Michigan Department of Social Services, DAB No. 863 (1987)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  Michigan Department of Social Services

Docket No. 86-104
Decision No. 863

DATE:  April 22, 1987

DECISION

The Michigan Department of Social Services (State) appealed a decision
by the Health Care Financing Administration (HCFA or Agency) disallowing
$2,210,007 in federal financial participation (FFP) representing
staffing costs claimed at a 75 percent enhanced FFP rate under the
Medicaid program for the period October 1, 1977 through September 30,
1981.  The disallowance was calculated as the difference between the
normal 50 percent FFP rate, allowable for administrative costs, and the
enhanced 75 percent FFP rate, allowable for costs attributable to the
operation of the Medicaid Management Information System (MMIS). The
State claimed 75 percent FFP for staff in its Bureau of Medicaid
Institutional Review, Medical Services Administration (BuMIR), because
it contended that these staff activities were part of the operation of
the MMIS.  The State's claims and claim adjustments for the questioned
staffing costs for the disallowance period were made on quarterly
expenditure reports (QERs) for the quarters ended December 31, 1977
through December 31, 1982. 1/

As discussed below, we find that the staffing costs were not
attributable to the operation of the MMIS and, therefore, were not
entitled to be reimbursed at the enhanced FFP rate. Accordingly, we
uphold the Agency's disallowance.

I.  Applicable Authority

The Medicaid Program was enacted in 1965, as Title XIX of the Social
Security Act (Act), and is administered by.each state according to an
approved state plan.  In Michigan, the State's Medicaid program is
administered by the Department of Social Services.

Under sections 1903(a)(3)(A) and (B) of the Act, FFP is available in the
costs of a mechanized claims processing system at the rate of 90 percent
for design, development, or installation of a system and at the rate of
75 percent for costs attributable to the operation of the system;
otherwise, administrative costs are reimbursed at a 50 percent rate.
Section 1903(a)(7).

The Agency regulation at 42 CFR 433.111 (1980) provides definitions
applicable to MMIS. 2/  Definitions relevant here are:

       "Mechanized claims processing and information retrieval system"
       means a system of software and hardware used to process Medicaid
       claims, and to retrieve and produce utilization and management
       information about services that is required by the Medicaid
       agency or Federal Government for administrative and audit
       purposes.

       "Operation" means the automated processing of claims, payments
       and reports.  "Operations" includes the use of supplies,
       software, hardware and personnel directly associated with the
       functioning of the mechanized system.

(Emphasis added.)

The regulation at 42 CFR 432.50(b)(2) (1980) provides for FFP at a rate
of 75 percent for expenditures attributable to personnel "engaged
directly in the operation of mechanized claims processing and
information retrieval systems."  The regulation also provides that rates
of FFP in excess of 50 percent are applicable only to those portions of
the individual's working time that are devoted to the duties that
qualify for the enhanced rate of reimbursement.  42 CFR 432.50(c)(1).

II.    The State has not established that the BuMIR staffing costs are
       attributable to the operation of the MMIS.

A.    Field Audit Division and Cost and Rate Settlement    Division

The State explained that the BuMIR unit is comprised of a Field Audit
Division (FAD) and a Cost Settlement and Rate Setting Division (CSRSD).

According to the State, its institutional providers are paid on a cost
settlement basis.  Under this system, invoices for services provided
Medicaid recipients are submitted by providers to the State's MMIS
system.  The invoices are then processed and paid on an interim basis.
At the end of each provider's fiscal year, the facility files a cost
report which provides an accounting of the services provided and the
cost of providing those services to Medicaid recipients.  The FAD is
responsible for on-site verification of the accuracy of the cost report
and statistical data provided by the institutional provider.  The State
also alleged that the FAD monitors the accuracy of related MMIS reports,
determines deviations or errors and reconciles MMIS records with
provider records where necessary, and processes corrections where
appropriate.  State's brief, pp. 2-3.  See also State's Appeal File, Tab
3.

The State maintained that its CSRSD is responsible for processing
initial settlements and subsequent final settlements on an annual basis
for participating providers.  Included in the responsibilities of this
division are:  reimbursement to providers (retrospective and
prospective), operation of the Medicaid interim payment system, and
review of the long term care facility's prospective reimbursement
system.  The CSRSD receives the FAD's final report of its audit of each
provider's costs of providing Medicaid services to eligible recipients.
From this information, the CSRSD develops the rate of payment to be made
by the claims processing system and inputs that rate into the provider
enrollment subsystem of MMIS.  After final cost settlements have been
calculated, this division inputs into the claims processing system gross
adjustments correcting the temporary rates to reflect the institutional
provider's final rate of reimbursement.  State's brief, pp. 3-5.  See
also State's Appeal File, Tab 4.

