably relied on them as interpreting the
statute on the question of covered services. Further, the States did
not incur the disallowed costs in reliance on these letters but would
have incurred the costs in any event. Merely because there was some
lack of clarity in Agency policy during a short period does not justify
permitting the States to benefit from a windfall of millions of dollars,
based on a regulation promulgated solely for administrative convenience.

Accordingly, we uphold the disallowances. Our decision is based on
the parties' written submissions and on a hearing (3) in which all of
the States except Pennsylvania participated. Pennsylvania specifically
elected not to participate and was provided a copy of the transcript and
an opportunity to make a post-hearing submission, which it chose not to
do.

Below, following a brief description of the States' claims, we
discuss the relevant statutory provisions. We then discuss the partial
month eligibility provisions and other regulations. Next, we examine
the various documents which the States said show the Agency's policy,
and analyze the legal theories raised by individual states as a basis
for contending that the Agency is precluded from taking these
disallowances. Finally, we consider the issues of whether
administrative convenience justifies these claims and whether FFP is
available in the month after the month of admission to an IMD.

Description of the States' Claims

We have included in Appendix A to this decision a more detailed
listing of the individual claims disallowed. Here, we give a brief
description of the claims submitted by each of the States.

Although the partial month eligibility provision has been in effect
since 1966, none of the States was submitting claims for FFP in
inpatient services in IMDs for individuals between 22 and 64, until the
Fall of 1978, when New York began submitting claims for such services on
an ongoing basis. Subsequently, New York also submitted retroactive
claims for $67,056,863 in FFP for services rendered during the period
January 1, 1971 through September 30, 1980, and for $23,561,717 in FFP
for the period October 1, 1978 through December 31, 1981. /1/ New (4)
York has now acknowledged that approximately $6 million of its
retroactive claim was a duplicate claim. The amount of New York's
claims, current and retroactive, remaining in dispute is approximately
$92 million. New York's claims include services rendered during the
months of admission and the months of discharge.


New Jersey submitted its first current claim on the statement of
expenditures for the quarter ended June 30, 1980. It later submitted a
retroactive claim of almost $8 million for the period January 1, 1970
through June 30, 1979, and another retroactive adjustment covering the
period starting July 1, 1979. New Jersey has conceded that about $3
million of its retroactive claim lacked adequate supporting
documentation. NJ Brief, p. 1. New Jersey's claims now total
approximately $7.9 million, and include services rendered during the
month after the month of admission, as well as the months of admission
and discharge.

Ohio also submitted its first claim on the statement of expenditures
for the quarter ended June 30, 1980. Its claims total approximately
$1.9 million and cover only services rendered during the month of
admission.

Delaware submitted its first claim on its statement of expenditures
for the quarter ended June 30, 1981. This included a retroactive
adjustment for the period beginning October 1, 1979. Delaware's claims
total about $.4 million for the months of admission and discharge.

Like Delaware, Pennsylvania did not submit any claim until the
statement of expenditures for the quarter ended June 30, 1981, and
included retroactive adjustments for the period beginning October 1,
1979. However, Pennsylvania's claim, totalling approximately $17.4
million, includes services rendered in the month after the month of
admission, as well as the months of admission and discharge.

(5) Discussion

I. The Statutory Provisions Support the Agency Interpretation

A. The Scheme of Section 1905(a)

In order to understand the issues here, it is helpful to examine the
scheme of section 1905(a) of the Act, which defines "medical assistance"
for the purposes of Title XIX of the Act. The section begins by
stating, "The term 'medical assistance' means payment of part or all of
the cost of the following care and services...." With some
qualifications not relevant here, the section describes the care and
services as for individuals who are in one of a number of categories of
eligibility, such as being aged or disabled (categorical eligibility),
and "whose income and resources are insufficient to meet all of such
cost" (financial eligibility). The section then lists various types of
care and services, some of which are considered "mandatory" services
which must be included in state Medicaid plans and some of which are
"optional." See section 1902(a)(13) of the Act. The following are the
services relevant here:

(1) inpatient hospital services (other than services in an
institution for tuberculosis or mental diseases);

* * *

(4)(A) skilled nursing facility services (other than services in an
institution for... mental diseases)...

* * *

(14) inpatient hospital services, skilled nursing facility services,
and intermediate care facility services for individuals 65 years of age
or over in an institution for... mental diseases;

(15) intermediate care facility services (other than such services in
an institution for... mental diseases)...;

(6) (16) effective January 1, 1973, inpatient psychiatric hospital
services for individuals under age 21, as defined in subsection (h) of
this section; /2./....


Inpatient services provided by a hospital, skilled nursing facility
(SNF), intermediate care facility (ICF), or inpatient psychiatric
facility are generally reimbursed at a per diem rate, which includes the
cost of room and board and nursing care and may also include other
services such as physicians' services, physical therapy, and laboratory
and x-ray services. Inpatient services may also be referred to as
institutional services because they are provided by facility which meets
the definition of an institution (see 42 CFR 435.1009), although not all
institutions are hospitals, SNFs, or ICFs.

After the list of services in section 1905(a) (formerly after
subsection (17), now after subsection (18)), the following appears:

except as otherwise provided in paragraph (16), such term (medical
assistance) does not include --

(A) any such payments with respect to care or services for any
individual who is an inmate of a public institution (except as a patient
in a medical institution); or

(B) any such payments with respect to care or services for any
individual who has not attained 65 years of age and who is a patient in
an institution for tuberculosis or mental diseases.

Subsection (B) of this provision is referred to below as the "general
IMD exclusion." Subsection (A) is included here because some of the
documents relied on by the States (7) in this appeal are related to the
availability of FFP in services to inmates of public institutions. An
IMD can be publicly owned without being a "public institution" for
purposes of subsection (A) if it is a medical institution or an
intermediate care facility. See, 42 CFR 435.1009.

The General IMD Exclusion

In arguing that the IMD exclusion is a prohibition on the eligibility
of people and not a prohibition on covered services, the States focused
on the general IMD exclusion in subsection (B). The effect of that
language, according to the States, is to make certain individuals,
because of their status as patients in an IMD, ineligible to receive
payment for their medical services. In support of this, the States
noted that the regulation at 42 CFR 435.1008 (discussed below) has the
title "Institutionalized individuals," rather than "Institutional
services," and appears in Part 435, on "Eligibility." Viewing the
exclusion as a question of the eligibility of individuals, the States
argued, means that the partial month eligibility provision is an
exception to the exclusion, permitting the States to disregard the
institutional status of the individual and to consider the individual
eligible for any services during the partial month.

We agree with the States that the general IMD exclusion in effect
renders certain people ineligible for Medicaid by reason of their
status, and does not itself distinguish between types of services.
Thus, we do not agree with the Agency that the plain language of the
general IMD exclusion requires the interpretation the Agency has
advanced here. As discussed below, however, the statutory scheme as a
whole does support the Agency interpretation.

The Statute as a Whole

The States claimed that the Agency position was based on a fallacy
that the IMD provision of the statute defines a category of services
that are not subject to FFP for individuals between 22 and 64 in IMDs
(i.e., "institutional services"). According to the States, "that
premise is just wrong. There is no such term or category in the
statute, and there is no statutory prohibition on a category of services
of this kind." Transcript (Tr), p. 11.

This argument has some appeal as a response to the Agency statement
in some of the disallowance letters here that FFP was available for
partial month coverage in IMDs only for non-institutional services, not
for institutional (8) services. At the hearing, however, the Agency
explained that it had used the term "institutional services" here
because the claims involved inpatient services provided by IMDs, but
that the Agency really viewed the problem as the States claiming for a
service which is not covered in the state plans. Thus, the Agency
acknowledged that there was not an explicit prohibition on covering IMD
institutional services to individuals between 22 and 64. Instead, the
Agency pointed to the absence of any provision covering such services.

