GAB Decision 786
September 11, 1986
California Department of Health Services;
Docket Nos. 85-156; 85-238; 86-31; 86-94; 86-153;
Ballard, Judith A.; Settle, Norval D. Teitz, Alexander G.
(1) The California Department of Health Services (State or DHS)
appealed several decisions of the Health Care Financing Administration
(HCFA or Agency) disallowing a total of $7,429,283 in federal financial
participation (FFP) claimed by DHS under Title XIX of the Social
Security Act (Act). Subsequently, California withdrew its appeal with
respect to $35,372.43, leaving $7,393,910.57 in dispute. This amount
represents the federal share of State sales taxes reimbursed by DHS as a
cost incurred by a contractor in rendering administrative support
services under the Medicaid program as a fiscal intermediary. The
disallowances were based on HCFA'a view that payments for the sales tax
were not actual expenditures by the State within the meaning of
applicable federal law because the State collected the tax from the
contractor. /1/
This decision resolves the second in a series of appeals involving
the
general issue of the availability of FFP for State reimbursements
of
taxes. Our conclusions here parallel those in the other
appeals. (See
Hawaii Department of Social Services and Housing,
Decision No. 779,
August 21, 1986; and New Mexico Health Services
Department, Decision
No. 787, September 11, 1986.
(2) As in Hawaii, we conclude that federal law was ambiguous
concerning
whether State income from sales taxes paid by the contractor here
had to
be deducted from DHS's reimbursements to the contractor for its costs
in
determining the amount of expenditures eligible for FFP. We
also
conclude that the State's interpretation was reasonable under
the
circumstances of this case, where: (1) a contract, which HCFA
approved,
specifically provided for reimbursement by DHS of all taxes which
the
contractor was legally required to pay; and (2) program
income
regulations supported the interpretation. Thus, the Agency
was
unreasonable in attempting to apply a different
interpretation
retroactively. Accordingly, we are compelled to sustain
the appeal
except for the portion withdrawn by California. /2/
As in Hawaii, nothing in this decision contradicts the Agency's
position
that generally expenditures claimed for FFP must be "net" of
any
applicable credits. Furthermore, we emphasize that nothing in
this
decision precludes HCFA from promulgating a rule or issuing
formal
policy guidance giving notice of HCFA's intent to eliminate sales
taxes
prospectively and specifically as a cost item eligible for FFP.
This decision is based on the written record, including comments
received
from the parties in response to a draft decision issued in the
Hawaii
appeals. We incorporate by reference much of the analysis of the
Hawaii
decision.
Facts.
Under California law, a 6% sales tax was imposed on all retail sales
of
tangible personal property (with certain statutory exceptions
not
relevant here). (State's Appeal File, Ex. C) The sales tax was a
tax on
the retailer; the retailer commonly collected the tax from
the
purchaser, but was liable for the tax whether or not it did so.
The
statute contained no exception for retailers selling to the State.
DHS contracted with Computer Sciences Corporation (CSC), a
fiscal
intermediary, to handle the processing of State Medicaid
(Medi-Cal)
claims, and related functions. This dispute centers around
sales taxes
on the computer services which CSC provided to DHS under the
contract.
(3) The State described the process of contracting in this case
generally
as follows: (1) the State issued a Request for Proposal
(RFP);
(2) prospective contractors responded; (3) the State sent
Invitations
to Bid (IFBs) to those whose responses met State standards;
(4) the State
accepted CSC's bid and entered into a contract. The
contract was
formally entered into when the parties signed a cover page
which incorporated
by reference the RFP, IFB, and certain other
documents not relevant
here. (Tape of Conference Call, April 14, 1986;
see Appellant's April
14, 1986 submission, Tabs B and C)
On August 14, 1978 DHS signed its first contract with CSC. The
contract
contained language in the IFB stating that the State would reimburse
the
contractor for "taxes imposed by the State Board of Equalization
on
items conveyed to the State. . . ." (See Attachment to March 11,
1986
submission) By letter dated August 31, 1978, HCFA approved the
contract.