The Agency disallowed the State's claim because it found that the
BuMIR's staff performed the functions of rate-setting and audit and cost
settlement for institutional providers, and that the staff was not
directly engaged in the operation of the MMIS.  It concluded,
accordingly, that the costs of such staff did not qualify for the
enhanced rate of FFP. 3/

The State admitted that the BuMIR has two primary functions: rate
setting for institutional providers and final adjudication of
institutional claims through the cost settlement process.  It argued,
however, that all of the activities performed by the BuMIR have a direct
relationship with the MMIS invoice processing system and adjudication
process.  The State contended that although most of the personnel for
whom 75 percent FFP is sought are not engaged in the direct operation of
the computers which form the heart of the State's MMIS, that does not
mean that those positions are not entitled to FFP at the 75 percent
rate.  The Agency argued that the burden is on the State to justify its
claim for enhanced funding, and the State has not justified its claim.
Further, the Agency argued that although the State has described the
BuMIR positions in an attempt to qualify for 75 percent funding, the
descriptions are not supported by documentation in the appeal file and
in many cases are inaccurate.  The Agency maintained that the statement
that the FAD also "monitors accuracy of related MMIS reports and
determines deviation or errors and reconciles MMIS records where
necessary" is not supported by the State's submission, at Tab 3, and
there is no indication that this is an ongoing activity of the FAD.
Instead, the Agency argued that Tab 3 indicates that the division is
comprised primarily of auditors whose duties are to perform on-site
audits.  The Agency submitted workpapers to support its position.
Agency Appeal File, Ex. 1.  The only relation to MMIS is that certain
data is input (not by auditors in the Field Audit Division) into the
Long Term Care Cost History File, which is described as being "resident"
in MMIS.  The Agency argued that this cost settlement process is part of
the approved State Medicaid Plan, not the MMIS.

Further, in regard to the CSRSD, the Agency maintained that the rate
inputting is not done by BuMIR staff, although a limited number of BuMIR
staff prepare the input documents, an activity which the Agency said it
would accept for 75 percent FFP.  See n.  3, supra.  The Agency
maintained that the primary functions of these two divisions are related
to auditing of cost reports and setting of payment rates and their
staffs are primarily comprised of auditors.  The Agency argued that the
fact that the State originally claimed FFP at the 50 percent FFP rate
for administration of the Medicaid program is an indication that the
State only belatedly came to the view that these positions are MMIS
positions. 4/

The regulation at 42 CFR 432.50(b)(2) provides that in order to qualify
for the 75 percent FFP enhanced rate, personnel must be "engaged
directly in the operation of mechanized claims processing and
information retrieval systems."  We find that the documentation
submitted by the State does not support its position.  Also, as the
Agency pointed out, the State described certain activities so that there
would appear to be more direct contact with the MMIS than the Agency's
review report or its review work papers would substantiate.  The State's
documentation consists largely of undated and presumably
non-contemporaneous descriptions of the activities of FAD and CSRSD.
The Board has previously found that while we will accept
non-contemporaneous documentation, the sufficiency of the documentation
will be carefully scrutinized.  Indiana Department of Public Welfare,
Decision No. 772, August 7, 1986.  In the instant case, the State has
not submitted any individual position descriptions or other
contemporaneous documentation that would substantiate the State's claim
that the staff at issue performed activities directly attributable to
the operation of the MMIS.  Conversely, the documentation appears to
generally substantiate the Agency's arguments, based on its financial
review, that the BuMIR was responsible for audit, rate setting, and cost
settlement activities.  See Workpapers for the Financial Review, Agency
Appeal File, Tab. 1.  We agree with the Agency that the State "is
attempting to subsume these routine administrative costs into its MMIS
system solely on the basis that certain rates and data developed by
[BuMIR] are ultimately input into the MMIS system by other non-BuMIR
staff."  Agency Brief, p. 8.

Moreover, the State was aware of the Agency's position that the BuMIR
employees were not engaged directly in the operation of the MMIS. 5/
The State had not claimed the enhanced rate until September 30, 1980,
when it first revised its QERs for the prior periods.  The record shows
that since 1979, the State attempted to get approval for the enhanced
FFP rate for these and other activities, and the Agency consistently
made its position clear that for personnel to receive the 75 percent
rate, they must be directly engaged in the operation of the MMIS.  See
State's Appeal File, Tabs B-E.