The Agency position is supported by the statute. In section 1905(
a), provisions on inpatient hospital services, SNF services, and ICF
services are each modified by the parenthetical "other than services in
an institution for... mental diseases." Thus, the provisions included in
state plans covering inpatient services generally do not include those
services in an IMD.

When asked whether the parenthetical phrase in the definition of
inpatient hospital services supported the Agency's interpretation, the
States responded by pointing to the legislative history of the original
Medicaid law, enacted as part of the Social Security Act Amendments of
1965, Public Law 89-97. The House bill simply listed "inpatient
hospital services" as one of five services the states were required to
provide. The Senate added the parenthetical phrase, and the relevant
Senate report explained that addition of the phrase "would help make it
clear that it is optional rather than mandatory for a State to include
services for the aged in tuberculosis or mental institutions." S.REP.
No. 404, Pt. I, 89th Cong., 1st Sess. 81 (1965). According to the
States, "The purpose of the parenthetical phrase was merely to confirm
the distinction between what was a mandatory service and what was an
optional service," and, therefore, "the phrase supports the State's
contention that the IMD provision related to person eligibility, not to
the definition of covered services." NY Reply Brief, p. 4.

Contrary to the State's assertion, however, the legislative history
does not show that the Agency interpretation is erroneous. The fact
that Congress added the parenthetical to distinguish between two types
of covered services, mandatory inpatient hospital services and optional
IMD services to the aged, does not necessarily mean that Congress
intended to permit coverage of IMD services to another age group. In
any event, the States' argument focuses on the purpose of the
parenthetical, rather than its effect. The point is that, as a result
of the services being defined as other than in an IMD, there (9) is no
provision generally for coverage of such services in an IMD. The States
did not deny that provisions in their state plans for inpatient hospital
services, SNF, and ICF services contained the limitation expressed in
the parenthetical. Thus, the key question becomes whether the services
are covered elsewhere in the State plan.

The States' position that the services were covered elsewhere is
linked to the States' argument that the IMD exclusion is solely a
limitation on person eligibility. Services in IMDs listed as optional
covered services in subsections (14) and (16) of section 1905(a) are
described in terms of persons in certain age groups (aged or children).
The States reason that, once a person age 42 is in an IMD providing
services to the aged, it is solely age that renders the person
ineligible. Accepting the States' premises for a moment, it sounds
plausible to say that these age limitations are overcome by the partial
month eligibility provision.

This view might be reasonable if the exceptions for IMD services to
the aged and to children were framed solely in terms of age. In
permitting optional coverage of some services in IMDs to individuals in
these age groups, however, Congress placed certain conditions on federal
Medicaid funding for these services. Sections 1902(a)(20) and (21) of
the Act set out conditions which a state must meet if its state plan
includes services to aged in IMDs (including public IMDs). For example,
the state plan must --

provide for an individual plan for each such patient to assure that
the institutional care provided to him is in his best interests,
including, to that end, assurances that there will be initial and
periodic review of his medical and other needs, that he will be given
appropriate medical treatment within the institutions, and that there
will be a periodical determination of his need for continued treatment
in the institution;....

Section 1902(a)(20)(B).

Similarly, section 1905(h) of the Act, in defining "inpatient
psychiatric services for individuals under age 21," sets specific
conditions for such services, including that they be provided in an
institution accredited by the Joint Commission on Accreditation of
Hospitals and that they involve "active treatment" of the individual.
In other words, the exceptions do not apply to any IMD services provided
to the aged or children, but only to (10) services meeting certain
requirements. /3/ Moreover, Congress has never provided that, even for
IMD services which meet these requirements, the states may include them
as an optional covered service for persons in the 22-64 age group. This
supports the Agency view that the proper interpretation is that the IMD
exclusion is not merely a question of a person's eligibility, but also
limits what services are covered under a state plan.


The States argued, however, that the interpretation they advanced
here did not contradict the underlying purpose of the IMD exclusion.
The reason for the exclusion (as stated in the Senate report on the
exception for the aged) was that "long-term care in such hospitals had
traditionally been accepted as a responsibility of the States." S.Rep
404, Pt. I, 89th Cong., 1st Sess. 144 (1965). The States argued that
permitting FFP for persons aged 22-64 only for partial months in an IMD
would not be supporting their care on a "long-term" basis. In light of
the provisions discussed above, however, it is clear that Congress was
concerned, not only with the states' financial responsibility for care
in IMDs, but also with the nature of the services provided there. See,
also, Schweiker v. Wilson, 450 U.S. 221, 242 (1981), dissenting opinion;
Legion v. Richardson, 354 F. Supp. 456 (S.D. NY), aff'd sub nom. Legion
v. Weinberger, 414 U.S. 1058 (1973). Permitting FFP for partial months
for individuals in the 22-64 age group in IMDs would frustrate
Congressional intent because services on a partial month basis could not
be subject to the type of long-range planning and periodic review
Congress contemplated for IMD services Medicaid would cover.

Finally, the scheme of section 1905(a) itself supports the Agency
interpretation. The general IMD exclusion does not appear with the
provisions on categorical and financial eligibility of individuals but,
instead, was placed after the listing of services, as an exception to
what may be included within the term "medical assistance." This is (11)
consistent with an interpretation that the exclusion is a limit which
affects both eligibility and covered services.

Thus, we conclude that the Agency interpretation is preferable
because it gives effect to all of the provisions of the statute.

II. The Regulations Support the Agency Interpretation

In this section, we discuss Agency regulations in light of the issues
here. We first discuss the history of the partial month eligibility
provisions and the interpretation of those provisions. Then we examine
Agency regulations concerning covered services.

A. Monthly Eligibility Provisions

There is no statutory provision specifically authorizing
determinations of eligibility on a monthly basis. The legislative
history of section 1905(a), however, contains the following statement:

Medical assistance provided under the bill may include payment for
care and services provided at any time within the month in which an
individual becomes eligible or ineligible for assistance, e.g. by
attaining a specified age. This avoids the administrative inconvenience
of segregating bills by the day of the month on which care or services
were provided and is consistent with the monthly pattern of benefits
under the other public assistance titles.

S.REP. No. 404, Pt. I, 89th Cong., 1st Sess 82 (1965).

Based on this statement, the Agency promulgated a regulation
authorizing monthly eligibility determinations "as an administrative
method to simplify and rationalize the eligibility determination
process." PIQ-MMB-77-6, NY Appeal File, Tab 2. The current version of
this regulation permits a state "to make eligibility for Medicaid
effective on the first day of a month if an individual was eligible at
any time during that month." 42 CFR 435.914(b). /4/


(12) It is undisputed here that all of the States have opted in their
state plans to adopt this procedure although the record does not
indicate when they chose to do so.

B. Provisions on Institutional Status

General provisions on "institutional status" related to inmates of
public institutions or patients in IMDs (and tuberculosis institutions)
appeared in the Handbook of Public Assistance Administration, Supplement
D (1966), and were first codified at 45 CFR 248.60. That regulation
stated, in part:

(a)(2) Federal financial participation is not available in medical
assistance for any individual who has not attained 65 years of age and
who is a patient in an (IMD).

(3) For purposes of this paragraph:

(i) Federal financial participation is available in the costs of
medical assistance for the month in which an individual (if otherwise
eligible) became.. a patient in an (IMD)....

Redesignated as 42 CFR 448.60, 42 Fed. Reg. 52827, September 30,
1977.

