Arkansas Department of Human Services, DAB No. 737 (1986)

GAB Decision 737

April 7, 1986

Arkansas Department of Human Services; 
Docket No. 85-153
Ballard, Judith A;  Settle, Norval D.  Garrett, Donald F.

The Arkansas Department of Human Services appealed a decision by the
Health Care Financing Administration (HCFA or Agency) disallowing
$560,356 in federal funds claimed under title XIX (Medicaid) of the
Social Security Act.  The State of Arkansas had issued grants to the
Arkansas Children's Hospital in appropriation acts of 1979 and 1981 for
defraying expenses of a neonatal, intensive care nursery.  The Agency
found that these grants were "restricted" within the meaning of Medicare
regulations and accordingly should have been deducted from operating
costs before the State computed claims for services for the hospital
under Medicaid.  During the period in question, the Arkansas Medicaid
Plan specified that inpatient hospital reimbursement would be made in
accordance with the principles and methods used in computing
reimbursement to hospitals under the Medicare program.  Medicare
regulations provided that grants to a facility "designated" or
"restricted" by a donor for paying specific operating costs should be
deducted from the operating cost or group of costs before those costs
could be included in computing a claim for reimbursement.  The Agency
developed several exceptions to the general rule requiring deduction of
restricted grants, however.  These exceptions were set out in Chapter 6
of the Provider Reimbursement Manual and included "seed money" grants.

The two issues raised on this appeal were whether the State legislative
appropriations created a "restricted" donation within the meaning of the
regulation;  and whether the seed money exception to the restricted
donation rule applies here. /1/


While we conclude that the appropriations at issue were restricted
donations, we also find that the appropriations were seed money grants,
and therefore reverse the disallowance in full.(2)

The appropriation acts.

The initial appropriation act at issue states in its title that funds
are to be appropriated to the Arkansas Children's Hospital for the
biennial period ending June 30, 1981 for "Partially Defraying the Cost
of Establishing and Operating a Level III, Neonatal, Intensive Care
Nursery." Act 869 of 1979.  The second act also states that funds are to
be appropriated to the Hospital for the biennial period ending June 30,
1983 for "Partially Defraying" the costs of the nursery.  Act 204 of
1981.  Both acts contain procedures concerning disbursement of the funds
and requirements that the Hospital file an annual financial and
operations report and that disbursement of the funds be in full
compliance with other applicable laws.  The record contains an
"Information Statement" (State's Appeal File, Attachment E) that
accompanied the Hospital's proposal to the governor and legislature for
State funds.  It also contains a "legislative summary" of the 1979 act.
State's Appeal File, Attachment E.

The "legislative summary" indicates that Arkansas then lacked a level
III neonatal intensive care nursery and that such a nursery would be
"the focal point for referral of critically ill newborns from all over
the State," and that it would serve to prevent neurological damage,
retardation and death in newborn infants.  State's Appeal File,
Attachment E.

Were the grants in question "restricted"?

For the period at issue, Medicare regulations provided:  /2/

   (a) Principle.

   * * *

   Grants . . . designated by a donor for paying specific operating
costs should be deducted from the particular operating cost or group of
costs.

   * * *

   (b)(2) Definitions -- Designated or restricted grants . . . .

   Designated or restricted grants . . . are funds . . . which must be
used only for the specific purpose designated by the donor.

   * * *(3)

   (c) Application.  (1) Unrestricted funds . . . (as opposed to
donor-restricted funds) are generally the property of the provider to be
used in any manner its management deems appropriate and should not be
deducted from operating costs.

   * * *

   (2) Donor-restricted funds which are designated for paying certain
hospital operating expenses should apply and serve to reduce these costs
or group of costs and benefit all patients who use services covered by
the donation.  If such costs are not reduced, the provider would secure
reimbursement for the same expense twice;  it would be reimbursed
through the donor-restricted contributions as well as from patients and
third-party payers including the title XVIII health insurance program.

42 CFR 405.423


Arkansas has consistently argued throughout this appeal that the
appropriation acts did not represent "restricted" grants within the
meaning of the Medicare regulations then in effect.

The State argued that while the intensive care unit was a "primary
motivation for the appropriations," the acts do not limit expenditures
to only that unit.  The State suggested that the acts do not contain any
"limiting language, monitoring abilities or penalties for failure to
stay within any spending perimeters," that while the "first intent" was
for funding the unit, other purposes were also permissible. State's
brief, p. 10.