The Agency also maintained that the Board's decision in Pennsylvania
Department of Public Welfare, Decision No. 832, February 20, 1987,
supported its argument that the costs of the staff at issue are not
entitled to the enhanced FFP rate. Agency's supplemental brief, p. 1.
In reply, the State maintained that the decision in Pennsylvania is
distinguishable from the present case.  The State argued that
Pennsylvania's Division of Provider Inquiry merely used the information
provided by the state's MMIS.  The State argued that in this case, the
programs and employees for which it has claimed 75 percent FFP actually
contribute information to the MMIS which benefits its ongoing operation.
State's reply to supplement, p. 1.

We find that the reasoning used to reach the decision in Pennsylvania is
applicable to this case as well.  As we said in Pennsylvania:

       . . . , functions which would occur regardless of the MMIS,
       simply because providers submit claims, are not functions which
       directly benefit the MMIS and, consequently, are not functions
       which warrant the incentive of an enhanced rate of reimbursement.

Similarly, the audit, rate setting, and cost settlement activities at
issue here would occur regardless of the MMIS.  The record in this case
does not show any direct relationship between the auditing staff and the
operation of the MMIS.  Based on the above, we find that the activities
of the BuMIR divisions at issue bear no more direct relationship to the
MMIS than any other medical administrative function.  It is undisputed
that Congress did not intend to provide 75 percent reimbursement for
general costs of administration.  We find further that this is an
instance where the State is attempting to unreasonably extend the
availability of 75 percent FFP.

B.    The decision reached in New Jersey is not applicable to this case.

The State maintained that its situation was identical to that presented
in a prior proceeding before the Board, New Jersey Department of Human
Services, Decision No. 648, May 17, 1985 (Decision affirmed in the
Board's Ruling on Request for Reconsideration of Decision No. 648).  The
Agency contended that New Jersey was inapposite to the present case.

The State contended that HCFA raised essentially the same arguments in
New Jersey that it has raised in the instant case to contest the
allowance of 75 percent FFP for the "statewide and department-wide
indirect costs" allocated to New Jersey's MMIS.  6/  Further, the State
argued that since essentially the same type of costs are involved in
both cases, the Board's rationale and decision in New Jersey should
control the instant appeal.

In New Jersey, the Board reversed a decision by the Division of Cost
Allocation that disapproved a portion of New Jersey's revised Cost
Allocation Plan (CAP) that provided for 75 percent FFP for statewide and
department-wide indirect costs allocated under OMB Circular A-87 to the
operation of New Jersey's MMIS. In New Jersey, the Board concluded:

       There is no dispute that the statewide and department- wide
       indirect costs in question here are allowable and properly
       allocated to the State's MMIS.  The only issue is whether FFP in
       these costs is available at the enhanced 75% rate for cost
       "attributable to the operation" of the MMIS or at the normal 50%
       administrative rate under Title XIX of the Act.  The Agency
       relied on a policy clarification which is not an adequate
       statement of a policy to preclude 75% FFP for such costs, in
       light of prior policy statements and the applicable cost
       principles.  In essence, if the Agency intended such a policy, it
       neglected to clearly inform the State. . . .  [W]e determine that
       these costs are properly attributable to the operation of the
       MMIS and thus subject to enhanced FFP.  Decision 648, p. 1;
                      affirmed in the Board's Ruling on Request for
                        Reconsideration, November 22, 1985.

The Agency argued that the State's reliance on New Jersey is misplaced,
and we agree.  We see no parallel between the costs at issue in New
Jersey, and the costs at issue in the present case. New Jersey involved
indirect costs under an approved CAP.  The CAP methodology was not at
issue.  Further, there was no dispute that the statewide and
department-wide indirect costs in question were allowable and properly
allocated to the state's MMIS.  In that case, the Agency attempted to
draw a distinction between "costs attributable to the MMIS" and "costs
directly attributable to the MMIS."  Moreover, we found that because the
Agency had approved such costs in the past, the reasonableness of the
Agency's interpretation was seriously undercut.  In the present case, we
are dealing with direct staffing costs, not statewide and
department-wide indirect costs.  Here, although the BuMIR costs are
clearly allowable administrative costs of the Medicaid program, properly
reimbursed at 50 percent, the Agency has never found these costs
allocable to the MMIS and has consistently stated that the BuMIR
personnel were not involved directly in the operation of the MMIS.

The State argued that, although not cited by the Board in New Jersey,
the Board's interpretation is supported by the Comptroller General of
the United States. 7/  The State argued that a report by the Comptroller
General found that:

       HEW has not developed adequate guidance on what state
       administrative costs are proper for inclusion in the 75 percent
       federal reimbursement level if the state has an approved system.
       HEW has been indecisive as to what is and what is not allowable
       as an MMIS cost. The Comptroller General's Report, HRD-78-151,
       September 26, 1978, State's brief, p. 15; reproduced at State's
       Appeal File, Tab 6.