In 1978, in a general recodification of the Medicaid regulations
intended to make no substantive change, these provisions were recodified
at 42 CFR 435.1008, 43 Fed. Reg. 45176, September 28, 1978. Although,
as the States pointed out, Part 435 concerns "eligibility," the relevant
provisions appear in Subpart K, entitled "Federal Participation." The
scope of this subpart is described as follows:

This subpart specifies when, and the extent to which, FFP is
available in expenditures for determining eligibility and for medicaid
services to individuals determined eligible under this part, and
prescribes limitations and conditions on FFP for those expenditures.

(13) Under the general heading "LIMITATIONS ON FFP" and the specific
heading "Institutionalized individuals," section 435.1008 states, in
part:

(a) Except as provided in paragraph (b) of this section, FFP is not
available in expenditures for services provided to --

(1) Individuals who are inmates of public institutions as defined in
$435.1009; or

(2) Individuals under age 65 who are patients in an institution for
tuberculosis or mental diseases unless they are under age 22 and are
receiving inpatient psychiatric services under Sec. 440.160 of this
subchapter.

(b) FFP is available in expenditures for services furnished to
eligible individuals during the month in which they become inmates of a
public institution or patients in an institution for tuberculosis or
mental diseases....

As mentioned above, the States relied on the nature of Part 435 and
the subheading "Institutionalized individuals" for support of their
position that the IMD exclusion was a question of the eligibility of
individuals. Placement of this provision as a limitation on FFP in
Subpart K, rather than with provisions on categorical and financial
eligibility, however, supports the Agency position that the exclusion is
not merely a question of individual eligibility.

C. Interpretation of Section 435.1008(b)

In some of the first disallowance decisions appealed here, the Agency
explained its position as being that the term "services" in section
435.1008(b) had to be read to mean only "non-institutional services."
The States challenged this interpretation as not warranted by the plain
language of the section and as being inconsistent with the Agency
interpretation of section 435.1008(a) as prohibiting FFP generally in
any services to institutionalized individuals.

During the course of Board proceedings, however, the Agency explained
that it used the term "institutional services" to refer to inpatient
services to individuals in IMDs between the ages of 22 and 64. The crux
of the Agency position is that when the regulation refers to (14)
"services" it can only mean services which are covered by the state
plan.

The States did not directly dispute this interpretation. Indeed, to
interpret the provision to permit FFP even in services not covered in a
State plan would mean that FFP would be available in more services to
individuals during partial months in IMDs than were available to other
recipients. This is clearly an unreasonable reading of the regulation.
Moreover, the partial month eligibility provision must be read in
context, with other regulations that deny FFP for services other than
those specified as services the states can cover in their state plans,
see, e.g., 42 CFR 440.2(b) (1978-1982), and with the scope section of
Subpart K, which refers to "Medicaid services."

We also note that there are other questions of interpretation which
are not disputed here. Although section 435.1008(b), and its
predecessor at 45 CFR 248.6(a)(3), only refer to the month in which an
individual became a patient in an IMD (i.e., the month of admission to
the institution), the Agency does not deny that coverage is also
available for the month of discharge. This is consistent with the
wording of the more general provision at 42 CFR 435.914 and its
predecessor. Also, there is no dispute about whether services which are
covered in a state plan may be claimed when provided to an "otherwise
eligible" individual aged 22-64 during the month of admission or
discharge, even if provided by the IMD. The Agency acknowledged that
services such as physician services, laboratory services, eyeglasses and
prosthetic devices, if covered in the state plan, may be claimed.

One remaining area of dispute over interpretation of these provisions
is the question, discussed in section VI below, raised by several of the
States, concerning whether FFP is available during the month after the
month of admission. However, the primary issue here is not really a
matter of interpretation of section 435.1008(b) but a question of how
that section interacts with provisions concerning covered services. /5/


(15) Thus, cases cited by the States for the proposition that the
Agency is bound by its own regulation are simply inapposite relative to
section 435.1008(b). The Agency did not deny that it is bound by this
section but merely disagreed with the States' proposition that the
section authorizes the States to disregard limits on covered services.

D. The Regulatory Scheme Reflects the Agency Interpretation

From the inception of the Medicaid program, the IMD exclusion has
appeared in Agency rules as a funding prohibition which affects what
services as well as what individuals may be covered. See, Handbook of
Public Assistance Administration, Supplement D (1966), sections D-5141
and D-5150. Current Medicaid regulations at 42 CFR Part 440 interpret
the list of services included in the definition of "medical assistance"
in section 1905(a) of the Act, as well as the definitions of specific
services in other subsections of section 1905. The Agency
interpretation of section 1905(a)(1) of the Act, for example, is in
relevant part that -- "Inpatient hospital services" means services that
are furnished in an institution that --

(a) Is maintained primarily for the care and treatment of patients
with disorders other than... mental diseases;

42 CFR 440.10; see, also, 42 CFR 440.40; 440.150.

Regulations concerning services for the aged in IMDs include the age
limitation as part of the term being defined; for example, the
regulations provide that "'Skilled nursing facility services for
individuals age 65 or older in institutions for... mental diseases'
means...." 42 CFR 440.140. Moreover, the service definition makes clear
that only services in IMDs meeting specified requirements are covered.
In other words, coverage of services in IMDs is not automatic merely
because the individual receiving the services is aged. Similarly, the
term "inpatient psychiatric services for individuals under age 21" is
used to describe the exception for children, and is defined not merely
in terms of an age requirement, but also in terms of service
requirements. 42 CFR 440.160.

(16) Finally, 42 CFR Part 441 sets out "limits on FFP for specific
services defined in Part 440," including a prohibition on FFP for any
individual under age 65 in an IMD, except an individual under age 22
receiving covered inpatient psychiatric services. 42 CFR 441.13.

Although these regulations do not explicitly address the issue here,
they are sufficiently clear to put the States on notice that the Agency
considered the IMD exclusion to be a matter of covered services as well
as individual eligibility.

Thus, we conclude that nothing in section 435.1008(b) precludes these
disallowances and that, read together, the regulations support the
Agency interpretation.

III. The Documents Relied on by the States

In spite of the statutory and regulatory provisions on covered
services, discussed above, the States argued that the disallowances here
were contrary to a clear and longstanding interpretation by the Agency
permitting FFP in the expenditures claimed. For this proposition, the
States relied primarily on the series of documents which we discuss in
this section. Since these documents number over 40, we have grouped
them generally in the following categories: formal policy issuances;
internal Agency memoranda; correspondence from regional Medicaid
officials; and miscellaneous. We also discuss, in a separate part,
documents relevant to Ohio's contention that the Agency had approved an
amendment to Ohio's state plan providing for the claimed services. We
conclude that --

* The formal policy issuances simply do not address the question
here.

* The internal memoranda were not intended as an official
interpretation of the statute, and, in any event, the States could not
reasonably rely on them and, indeed, have not shown that they did rely
on them.

* To the extent that correspondence from regional officials may have
suggested, for a brief period, an interpretation allowing the claims,
the States should have known, in context, that the issue was not clear
and that payment was uncertain for such claims.

(17) * Some of the miscellaneous documents indicate that at least
some of the States may have known that there were difficulties with the
claims.

* The Agency did not approve an amendment to the Ohio state plan
covering inpatient psychiatric services to individuals aged 22-64.

The reasons for these conclusions are stated below. In the following
section, we discuss these conclusions in light of the States' additional
arguments concerning the effect of the documents.

A. Formal Policy Issuances

The documents discussed in this part were not published in the
Federal Register but were issued as part of the Agency system of
guidance to states. The first document is section 4-50 of the Medical
Assistance Manual, issued in the form of an Action Transmittal,
SRS-AT-76-110 (MSA), July 8, 1978. Document (Doc.) 1. /6/ This manual
section concerns persons in public institutions and, at 4-50-20G.,
discusses "partial-month institutionalization." The other three
documents are internal memoranda which are identified by numbers which
indicate that they were considered "Policy Interpretation Questions"
(PIQs) by the Agency and were issued to the states. PIQ-MMB-77-6,
September 12, 1977, Doc. 2; PIQ-MMB-78-7, April 20, 1979, Doc. 3; and
MMB-PIQ-78-10, May 5, 1978, Doc. 4. Each of these PIQs concerned
inmates of public institutions.