We think the acts unquestionably contain limiting language and create
designated or restricted grants within the meaning of the Medicare
regulations.  The first section of each act specifically designates a
particular amount of funding to the Arkansas Children's Hospital for
"establishing" or "partially defraying" the operating costs of the
neonatal nursery.  No other purposes for the funding were specified in
either act.  While the acts do not literally say "solely" for the
nursery, that is the only possible interpretation. /3/ Moreover,
contrary to what the State(4) argued, the acts do contain monitoring
requirements.  The acts expressly state that in order to provide
accountability to the citizens of Arkansas "for funds appropriated to a
private institution," the Arkansas Children's Hospital "shall file
annually a certified annual financial and operations report." While the
State is correct that the acts do not expressly provide a penalty if the
funds are not used for the designated purpose, the State did not here
allege that the Hospital could act with legal impunity under Arkansas
law in using the funds outside the stated purpose of the legislature in
enacting the acts.  In any event, the regulations at issue merely
require that the donor designate or restrict the funds for a particular
purpose, not that the funds must be monitored or that there be express
penalties for misuse.  Likewise, the manner in which the Hospital
ultimately transfers or disposes of the funds cannot change the nature
of the grant. The State seemed to be arguing that the grants were not
restricted because the Hospital ultimately placed the funds in a general
account for the support of the clinic but that it may have been
impossible to keep track of which grant funds were specifically expended
for the clinic.  That allegation, even if true, could not make the
grants unrestricted when the grantor expressly placed restrictions on
them.


Accordingly, we conclude that the grants in question were restricted as
contemplated by Medicare regulations based on the clear language of the
appropriation acts.  Our conclusion is also fully supported by the
legislative history of the acts in the State's Appeal File, Attachment
E.  Both documents contemplate that the funds would be used solely to
support the operations of the neonatal nursery.  State's Appeal File,
Attachment E. /4/


(5)

Do the appropriations qualify as "seed money grants"?

Chapter 6 of the Provider Reimbursement Manual provides an exception to
the general rule concerning restrictive grants. /5/ That Chapter
provides as follows:

   612.1 Seed-Money Grants. -- Grants designated for the development of
new health care agencies or for expansion of services of established
agencies are generally referred to as "seed money" grants.  "Seed money"
grants are not deducted from costs in computing allowable costs.  These
grants are usually made to cover specific operating cost or groups of
costs for services for a stated period of time.  During this time, the
provider will develop sufficient patient caseloads to enable continued
self-sustaining operation with funds received from Medicare
reimbursement as well as from funds received from other patients or
other third-party payers.


The three requirements for seed money grants, then, may be summarized as
follows:

(1) The grants must be for the development of new agencies or for the
expansion of services of established agencies;

(2) the grants should be made to cover specific operating costs for a
stated period;  and

(3) there is the expectation that the provider will develop sufficient
patient caseload to enable the new service to become a self-sustaining
operation.(6)

The Agency conceded that the grants here were for expansion of services
of an established agency and therefore met the first requirement.
Agency response to Board Order, p. 2.

Further, there can be no doubt that the appropriations in question were
to cover specific operating costs for a stated period, and thus met the
second requirement. We found previously that the grants were restricted
to specific costs and the statute and legislative history expressly
establish that they are to cover a 4-year period when the clinic is
being established and brought into full operation.  Each appropriation
act in its title and text states that the funding is for a two-year
period.  Further, the "legislative summary" contains a timetable as to
when the clinic would be operational.  The Hospital would be ready to
"initiate operation of a 10-bed unit by January 1, 1980, and a full
20-bed unit by March, 1982." Indeed, the fact that the support for the
nursery came in the form of two separate appropriations rather than from
an ongoing legislative program is a further indication that the grants
were for a stated period.  The Agency argued, nevertheless, that the
information statement that was part of the Hospital's proposal
"expressed the intent by the hospital for ongoing requests for State
funds." Agency's response to Board order, p. 2.  The statement cited by
the Agency, however, merely indicated that the State intended to make a
further request for the second appropriation based on its experience
with 10 bassinets (funded by the first appropriation).  There is no
indication in the record that the State intended to make regular ongoing
appropriations for this nursery.

Finally, we conclude that the grant met the third requirement for "seed
money grants" since it was made with the intent that the neonatal
nursery would become self-sufficient.  As we indicated previously, the
grants were in the form of two biennial appropriations and did not set
up an ongoing statutory program to support the Hospital.  At the end of
that four-year period the nursery was to have a "full complement" of 20
beds.  The State indicated that special intervention from the
legislature was needed in the initial stages of the nursery's operations
because the services to be provided by the nursery were among the most
expensive health care services provided in modern hospitals, and that
the hospital would not be able to initiate the service without outside
support.  The Agency, however, quoted language from the "Information
Statement," which the Agency argued indicated that the nursery would not
become self-sustaining.  The language quoted by the Agency, however,
indicated only that the nursery would not be self-sustaining during the
period covered by the appropriation, and hence served only to justify
the need for appropriation.  Nowhere is there evidence from the
legislative history that the nursery was not ultimately intended to be
self-sustaining once it reached its full complement.  We also disagree
with the Agency that the State(7) here must demonstrate that the nursery
has in fact become self-sustaining.  That clearly is a misinterpretation
of what is required by the Manual.  The Manual requirements are drafted
from the perspective of the intent of the grantor at the time the grant
was made and do not require that there be verification at some time
later time before the grant can be viewed as "seed money."

