New York State Department of Social Services, DAB No. 521 (1984)

GAB Decision 521
Docket Nos. 83-170, 83-180

March 6, 1984

New York State Department of Social Services;
Ballard, Judith; Garrett, Donald Teitz, Alexander


The New York State Department of Social Services (State) appealed a
decision of the Health Care Financing Administration (HCFA, Agency)
disallowing claims for federal financial participation (FFP) for medical
assistance payments under Title XIX of the Social Security Act (the
Act). In Docket No. 83-170 the original amount in the appeal before us
was $48,535; /1/ in No. 83-180 the original amount was $40,746. The
bases for disallowance in both cases were related to untimely filing of
the claims. The disallowances were taken by the Agency because the
claims for expenditures were not filed within the applicable time limits
imposed by one or more of the following: Section 1132 of the Act; Pub.
L. 96-272; Pub. L. 97-92 and Pub. L. 97-276; and 45 CFR Part 95,
Subpart A. Based on our analysis below we uphold the disallowances in
both appeals, /2/ in amounts reduced by the State's partial withdrawals.


(2) Facts

83-170

The disallowance in this appeal, dated July 12, 1983, /3/ was broken
down into three segments:

1. $39,385 pertained to expenditures in FY 1980 and was disallowed
because claims were not filed within time limits of section 1132 of the
Act and 45 CFR Part 95, Subpart A (1981) (hereafter Part 95). The State
later withdrew its appeal of $6,235 of this amount.

2. $9,150 pertained to expenditures in FY 1979 and was disallowed
because claims were not filed by May 15, 1981, as required by Pub. L.
96-272, section 306(b), and Part 95. The State later withdrew its
appeal of $8,710 of this amount.

3. $12,596 related to FY 1978; this amount was allowed in a
separate claim and was not appealed.


(3) 83-180

The disallowance in this appeal, dated July 14, 1983, /4/ was broken
down as follows:

1. $32,779 pertaining to expenditures in FY 1980 was disallowed
because claims were not filed within time limits of section 1132 and
Part 95. The State later withdrew its appeal of $2,412 of this amount.

2. $7,427 pertaining to FY 1979 was disallowed because claims were
not filed by May 15, 1981, as required by Pub. L. 96-272, section 306(
b), and Part 95. The State later withdrew its appeal of this entire
amount.

3. $540 pertaining to FY 1978 was disallowed because claims were not
filed within one year of the fiscal year in which expenditure occurred,
as required by Pub. L. 97-92, Pub. L. 97-276, and Part 95. The State
later withdrew its appeal of this amount.


(4) Background

There was no statutory time limitation upon the filing of retroactive
claims by the states before Pub. L. 96-272, although attempts had been
made at limitation in appropriation bills.

Section 306(a) of Pub. L. 96-272 required claims by states for
expenditures during a calendar quarter under the various public
assistance programs to be filed "within the two year period which begins
on the first day of the calendar quarter immediately following such
calendar quarter," or payment would not be made. Subsection (a) stated
that it was not to be applied so as to deny payment with respect to any
expenditure "involving court-ordered retroactive payments or audit
exceptions, or adjustments to prior year costs." Subsection (b) provided
for the granting of a waiver by the Secretary for good cause.
Subsection (b)(1) stated that subsection (a) applied only to claims for
expenditures in quarters beginning on or after October 1, 1979.

For claims for expenditures prior to October 1, 1979, there were two
different provisions in the statute. If these claims were filed prior
to the date of enactment of 96-272 (June 17, 1980), there was no time
limitation for their payment. Section 306(b)(2). If claims for
expenditures prior to October 1, 1979 were not filed by June 18, 1980,
they had to be filed by January 1, 1981. Section (b)(3). The
exceptions for "adjustments to prior year costs or court-ordered
retroactive payments or audit exceptions" found in subsection (a) were
also provided for claims for pre-October 1, 1979 expenditures. Section
(b)(4). This same paragraph, (b)(4), authorized the Secretary to waive
the requirements of (b)(3) in the same manner as under section 1132(b).
/5/

The statutory provisions were implemented by 45 CFR Part 95, Subpart
A (1981). The regulatory provisions on time limits in general track the
statutory requirements.

(5) 45 CFR 95.7 provides that expenditures made after September 30,
1979 will be paid only if the State files a claim within two years after
the calendar quarter in which the expenditure was made.

45 CFR 95.10 provides that expenditures made before October 1, 1979
will be paid only if the State's claim is filed before January 1, 1981
(extended to May 15, 1981; see n.5).