Although these four documents do clarify certain points regarding the
partial month eligibility provisions (e.g., that the month of discharge
is covered), these points are not disputed here. The issue of whether
inpatient psychiatric services are covered simply is not mentioned.
This is not surprising since the documents address questions related to
inmates of public institutions, rather than patients in IMDs qualified
to provide services to the aged or children. A medical institution or
an intermediate care facility is not considered a public institution.
Institutional services provided by a public institution such as a prison
(e.g., room and board) would never be a covered Medicaid service.

(18) B. Internal Agency Memoranda

Internal Agency memoranda contain the statements which most nearly
address the question we are concerned with here. The following is a
summary of the memoranda with the statements which most strongly support
the States' position in quotes:

Memorandum dated August 21, 1980 to Regional Medicaid Directors from
Director, Bureau of Program Policy:

This memorandum responds to regional inquiries concerning partial
month coverage in IMDs and clarifies that an individual may apply for
Medicaid during the first month of institutionalization. The memorandum
then states: "A State may cover medical care, including psychiatric
care and services, as indicated in the State plan, during the month (of
admission to an IMD) when three conditions exist: ..." The three
conditions listed are that 1) the individual is otherwise eligible for
Medicaid; 2) the State provides full month coverage; and 3) the State
provides coverage to all otherwise eligible individuals in both public
and private IMDs. The memorandum then discusses the general IMD
exclusion, stating that the partial month provision is an exception to
this, based on administrative convenience. The memorandum further
states: "We are in the process of reexamining this area and will notify
you if our development results in a policy revision." Doc. 20.

Memorandum dated November 17, 1980, to Regional Medicaid Director,
Region II, for Director, Office of Eligibility Policy:

In response to questions, this memorandum clarifies that "an
individual has to have been eligible for Medicaid prior to entering a
public institution or an IMD/TB." It then states that "FFP may be
claimed by the States for reimbursement to mental institutions for per
diem psychiatric care for Medicaid eligible individuals in the 21
through 64 years of age group for the remainder of the first month of
institutionalization." The memorandum then discusses the conditions set
out in the August 21 memorandum. Doc. 23.

(19) Memorandum dated December 8, 1980 the Regional Administrator,
Region VIII, from Director, Bureau of Program Policy: /7/


This memorandum responds to a statement that "FFP is limited to
inpatient hospital services for individuals 65 years of age or over in
an IMD/TB, or to inpatient psychiatric hospital services for individuals
under age 21." The response is that "FFP is available for medical care,
including psychiatric care and services provided to an individual in the
21 through 64 years of age group, during the month in which an
individual enters an IMD/TB.... The inpatient per diem services are
covered under the Medicaid program during that partial month in the same
manner as the inpatient per diem services are covered in an IMD/TB for
the 65 years of age or over group. The States should be informed that
FFP may be claimed for those services without the risk of disallowance."
Doc. 25.

Memorandum dated January, 1981, from Regional Medicaid Director,
Region II, to Acting Director, Bureau of Program Operations:

This memorandum expresses concerns regarding "the policy
interpretations recently issued by the Bureau of Program Policy....",
including the potential financial impact of retroactive claims. It
states: "It is still our contention that care in institutions for
mental diseases for individuals between the age of 21 and 64 is not a
covered service under Title XIX." Doc. 28.

Memorandum dated April 30, 1981, from Director, Bureau of Program
Policy, to Regional Medicaid Director, Region II:

The central office response states that a legal opinion regarding
retroactive claiming had been requested. The response then addresses
other concerns in the Regional Medicaid Director's memorandum, stating:
"We do not agree with your contention that medical care for this age
group in an IMD/TB is a noncovered service..." Doc. 29.

(20) While these memoranda do seem to suggest the allowability of the
claims involved here, we think that the following factors concerning
these memoranda are critical:

* The memoranda were internal Agency documents. Although the States
alleged generally that they become aware of the contents of such
documents, the States provided no evidence that these documents were
issued to the States in a manner which would suggest that they were
authoritative statements of Agency policy. Moreover, the States did not
provide any specific evidence of when they obtained copies of the
documents. /8/

* The memoranda have to be read in light of the qualification in the
August 21 memorandum "as indicated in the State plan." There is no
specific finding by any Agency official that any particular State plan
did cover the services here.

* We do not think that the documents were intended as an official
interpretation of whether the IMD exclusion is a matter of covered
services as well as of eligibility of individuals. The question seems
to have been considered merely as one of the effect of the partial month
eligibility provision. To the extent these memoranda view the question
as solely one of age, once an individual is in a qualifying IMD, they
are inconsistent with the statutory and regulatory schemes discussed
above.

* The memoranda suggest a context in which the matter of FFP in the
per diem rate was an unsettled question on which central office and
regional officials disagreed. Although the central office advised
Region VIII, in December of 1980, that the states should be advised that
there was no risk of (21) Disallowance, the correspondence discussed
below shows that these States were not so advised.

* To permit the States to rely on internal Agency documents would
inhibit Agency officials from engaging in dialogue about disputed issues
of FFP. /9/

Accordingly, we conclude that these memoranda were not intended as an
official interpretation of the statute. Moreover, the States could not
reasonably rely on them in context. Indeed, since the States have not
shown when they become aware of these documents, there is a substantial
question whether the States relied on them at all.

C. Correspondence to the States

None of the documents discussed in this part was issued by the
Agency's central office to all states as part of the Agency's system of
formal guidance.

1. Region I Memorandum

The first, and most official, document was issued by the Regional
Medicaid Director, Region I on August 15, 1979, and was designated HCF/
MB #79-4. Doc. 12. This document was addressed to "All State Public
Welfare Administrators" although this may have meant only states in
Region I. (None of the States here are in Region I; New York and New
Jersey are in Region II; Delaware and Pennsylvania are in Region III;
and Ohio is in Region V.) This memorandum clarifies the partial month
eligibility provision as it relates to institutionalization, but states:

We note that the particular services for which FFP is sought would
have to be included in the State plan as a covered expenditure...
However, as previously (22) mentioned Section 1905(a)(17)(B) prohibits
Medicaid from reimbursing for services provided to an individual between
22-64 in an institution for mental diseases. It seems to us that most,
if not all, health services provided by an institution for mental
diseases would be such services, since we believe such facilities assume
responsibility for its patients in all respects from the outset of their
institutionalization.

While not stated in definitive terms, this document certainly
suggests that FFP would not be available in the expenditures claimed
here.

2. Region V Letter

The remaining documents in the correspondence category were all
issued to individual States. The earliest correspondence was a
response, dated December 4, 1979, by the Regional Medicaid Director,
Region V, to an inquiry by the Director, Ohio Department of Public
Welfare. Doc. 14. The inquiry, dated November 15, 1979, said that
Ohio's interpretation was that "Federal financial participation is
available for both institutional services (e.g., services rendered in
institutions for mental diseases) and noninstitutional services
furnished during the month of admission..." The letter continued that,
if no response were received by January 1980, Ohio would "submit a state
plan amendment... based on that interpretation." Doc. 42.

The Regional Medicaid Director's response does not specifically
address the question of institutional versus non-institutional services.
Even if it could be read as concurring in Ohio's interpretation,
however, the response states an understanding that Ohio will submit a
state plan amendment, which indicates that any concurrence was
conditioned on Ohio providing coverage in its plan. As discussed below,
we do not think that the amendment submitted by Ohio accomplished this.

