GAB Decision 623
February 11, 1985
Wisconsin Department of Health and Social Services;
Ford, Cecilia Sparks; Teitz, Alexander G. Settle, Norval D.
Docket No. 84-209
The Wisconsin Department of Health and Social Services (State)
appealed the disallowance by the Health Care Financing Administration
(HCFA, Agency) of $263,798 in federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act).
The disallowance was based on an audit report reviewing the State's
treatment of interest earned on provider refunds under the Medicaid
program. HCFA adopted the audit report's finding that $263,798 in
interest earned on provider refunds deposited in interest-bearing
accounts should be returned to HCFA by the State.
The major issue presented is whether a written agreement between the
State and HCFA establishing procedures for the drawing down of federal
funds for the Medicaid program allows the State to retain all the
interest earned on Medicaid funds placed in interest-bearing accounts,
notwithstanding a well-established policy that HCFA normally may recover
such funds. For the reasons discussed below, we fund that the agreement
does not provide exceptional grounds for permitting the State to keep
the interest. Accordingly, we uphold the disallowance.
Case Background
The HHS Office of Inspector General, Office of Audit, issued a report
entitled "Report on Audit of Interest Earned on Provider Refunds under
the Wisconsin Medical Assistance Program" (ACN 05-40231). The purpose
of the audit was to determine whether the federal share of interest
earned by the State on refunds received from providers under the
Medicaid program was used to reduce the amount claimed for FFP. The
audit covered the period October 1, 1979 through September 30, 1982.
The auditors determined that the State earned interest on Medicaid
funds from two sources: (1) a commercial bank account into which
Medicaid provider refunds were deposited by the State's fiscal agent for
the Medicaid program, (2) Electronic Data Systems Federal (EDSF); and
(2) the State of Wisconsin's general fund to which the monies were
periodically transferred. Audit Report, State's Appeal File, p. 107.
EDSF is responsible for obtaining refunds from providers under the
Medicaid program. On a daily basis, EDSF deposited all provider refunds
into a checking account (provider refund account) maintained at a
commercial bank. The commercial bank has a contract with the Wisconsin
State Treasurer, whereby interest will be earned each month based on the
average daily balance maintained in the account. During the audit
period, the State earned interest of $402,774 (FFP $233,463) on this
commercial account. Id.
EDSF also periodically issued checks to the State from the commercial
bank account. The State then sent the refund checks to the State
Treasurer's Office, which subsequently deposited the checks into the
State of Wisconsin's general fund. The refunded monies remained in the
general fund from four to nineteen days before adjustments were made to
the single letter of credit issued to the State of Wisconsin by the
federal government for Medicaid expenses. The deposited amounts in the
general fund were then invested by the State Treasurer's Office. During
the audit period, the State earned interest on the amounts in the
general fund of $52,774 (FFP $30,335). Id., p. 108.
The auditors concluded that the State should have used the $263,798
($233,463 + $30,335) in earned interest to reduce expenditures
applicable to the Medicaid program.
HCFA adopted the auditor's findings and disallowed $263,798 FFP for
interest earned on the federal share of refunds invested in
interest-bearing accounts.
Discussion
The question of HCFA's authority to recover the federal share of
interest earned by a state on invested Medicaid funds recovered from
providers was decided in HCFA's favor by the Board in North Carolina
Department of Human Resources, Decision No. 361, November 30, 1982. In
North Carolina the Board concluded that such interest was, in effect, an
overpayment within the meaning of section 1903(d)(2) of the Act.
Section 1903(d)(2) provides that the Secretary's quarterly payments to
the state for the Medicaid program shall be --
. . . reduced or increased to the extent of an overpayment or
underpayment which the Secretary determines was made under this section
to such State for any prior quarter. . . .
(3) In North Carolina, that state placed recoveries from Medicaid
providers in an interest-bearing account pending the ultimate
distribution of the recoveries to federal, state, and county
governments. Interest earned from this account was credited to the
state's general fund and not to the federal government for its share of
the account's funds. The appellant in North Carolina argued that
"interest" did not constitute an overpayment within the meaning of
section 1903(d) and that therefore interest could not be used to reduce
the State's claim on federal Medicaid funds.
