Maine Department of Human Services, DAB No. 712 (1985)

GAB Decision 712

December 11, 1985

Maine Department of Human Services; 
Garrett, Donald F.; Settle, Norval D.  Teitz, Alexander G.
Docket No. 84-243;  ACN 01-15026


The Maine Department of Human Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $197,588 in federal financial participation (FFP) claimed for
expenditures for the survey and certification of long-term care
facilities pursuant to section 1903(a)(4) of the Social Security Act
(Act) for the period October 1, 1978 through September 30, 1979.

The Agency took the disallowance because it found that (1) 50% of the
costs for the joint Medicaid certification-state licensure survey, and
(2) 33 1/3% of the costs for the joint Medicare certification-Medicaid
certification-state licensure survey should have been allocated to the
State's licensure program. /1/ The Agency found that the allocation was
appropriate because the survey data were used for state licensure
purposes.


For the reasons discussed below, we uphold the Agency's disallowance in
full.(2)

Background

In Maine the Department of Human Services was the single State agency
for Medicaid under section 1902(a) (5) of the Act.  The single State
agency had to use the State survey agency designated pursuant to section
1864(a) of the Act to determine whether SNFs and intermediate care
facilities (ICFs) qualified for participation in the Medicaid program
under section 1902(a)(33)(B).  In Maine this State survey agency was the
Division of Licensing and Certification.  Section 1903( a)(4) of the Act
provides for payment of Medicaid funds for compensation or training of
personnel responsible for inspecting facilities providing long-term care
to recipients of medical assistance to determine whether such
institutions comply with health and safety standards applicable to such
institutions under the Act.

The Disallowance

The Ritchey Audit Report covered the period July 1, 1973 through
September 30, 1979.  The auditors noted that although the State
conducted joint federal certification and state licensure inspections of
health care providers, the State had not allocated any portion of the
survey costs to the state licensure program.  The auditors concluded
that because the State received benefit to its licensure program from
the joint surveys, the State should bear an appropriate share of the
survey costs and not allocate such costs exclusively to the Medicaid
program.

After considering licensure requirements and certification standards and
the manner in which the surveys were conducted, the auditors recommended
a disallowance of $818,824 in Medicaid costs that should have been
allocated to the State licensure program for the period from July 1,
1973 through September 30, 1979.

The Agency declined to follow the disallowance recommendation for the
time periods before fiscal year 1979 (October 1, 1978 through September
30, 1979) because "prior to 1979 there apparently was no clear policy as
to the State sharing of Title XIX survey costs." The Agency did follow
the recommendation of the auditors with regard to fiscal year 1979 and
disallowed a total of $197,588 in FFP.

State's Position

The State's position was that:

   * There was nothing in the Act, regulations, or Agency policy of
which the State had notice by fiscal year(3) 1979 that required the
State to pay a portion of the costs of a survey conducted for the
purpose of verifying Medicaid certification.

   * The Act was amended in 1972 to allow FFP for 100% of personnel
costs of surveys for Medicaid certification.

   * 100% participation meant that no portion of the survey costs should
be allocated to the State licensure program and that any use the State
might put the information to would be purely incidental to the Medicaid
certification survey.

   * Even if the Agency had had statutory authority to formulate
regualtions requiring allocation of survey costs to the State, the
Agency never formulated such regulations.

   * Even if there were a statutory or regulatory basis allowing cost
allocation, the Agency did not have such a policy before or during
fiscal year 1979.

   * Even if the Agency had had a cost allocation policy supporting the
disallowance, the Agency did not provide the State with adequate notice
of the policy for it to be enforceable in fiscal year 1979.

Agency's position

The Agency's position was that:

   * The cost allocation and disallowance was consistent with the Act,
regulations, and Agency policy.

   * The 1972 amendments to the Act merely raised the rate of FFP
available for survey costs from 75% to 100%.

   * The change in FFP percentage had nothing to do with allocation.

   * The State's obligation was to allocate survey costs to the State
licensure program in relation to the "benefit" provided to the state
program.

   * Because the State used the survey information, it was required to
pay a share of the costs of a joint Medicaid certification-state
licensure survey and a joint Medicare certification-Medicaid
certification-state licensure survey.(4)

I THE STATUE.