3. Region II Letters

The record contains three letters to the Commissioner of the New York
State Department of Social Services from the Regional Medicaid Director,
Region II. With respect to the issue here, the first letter, dated
November 6, 1979, states, "We are currently awaiting policy
clarification as to whether Federal financial participation may be
claimed for inpatient care of individuals age 22 to 64 in psychiatric
institutions during the first and last partial (23) months of
institutionalization." Doc. 13. A similar statement, to the effect that
it was still an issue whether per diem psychiatric care was allowable,
appears in the letter of October 10, 1980. Doc. 22. A letter dated
December 12, 1980, states, "The current federal interpretation is that
these Medicaid eligible individuals continue to be eligible for medical
care, including psychiatric care and services, with Federal financial
participation...." Doc. 27. This statement is qualified in two
respects: it states conditions which apply "(if) New York chooses to
provide coverage to otherwise Medicaid eligible individuals" in IMDs
during partial months, indicating that such coverage was not already
provided in the state plan, and it mentions that "Federal staff are
still reviewing several ramifications of the above policy," indicating
that it was not entirely settled.

The record also contains three letters from the Regional Medicaid
Director, Region II, to the Director, New Jersey Division of Medical
Assistance and Health Services. The first, dated August 18, 1980,
refers to a need for policy clarification (Doc. 19); the second, dated
October 24, 1980, states that officials are still researching whether
FFP may be claimed for per diem psychiatric care (Doc. 21); and the
third, dated December 12, 1980, is substantially identical to the New
York letter of that date (Doc. 26). /10/


There are several things to note about the timing of these letters:

* The State of New York started claiming FFP in inpatient psychiatric
services in 1978, prior to any explicit statement on this issue by any
Agency official.

* Although the October 1980 letters were almost two months after the
central office memorandum of (24) August 21, the Regional Medicaid
Director still considered the issue to be an open one.

* Similarly, the December 12, 1980 letters are much more tentative
than the internal memorandum dated four days earlier, and, contrary to
that memorandum, did not inform New York and New Jersey that they could
claim without the risk of disallowance.

* Although New Jersey submitted its first claims after December 12,
1980, the record indicates that New Jersey had begun preparing its
claims in 1978. NJ Reply Brief, Attachment, Affidavit of Alan G.
Wheeler.

The statement in the December 12 letters concerning the "current
Federal interpretation" appears to support the States' position. /11/
There are several reasons, however, why we do not think that this
statement should be considered evidence of an official Agency
interpretation binding here:

* As mentioned above, the statement was qualified by the rest of the
letter.

* The letter is phrased in terms of eligibility during partial months
and does not explicitly address the question of covered services as a
matter of statutory and regulatory interpretation. To the extent that
it implicitly addresses the question of covered services, it is
inconsistent with the treatment of the IMD exclusion in the statute and
regulations as a whole, as discussed above.

* In context, New York and New Jersey should have known that the
issue was still an unsettled one. The earlier litters had warned that
the issue was unclear, and the December 12 letter indicated that the
matter was still under review. In addition, (25) the author of the
letters stated in an affidavit dated April 20, 1983, that he
"consistently made clear to the States that claims for IMD services
under 42 CFR 435.1008(b) were high risk claims." NJ Respondent's
Supplemental Memorandum, Attachment A.


New Jersey and New York were further informed prior to the
disallowances here of the questionable nature of the claims. New Jersey
had one of its claims deferred, by letter dated March 6, 1981. In
September 1981, in response to a request by New Jersey that he issue an
interpretation, the Associate Regional Administrator, Region II, stated
that there was now a serious question concerning the matter. On April
16, 1982, New York was informed that "Title XIX precluded the coverage
of individuals between 21 and 65 years of age in an IMD/TB at any time
and therefore FFP for these inpatient services is never available for
this group." /12/


3. Region III

There is no evidence in the file that any regional or central office
Agency official directly informed either Delaware or Pennsylvania of an
interpretation that might suggest that FFP was available in inpatient
psychiatric services to individuals between the ges of 22 and 64 in IMDs
during partial months. Pennsylvania apparently engaged in some
discussion of the issue with New York and, in April 1981, received a
copy of the Region II December 12, 1980 letter.See Doc. 36. We have
discussed that letter above.

In any event, Pennsylvania was notified of the questionable nature of
the claims by a letter dated August 31, 1981 from the Associate Regional
Administrator. Dec. 38.

D. Miscellaneous Documents

With its ppeal brief, New Jersey submitted to the Board a memorandum,
dated April 26, 1979, sent by an official in (26) the New York State
Office of Mental Health to New Jersey, Ohio, and a number of other
states which had indicated interest in "billing Medicaid for inpatient
care for patients aged 21 through 64." Doc. 6. Attached to this
memorandum were minutes from a meeting of the National Association of
Reimbursement Officers held in February 1979. These minutes indicate
the following:

* New York began billing based on information supplied by the Agency
to Minnesota and New York although the question here was not
specifically addressed and New York recognized that there was some risk
to the claims.

* The discussion among states about the possibility of billing was
apparently tied to the 1978 recodification of the Medicaid regulations.
(It is not clear whether this was because the newer version said FFP was
available in "services" during partial months rather than in "medical
assistance" (see page 12 above), or had to do with the fact that the new
regulations clarified that a patient in an IMD which qualified as a
"medical institution" was not considered an "inmate of a public
institution.")

* Wisconsin had received an answer from the Agency that such coverage
of inpatient services was not available.

* State officials were advised that to avoid getting a similar
response, they might have to "argue that the provisions of 435.1008 and
435.1009 in fact modify the provisions of 441.11(c) and 441.13."

Section 441.13 is the section quoted above, setting out as a limit on
covered services the prohibition on FFP for services to individuals in
an IMD, not receiving services within the age exceptions. From this, it
appears that at least some states were aware that the billing they were
considering potentially conflicted with coverage provisions.

In addition, New Jersey submitted some internal State correspondence
which indicates that some State officials thought that a State plan
amendment might be required in order to cover the services in question
here. Doc. 16 and (27) 17. There is no evidence that New Jersey ever
submitted such an amendment. /13/


Finally, internal documents from the States of Ohio and New York
further indicate that these States began claiming based on what they
perceived as a change in policy, rather than merely a clarification of a
longstanding, existing policy. Doc. 45 and Agency Hearing Exhibit 1.

In short, these documents support the Agency's position, rather than
the States'.

The Ohio Plan Amendment

Ohio contended that, although it did not think that a State plan
amendment was necessary in order to cover inpatient psychiatric services
to individuals aged 22-64, it nonetheless submitted such an amendment,
which was approved by the Agency. In support of this contention, Ohio
submitted a copy of a state plan amendment approved by the Agency on
January 1, 1981, effective October 1, 1980. Doc. 43.

We do not agree with Ohio that this amendment provided coverage for
the services in question here. In the first place, the amendment was
not submitted as a change in coverage provisions but consists of an
agreement between the Ohio Department of Mental Health (ODMH) and the
Ohio Department of Public Welfare (ODPW). The language on which Ohio
relied appears in a section describing ODPW's duties under the
agreement, specifying that ODPW should:

Include in the State plan provision to allow Medicaid payment for
services rendered during the month of admission to a certified ODMH
institution for persons who are Medicaid eligible.

Paragraph II, A., 4.

At the hearing, an Ohio official who was involved in submission of
this amendment testified that Ohio intended this provision to authorize
coverage of the services in question here. He further testified that
Ohio had placed this provision in its agreement because the pre-printed
(28) state plan provisions on coverage authorized by the Agency did not
lend themselves to covering such services.

