New York State Department of Social Services, DAB No. 721 (1986)

GAB Decision 721

February 6, 1986

New York State Department of Social Services; 
Settle, Norval D.; Teitz, Alexander G.  Ballard, Judith A.
Docket No. 85-173


The New York State Department of Social Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $412,136 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act).  The disallowance was
based on a review of the State's cash management procedures and
quarterly expenditure reports for Medicaid claims.  HCFA determined that
$412,136 represented interest which had been earned by the State on
federal funds but which had not been credited to HCFA.

The major issue presented is whether HCFA can disallow an amount equal
to the federal share of interest earned by the State on Medicaid
payments which were placed in special accounts after being withheld from
Medicaid providers or collected in fraud and abuse recoveries.  In a
previous decision involving the same issue, the Board upheld HCFA's
disallowance.  New York State Department of Social Services, Decision
No. 588, October 31, 1984.  The State conceded that this appeal did not
present any material issues of fact distinguishable from those
considered by the Board in Decision No. 588, but argued that a
subsequent federal court case has rendered Decision No. 588 null and
void.  For the reasons discussed below, we find that the cited court
case has no relevance to the facts of this appeal.  Accordingly, we
sustain the disallowance based on the reasoning of Decision No. 588.

The holding of Decision No. 588

At issue in Decision No. 588 was the interest the State earned from an
interest-bearing account, into which the State had placed:  Medicaid
payments withheld from Medicaid providers suspected of fraud and abuse
activities;  and collections made pursuant to voluntary restitution
agreements which were entered into by Medicaid providers determined to
have received overpayments as a result of proscribed activities on the
part of the providers.  The Board found that such interest gave rise to
an overpayment(2) to the State within the meaning of section 1903(d)(2)
of the Act.  The section provides that the Secretary's quarterly
payments to a state for the Medicaid program shall be --

   . . . reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this section
to such State for any prior quarter. . . .

The Board determined that the State had received an overpayment in the
amount of the federal share of the interest since the interest amounted
to an applicable credit, as described in 45 CFR Part 74, Appendix C,
Part I, C.3 (1979), which should have reduced the State's claim for
Medicaid expenditures. /1/ Since there was no reduction on the State's
part, the State in fact received more Medicaid funds than it was due,
resulting in an overpayment.  The Board based its holding on a previous
Board decision, North Carolina Department of Human Resources, Decision
No. 361, November 30, 1982, /2/ where 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.

 

In finding that there was thus a regulatory basis for the determining
that the interest should have been offset(3) against further Medicaid
claims, the Board held in Decision No. 588:

   (The) State was not required by federal statute or regulation to
place the withheld and recovered Medicaid payments in an account that
earned interest.  Once the State did so, however, the federal government
became entitled to share in that interest.  The ultimate source of a
portion of these funds was federal monies and the federal government is
entitled to a pro rata share of the interest those funds earned.  This
interest, if not applied as an applicable credit, results in an
overpayment within the meaning of section 1903(d)(2).  p. 7.

The Board also concluded that the funds were not held "pending
disbursement" and, therefore, the exception in the Intergovernmental
Cooperation Act allowing states to retain interest on federal funds
"pending disbursement" did not apply.

The Perales decision is not relevant to the facts of this appeal.

The State's primary argument here is that Perales v. U.S., 598 F. Supp.
19 (S.D. N.Y. 1984), aff'd, 751 F.2d 95 (2d Cir. 1984), requires
reversal of Decision No. 588 and the disallowance at issue here. /3/
Perales concerned the(4) operation of the Food Stamp Program in the
State of New York.  The Food Stamp Program is administered nationally by
the Department of Agriculture's Food and Nutrition Service (FNS).  FNS
initiated a policy of charging interest on all debts over 30 days old
owed to FNS by, among others, state agencies charged with the local
administration of the Food Stamp Program.  The debts at issue in Perales
arose from a FNS determination that persons had received food stamps on
the basis of expired eligibility cards.  FNS billed New York for the
amount of the improperly issued food stamps and assessed interest on
this amount.


The court in Perales found that FNS has no authority, either by common
law or regulation, to impose interest against a state agency.  The court
found that, unlike other federal programs, there is no provision for
interest in the Food Stamp Act and that state agencies had never before
been liable for interest under the Food Stamp Program.  Citing Pennhurst
State School and Hospital v. Halderman, 451 U.S. 1 (1981), the court
stated:

   The terms and conditions upon which State agencies participate in the
Food Stamp Program were clearly articulated by Congress, and cannot be
expanded by administrative action.  In the administration of cooperative
federal-state programs, state governments assume only those obligations
that are explicitly imposed by statute.

   587 F. Supp. at 24.

The court concluded that the absence in the Food Stamp Act of a
provision authorizing the assessment of interest precluded FNS from
claiming interest from New York.

According to the State, the interest denied by the Perales court is
identical to the interest at issue here.  The State contended that
without express authority from Congress a federal agency, be it FNS or
HCFA, may not charge a state agency interest on overdue claims.
Although the funds in question in Perales were labeled a "penalty," the
State reasoned, they amounted to nothing more than the charging of
interest on a debt owed to the federal government, similar to the
Medicaid funds collected or withheld from providers.  The State argued
that Perales mandates the proposition that regulations are not an
adequate substitute for explicit congressional approval of interest
assessment and that Congress has not authorized the payment by states of
interest on Medicaid funds.