The exceptions in the statute for claims for adjustment to prior year
costs, resulting from an audit exception, resulting from a court-ordered
retroactive payment, and for a good cause waiver, are spelled out in
section 95.19.

This regulation also includes definitions of "adjustment to prior
year costs" and "audit exception," which are of significance in this
appeal, in section 95.4. There is also a section (95.13) which states
in which quarter a state agency's expenditure for assistance payments is
considered made.

The terms "audit exceptions," "adjustment to prior year costs," and
"expenditure" are also defined in the State Medicaid Manual, issued by
HCFA, in Part 2 - State Organization, Transmittal No. 9, dated February
1983, attached to Respondent's Memorandum of Law as Exhibit 1.

I. ISSUES

The issues in both these appeals are the same:

A. DO THE DISALLOWED CLAIMS QUALIFY AS AUDIT EXCEPTIONS WITHIN THE
MEANING OF THE TIME LIMITATIONS?

B. WHEN DID THE EXENDITURES IN THE DISALLOWED CLAIMS OCCUR?

C. CAN THE TIME LIMITATIONS ON FILING CLAIMS BE APPLIED TO
EXPENDITURES MADE PRIOR TO ENACTMENT OF THE CLAIMING STATUTE?

II. ANALYSIS

It should be noted first that we are dealing here solely with
limitation provisions. We are not concerned with the validity of the
claims in question, since the Agency found that all the State's claims
were allowable. The only reason the claims were not paid was because,
according to the Agency, they were not filed timely within filing
requirements.

(6) A. Audit Exceptions

The statute provides that the time limitations do not apply to
expenditures involving audit exceptions. The pertinent language of the
statute is:

except that this subsection (1132(a)) shall not be applied so as to
deny payment with respect to any expenditure involving court-ordered
retroactive payments or audit exceptions, or adjustments to prior year
costs.

The State's position was that the claims at issue "were developed as
a result of the appellant's audit activities and had the effect of
adjusting prior year costs." Therefore, the filing restrictions of
section 1132 did not apply and the claims were timely filed.
Appellant's reply brief, p. 2.

The State went on to say that the Agency relied primarily on the
definitions of the terms "audit exception" and "adjustment to prior year
costs" in the State Medicaid Manual. The State argued that the
definitions of "audit exception" and "adjustment of prior year costs"
were not published in the Medicaid Manual until February 1983. Reply
brief, p. 4. The State contended that since this administrative
construction of statutory language "was not formulated contemporaneously
with the enactment of the statute," it should not be given deference by
the Board. /6/ Id.


If the Medicaid Manual provisions were material here, there would be
a more pertinent reason for not according them defeerence. The reason
is that they were not issued until several months after these claims
were filed on the Quarterly Expenditure Report for the quarter ended
March 31, 1982. If the Medicaid Manual interpretation of the statute
was something new and different, it could well be argued that it should
not affect claims filed long before it was promulgated, and before the
states had notice of it. /7/


It is unnecessary to consider such a possible argument, since, as we
discuss below, there is a regulation, issued before the claims were
filed, which defines both "audit exception" and "adjustment to prior
year costs."

(7) Appellant devotes a substantial part of its reply brief to its
contention that "the respondent has effectively circumvented the
rulemaking provisions of the Federal Administrative Procedure Act"; and
therefore "the State Medicaid Manual's definition of the term 'audit
exception' does not have the force and effect of law." Reply brief, pp.
2-3. The trouble with this argument is that it starts from a false
premise in the reply brief:

At the outset, it should be noted that Section 1132 of the Act does
not define the term "audit exception" nor has the respondent provided a
definition of that term in its regulations. . . .

Id., p. 2.

There is a specific definition of the term "audit exception" in a
regulation.

Sec. 95.4 Definitions

* * *

Audit exception means a proposed adjustment by the responsible
Federal agency to any expenditure claimed by a State by virtue of an
audit.

The regulation's definition of "audit exception" could on its face
apply to an "audit" conducted by the State, as well as one by an
Inspector General or by the General Accounting Office. However, the
vital issue is not who does the audit, but who accepts it. The
regulation requires a proposed adjustment "by the responsible federal
agency."

The regulation makes it clear that a proposed adjustment to claims
for prior year costs based on a state audit is not enough to constitute
an "audit exception." The federal government--the responsible federal
agency--must propose to make an adjustment in the claims for prior
years. Only then does the statute of limitations not run on the time
for filing or amending such claims.