The State argued that the statute precludes the proposed disallowance
since it requires "100% FFP for costs attributable to the compensation
and training of inspection personnel.  " /2/ (Appellant's brief, p. 11)
The statue does say that, but that is not all the statute says.  The
statute says that 100% FFP is available for costs incurred attributable
to compensation and training of personnel responsible for inspecting
institutions providing long-term care "to determine whether such
institutions comply with health or safety standards applicable to such
institutions under this (Social Security) Act." The statute does not say
that 100% FFP is available for all costs of inspection personnel; it
applies only for costs of inspection to determine if the institutions
comply with the requirements for Medicaid certification.


That is not all State inspection personnel do.  They also inspect the
institutions to see if they meet the requirements for receiving and
retaining a license under State law, since certification of an
institution for Medicaid has the prerequisite of a valid license under
local state law.  (42 CFR 442.201 and 442.251)

We agree with the authorities cited by the State that we look first to
the language of a statute, and only if that is ambiguous do we look
elsewhere.  The issue here is not the clarity of the statute;  the
problem is that the language of the statute is silent on the situation
before us.  The clear language of the statute tells us that 100% FFP is
available for costs of inspection of long-term care facilities for
Medicaid certification.  It does not tell us what percentage of FFP is
available for inspection of these facilities when the same inspection
meets the requirements of State licensure as well as Medicaid
certification.  The statute is not ambiguous;  it simply does not cover
the situation before us.(5)

II.  THE REGULATION

Section 250.120(d) (1974) of Volume 45 of the Code of Federal
Regulations provided that with regard to survey costs:

   Federal financial participation at 100 percent is available . . .
for the compensation and training costs of personnel of the State
licensing agency . . . who are responsible for inspecting public or
private skilled nursing or intermediate care facilities to determine
whether such facilities comply with health or safety standards
applicable to them under the act. . . .

   Such Federal financial participation is available only for those
expenditures of the State licensing agency which are not attributable to
the overall cost of meeting responsibilities under State law and
regulations for establishing and maintaining standards but which are
necessary and proper for carrying out these regulations.

The regulation was recodified as 42 CFR 431.610(h)(1) and (2) in 1978
without substantive change in policy.

The regulation sheds no further light on the problem.  All it says is
what no one disputes.  FFP is available in expenditures of the survey
agency to carry out inspections for certification for Medicaid;  FFP is
not available for expenditures "attributable to the overall cost of
meeting responsibilities under State law and regulations for
establishing and maintaining standards." Again the language is clear,
but it does not say what happens when the requirements for Medicaid
certification and state licensure are intentionally indentical, or
practically so.  If the same inspectors go out and examine at the same
time for the same requirements, what happens then?  Does the federal
government pay 100%, on the ground that the inspection is required for
Medicaid certification?  Does the state pay 100% because it would have
to inspect for state licensure, even if there were no Medicaid
requirements?  Or is the answer somewhere in between, based on the
benefit the state receives from having the inspection for Medicaid
certification also take care of state licensure?

III.  PRIOR BOARD DECISIONS.

Two Board decisions have addressed this problem:  Pennsylvania
Department of Public Welfare, Decision No. 277, March 31, 1982, and
Nebraska Department of Health, Decision No. 373, December 30, 1982. (6)

The State argues strenously that this case is bound by our decision in
Pennsylvania, so we examine that case first.  There the requirements for
Medicaid certification and State licensure were substantially identical,
as the requirements are here.  In Pennsylvania we found that it was
Agency policy for the period of that disallowance (which was prior to
the disallowance period here) to pay 100% of the cost of inspection.
This was based on the reply to a Policy Interpretation Question (PIQ
75-148), which stated that 100% FFP was available in the situation where
the requirements were identical.  We referred also to the correspondence
between the State and Regional officials which referred specifically to
the PIQ, which was based on a California situation.  However, we did not
limit our reliance on the PIQ to the tie-in with correspondence to the
specific state.  We stated categorically that the PIQ response "was an
official Agency interpretation binding on the Agency in all Regions."
(p. 12)

The first question we face is why PIQ 75-148 should not apply to the
present situation.  We addressed this issue in Nebraska, where we found
the Agency's allocation of inspection costs to be reasonable.  We
distinguished Pennsylvania, saying that it was not relevant for two
reasons.  The first was that it was based on a PIQ and on certain
correspondence between federal and state officials in Region III, and
was for a prior period of time, namely 1976-1978.  The second and more
important reason, was that the Agency was not locked into the
interpretation in PIQ 75-148.  (Nebraska, n. 7) We pointed to the
specific language in Pennsylvania that the Agency could have interpreted
the regulation "to require a 50% allocation to state licensure and 50%
to Medicaid inspection." (Pennsylvania, p. 15, quoted in Nebraska, n. 7)

The obvious next inquiry is if the Agency could have interpreted the
regulation to provide for an allocation of other than 100%, did it do
so, and if it did, when and how?  If the Agency changed its
interpretation, was it required to give notice to the State?  If it was,
did it give notice and was the notice adequate?