The Board interpreted the term "overpayment" as used in section
1903(d) broadly, as encompassing the total federal/ state fiscal
relationship. The Board found that the Secretary's determination that a
state has claimed and received FFP in unallowable costs is tantamount to
a determination that the disallowed amount is an overpayment to be
adjusted under section 1903(d)(2). The Board also found that the
interest earned constituted an "applicable credit" within the meaning
of
45 CFR Part 74, Appendix C, Part I, C.3 (1979). /1/ That provision
states in pertinent part, that --
a. Applicable credits refer to those receipts or reductions of
expenditure-type transactions which offset or reduce expense items
allocable to grants as direct or indirect costs. Examples of such
transactions are: purchase discounts; rebates or allowances;
recoveries or indemnities on losses; sale of publications, equipment,
and scrap; income from personal or incidental services; and
adjustments of overpayments or erroneous charges.
b. Applicable credits may also arise when Federal funds are received
or are available from sources other than the grant program involved to
finance operations or capital items of the grantee. . . . These types
of credits should likewise be used to reduce related expenditures in
determining the rates or amounts applicable to a given grant.
The cost principles further provide that, to be allowable under a
grant program, costs must "(be) net of all applicable credits." 45
CFR
Part 74, Appendix C, Part I, C.1.g. (1979). The Board reasoned in North
Carolina that "(i)f the interest (4) constituted an applicable credit
under C.3., part of the State's claim -- equal to the federal share of
the interest -- for FFP under Title XIX would be unallowable under
C.1.g. because the interest was not deducted from the claim." p. 7. In
finding that the interest generated did constitute an applicable credit,
the Board looked to the source of the interest:
We are not persuaded by the argument that the interest was generated
by the State's investment activities rather than by the Medicaid
program. The Medicaid recoveries directly supplied capital for
investment; the interest in dispute would not have been earned if the
State had not recovered money from its Medicaid providers. . . .
Since the interest was attributable to the Medicaid program, it
should have been credited against program expenditures. pp. 8-9.
The Board's decision was subsequently upheld in State of North
Carolina v. Heckler, 584 F. Supp. 179 (E.D. N.C. 1984). See also, New
Jersey Department of Human Services, Decision No. 480, November 30,
1983, and New York State Department of Social Services, Decision No.
588, October 31, 1984.
The State did not challenge the Board's conclusions in North
Carolina. Nor did the State deny that it earned interest on the two
accounts in question. Rather, the State contended that the existence of
an agreement between the State of Wisconsin and HHS distinguished its
appeal from North Carolina and provided exceptional grounds for the
retention of all interest earned.The State argued further that it would
be inequitable for this agreement not to include the provider refund
account when the State suffered financially under other aspects of the
agreement.
I. Does the agreement allow the State to retain all interest earned on
provider refunds?
The agreement in question, entitled "Agreement Between Department of
Health and Human Services (HHS) and Recipient Organization (RO)
Establishing Check Clearance Patterns to Be Used for Federally Financed
Public Assistance Programs," had an effective date of August 18, 1980.
Medicaid was among the programs covered by this agreement. The
agreement detailed a delay of draw technique for the receipt of Medicaid
funding by the State from the federal government. The agreement
provided that the draw-down of federal funds by the State would be
delayed a given number of days based on the average daily balance in
bank accounts used to pay providers and administrative expenses for the
Medicaid program.
(5) While conceding that the subject of interest was not discussed in
the agreement, the State insisted that "the intent of the Agreement was
to establish procedures for the Title XIX program whereby neither party
would benefit from or suffer a loss because of differences between the
time that Federal funds were drawn down and provider checks were
cashed." State's Brief, p. 5 (emphasis in original). The State added,
while again conceding that it was not specifically mentioned in the
agreement, that it was intended that the delay of draw computations
would include the average daily balances in the provider refund account.
The State has not provided us with any evidence at all to support its
assertion that the agreement was specifically intended to allow the
State to retain all interest earned on deposited Medicaid funds, and
there is nothing on the face of the agreement which would reasonably
require this action. /2/ It appears to us that the State is attempting
to read something into the agreement that plainly is not there. The
State admitted that there is no reference to interest in the agreement.
State's Brief, p. 5. Nothing in the agreement strikes us as ambiguous.