Regardless of what Ohio intended, however, it did not accomplish
through this provision what it said it did. The plain wording of the
provision implies that ODPW will take some further action to include a
coverage provision, not that this is considered a coverage provision.
Further, the provision refers merely to "services," not to inpatient
psychiatric services to individuals aged 22-64. We reject the notion
that approval of this ambiguous provision can be considered approval of
the claiming here. Indeed, since Ohio knew that the pre-printed plan
provisions were not consistent with the coverage proposed here, Ohio had
a duty here to make it clear what it was trying to do. /14/


Although Ohio also submitted a copy of a later agreement, similarly
approved as a state plan amendment (effective October 1, 1981), that
agreement contains the same provision which appears in the earlier
agreement. Doc. 44. Ohio has submitted no other provision which could
be read as covering the services involved here. Accordingly, we
conclude that Ohio has failed to show that its state plan covered the
services claimed here.

E. Summary of Effect of Documents

In Summary, the documents submitted by the States simply do not show
that the Agency had a clear and longstanding policy to permit FFP in the
expenditures here. Further, the documents do not evidence any intent to
officially interpret the IMD exclusion to be solely a matter of
individual eligibility, so that resulting limits on covered services can
be disregarded where the partial month eligibility provision applies.
Thus, the documents provide no substantial support for the States'
contention that their interpretation of the exclusion is the correct
one.

On the following section, we address certain legal theories advanced
by the States as a basis for precluding the disallowances here,
discussing them in light of our (29) conclusions regarding the documents
and other relevant factors.

IV. The Disallowances Are Not Precluded

The States' argued that, even if we were to conclude that the
Agency's interpretation is proper, the States should prevail here. The
States advanced the following legal theories as a basis for precluding
the disallowances here:

* The States argued that the position reflected in the disallowance
letters was a "new interpretation" contrary to the policy advice given
to the States based on the central office memoranda, and that this
interpretation could not be applied retroactively to disallow funds.

* The States contended that the disallowances were contrary to
fundamental principles of fairness and the concept of cooperative
federalism.

* The States asserted that the principles of estoppel applied to
preclude the disallowances.

There are several underlying questions which are important to one or
more of these theories: did the States rely on Agency advice; was it
reasonable under the circumstances to do so; and were the States harmed
by that reliance. We discuss these questions in subsection A below. We
then address the separate legal theories in light of the underlying
facts.

A. The Underlying Facts Show That the States Did Not Rely to Their
Detriment

The States did not show that they reasonably relied on Agency advice
to their detriment. The States could not not have relied on any of the
formal policy issuances in claiming the per diem rate, because these
issuances simply do not address the question. There is no specific
evidence that any State was aware of the central office memoranda prior
to submitting its first claim, and some of the claims here were
submitted after the States were specifically informed that no FFP was
available. New York, moreover, began claiming in the fall of 1978,
about two years prior to the Regional Medicaid Director's letter of
December 1980. Ohio began claiming prior to submitting a state plan
amendment as required by the Region V letter, apparently because of
Ohio's own belief that such an amendment was not necessary. Finally,
there is some evidence that the States were relying on their own (30)
perception that there was some change in policy reflected in the
recodified regulations which would permit such claiming.

To the extent that the States may have relied on the central office
position and the Region II letters, there is a substantial question as
to whether such reliance was reasonable, since any implication that the
IMD exclusion did not affect covered services would be inconsistent with
the Act and published regulations. There were no formal policy
issuances directly addressing the effect of the statutory and regulatory
limits on covered services. Even the central office memoranda were
qualified by reference to the state plans. Further, the States should
have known that the area was a disputed one which had not been entirely
settled within the Agency.

Moreover, even if we were to find that the States reasonably relied
on Agency advice in submitting the claims, this is not tantamount to
finding that the States relied on Agency advice in incurring the
underlying costs. The States have not alleged that they would not have
incurred the costs but for Agency advice, because the States
traditionally have paid for IMD services. This point is crucial also to
the question of what harm the States might have suffered in reliance on
Agency advice. The States did not alter their programs of services in
any way but merely determined that FFP could be claimed for services
they were already providing.

Several States did allege harm in two respects: 1) they contended
that they had hired consulting firms to prepare their retroactive
claims, as well as devoting their own staff time to the effort; and 2)
they claimed that they had prepared their state mental health budgets in
anticipation of receipt of the federal funds disputed here and that
their programs would suffer as a result of the disallowances. These
are, at the most, administrative or remote consequential effects of the
disallowances, and are insufficient to justify awarding the States
millions of dollars to cover costs which they would have incurred in any
event. Moreover, the Agency has stated that it would participate in the
administrative costs of preparing the claims, so that any harm of this
nature would at least be mitigated. We also note that Pennsylvania's
contract with a management consulting firm was signed by the contractor
after that State had received notice that the claims were questionable.
New Jersey had begun preparing its claim in 1978. Moreover, the
inter-agency agreement New Jersey submitted as evidence of steps it had
taken in reliance on Agency advice is undated. Doc. 34. Thus, the
States have (31) not shown these effects were the result of Agency
advice rather than a risk the States themselves took.

B. This Is Not a New Interpretation Improperly Applied

The States argued that the position taken by the Agency in the
disallowances here could not be applied retroactively. The States cited
the Board's decision in Pennsylvania Department of Public Welfare,
Decision No. 277, March 31, 1982, for the proposition that the Board has
ruled that new interpretations of the law cannot be applied
retroactively to disallow funds that a state was permitted to claim
under an earlier, more favorable interpretation by an agency.

The Board's reasoning in Pennsylvania does not apply to the facts
here, however. In Pennsylvania, that State had relied on an official
Agency interpretation, issued as a PIQ to all regions. The clear
interpretation in the PIQ was found to be binding on the Agency until
notice was given of a change in policy, because the interpretation was
not contrary to anything in the applicable statute or regulations.

Here, there is no formal policy issuance, intended as an official
interpretation of the IMD exclusion. To the extent that any statements
in the documents suggest that the IMD exclusion is merely a matter of
eligibility, they are inconsistent with the statute and the scheme of
covered services in the published regulations. The Agency here is
merely applying the policy always reflected in its published
regulations, and should not be bound by unclear statements made in
informal documents. /15/


(32) C. The Disallowances Are Not Unfair to the States

The States also argued generally that the disallowances were contrary
to fundamental principles of fairness and the concept of cooperative
federalism. Given our conclusions that the States would have incurred
the claimed costs in any event and that the States were aware of the
risks of claiming them for FFP, we do not think that anything in the
Agency's conduct here is contrary to fundamental principles of fairness.
Nor do we the think that the concept of cooperative federalism requires
payment of unallowable claims.

D. Estoppel Does Not Apply Here

The States argued that the Agency should be estopped from taking the
disallowances here, citing case law in support of the proposition that
estoppel can be applied against the federal government. In order to
prevail on a claim of estoppel, however, the States had to show that the
basic elements of estopppel are present. See, Montana Department of
Social and Rehabilitation Services, Decision No. 71, April 30, 1980, and
cases cited therein. The States have failed to do this. As discussed
above, we do not think that this is a situation where the States
reasonably relied on Agency advice, to their detriment.

Moreover, the Supreme Court has recently indicated that, if estoppel
applies against the federal government at all, the party asserting the
defense must at the very least show "affirmative misconduct" on the part
of the federal government. Schweiker v. Hansen, 450 U.S. 787 (1981).
In support of their position that we should find affirmative misconduct
here, the States cited the case of Community Health Services of Crawford
County v. Califano, 698 F. 2d 615 (3rd Cir. 1983). In that case, the
U.S. Court of Appeals for the Third Circuit found affirmative misconduct
on the part of the government's fiscal agent sufficient to estop the
government from recouping costs claimed by a health care provider, in
reliance on an official decision of the fiscal agent. The States argued
that the rationale in Crawford County should apply here.