We did not reach the notice issue in Nebraska because it was undisputed
"that the State was put on notice that it would at least have to suggest
some allocation of inspection costs." (p. 11)

The State argued from a casual statement by us in Pennsylvania that PIQ
75-148 was still in effect in November 1978, which was well into fiscal
year 1979.  We stated that it was "significant" that PIQ was
"specifically listed" in Health Care Financing Administration Rulings,
Publication No. MBR-1 dated 11-78.  (Pennsylvania, p. 13) This was
clearly not necessary for our decision on the disallowance, which ran
only(7) through March 1978.  We did not say that MBR-1 showed that PIQ
75-148 was in effect unchanged in November 1978.  In fact, an
examination of MBR-1 shows that PIQ 75-148 appeared in a "numeric
listing" of policy interpretations "responded to" by the Medicaid
Bureau.  (p. 169) The listing was nothing more than it purported to be,
namely, a listing of all the PIQs issued during a period of time,
beginning with number 23 in 1974 through number 6 in 1977.  There was
nothing in the listing which indicated whether a particular PIQ was in
effect, or had been rescinded, withdrawn, or modified.  The listing of
PIQ 75-148 in MBR-1 was, therefore, no evidence that the policy in it
had not been changed before November 1978, when MBR-1 was issued.

We examine next the various documents in which the Agency claims it gave
notice of its changed policy to the State.  We find that the State did
receive such notice, and that the notice met legal requirements.

IV.  NOTICE TO THE STATE.

   A.  The State Operations Manual and the Memorandum to Regional
Directors.

The Agency referred us to sections of the State Operations Manual (SOM)
put out by the Bureau of Health Insurance, in Appellant's Exhibits 2 and
3.  These do say what the Agency say they do, that States were advised
that cost-sharing was expected where there were joint Medicare
certification and State licensure inspections.  (Respondent's brief, p.
9) The cited sections were dated August 1968 and May 1969 and have no
direct reference to inspections for Medicaid, as distinguished from
Medicare.  (Presumably, even if they did apply, they would be superseded
by PIQ 75-148.) However, the SOM provisions have some relevance in
considering the adequacy of the notice of policy change given the State.
When the State was told in April 1978 (Appellant's Exhibit 26, p. 2)
that the budget limitations and control procedures with which they were
familiar from the Medicare program would "apply to all certification
costs for the remainder of Fiscal Year 1978 and beyond," the State was
alerted to the need to refer to the cost-sharing provisions in the SOM.

Similarly, the memorandum dated January 30, 1978 to Regional Directors
instructing them to inform the states that they would be responsible for
an "appropriate share of effort for long term care institution surveys"
(Appellant's Exhibit 24) standing alone is not decisive.  A state can of
course not be bound by an internal Agency memorandum.  The memorandum
does, however, show that the letters from the Regional Office to the
State of Maine (referred to hereafter) were not an arbitrary development
by the Region on its own.  The Region took Agency(8) policy, as it
perceived it from the memorandum, and notified the State accordingly.
In fact, much of the language in the April 11 letter is contained in a
suggested form of notice attached to the memorandum to all the Regional
Directors. /3/


   B.  The letters to the State.

The Agency relied for notice to Maine on three letters written in 1978
by the Acting Regional Director of the Region I Health Standards Quality
Bureau Office to the Commissioner of the Maine Department of Health and
Welfare (now Human Services).  The Agency made a general argument, as to
all three letters, that since the State was told the SOM would be used
in preparing the Medicaid (as well as the Medicare) budget, it had to
realize that inspection activities for Medicaid certification would then
be subject to the same cost-sharing requirements required for Medicare
since 1969.

It is arguable that standing alone the general statements pertaining to
budget preparation were not sufficient notice to the State.  We
therefore examine the letters separately to see if there was any more
specific notice, which read with the general statements, was certainly
sufficient notice.