The State was of course not happy with such a requirement. It
contended that such an interpretation would render the "audit exception"
and "adjustment to prior year costs" exemptions meaningless, "since the
Federal government does not normally conduct or adopt audits with a view
to adding to its financial burden under Title XIX." Reply brief, p. 7.
This cynical attitude assumes that federal auditors, and those federal
(8) officials who review audits, will refuse to process an audit if it
means that the final result will be that the State will get more money
from the federal government than the records originally indicated.

The best approach to this question is to look at the purpose behind
the limitation statute, Pub. L. 96-272. The purpose of this legislation
was not on its face to save federal money by depriving the states of FFP
in valid claims for expenditures. The purpose was to prevent the states
from coming in many years after expenditures were made and claiming FFP,
or transferring claims for FFP from one program to another, without any
time limit. Such delayed claiming made it difficult for the Department
of Health and Human Services to plan its budget; claims for millions of
dollars for expenditures in years long gone by could turn up at any
time.

This was brought out in Connecticut v. Schweiker, 684 F.2d 979, 982
(D.C. Cir. 1982), cert. denied, 103 S. Ct. 1197 (1983):

Until 1980, the Social Security Act contained no time limits for
submitting claims for prior-period expenditures. The absence of any
time limits apparently made it more difficult for HHS to plan and
administer the budget for the various Social Security Act programs. . .
.

The exceptions (or exemptions as the State calls them) to the time
limitations were intended to cover only extreme situations. They were
not intended to cover a routine situation where a state simply did not
get around to getting its data together in time to file a claim within
the statutory requirements. The exceptions are to take care of those
cases where it would be patently unfair to a state to outlaw its claims
merely because of the passage of time.

This principle applies to an "adjustment to prior year costs." This
is not defined in the statute but is defined in the regulation (45 CFR
95.4).

Adjustment to prior year costs means an adjustment in the amount of a
partiular cost item that was previously claimed under an interim rate
concept and for which it is later determined that the cost is greater or
less than that originally claimed.

The classic example of this exception is in paying providers of
medical services on a retrospective rate reimbursement system. A (9)
facility has an "interim" rate set for payment based on the prior year's
costs. During the year the cost of an item or items goes up sharply,
whether due to inflation or because of a reason peculiar to this cost
item. At the end of the year adjustments of the rate are in order,
based on changes in the cost of the particular items during the time
period. However, it would be grossly unfair to the state not to allow
it to claim for FFP based on the retrospective rate because it was now
too late under the time limitation statute. In many cases two years
might well elapse after the original expenditure before the rate was
finally adjusted. Hence, the exception in the statute and regulation to
prevent manifest injustice. /8/


The same rationale applies to the exemption for an "audit exception."
For example, a state files its claim for expenditures when the two year
limitation is almost up. Then months later an audit is done, by state
auditors, federal auditors, or "independent" auditors. This shows
clearly that due to no fault of the state, an error was made in
claiming, so that much more FFP should have been claimed than actually
was claimed. If this audit is accepted by the responsible federal
agency, then the state may recover FFP in the underclaim, just as the
federal agency can recover back FFP if there is an overclaim. The mere
lapse of time will not bar a state from recovering amounts found due it
if all the other statutory and regulatory requirements are met.

On the other hand, merely having a state audit which on its face
shows that the state has underclaimed is not enough. As the Agency
points out, this interpretation by the State would be contrary to the
statutory requirements and intent "because it would permit the state at
any time to perform audits and adjust prior year claims upward
accordingly." Respondent's Memorandum of Law, p. 13.

This Board is bound by all applicable laws and regulations. 45 CFR
16.14. The State has not shown us any reason why the Agency
interpretation of the statutory provisions on audit exceptions and
adjustment to prior year costs in the regulation is not reasonable and
we therefore uphold it.

(10) B. When an expenditure is made

Pub. L. 96-272 sets various time limitations for filing claims for an
"expenditure" made in certain calendar quarters. The second basis for
the State's appeals was that the "expenditures" were not "made" until
they were reclassified.

The claims in dispute were developed as a result of audits which
reclassified certain cost items as being eligible for federal funding
under Title XIX. Since cost items were incurred without regard to the
availability of Federal funding, they do not initially represent
expenditures incurred under Title XIX. Simply stated, no such
expenditures could have been made until the cost items were reclassified
and Federal funding under Title XIX was claimed. . . .

Appellant's Reply Brief, p. 7.