We disagree. In Crawford County, the Third Circuit found that the
fiscal agent had knowingly violated applicable statutory and procedural
guidelines in failing to communicate the provider's questions to the
proper agency authority, and that this constituted affirmative
misconduct. There is no showing here that any Agency official violated
comparable guidelines.

(33) We also do not agree with the States that this is not a case
where we need to worry about protecting the public fisc, a factor
recognized by the Seventh Circuit as a consideration in estoppel cases.
Portmann v. United States, 674 F.2d 1155 (7th Cir. 1982); compare, INS
v. Miranda, 103 S.Ct. 281, 283-84 (1982). Allowing FFP of over $120
million in claims for services traditionally paid for by the States
would affect the Medicaid program considerably. We find it somewhat
disingenuous for the States to assert that the Agency and the Medicaid
program would not be harmed if estoppel were applied here, yet to allege
that the disallowances affect their budgets and programs in a
detrimental manner.

Accordingly, we conclude that the States have not shown that the
Agency should be precluded from taking these disallowances.

V. The Question of Administrative Convenience

The States argued that, if we were to adopt the Agency's view that
some, but not all, of the services included in the States' per diem
rates represented covered services, this would require the States to
"disaggregate the institutional services between those that are
separately identified in the statute and those not." NY Brief, p. 20.
According to the States, this would present administrative nightmares.
Since the purpose of the partial month eligibility provision is
administrative convenience and the statute generally promotes simplicity
of administration, the States argued, this would justify "covering all
of the services provided by the institution during the partial month,
even those that may go beyond the specific categories of medical care
for which the person was eligible prior to his admission." NY Brief, p.
21.

We do not agree that "administrative convenience" alone justifies
providing FFP in services which are not covered under the Act or the
regulations. The partial month eligibility provisions were based on
specific legislative history expressing Congressional concern over
avoiding the particular inconvenience of having to segregate bills by
the day of the month on which care or services were provided. Moreover,
Congress recognized that considering persons eligible on a monthly basis
was consistent with other public assistance programs. The States have
cited to no comparable legislative history which would authorize FFP in
a rate which included costs of services which are not covered.
Moreover, even if the Secretary could authorize FFP in such costs by
regulation, in order to provide for the efficient administration of the
Medicaid (34) program (see section 1102 of the Act), such authority has
not been exercised here. /16/


According to the Agency, the State overstated the difficulties of
"disaggregating" the allowable from the unallowable costs. Since the
States are responsible for determining the rates, the Agency argued, the
States can separate out the cost components which make up the rates. We
do not reach the issue here of how feasible it is to separate the costs
since that determination is unnecessary to our conclusion. We note,
however, that the States merely made a general allegation of the
difficulties involved, without supporting analysis and evidence. We
think that the parties here can cooperate to find a simple method of
determining what part of the rates relates to covered services.

Thus, we conclude that administrative convenience does not justify
FFP in a rate which includes unallowable costs.

VI. The Month After the Month of Admission

The States of Pennsylvania and New Jersey claimed the costs of
services rendered during the month after the month of admission to an
IMD. These States based their claims on the following statement,
concerning when a person becomes an inmate of a public institution:

A person shall not be considered an inmate of a public facility until
he has resided therein for a full calendar month. Federal matching is
available in Medicaid payments for services received by eligible persons
during the first and last partial months of residence in public
facilities. Section 4-50-20G., Medical Assistance Manual.

The States read this definition as meaning that an individual should
not be excluded from Medicaid coverage until he has attained "inmate"
status, which would not occur until the full calendar month of residence
following admission.

(35) The States' reading ignores the second sentence of the quoted
provision. That sentence provides federal matching only for the "first
and last partial months of residence" and does not refer to inmate
status. Moreover, the regulation at 42 CFR 435.1008(b) permits FFP in
expenditures for services to eligible individuals only "during the month
in which they become inmates of a public institution or patients in an
(IMD)." The individuals in question here would all become patients in an
IMD in the month of admission, under the applicable definitions at 42
CFR 435.1009.

Thus, we conclude that no FFP is available in services to individuals
between 22 and 64 in the month after the month of admission to an IMD.

VII. Other Matters

With regard to New York's retroactive claims for the period April
1971 to December 1973, the Agency also raised a question about whether
the State had demonstrated the eligibility of the individuals receiving
the services. We do not reach this issue here since it is unclear
whether the State will pursue its claim for that period for that portion
of the per diem rates attributable to covered services, given the
perceived difficulties in disaggregating the rates. If the State does
pursue its claim, we think that this eligibility dispute would benefit
from informal discussions between the parties about the method the State
used in formulating its claims and why the Agency finds that particular
method unacceptable in the Medicaid program.

In the latest appeal filed by Pennsylvania (Docket No. 83-90), part
of the disallowed amount ($866) was questioned because it related to
abortion costs. The Agency subsequently indicated that it would issue a
separate disallowance letter concerning the $866. If Pennsylvania
wishes to pursue its appeal with respect to that amount, it should
notify the Board.

(36) Conclusion

For the reasons stated above, we uphold the disallowances, subject to
reduction to the extent that the States can show the Agency what portion
of the rates were for the costs of services separately covered in the
State plans. The Agency should provide the States an opportunity to
make the requisite showing. The parties should cooperate to develop the
least burdensome method of doing this. If parties cannot agree on the
amount of any reduction they may return to the Board. (37)

*3*Appendix A *3*BREAKDOWN OF DISALLOWANCES Docket.
Date of Disallowance Letter Amount Appealed *3*DELAWARE 82-115
6/3/82 82-173 9/2/82 *3*NEW YORK 82-220
10/21/82 67, 82-230
11/3/82 23,5 83-24
1/?/83 3 83-43
2/16/83 3, *3*OHIO 82-215
10/4/82 1, *3*NEW JERSEY 82-234
11/3/82 82-236 2/1/82
4, 82-250 12/8/82 83-51
2/?/83 83-61 3/1/83 83-62
3/1/83


(38)

*3*PENNSYLVANIA 82-200 9/29/82
15, 83-90 4/4/83
1,6

(39) Appendix B

LIST OF DOCUMENTS

This appendix lists the documents discussed in Section III of our
decision and indicates where they can be found in the various parties'
submissions. We have numbered documents submitted by more than one
State in the order found in New Jersey's Appeal File since that file is
the most complete.

1. NJ Appeal File, Tab 1; NY Appeal File, Tab 1; DE Appeal File,
Tab A; PA Appeal File, Tab 1; OH Appeal File, Tab A.

2. NJ Appeal File, tab 2; NY Appeal File, Tab 2; PA Appeal File,
Tab 2.

3. NJ Appeal File, Tab 3; NY Appeal File, Tab 3; PA Appeal File,
Tab 3.

4. NJ Appeal File, Tab 4; NY Appeal File, Tab 4.

5. NJ Appeal File, Tab 5.

6. NJ Appeal File, Tab 6.

7. NJ Appeal File, Tab 7.

8. NJ Appeal File, Tab 8.

9. NJ Appeal File, Tab 9.

10. NJ Appeal File, Tab 10.

11. NJ Appeal File, Tab 11; NY Appeal File, Tab 5; DE Appeal File,
Tab B; PA Appeal File, Tab 4.

12. NJ Appeal File, Tab 12; NY Appeal File, Tab 8.

13. NJ Appeal File, Tab 13; NY Appeal File, Tab 6; PA Appeal File,
Tab 5.

14. NJ Appeal File, Tab 14; NY Appeal File, Tab 7; DE Appeal File,
Tab C; PA Appeal File, Tab 6; OH Appeal File, Tab C.

15. NJ Appeal File, Tab 15.

16. NJ Appeal File, Tab 16.

17. NJ appeal File, Tab 17.

(40) 18. NJ Appeal File, Tab 18.