The first letter is dated April 11, 1978 (Appellant's Exhibit 26). This
stated clearly that "(Since) a portion of the survey and certification
costs for Medicaid will continue to be borne by the State," a copy of
the budget request and activity plan should be submitted to the State
Medicaid agency for review and approval.  The letter then has this
language:

   In preparing your budget, you should note that there is no rigid
national policy governing the allocation of multi-program certification
costs between Fereral and State programs.  The porportions of these
costs vary depending on whether each particular category of certified
institution is subject to State inspection program and whether the
survey effort required by such inspection programs is greater or less
than that demanded under Federal certification program.  There is no
prenegotiated(9) cost allocation plan to address this.  We expect that
the appropriate State share of effort for long term care surveys will be
consistently reported on surveyors' time records to ensure the equitable
distribution of these costs between Federal and State programs. . . .

Undoubtedly this letter could have been more specific.  The use of the
words "greater or less" to compare the survey effort under State
inspection programs with that under the federal Medicaid program does
leave open the situation where the survey effort is the same under State
licensure and Medicaid certification programs.  However, the
introductory sentence at the beginning of the paragraph is clear, that
"a portion of the survey and certification costs for Medicaid will
continue to be borne by the State." We find that this letter
notification to the State that the State will not automatically receive
100% FFP for inspections that serve both State licensure and Medicaid
certification, even though it does not say what the percentage will be.
In fact, the State admitted that this letter indicated that for fiscal
year 1979 the Agency contemplated some allocation.  (See below, under
"Adequate Notice".)

The second letter is dated less than a month later on May 10, 1978.
(Appellant's Exhibit 27) Again there is the general caveat that the
"budget limitations and control procedures" with which the State was
familiar from the Medicare program would now apply to all certification
costs.

There is, in addition, in this letter language which notifies the State
unmistakably that from that time on it would have to share in Medicaid
inspection costs.  Again, no percentage is given, and no clear guidlines
for determining the allocation appear.  But the notice that there must
be some cost sharing is unambiguous:

   We expect that the appropriate State share of effort for long term
care surveys will be consistently reported on surveyor's time records if
these institutions are licensed by the State.  Survey activities that
are an essential part of State licensure programs cannot be asumed 100
percent Federally reimbursable on the grounds "incidenthat licensure
usage of the survey reports is "incidental".

The third letter in this series is dated September 27, 1978.
(Appellant's Exhibit 29) Standing alone, we would not consider it as
giving the State notice of a change from 100%(10) FFP.  Again, the State
is referred to the SOM.  The pertinent sentence is:

   We particularly call your attention to the requirement that . . .
licensure activities not be charged to the Federal programs.

Standing alone, the State has a plausible argument that the words
"licensure activities" could refer to licensing of institutions which
are not in the Medicaid program.  The State is cautioned against
charging either Medicaid or Medicare with the cost of inspecting these
facilities for State licensure only.

Read in context of the earlier two, however, and taking the record as a
whole, we find that the State was notified before fiscal year 1979 began
that, beginning with that year, it would have to charge to the State
some of the cost of inspecting facilities for State licensure and
Medicaid certification, even if performed at the same time under
identical requirements.

The State argued that advice, sought by the Region I Audit Director from
the Regional Attorney, indicated that it was the Agency's policy to pay
100% of the costs for Medicaid certification even if a State utilized
some of the information to determine if state licensure standards had
been met.  However, the Regional Attorney's letter (Appellant's Exhibit
21) relied upon by the State was dated February 1, 1977.  While it may
or may not have stated Agency policy at the time, the letter was written
over a year before the three letters examined above.

As stated above, we find that the three letters as a group provided the
State with sufficient notice of the Agency's intent to allocate a
portion of the joint survey costs to the State licensure program.
Therefore, the Regional Attorney's letter cannot be deemed to state
Agency policy for the time period involved in this appeal.

V.  Notice and the Administrative Procedure Act.

The State contended that the Agency's "cost-sharing" policy is legally
unenforceable, since the policy was not promulgated under the notice and
comment rule making procedures of the Administrative Procedure Act
(APA), particularly 5 U.S.C. 553.

The Agency's first answer to this contention was that the APA has an
exception for "benefits".  Although the Secretary waived this exception
in 1971, it continues to apply to rules issued prior to that date.
Since the SOM provisions were issued in 1968, they were not in violation
of the requirement (11) when issued, and so continued in effect, argued
the Agency.  We must reject this argument, since the SOM provisions,
even if applicable to Medicaid, were modified by PIQ 75-148.