The Agency relied primarily on the definitions in the State Medicaid
Manual for determining when an "expenditure" was made. Section 2560.4G,
Agency Exhibit 1. The State admitted that under none of the definitions
in the Medicaid Manual would an expenditure occur "when an item is
reclassified from non-Federal participating to Federal participating."
Reply Brief, p. 8. However, as it argued with the "audit exception"
definition, the State contended the definitions in the Medicaid Manual
did not have the force and effect of law, since they were not
promulgated as regulations. Moreover, the definitions were unreasonable
under the circumstances in these appeals, according to the State.

If it were necessary to consider the definitions in the Medicaid
Manual of when an expenditure is made, we might well have the same
problem as with the Manual's definition of an audit exception. If the
definition in the Medicaid Manual actually added something new and
different from the statute and the regulation, then there would be the
question of notice to the state of a manual definition put out long
after the filing of the claims. But, as with the audit exception, we do
not find it necessary to go beyond the regulation. Section 95.13 of
Part 95 is entitled "In which quarter we consider an expenditure made."
Subsection (b) states that:

We consider a State agency's expenditure for services under title I .
. . or XIX to have been made in the quarter in which any State agency
made a payment to the service provider.

(11) Thus the time of the expenditure is when the payment is made to
the service provider. A reclassification from non-federal paticipating
to federal participating does not change the time when the money is paid
to the provider; that is when the expenditure occurs.

This is brought out by considering other definitions in the same
regulation. Section 95.4 defines "claim" as "a request for Federal
financial participation." The meaning of "Federal financial
participation" is the "Federal government's share of an expenditure made
by a State agency under any of the programs listed in Sec. 95.1."

Therefore, in these appeals the "claim" which must be filed within
certain time limitations is a request for the federal government's share
of an expenditure made by the State agency. The expenditure occurs when
the provider is paid for services. It is perhaps unfortunate that at
the time payment was made by the State it did not realize that FFP might
be available in these expenditures, which it then thought were
non-federal participating. The expenditures were made at a fixed time.
The time allowed for filing claims for the expenditures runs from that
time. The State had until the statutory period (ordinarily two years)
had run in which to reclassify and claim for the expenditures, but
reclassification does not change the expenditure date.

C. Retroactivity

The third argument of the State for reversing the disallowances here
was that the time limitation statutes cannot be given "retroactive"
effect.

Section 1132 of the Social Security Act and P.L. 96-272 cannot be
given effect retroactively so as to bar payment of claims based upon
expenditures incurred prior to June 17, 1980, the date the provisions
were enacted.

Appellant's Brief, p. 8.

The State first argued that Congress never intended to have the
statute apply to claims for expenditures made before the statute was
enacted, and cited from Senate Report No. 96-336. Id. However, as with
the State's argument that no regulation defined "audit exception" (see
A., above), the State simply has its facts wrong. As the Respondent's
Memorandum of law points out (p. 18):

(12) Unfortunately, the language relied upon by appellant cannot be
cited as authoritative legislative history because the version of the
bill enacted into law was different from that upon which the Senate
Report commented. . . .

The Agency quotes from Connecticut v. Schweiker, supra, at 684 F.2d
991, to show that Pub. L. 96-272 was indeed amended in the Senate before
final passage to provide a transition period for claims for past
expenditures which had not been filed at the time the bill was passed.
This transition period applied to expenditures made before enactment.

In its reply brief, the State shifted its argument to say that the
"cited legislative history can, most accurately, be described as
conflicting and inconclusive." p. 10. On this particular point it is
nothing of the sort. It is clear that the Finance Committee had wanted
the limitations to apply only to expenditures made after the Act was
passed. However, the law was amended to provide for limitations on
claims for expenditures made before passage, and for which claims had
not been filed by the date of passage.

The State then argued that any other interpretation but its own
"would transform Section 1132 and Public Law 96-272 into ex post facto
laws" in violation of the Constitution. Id. The constitutional
provision against ex post facto laws has long been held to apply only to
criminal laws. See, Harisiades v. Shaugnessy, 342 U.S. 580, 594-95
(1952).