(Appellant's April 14, 1986 submission, Tab A)
Subsequently, CSC sought advice from the California State Board
of
Equalization regarding whether CSC had to pay sales tax on the
computer
services provided to DHS. /3/ On September 20, 1979, the State Board
of
Equalization ruled that CSC did have to pay sales tax, since
the
transaction involved a transfer of tangible personal
property.
(Respondent's brief, p. 6)
CSC thereafter paid the tax and the State reimbursed CSC for
the
payments in accordance with the terms of the contract. The State,
in
turn, filed with HCFA claims for FFP for tax reimbursements to CSC
as
part of its total claims for expenditures. The State claimed
the
expenditures as administrative costs of providing medical services
under
the Medicaid program. For years, the Agency paid these claims
without
reservation.
On June 2, 1983, HCFA approved a State RFP for a follow-up contract.
The
State submitted an RFP showing an "issue date" of "March 21, 1983"
on some
pages and "May 10, 1983" on others. The State represented that
this was
the RFP the Agency had approved on June 2. The Agency did not
dispute
this representation. The portion of the RFP showing the issue
date May
10, 1983 contained the following provisions on sales tax:
(4) 8.9.4 SALES TAX
Sales tax relates only to products or services delivered to the
State
as part of this Contract for which a sales tax liability is
incurred.
8.9.6 SALES TAX INVOICE
The Contractor shall invoice the State quarterly for sales
tax
charged for the delivery of products to the State. All sales tax
shall
appear on this quarterly invoice itemized by the contract areas.
Sales
tax shall not appear on any of the other invoices received by the
State
for payment. The Contractor may invoice the State monthly, if it
can
demonstrate to the Contracting Officer that monthly sales tax
payments
must be made.
On October 1, 1983 the State entered into its second contract with
CSC.
(Tab C, April 14, 1986 submission) The cover page to the
contract
incorporated the RFP by reference. /4/ The State continued to
reimburse
CSC for sales tax and claim FFP for these expenditures. HCFA
continued
to pay these claims until June 19, 1985, when HCFA disallowed a
total of
$6,444,098 in FFP. This represented sales tax reimbursements
to CSC
claimed by the State during the period July 1, 1979 through March
31,
1985. The Agency, thereafter, disallowed additional claims for
sales
tax, bringing the total disallowance to $7,429,283 (later reduced to
the
amount in dispute here) for the period through the quarter ending
March
31, 1986.
I. Did "federal law" mandate the disallowances here?
In Hawaii, HCFA based the disallowances on its view that federal
law
(i.e., section 1903(a) of the Act and Office of Management and
Budget
Circular A-87) required the disallowances. We concluded in
Hawaii that
section 1903(a) and the Circular simply are not that
specific; while
HCFA's interpretation is not inconsistent with them
(and thus might
reasonably be imposed through a regulation or guideline), it
was
unreasonable to conclude that the Act and the Circular
themselves
required the disallowances so as to justify a retroactive
disallowance.
The parties' arguments regarding "federal law" in this case
are
essentially the same as in Hawaii, and we incorporate the
applicable
discussion and conclusions from that decision (see pp. 3-10).
(5) Below, we discuss minor ways in which the analysis here differs.
The
overall result, however, is the same.
A. The statute did not mandate the disallowances.
While in Hawaii the Agency argued that section 1903(a)(1) mandated
the
disallowances, in this case the Agency argued that 1903(a)(7)
mandated
them. /5/ Section 1903(a)(1) provides that a state with an
approved
Medicaid plan may receive:
an amount equal to the federal medical assistance percentage . .
.
of the total amount expended during such quarter as medical
assistance
under the State plan. . . . (emphasis added)
Section 1903(a)(7) provides that a state with an approved Medicaid
plan
may receive:
an amount equal to 50 per centum of the remainder of the
amounts
expended during such quarter as found necessary by the Secretary for
the
proper and efficient administration of the State plan. (emphasis
added)
The two sections of the Act differ only with regard to the percentage
of
FFP they authorize and the fact that 1903(a)(1) provides FFP for
medical
services while 1903(a)(7) provides it for administrative costs.
As in Hawaii, the Agency argued here that the disallowances were
compelled
because the statute was clear and unambiguous on its face in
meaning that
only "actual" or "net" expenditures were eligible for FFP.