The Comptroller General's opinion is simply not relevant here. These
costs are clearly not entitled to the enhanced FFP rate under the
regulatory standard requiring personnel to be directly engaged in the
operation of the MMIS, and there is not a question as to whether the
State was misled or whether the applicable regulation has been
misapplied.  Moreover, the State did not point to any deficiency in
HCFA's guidance which might have supported its position concerning the
activities at issue here.

Conclusion

Based on the foregoing reasons, we uphold the Agency's disallowance.

 


______________________________ Donald F. Garrett

 

______________________________ Alexander G. Teitz

 

______________________________ Cecilia Sparks Ford Presiding Board
Member

 


1.   The costs for fiscal years 1978, 1979 and 1980 were originally
claimed at 50 percent FFP, but were adjusted to 75 percent by claiming
an additional 25 percent on QERs for the quarters ending September 30,
1980 and September 30, 1981.  The State claimed 75 percent FFP for most
of the BuMIR costs for fiscal years 1978 and 1979 and all of the BuMIR
costs for fiscal years 1980 and 1981.


2.   We cite to the 1980 version of the regulations, as the parties did
in their submissions.  However, the MMIS regulations have been codified
under various sections, but in substance have not changed since 1974.
Sections 250.90 and 250.120 of 45 CFR were redesignated as 42 CFR 450.90
and 450.120.  42 Fed. Reg. 52827, September 30, 1977. Section 450.90 of
42 CFR was redesignated as sections 433.111 - 433.114 of 42 CFR.
(Section 450.90(a) became section 433.111 and section 450.90(b)(2)
became section 433.113.)  43 Fed. Reg. 45176, September 29, 1978.
Section 450.120 of 42 CFR became section 446.175 of 42 CFR.  Section
446.175 of 42 CFR was added as part of Subpart B, Personnel
Administration of Part 446, State Organization - Medical Assistance
Programs.  42 Fed. Reg.  60564, November 28, 1977.  Section 446.175 was
redesignated as section 432.50 of 42 CFR.  43 Fed. Reg.  45176,
September 29, 1978.  Redesignations occurred after the time period at
issue here, but are not relevant.

3.   The Agency reviewers found that the costs for four clerks in the
Cost Settlement and Rate Setting Division and the Data Systems Analyst
in the Director's Office appeared to qualify for 75 percent FFP, if the
State could identify and document, in readily reviewable form, the MMIS
operational activities performed by these individuals.  The Agency
provided the State with the opportunity to submit such evidence.  Also,
the State could have provided such evidence during this appeals process.
However, the State has neither provided such evidence nor indicated an
intent to do so.  Review of MMIS claims for BuMIR, State's Appeal File,
Tab F, pp. 6 and 7; Disallowance Letter, State's Appeal File, Tab 1.
Consequently, in our analysis we do not distinguish these staffing costs
from the other disallowed costs.

4.   The State did not respond to the Agency's arguments. By telephone
conversation on March 24, 1987, the State informed the Board that it did
not wish to submit a full reply brief.  The State did, however, submit a
brief reply to the Agency's supplemental submission dealing with
Pennsylvania Department of Public Welfare, Decision No.  832, February
20, 1987.

5.   In the disallowance letter, the Agency stated that it had notified
the State of its long-standing policy that the disallowed costs did not
qualify for an enhanced FFP rate because the costs were for
audit-related activities. In fact, the Agency noted that the State had
contacted the Agency in 1981 to request a digression from its "long-
established policy not to allow higher FFP for any audit related
activity."  State's Appeal File, Tab C.  In our acknowledgment letter,
the Board requested the State to respond to the Agency's statements.
However, the State elected not to comment.

6.   In New Jersey, HCFA argued that the indirect costs at issue there
were not entitled to the enhanced FFP rate, because they were too remote
and thus not "directly" attributable to the operation of the MMIS.

7.   We note that the State also argued that an opinion by the Agency's
Office of General Counsel, Memorandum from Office of General Counsel to
Bureau of Program Operations, October 20, 1980, and Action Transmittal
HCFA-78-33 (State's Appeal File, Tab 5) support its position.  The
Agency argued that the OGC memorandum dealt with a broader range of
costs than those here when recommending the issuance of policy
clarifications and that the State has misconstrued the action
transmittal as providing for enhanced reimbursement for activities
indirectly related to the MMIS.  The State did not respond to the
Agency's points.  Since we find the result here so clear cut we do not
address these arguments