We believe that the State has misread the meaning of Perales and
overstated its scope.  The court in Perales was concerned with the
question of whether a federal agency,(5) having determined that a state
agency owed it a debt, could assess interest on that debt without
statutory authority.  Moreover, the action that gave rise to the debt
was an action (issuing food stamps to persons whose eligibility cards
had expired) for which Congress had authorized a federal remedy without
specifically authorizing interest.

Here, it is not a question of assessing interest on a debt owed to the
Federal Government, but of determining whether the State properly
reported program expenditures.  The gist of our holding is that the
interest (actually earned) was income to the program which should have
been applied to reduce program expenditures under the applicable cost
principles of which the State had notice.  Since the State did not apply
the interest to reduce its claimed expenditures, it claimed and received
FFP in an excess amount equal to the federal share of the interest.
Thus, we are not holding here that HCFA can assess interest on a debt
owed by the State, but rather, that the State owes a debt in the amount
of the interest because the State did not reduce its reported
expenditures to account for the interest as an applicable credit.  This
is an important distinction.

The statute authorizes FFP only to the extent a state has actually
incurred an expenditure;  the interest income here must be applied to
reduce the State's expenditures and, consequently, to reduce the amount
of FFP to which the State is entitled.  The fact that the applicable
credit to be applied to reduce program expenditures here constitutes
interest is wholly incidental.

Furthermore, the court in Perales limited its inquiry to the Food Stamp
Act, wherein it found no provision for the payment of interest.  The
court specifically contrasted the Food Stamp Act with the Medicaid Act,
where, at section 1903(d)(5), a state is liable for retroactive interest
on disallowed Medicaid funds if its appeal of the disallowance is
unsuccessful.  Although the cited authority for the recovery of interest
here is the overpayment adjustment provision at section 1903( d)(2) of
the Act rather than section 1903(d)(5), we find it relevant and damaging
to the State's position that the court in Perales drew this distinction,
thus confining its holding to the Food Stamp Act.

As the Agency pointed out, there is a significant difference in the
"interest" disapproved of in Perales and the interest at issue here. In
Perales the interest was in fact a penalty assessed on a debt New York
owed to FNS.  Here the State either collected or withheld payments from
Medicaid providers.  At a minimum, half of the funds placed in the(6)
account were federal dollars (the lowest rate of federal participation
in such payments in 50%).  Since the State had determined that the
Medicaid funds could not properly be disbursed to those providers, the
federal share of those funds was to be returned or credited to HCFA. Of
its own volition, the State placed those Medicaid funds in an
interest-bearing account.

It may have been a prudent business practice for the State to place the
funds in an interest-bearing account (and, of course, the State is
entitled to retain the interest on its share of the Medicaid funds).
But, as the Board stated in Decision No. 588, to allow the State the
interest on the federal share of the funds would be tantamount to a
windfall for the State.  On the other hand, requiring the State to
account for the interest promotes timely repayment of the federal share
of the funds once the State determines that they cannot be disbursed to
the providers.  If we were to accept the State's argument, each state
would then be in a position to claim Medicaid funds in excess of what
was properly due, invest those funds pending return of the federal
share, and then retain all the interest.  This would be the equivalent
of the federal government giving the states interest-free loans.  We do
not think that Congress intended such a result when it enacted the
Medicaid Act.

The State argued that, since Congress had specifically authorized the
recovery of interest in the Medicaid program only in section 1903(d)(
5), it necessarily follows that such recoveries are extraordinary in
nature and not otherwise authorized under the Medicaid Act.  The State
concluded that, if Congress had intended to allow for such recoveries of
interest as the one at issue here, it could have provided appropriate
and specific legislation.

We disagree.  As discussed above, the question of how to treat interest
actually earned on federal funds is different from the question of
whether specific authority is needed before a federal agency can assess
interest on a debt owed by a state.

Unlike the court in Perales, the court in North Carolina, supra,
examined specifically the question of interest earned on Medicaid funds
held in a special account, under circumstances similar to those here,
and found the Federal Government entitled to a pro rata share of the
interest.  We consider that decision to be the definitive ruling on this
question.  We find that Perales is simply not relevant to the questions
raised here and that the Board's Decision No. 588 is still controlling
on the subject.(7)

Conclusion

For the reasons stated above, we sustain the disallowance in the amount
of $412,136.  /1/ Although Appendix C was deleted from 45 CFR Part 74 on
        May 22, 1980 (45 Fed. Reg. 34274), its provisions 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 Board's decision was upheld
in State of North Carolina v. Heckler, 584 F. Supp. 179 (E.D. N.C.
1984).  /3/ In its Notice of Appeal the State requested that the
disallowance be reversed on the basis of Perales, or, alternatively,
that the Board issue a summary decision based on Decision No. 588.  In a
subsequent telephone conference, the State, in response to a Board
question, declared that, in addition to arguing that the disallowance be
reversed because of Perales, it would also in its brief reiterate the
arguments previously made in the appeal that resulted in Decision No.
588.  The State thus argued here that the grounds for the disallowance
cited by HCFA were inapplicable to the assessment of interest on
recouped or withheld Medicaid funds.  In its disallowance determination,
HCFA cited sections C(3)(a) and (b) of Office of Management and Budget
Circular A-87, 45 CFR 74.47(a), and section 2555.2E of the State
Medicaid Manual as authority for the disallowance.  The Board considered
and rejected the State's arguments on these points in Decision No. 588.
The State has not presented anything new in this appeal that would lead
us to re-examine the Board's holdings on these matters and we
accordingly adopt them here.