But, in effect,
this argument only begs the question; we concluded in
Hawaii that the
statute was not sufficiently specific on its face to
preclude reimbursement
of the tax in circumstances like those here.
(Hawaii, supra, pp. 3-5).
Since the two sections of 1903(a) are essentially the same, and the
focus
of the Agency's arguments with regard to the two sections was
identical, the
statutory analysis and conclusions in Hawaii apply here
as well. We
incorporate them here and conclude that 1903(a)(7) did not
compel the
disallowances in this case.
(6) B. OMB Circular A-87 did not mandate the disallowances.
As in Hawaii, the Agency argued that A-87 required the disallowances
and
the State argued that it did not. The arguments presented by
both
parties were essentially the same as in Hawaii.
There, we concluded that OMB Circular A-87 did not mandate
the
disallowance of FFP for State reimbursements of excise tax;
the
Circular did not conclusively establish that the taxes paid by
providers
had to be treated as "applicable credits" against reimbursements to
the
providers. (Hawaii, supra, pp. 5-8).
HCFA did not argue that there was any difference between Hawaii's
excise
tax and California's sales tax which should produce an analysis
or
result different than that in Hawaii (and we do not see any
such
difference). The only difference in the circumstances surrounding
the
two states' taxes worth commenting on is that Hawaii's tax
was
reimbursed indirectly through a rate, whereas California's tax
was
reimbursed directly. HCFA did not argue that this should produce
a
different result, and we see no reason why it should.
Accordingly, we conclude that the analysis regarding A-87 at pages 5-8
in
Hawaii applies here as well. The Circular did not compel
the
disallowances here, and, indeed, as discussed in Hawaii,
contained
language which reasonably could have led the State to believe the
tax
was an allowable cost.
II. Was the State's interpretation reasonable under the
circumstances
of this case?
In Hawaii we concluded that, in addition to the ambiguity in A-87
itself,
there are other factors which set a context in which the State
reasonably
thought that it did not have to treat excise taxes as
"applicable credits"
offsetting payments to providers for medical
services. (Hawaii, supra,
p. 8.) Below we address such factors also
present in this case.
A. The contract as support for the State's interpretation.
In Hawaii, the State Medicaid plan, which HCFA approved, adopted the
use
of Medicare principles of reimbursement, and under those principles
it
was clear that the taxes in question were allowable costs. The
Board
concluded that, in the absence of any Agency issuance stating
clearly
that taxes had to be treated as applicable credits, the State
plan
supported the State's interpretation. (Hawaii supra, pp. 9-10)
(7) In this case there was no similar State plan provision.
Nevertheless,
there was a somewhat similar circumstance involving
contracts, also approved
by HCFA, between DHS and CSC.
The State argued, and the Agency did not dispute, that the contracts
bound
the State to reimburse CSC for sales taxes paid on the transfer of
computer
tapes and other items to DHS. Language in both contracts
supports the
State's position. The 1978 contract contained language,
quoted above
(p. 3), to the effect that DHS would reimburse any taxes
which the State
Board of Equalization imposed on CSC in its dealings
with DHS. When in
1979 the State Board advised that CSC had to pay the
sales tax on the
transfer of computer tapes, DHS became bound to
reimburse CSC for the cost of
the tax. The 1983 contract contained
language (in section 8.9.6, also
quoted above (p. 4)) setting forth how
the contractor should bill DHS for
sales tax charged on the delivery of
products to DHS.
The State also argued that the Agency's approval of the contracts
meant
that the Agency agreed to provide FFP in State outlays for the tax.
The
State argued that the Agency should have known when it approved
the
provisions that the State would claim FFP for tax reimbursements
because
the State claimed FFP on the "overwhelming portion" of all
fiscal
intermediary costs and sales tax was a fiscal intermediary cost
under
the contract (Appellant's Brief, pp. 2, 6) /6/
The Agency argued that approval of the contract could not be
interpreted
as Agency agreement to provide FFP for all State payments to CSC
under
the contract. The Agency argued that many costs which the
State
reimbursed under the contract were not "eligible" for
FFP.
(Respondent's Brief, p. 5)
On this point, the Board asked the State why Agency approval of
the
contract provisions should have bound the Agency to provide FFP
for
sales tax if the relevant contract provisions did not specify
whether
taxes were the type of cost that would be eligible for FFP.