The second reason given by the Agency for not requiring notice and
comment rule making was better grounded.  The statute has an exception
for "interpretive rules" or general statements of policy.  We believe
the cost-sharing requirements came under the "interpretive rule"
exception.  As we indicated in Nebraska, in referring to the SOM
requirements, interpretive rules are "statements interpreting statutes
and regulations." Although they do not have the force of law, if an
interpretation by a federal agency of a regulation it is charged with
enforcing is a reasonable one, and the State had notice of it, then it
will be upheld by the Board.  (Nebraska, p. 18) The correspondence
between the Agency and the State referred to above was similarly an
interpretation of the regulation as the Agency thought it should be
applied in the future.  It may be noted that PIQ 75-148, on which the
State relied, was itself an interpretive rule which was not considered
to require notice and comment before issuance.

VI.  Adequate Notice

Assuming that the State was given notice of the "cost-sharing" policy to
be in effect for 1979, and this was not subject to the notice of
proposed rule making requirements of the APA, the State still argued
that it was not given "adequate" notice of the policy.  The State argued
that notiication of a policy change was normally given in some formal
transmission, such as State Agency letters, and only in that way could
the State be notified of the changed policy. /4/


In any event, the State admitted that the three letters put the State on
notice that some allocation was required.  In the State's response to
the 1980 Audit, dated November 16, 1981, the Commissioner of the Maine
Department of Human Services said the following:

   The instruction quoted (from the April 11, 1978 letter) indicates
that for fiscal year 1979 some allocation of state and federal survey
expenses was contemplated by HHS. . . .

   (Appellant's Exhibit 35, p. 11;  emphasis in original.)(12)

The State argued that this letter "which did refer to the allocation of
costs for state survey programs does not support the allocation system
recommended in the 1980 Audit." (Id.) We agree with the State, in our
discussion below, that this letter standing alone did not spell out the
actual allocation sought by the 1980 Audit.  For the purposes of the
notice issue, we consider it significant that the State recognized that
the correspondence notified the State that the Agency expected some
allocation of costs of inspection to State licensure.

VII.  The Allocation.

We have found that the State was given adequate notice for fiscal year
1979 that some allocation of survey costs would be required between
Medicaid certification and State licensure.  We turn now to the question
of what the allocation should be.

Allocation Percentage

We have found above that it is appropriate to allocate a portion of
joint survey costs to the State licensure program;  we must next decide
the percentage to allocate to the State.  The regualtion does not
provide an allocation percentage.  All it says is that FFP is available
for surveys for Medicaid certification, but is not available for costs
of state licensure inspection.  Unless the two surveys are done
separately, which is obviously wsteful if the requirements are the same,
then an allocation problem must arise.

The three possibilities from the record in this case are to allocate to
the State licensure program 50%, or 15%, or 8.3% of costs. /5/ The 50%
comes from the Ritchey audit.  The 15% comes from the Commissioner of
the State Department of Health and Welfare, and is mentioned in the
Ritchey audit.  The 8.3% comes from the Bafna audit.


We consider first the 50% suggested in the Ritchey audit.  This is based
on the proposition that since the requirements for Medicaid
certification and State licensure were the same (or substantially so)
then each program benefited equally from a joint survey.

The State argued that even if it were notified tht some allocation of
survey costs would be required beginning in FY 1979, it was never
"notified" of any "benefit theory." (Appellant's(13) brief pp. 40-46)
But it is clear that the general cost principles applicable to federal
grants base allocability upon benefit received.  This is a long-standing
principle well-articulated in regulations.

45 CFR Part 74, Appendix C (1978), /6/ entitled "Principles for
Determining Costs Applicable to Grants and Contracts with State and
Local Governments," provides under "C.2 Basic Guidelines":

   Allocable costs.  A cost is allocable to a particular cost objective
to the extent of benefits received by such objective.


In Nebraska we pointed out that it was "clear that the State did benefit
from the . . . Medicaid health surveys." The reason we gave was that the
joint surveys "provided the assurances that licensure requirements were
being met without the need for and expense of separate license surveys."
(p. 16)

There is no question that the costs in issue here must be allocated
between state and federal programs on the basis of benefits received by
the two programs.  The issue here concerns what the definitive measure
of benefit is.  The Agency argued that the record shows the most
reasonable allocation of benefit involved an equal sharing by the State
and federal programs.