In addition to the foregoing analysis of the actual language of the
appropriations and their legislative history (which we find highly
compelling), we believe that still further factors support the
conclusion that the exception should be applied and that the grant funds
should not be deducted from operating costs of the hospital.

* The general rule applicable to restricted grants in Medicare
regulations was repealed in 1983. 48 Fed. Reg. 39753 (September 1,
1983).  At that time, the Agency noted that over the years a number of
exceptions to the general rule had been administratively established.
All of these exceptions, including the seed money grant exception, were
liberalizations of the rule and represented situations where strict
application of the general rule would not have yielded an equitable or
the desired result.  Under these circumstances, we believe that the
Agency's unwillingness to apply the seed money exception is clearly
overtechnical and does not take into account critical factors
surrounding these grants identified in the legislative history, such as
the fact that no such clinic already existed in the State, the founding
of the clinic would require extraordinary initial costs, and savings
ultimately would likely benefit other health care programs in the State
through the prevention of mental retardation and the diminution of
infant mortality.

* The State is entitled to deference in its interpretation of its own
appropriation statutes as creating seed money grants.  See, e.g.,
California Department of Social Services, Decision No. 393, March 28,
1983, p. 6.  While we could not agree initially with the State that its
statute did not create a "restricted" or "designated" grant because the
statutory language indicated otherwise, the statute and its history
clearly support the conclusion that the statute served to provide seed
money for urgently needed health care services.

* As the Agency pointed out in response to one of the Board's questions,
the Secretary has statutory authority to "waive" the offset of
restricted grants, where such grants "in the best interests of needed
health care, should be encouraged. . . ." Section 1134 of the Social
Security Act.  The State apparently here has never made a waiver request
because it has persistently argued that the grants were not (8)
"restricted" in the first place.  This issue, therefore, has not been
considered within the Department.  Nevertheless, the record here
indicated several factors that possibly could support a waiver if one
had in fact been requested.

Conclusion

Accordingly, we conclude that the two acts in question met the
requirements for the seed money exception, and therefore reverse the
disallowance in full.  /1/ The Board in an inquiry to the parties raised
        a third issue:  whether the funds could be considered part of
the state share of financial participation in the program, and not a
donation at all.  The Agency argued that the funds in question became
the provider's funds and not those of the State Medicaid Agency and that
the authorized Medicaid reimbursement scheme did not envision the use of
granted funds such as these as part of the state matching share.  Agency
response to Board's inquiry, p. 2.  Since we conclude that an exception
to the restricted grant rule applies here, we do not need to consider
whether the funds may also qualify as part of the State's matching share
under the circumstances of this case.         /2/ This provision has
since been repealed and no requirement concerning restricted grants
presently exists in the Medicare program. 48 Fed.  Reg. 39797 (September
1, 1983).         /3/ While the titles to both acts do state that the
appropriation is to provide the funds to the Children's Hospital and
"for other purposes," that reference cannot be considered to weaken the
clear restrictions in the acts for the use of the funds.  Rather, it
appears to be a reference to the subsidiary provisions for reports,
disbursement, and compliance with other laws.  /4/ The State also argued
        on appeal that two federal court cases applying the regulation
in question supported its position.  We agree with the Agency, however,
that both cases are distinguishable and do not support the State's
position.  While the Court of Claims case in Milford Memorial Hospital
v. United States, 675 F.2d 270 (Ct. Cl.  1982), concludes that the grant
there was not restricted, it did so in the absence of a contemporaneous
awarding authority that set explicit limitations.  The Court concluded
that there was nothing in the grants providing that the money was
earmarked in any way. In Temple University v. Associated Hospital
Service, 361 F. Supp. 263 (E.D. Pa. 1973), the court interpreted the
restricted grant regulation to mean that there must be an expressed
restriction on the use to be made of the money, as opposed to a mere
expectation that the funds would be used for a certain purpose.  The
grant considered in Temple involved a ledger transfer from the
University's medical school account to the account of an affiliated
university-owned teaching hospital. The note describing the transfer
stated that it was an "unrestricted" contribution.  Here, as opposed to
the Temple facts, the appropriation provided express restrictions, not a
mere "expectation," and there is no countervailing evidence that the
grantor legislature viewed the grant to be unrestricted.  Thus, the
Temple case, like the Milford case, ultimately fails to support the
State's position.         /5/ The Agency did not contest the
applicability of the Manual as an interpretation of the restricted grant
rule in the Medicare regulations then in effect.  Indeed, when the rule
was repealed in 1983, the Agency in its preamble specifically recognized
that a number of liberalizing exceptions to the general rule had been
"administratively established and implemented over time," and
specifically referred to "seed money" grants as an example.  48 Fed.
Reg. 39797 (September 1, 1983).