(Tape of
Conference Call, April 14, 1986) The State explained (and the Agency
did
not deny) that the contracts did not specify that particular costs
would
be eligible for FFP; the contracts merely specified what costs
the
State would reimburse the fiscal intermediary.
(8) The State argued that whether the federal government shared in
the
State's expenditure depended on whether the program was a
federal
matching program (as opposed to State-only funded program). The
State
explained that the computer tapes on which CSC paid tax contained
the
names of beneficiaries of both "State only" and "State/Federal
matching"
programs. The State argued that the Agency should have known
that its
approval of the contracts implied agreement to share in all costs
under
the federal matching programs for which the State had agreed under
the
contracts to reimburse CSC.
This Board has previously held that mere Agency approval of a
state
contract does not preclude the Agency from disallowing contract
costs
which are clearly unallowable under an applicable cost principle
or
other program requirement. Here, however, the Agency has pointed to
no
Agency policy issuance which specified that taxes must be
"netted"
against program expenditures incurred by a state. In the
absence of
such a requirement, the fact that the Agency approved
contracts
containing specific provisions for reimbursing sales tax to
the
contractor, without informing DHS that no FFP would be available in
that
type of contract costs, provides support for the State's position
that
DHS could reasonably have thought that FFP was available in the
sales
tax (particularly in view of the ambiguity and mixed messages of the
Act
and OMB Circular A-87). We also find it significant that HCFA
approved
the first (1978) CSC contract, reimbursed DHS for several years for
the
tax under that contract, approved a second contract with even
more
specific language on taxes in 1983, and continued reimbursement of
the
tax for about two more years.
B. The program income regulations as support for the
State's
interpretation.
The disallowances involved in this decision were initially joined
(and
later severed) for purposes of briefing with the Hawaii
cases.
Therefore, important arguments raised in briefing the Hawaii case
before
it was severed from this case are considered here to the
extent
relevant. One such argument concerned whether the program
income
regulations at 45 CFR 74.41 required that the Agency provide
FFP. We
concluded in Hawaii that, while the regulations may not
actually have
required the Agency to provide FFP, they supported
Hawaii's
interpretation. (Hawaii, supra, p. 12) We incorporate the
discussion at
pages 10-12 here by reference and conclude that the regulations
support
California's interpretation as well.
(9) III. Additional Arguments
As in Hawaii (in fact, while the cases were joined), the parties here
made
several additional arguments. The arguments were essentially the
same
as those discussed in section III (pages 12-15) of the Hawaii
decision, and
we incorporate that discussion here.
IV. Notice
In the cover letter to a draft decision in Hawaii sent for comment to
the
parties the Board noted that, if the Board's initial conclusions
were adopted
as the final decision in that case, FFP would be available
to Hawaii until
such time as that State had actual notice of the
Agency's present
interpretation. The Board pointed out that actual
notice was required
before a party could be adversely affected by a
change in policy. /7/ (See
Alabama Department of Pension and Security,
Decision No. 128, October 31,
1980; Oregon Department of Human
Resources, Decision No. 129, October
31, 1980; Utah Department of
Social Services, Decision No. 130, October
31, 1980; New Mexico Human
Services Department, Decision No. 382,
January 31, 1983; and see 5 U.
S.C. 552(a)(1)(D) and (E)). The
Board asked the parties in this case to
comment on(10) whether certain
documents here and in the Hawaii case
should be considered notice of a change
in Agency policy. The documents
included (1) a letter from the Agency
advising the State that its claim
for FFP was being deferred pending further
consideration, and (2) the
subsequent disallowances.
The parties' arguments in response were essentially the same as
those
presented in Hawaii. We incorporate the analysis at pages 15-22
of
Hawaii here and conclude that the deferrals and disallowances
also
cannot be considered notice under the circumstances of this case.