The Ritchey audit pointed out the detailed similarities between the
inspection for Medicaid certification and State licensure.  The
requirements were "very similar." (Appellant's Exhibit 32, p. 11) The
inspections for State licensure and Medicaid certification were both
done at the same time using the same report forms.  Significantly, the
auditors pointed out two instances where the issuance of a State license
to a facility was contingent upon the correction of deficiencies found
in the joint survey.  (Id., pp. 11-12)

In the absence of any further evidence, it would be reasonable to
conclude that the joint survey benefited the State licensure and
Medicaid certification equally, and that based on the cost allocation
regulations, the costs should be shared equally.  The State has offered
further evidence, however, in the form of the two other suggested
sharing rates.  After considering this evidence, we conclude that the
above position of shared benefit is not displaced as the most
reasonable(14) approach in the facts of this case.  Neither the 15%
proposed by the State Commissioner nor the 8.3% in the Bafna audit is
based on any contemporaneous recordkeeping, nor does either figure have
any substantial factual basis.

The 15% figure did not enter the picture until April 1980, or some six
months after the end of FY 1979, the year of this disallowance.  The
Ritchey audit states that on the 9th of April, 1980, at a supervisor's
meeting, the Director announced that "a percentage of each surveyor's
time should be allocated to State Licensing." (Exhibit 32, p. 13) The
participants agreed that "15% of survey time could be designated as
State Licensing." However, as the report points out, "No support or
justification was presented for choosing 15% as a fair allocation
percentage."

The 15% next appeared in the Commissioner's comment on the draft audit,
in a letter dated August 17, 1981.  (Appellant's Exhibit 33) After
several pages stating why no allocation at all should be made, the
Commissoner gave the "State's alternative position," that "no more than
15% of nursing home survey time should be allocated to State licensure.
. . ." (Id., p. 13) The Commissioner stated that this percentage was
"based on the experience and expertise of our surveyors." He attempted
to provided some justification for the 15% by comparison with boarding
houses, which are state licensed only.  However, the Commissioner
finally admitted that "it is now impossible for us to provide more
complete documentation as to the quantitative differences in the nursing
home licensing survey effort before and after assumption of Medicaid
certification activities." (Id.)

The letters from the Agency before FY 1979 had told the State that this
documentation was just what the State would have to furnish.  Thus, the
April 11, 1978 letter stated that since there was no "pre-negotiated
cost allocation plan," the Agency expected that:

   the appropriate State share of effort for long term care surveys will
be consistently reported on surveyors' time records to ensure the
equitable distribution of these costs between Federal and State
programs. . . .

The State was thus notified that beginning with FY 1979 the State would
not only have to allocate some portion of the joint survey costs to
State licensure, but would have to report the "appropriate State share
of effort" on its surveyors' time records. /7/ By failing to do so, the
State took the risk that, in the absence of such contemporaneous
records, the Agency could impose a reasonable allocation on the State.

(15)

The 15% figure has virtually nothing behind it to establish and explain
its validity;  it is simply an arbitrary choice of figures.  Given the
rational basis in the record and in cost allocation regulations of the
equal-benefit approach, the 15% figure is clearly an unreasonable choice
in comparison.

The remaining alternative we must consider is the 8.3% from the Bafna
report.  This review was performed by auditors under contract with the
federal government.  It concluded that 8.3% of surveyor's time should be
allocated to State licensure. However, this report cannot be treated as
definitive.  The audit was for fiscal years 1980 through 1982,
subsequent to the period in question here.  The State argued that since
survey activities were the same for those years as in fiscal 1979, the
allocation for 1979 should be limited to 8.3%.  Earlier in this
decision, we concluded that the State was on notice that it had a new
obligation for the time period in question here to distribute costs
equitably to federal and non-federal programs.  The State had a clear
responsibility to maintain records related to accountability for federal
funds (see, e.g., 45 CFR 74.61 (b)(f) and (g), and Neighborhood Services
Department, Decision No. 110, July 15, 1980).  Thus, to accept the
State's 8.3% figure would have us debase the requirement for adequate
record-keeping.  There was no explanation of what methods were followed
by the surveyors in allocating their time.  There is no more basis for
accepting the 8.3% figure than for accepting the 15% figure that the
State surveyors had previously decided to use in 1980.