Apart from that, the statute is not truly a retroactive one. Even if
it were, it might well pass muster, but it does not have that effect.
True it applied to claims for expenditures made before it was enacted,
but there was time allowed for the states to file their claims for these
expenditures after passage of the statute before they became
time-barred. If an expenditure was made after September 30, 1979, the
State had two years after the quarter in which the expenditure was made
to file. Thus, even if the expenditure was made October 1, 1979, it
could be claimed until December 31, 1981 (two years from the end of the
quarter in which made), more than eighteen months after passage of the
statute. If the expenditure was made before October 1, 1979, the claim
had to be filed by May 15, 1981. So even for these expenditures the
State had almost eleven months after enactment to file its claim,
namely, from June 17, 1980 to May 15, 1981. This is entirely different
from passing a law which when enacted has the effect of barring any
claim for expenditures made before its passage. The time limitations in
Pub. L. 97-262 are not in (13) fact retroactive. Clearly the statutory
limitations can be given effect as written.

CONCLUSION

We uphold the disallowances in both Docket No. 83-170 and Docket No.
83-180. In 83-170 the amount, as reduced by the State's partial
withdrawal, is $33,590; in 83-180 the reduced amount is $30,367. /1/
All amounts referred to in this decision are the amounts of FFP
claimed. /2/ The two appeals, 83-170 and 83-180, were joined
because of common questions of fact and law. The parties did not
object; in fact, they briefed the two appeals jointly prior to the
Board's formal joinder order. The amount at issue in these appeals was
substantially reduced when the State withdrew its appeal as to certain
amounts in each case being duplicative of other claims, which had been
separately disallowed. The State originally requested these withdrawals
on February 24, 1984. On March 5, 1984, the Agency in a telephone
conference stated, it had no objection to the withdrawal of these
amounts from these appeals, but without any commitment as to their
allowability in another appeal. /3/ The Agency originally
deferred claims totalling $84,161 representing various local district
claims adjusting prior period expenditures. In accordance with 45 CFR
201.15, the State was requested to submit documentation necessary to
determine the allowability of the claims. The Agency notified the State
that the documentation reviewed adequately supported both the amount and
the periods claimed. However, claims totalling $61,131 would not be
paid, based on 45 CFR Part 95 and "the appropriations restrictions." The
State then appealed to this Board, claiming that the suspension of
payment had the same effect as a disallowance. (Board Docket No. 83-2)
The Board, in its acknowledgment of the appeal, requested the Agency to
state its position regarding the Board's jurisdiction. The Agency's
brief took the position that the Board lacked jurisdiction of the
appeal. The State was then given an opportunity to reply on this issue.
Before the Board ruled on the jurisdictional issue, the Agency issued a
disallowance. The State then withdrew its appeal from the suspension
and appealed the disallowance, thereby mooting out the jurisdictional
issue. /4/ The Agency originally deferred claims totalling
$249,666 representing various local district claims adjusting prior
period expenditures. The State was requested to submit documentation
necessary to determine the allowability of the claims. The Agency
notified the State by letter dated November 19, 1982 that the
documentation submitted for review verified both the claimed amounts and
the periods of the claims; the expenditures were determined to be
allowable. However, claims totalling $40,746 would not be paid, based
on 45 CFR Part 95 and the "appropriations restrictions." The State then
appealed to this Board, claiming that the suspension of payment had the
same effect as a disallowance; this appeal was docketed as 82-254. The
Agency, in response to the Board's request, stated its position that the
Board lacked jurisdiction. The State was given an opportunity to brief
this issue in reply, but before the Board ruled, the Agency issued a
disallowance. The State then withdrew its appeal from the suspension
and appealed the disallowance, thereby mooting out the jurisdictional
issue. /5/ It was under this authority that the January 1, 1981
deadline in section (b)(3) was extended to May 15, 1981. See, 46 Fed.
Reg. 3528, January 15, 1981. Subsection (a) of section 306 was codified
as section 1132 of the Social Security Act; subsection (b) was never
codified. Reference is sometimes made interchangeably to section 1132
of the Act and section 306 of Pub. L. 96-272. n6 The State Medicaid
Manual, Transmittal No. 9, although dated February 1983, states it is a
"Clarification - Effective Date Not Applicable." If it incorporated any
change of substance such a self-serving preamble would be of doubtful
weight. /6/ The State Medicaid Manual, Transmittal No. 9,
although dated February 1983, states it is a "Clarification - Effective
Date Not Applicable." If it incorporated any change of substance such a
self-serving preamble would be of doubtful weight. /7/ The
preamble to the issuance of the final rule of 45 CFR Part 95 states that
"It has been our experience that in these areas (claims for services or
medical assistance based on interim rates) subsequent adjustments are
unforeseen and unavoidable." 46 Fed. Reg. 3527, 3528, January 15, 1981.

NOVEMBER 14, 1984