19. NJ Appeal File, Tab 19.

20. NJ Appeal File, Tab 20; NY Appeal File, Tab 9; DE Appeal File,
Tab D; PA Appeal File, Tab 7; OH Appeal File, Tab D.

21. NJ Appeal File, Tab 21.

22. NJ Appeal File, Tab 22; NY Appeal File, Tab 15.

23. NJ Appeal File, Tab 23; NY Appeal File, Tab 10; PA Appeal
File, Tab 8.

24. NJ Appeal File, Tab 24; NY Appeal File, Tab 12; DE Appeal
File, Tab E; PA Appeal File, Tab 9.

25. NJ Appeal File, Tab 25; NY Appeal File, Tab 11; PA Appeal
File, Tab 10.

26. NJ Appeal File, Tab 26; NY Appeal File, Tab 14; DE Appeal
File, Tab F; PA Appeal File, Tab 12.

27. NJ Appeal File, Tab 27; NY Appeal File, Tab 13; PA Appeal
File, Tab 11.

28. NJ Apeal File, Tab 28; NY Appeal File, Tab 16; PA Appeal File,
Tab 13.

29. NJ Appeal File, Tab 29; NY Appeal File, Tab 17; PA Appeal
File, Tab 15.

30. NJ Appeal File, Tab 30; NY Appeal File, Tab 18; DE Appeal
File, Tab G; PA Appeal File; Tab 16.

31. NJ Appeal File, Tab 31; NY Appeal File, Tab 19; PA Appeal
File, Tab 17.

32. NJ Appeal File, Tab 32.

33. NJ Appeal File, Tab 33.

34. NJ Appeal File, Tab 34.

35. NY Appeal File, Tab 20.

(41) 36. PA Appeal File, Tab 14.

37. PA Appeal File, Tab 18.

38. PA Appeal File, Tab 19.

39. PA Appeal File, Tab 22.

40. PA Appeal File, Tab 23.

41. PA Appeal File, Tab 24.

42.OH Appeal File, Tab B.

43. OH Appeal File, Tab E.

44. OH Appeal File, Tab G.

45. OH Hearing Exhibit 2.

46. OH Hearing Exhibit 5. /1/ The States argued that, if their
interpretation is correct, it should make no difference that the
States did not submit all of their claims on a current basis, since they
were entitled to the funds. However, we think that the fact that none
of these States was submitting claims on a current basis prior to 1978
bears on the reasonableness of their argument that the claims were
allowable. Moreover, the fact that the States can retroactively
reconstruct a claim at the per diem rate for individuals in this age
group for those days in the month following their admission to an IMD
(i.e. after they had institutional status) points up the inherent
contradiction in making such claims based on a regulation promulgated
solely to avoid the administrative inconvenience of segregating bills by
date. /2/ Agency regulations interpret the term "inpatient psychiatric
hospital services" in section 1905(a)(16) broadly to mean services
provided by an accredited psychiatric facility or inpatient program in a
psychiatric facility. See, e.g., 42 CFR 441.151 (1981). Thus, we refer
to these services below as "inpatient psychiatric facility" services.
Subsection (h) of section 1905 indicates that, if an individual is
receiving such services when he becomes 21 years old, he may continue to
receive the services until age 22. /3/ The fact that these
requirements are somewhat different for the aged and children points up
a difficulty with the State's interpretation. If a state which has
opted to cover IMD services for both the aged and children admits a
patient who is age 42 to a psychiatric hospital, it would be unclear
which set of requirements had to be met during the partial month.
/4/ This regulation was originally codified at 45 CFR 206.10(a)(6), 36
Fed. Reg. 3864, February 27, 1971, and was recodified at 42 CFR
435.914(b) by 44 Fed. Reg. 17938, March 23, 1979. /5/ To the extent
that the issue here may be considered a matter of interpretation
of section 435.1008(b), we think that regulation should be read narrowly
since it was promulgated solely for administrative convenience and is an
exception to provisions excluding FFP in all services to individuals
between 22 and 64 in IMDs. /6/ We have included in Appendix B to this
decision a list of the documents discussed here and where they may be
found in the record. /7/ An intervening memorandum dated November 24,
1980, directed to the Regional Medicaid Director, Region II,
simply clarified that the policy for the last partial month was the same
as for the first partial month. Doc. 24. /8/ New Jersey,
submitted an affidavit (NJ Reply Brief, Atachment), stating that New
Jersey officials expended extensive man hours preparing their claims in
reliance on "internal federal documents," but this affidavit did not
specify what documents were received by New Jersey or when. Moreover,
the affidavit is ambiguous about whether the internal documents were
part of the information received from Region II representatives or
"information obtained through communication among the various States."
Affidavit, p. 2a. /9/ Similarly, we do not think that the
States could rely on memoranda from the Office of the General Counsel
(OGC) to Agency officials. Doc. 11 and 30; compare Doc. 31. Although
the States did submit copies of OGC memoranda suggesting that FFP would
be available in "institutional services" under the partial month
eligibility provisions, the States themselves appeared to recognize the
considerations against allowing states to rely on internal legal advice.
See, Tr., p. 10. /10/ New Jersey also submitted a copy of a
letter dated May 8, 1978, from a Supervisory Medicaid Specialist to an
official in the New Jersey Division of Medical Assistance. Doc. 5.
This letter mentions a discussion concerning FFP for the month an
otherwise eligible person enters a public institution, but does not
refer to IMDs or the question of covered services. /11/ In an
affadivit submitted by the Agency, the author of these letters indicated
that he had sent them because of legislative proposals which would have
foreclosed the claims if they were delayed any further, but that he
still considered the issue as unresolved. Respondent's Reply Brief, NJ,
Attachment. It is unclear, however, whether this was communicated to
the States. /12/ This last letter seems to have been prompted by
a memorandum, from the Agency's Associate Administrator for Policy to
All Regional Administrators, dated April 2, 1982, stating that the
memoranda from the Bureau of Program Policy (discussed above) seemed to
have indicated a position which is "legally unsupportable." Doc. 39.
/13/ New Jersey contended that it was advised orally by Agency staff
that a plan amendment was unnecessary, but the document cited by the
State in support is not definitive and indicates that the person
contacted was not a high level Agency official. See, Doc. 18.
/14/ We also note here that Ohio began claiming for inpatient services
in State psychiatric hospitals for the quarter ending June 30, 1980,
covering a period prior to the effective date of the amendment described
above. /15/ This case is also distinguishable from that recently
decided in Florida Department of Health and Rehabilitative Services,
Decision No. 414, April 29, 1983. There, the Board followed a policy
ruling applying an ambiguous regulation to specific facts, where the
ruling was sought by a Regional Commissioner from the head of the
agency, was communicated to the grantee in a letter lifting the deferral
of funds, and was consistent with the applicable statutory and
regulatory provisions.The Board found, however, that the letter was not
binding on another issue, since the statements in the letter on this
issue indicated only qualified approval. /16/ We note also that
this is not a situation where FFP in the full rate would result only in
extending FFP to cover otherwise unallowable but merely incidental
costs. The costs of the room and board alone would likely be
substantial. * New York has acknowledged that $574,843 of this amount is
a duplicate claim. Affidavit of John F. Shepardson, Jr. ** New York has
acknowledged that $5,437,278 of this amount is a duplicate claim.
Affidavit of John F. Shepardson, Jr. *** This case was originally
docketed as Docket No. 82-35, closed without prejudice at New Jersey's
request, and reopened as docket No. 82-236. New Jersey has acknowledged
that $2,958,815 of the original claim for $7,838,071 in FFP was
undocumented, and, thus, appealed only $4,879,256 of the claim. ****
$866 of this amount relates to abortion costs.

JULY 07, 1984