The problem with the 15% suggestion, and the Bafna report's 8.3%, is not
only that they were for a later period, but because they did not have
any data to support the allocation percentage.  The difficulty is not
only with retroactive extrapolation from records in a later period.  The
real reason why the later figures have no validity for us is that there
is no basis for finding that the later data were derived from using a
reasonable methodology for allocating costs.  In Nebraska we said that
the auditors allocated an equal share of the survey costs to the State
because "'the Department of Health had not developed procedures for
allocating joint survey costs among benefitting programs.'" (p. 16) We
have the same situation here for FY 1979.

Because of the factors above, and in the absence of any definite
contemporaneous records the Banfa figures clearly are not as reasonable
as the Ritchey audit basis of alloting 50% of(16) the costs of the joint
surveys to the State.  There is simply nothing of any substance to show
that the State's licensure program did not receive as much benefit from
the joint inspections as the Medicaid certification program. /8/


We reach here a situation very close to that in Nebraska, where we said
that we were "faced with the situation where the State has never
suggested a plan for allocation." (p. 16) While the State here has
mentioned two possible percentages for allocation, it has not provided
any reasonable rationale why those figures should be accepted.  The
State has in effect not suggested any "plan for allocation", but merely
referred to unexplained percentages.

   CONCLUSION

Under all the circumstances, we reach the same conclusion that we did in
Nebraska.  There we stated that "(There) was clearly a substantial
benefit to the state licensure program." (p. 20) We went on to say that
"(In) the absence of any other suggested allocation by the State," we
found the Agency's allocation reasonable." (Id.) While we do not have
here a complete absence of any other suggested allocation by the State,
we do have the absence of any suggested allocation which has any
reasonable or rational factual basis behind it.

We therefore accept the Agency's allocation based on the Ritchey audit
and uphold the disallowance in full.  /1/ The disallowance here is
        concerned only with the claim for FFP in the Medicaid program.
The claim by the State for survey costs in the Medicare program is the
subject of a separate disallowance and follows a different appeal
procedure.  The Medicaid disallowance included survey costs at skilled
nursing facilities (SNFs) which participated in both the Medicaid and
Medicare programs.  The disallowance before us thus includes the
Medicaid portion of FFP claimed for inspections at these SNFs, which the
Agency claimed benefited the Medicaid, Medicare, and State licensure
programs.  In addition, we discuss the allocation in the Medicare
program so far as it has any significance in helping us determine proper
allocation under Medicaid.         /2/ The State argued that the
legislative history indicated that the purpose of the legislation was to
provide 100% FFP for Medicaid certification survey costs even when the
state licensure program benefited from data collected in the survey.
The State cited the Senate Committee on Finance report and a statement
of President Nixon. However, the Senate Committee report stated that the
reimbursement rate was raised from 75% to 100% to bring Medicaid up to
the 100% of survey costs paid for Medicare inspections so the states
would spend enough time inspecting Medicaid facilities.         /3/ We
do not consider as relevant the Agency's reference to the "new"
manual--the Provider Certification State Operations Manual (PSCOM).
Perhaps in the PSCOM (Appellant's Exhibit 31) HCFA "clearly indicated
that a State licensure cost-sharing requirement would exist under both
the Medicare and Medicaid programs." (Respondent's brief, p. 11) But the
PSCOM was not issued until April 1980.  The State could hardly be bound
as to fiscal year 1979 by notice given several months after that year
was over.         /4/ It is not clear that the State even knew of the
100% allocation to Medicaid under PIQ 75-148 in prior years (transcript
of conference, p. 63), so that the State has not even demonstrated that
it required notice in this instance.         /5/ In referring to the 50%
allocation, we are discussing only the costs of joint Medicaid-State
licensure inspections, and not the inspections which were for
Medicaid-Medicare-State licensure.         /6/ Part 74 is made
applicable to all Health, Education and Welfare grants, unless
inconsistent with Federal statutes, regulations, or other terms of a
grant, by 45 CFR 74.4(a).         /7/ We reject as inherently
unreasonable the 0% allocation of each surveyor's time to the State
licensing program stated in the affidavit of the Director o the State
Division of Licensing and Certification. (Appellant's Exhibit 47, par.
11)         /8/ The 50% allocation, which we uphold, applies to the
costs of joint surveys at ICFs which benefited both the Medicaid and
State licensure programs.  We also accept the 33 1/3% allocation to the
State in the Ritchey audit of the costs of joint surveys at SNFs which
benefited the Medicaid, Medicare, and State licensure programs, because
the State has provided no basis to find that there was anything other
than equal benefit to each program.

MARCH 28, 1987