It was clearly intended to deal strikes us as ambiguous. It was clearly
intended to deal with draw-down methods in federally funded programs and
nothing more.
We find it difficult to believe that HHS would knowingly enter into
an agreement where it was even implicitly suggested that a state would
be allowed to retain all interest - including the Federal share - earned
on deposited Medicaid funds. HHS, through its interpretation of section
1903(d)(2) of the Act and its use of OMB Circular A-87, has consistently
maintained a policy of not permitting grantees to retain interest earned
on grant funds. See also, 45 CFR 74.47(a). There is nothing in the
record to indicate that HHS intended to change this policy when it
executed the agreement.
Furthermore, as HCFA pointed out, the State's position is weakened by
the fact that the agreement was not effective until August 18, 1980,
while the auditors noted that the (6) State had begun retaining interest
at the start of the audit period, October 1979. Additionally, the
attachment to the agreement (State's Appeal File, p. 133) refers only to
the provider refund account. Thus, even if we were to accept the
State's interpretation of the agreement, interest earned on funds in the
State of Wisconsin's general fund would not be included in the
agreement.
The State has not presented any convincing evidence that the
agreement intended to allow the State to retain the interest earned on
Medicaid funds. On the basis of our past decisions, section 1903(d)(2)
of the Act, and OMB Circular A-87, we conclude that HCFA was entitled to
its share of any interest earned.
II. Does returning the federal share of the interest lead to an
inequitable treatment of the State?
The State contended that, if it is not allowed to retain all the
interest, it is being inequitably treated by HHS through the agreement.
The State reasoned that, as a result of the agreement, it has incurred
funancial disadvantages. According to the State, the operation of the
delay of draw agreement resulted in the State suffering delays in
obtaining the federal Medicaid funds to which it was entitled. The
State calculated that these delays gave rise to a credit of $95,916
owing to the State during the audit period, with the credit amount owed
to the State climbing to $645,339 by January 1984. Because of this, the
State argued that--
the most equitable outcome of this proceeding would be for the Board
to conclude that the August 1980 Agreement was indeed intended to cover
the State's Title XIX Provider Refund Account, even though the Agreement
is not explicit on this point. The interest attributable to Provider
Refund Account from October 1, 1979 to September 30, 1982 should be
offset against the net interest losses suffered by the State of
Wisconsin because of the delay of draw process.
State's Brief, p. 7.
Whether or not there are merits to the State's complaint, we find
this line of reasoning irrelevant to the issue before, the Board, the
retention of interest on Medicaid funds. Apparently because of delays
in receiving federal funds as a result of the agreement, the State was
temporaily required to use State funds to make up the federal
difference. Now the State wants to unilaterally take the interest on
the Medicaid funds, a subject not mentioned in the agreement, as an
offset to what it has perceived as a deficiency in the agreement.
(7) For the reasons outlined in the first part of our discussion, the
State is not entitled to do this. If the State has experienced problems
with the agreement, its remedy is to seek renegotiation of the agreement
with HHS. We note that paragraph F of the agreement provides:
Either HHS or the RO, at their discretion, may initiate action . . .
for revision of the agreement due to changes in check clearance
patterns. . . .
HCFA's policy on interest on Medicaid funds has been clearly stated.
The State can not be allowed to disregard that policy because of a
perceived inequity in its other dealings with HCFA.
Conclusion
For the reasons stated above, we sustain the disallowance in the
amount of $263,798. /1/ Appendix C was deleted from 45 CFR Part 74 on
May 22, 1980. 45 Fed. Reg. 34274. The provisions of Appendix C
had been adopted from Office of Management and Budget (OMB) Circular
A-87. OMB Circular A-87, formerly designated FMC 74-4, is made directly
applicable to states at 45 CFR 74.171. /2/ The State supplied an
affidavit from the State Finance Director for the State of Wisconsin, in
which he states that the agreement had the goal of establishing federal
cash draw-down practices to restrict any abuse of the federal treasury
by the State in administering the Medicaid program. State's Appeal
File, p. 135. While the affidavit does detail the financial
disadvantages the agreement has imposed on the State of Wisconsin, it
does not state that the State's retention of interest was contemplated
in the agreement.
MARCH 19, 1985