Conclusion
Based on the foregoing, we sustain the State's appeal (except for
the
portion withdrawn by California). /1/ We use "DHS", "California,"
and
"State" interchangeably when
referring to the appellant in this
decision. Nevertheless, it is useful
in picturing what happened in this
case to note that, while DHS paid the
contractor for its costs, the
contractor did not pay sales taxes back to
DHS. Rather, the contractor
paid sales taxes to the State Department of
Taxation and most of the tax
money went into the State's general
treasury. In fact, of the 6% sales
tax, portions went directly to
cities and counties, and to local transit
systems. Since we find for
the State, we need not consider whether any
distinction should be made
between sales taxes paid by the contractor
which go to the State itself, and
those that go to local governmental
entities. /2/ The withdrawal
represented State refunds to the
contractor, Computer Sciences Corporation, of sales taxes
previously
paid. The State made the adjustment in the disallowance
after an
inquiry from the Board about an amendment to the California
sales tax law
which exempted sales of certain types of custom computer
services and
provided for pro rata retroactive refunds. If the Agency
can establish
that further refunds should have been obtained, it may
choose to proceed
against California for FFP paid for taxes which CSC,
and therefore DHS, was
in fact not legally obligated to
pay. /3/
The sales tax
question arose, in part, because CSC, unlike the previous
contractor,
provided computer tapes (containing the names of
beneficiaries) to DHS,
which, in turn, issued Medicaid payments. The
previous contractor had
issued the checks directly; thus, there was no
transfer of tangible
personal property and no tax. While sales tax was
charged on other
computer services as well as the transfer of computer
tapes, the parties in
briefing focused their attention on the tax
charged on the computer tapes,
which were clearly the largest cost item.
(Appellant's March 6, 1986
submission, p. 7 and Appellant's January 13,
1986 submission, p.
"dated March 1983." Nevertheless, as stated above, the State
represented
the RFP provisions dated May 10, 1983 to be part of the contract
and the
Agency did not dispute that representation. Therefore, we consider
the
portion dated May 10, 1983 also to have been part of the contract.
/5/
The disallowance letters cited an additional rationale for the
Agency's
action that "reimbursement to the State for the State tax
included in its
payment for an administrative expense cannot be
considered as necessary for
the proper and efficient administration of
the State plan." This point was
not developed further in the briefing,
however, and we therefore do not find
it necessary to respond beyond
noting that this basis for the disallowance is
not an independent one,
but is part and parcel of the overall dispute;
our determinations in
Hawaii and in this case thus compel the consideration
of the tax as
necessary for proper administration of the Medicaid plan in
California
(during the time in question). (See, however, Fn. 2) /6/ The
State also
argued that the Agency
should be estopped from disallowing funds
in this case because its "blanket
approval" of the contract
"affirmatively misled" the State.
(Appellant's Brief, p. 7) The Agency
responded that the State had not
suffered the "legal detriment"
necessary for estoppel. The State
replied that indeed it did suffer a
legal detriment, given that the State
operates an annual balanced budget
and would have to reduce funding (and thus
services) under current
programs to pay back the disallowed funds. We
do not decide the
estoppel issue here since we conclude that the contract
supports the
State's position for other reasons and find for the State on
other
grounds. /7/ The Agency
also argued that there was no change in
policy since the Agency never had a
formal written policy on the issue.
The Agency argued that FFP for State
expenditures for such taxes was
paid "inadvertently" and that its present
position on taxes was an
initial interpretation of the Act. (Agency
Response Brief, p. 21) The
fact that the Agency provided FFP for taxes
for some 18 years in the
Hawaii cases and 6 years in this case seriously
undermines the argument,
however. The Agency, in effect, admitted that actual
notice was required
when it asserted in joint briefing that its pronouncement
on excise
taxes constituted an interpretative rule. (Agency Reply
Brief, pp.
18-19) Section 552(a)(1) of 5 U.S.C. (the Administrative Procedure
Act)
specifically identifies "statements of general policy or
interpretations
of general applicability," as well as substantive rule
changes, as among
the Agency actions requiring publication in the Federal
Register or
actual notice before a party can be adversely affected. Thus,
actual
notice was required here whether the new interpretation was an
initial
interpretation (as the Agency argued) or a changed interpretation
(as
the State argued). Even if the Agency policy were considered
an
"interpretative rule," exempted from notice and comment rulemaking
under
5 U.S.C. 553(b)(A), notice would be required before the State could
be
adversely affected. (See section 552(a)(1) of the APA)