Tennessee Department of Human Services, DAB No. 1094 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Tennessee Department DATE: September 7, 1989 of Human
Services Docket Nos. 89-36, 89-47, 89-92, and 89-132
Decision No. 1094

DECISION

The Tennessee Department of Human Services (Tennessee or State) appealed
four disallowances by the Family Support Administration (FSA or Agency)
totalling $168,425 in federal financial participation (FFP) claimed
under the Aid to Families with Dependent Children (AFDC) program, Title
IV-A of the Social Security Act (Act). FSA reduced the State's claim
for AFDC expenditures relating to the placement of eligibility workers
at hospitals because the hospitals had reimbursed the State for 50
percent of the costs for the workers. FSA determined that any funding
received from the hospitals constituted applicable credits, which, under
Office of Management and Budget (OMB) Circular A-87, must be deducted
from the State's claims for FFP. FSA conceded, however, that any funds
received from State-owned hospitals could qualify as the State share.

The central issue before us is whether the funds received from the
hospitals may be used, in effect, as part of Tennessee's matching share
of AFDC expenditures. For the reasons described below, we find that
under the applicable regulations the funds do not qualify as the state
share, as argued by the State, but must be considered applicable
credits. We further find that regulations adopted by other components
of the Department of Health and Human Services (DHHS or Department)
allowing donated funds to be used as the state share of program
expenditures are not binding on FSA or the AFDC program. Accordingly,
we sustain the disallowances, subject to a downward adjustment to
reflect the amount of funds received from State-funded public hospitals.

Factual Background

Tennessee established a program whereby its Family Assistance
eligibility determination workers were stationed at 45 hospitals
throughout Tennessee. These eligibility workers primarily processed
Medicaid applications for hospital patients and their families, but also
assisted applicants for the AFDC and Food Stamp programs. The costs of
the workers were charged to the appropriate assistance program pursuant
to a random moment sampling method. The State initially paid all the
costs associated with the workers, but the participating hospitals,
pursuant to agreements they had executed with the State, later
reimbursed the State an amount equal to 50 percent of the workers'
salaries and benefits and of any other costs associated with placement
of the workers at the hospitals.

FSA reviewed Tennessee's program and determined that the State had
received reimbursement from the hospitals but had not reported receipt
of those funds to FSA as required by OMB A-87. Regulations, at 45
C.F.R. 74.171, provide that the principles to be used in determining the
allowable costs of activities conducted by governments are contained in
OMB A-87. As relevant to the facts of this appeal, OMB A-87 provides
that, in order for a cost to be allowable under a grant program, it must
be net of all applicable credits. Section C.1.g. Applicable credits
are --

those receipts or reduction of expenditure-type
transactions which offset or reduce expense items
allocable to grants as direct or indirect costs.
Examples of such transactions are: purchase discounts;
rebates or allowances, recoveries or indemnities on
losses; sale of publications, equipment, and scrap;
income from personal or incidental services; and
adjustments of overpayments or erroneous charges.

Section C.3.a. In making its disallowance determination that the funds
received from the hospitals were applicable credits, FSA, however,
specifically noted that if Tennessee could demonstrate that any of the
participating hospitals were state-funded, "the reimbursement received
from such hospitals could be construed to be the State funds required to
match Federal funds, and as such, would not have to be reported as
income or revenue." State Exhibit (Ex.) E, p. 2.

The State sought reconsideration of the disallowance from FSA's
Administrator. After reviewing the arguments submitted by the State,
the Administrator determined that the particulars of a prior Board
decision involving Texas (discussed below) cited by Tennessee to support
its position were not similar to the circumstances of Tennessee's
program, and he affirmed the disallowance. State Ex. L.

Discussion

AFDC is a cooperative federal-state program to enable "each State to
furnish financial assistance . . . to needy dependent children and the
parents or relatives with whom they are living . . . ." Section 401 of
the Act. The amount of federal funding each state is entitled to under
the AFDC program depends on a formula based on the amount of state funds
expended for the program. Section 403(a) of the Act. Thus, as with
other joint federal-state programs such as Medicaid, AFDC requires that
a state fund a percentage share of the program.

As state funds became scarcer in an era of expanding assistance needs,
states have looked to other sources, rather than traditional state
revenues, for the required matching state share. In this regard, the
possibility of using donations from non-state sources as the state share
has been raised.

Under AFDC regulations, FSA explicitly permits donations to be used as
the state share only for expenditures relating to staff training.
Sections 235.61 through 235.66 of 45 C.F.R. specify the state plan
requirements for training programs and the conditions for FFP for
training costs under the state plan. Section 235.66(b) states:

Funds donated from private sources may be consideredas the
State's share in claiming Federalreimbursement only where the
funds are: (1) Transferred to the State or local agency and
under its administrative control; (2) Donated without any
restriction that wouldrequire their use for the training of a
particular individual or at particular facilities or
institutions; and (3) Do not revert to the donor's facility or
use.

This is the only mention in AFDC regulations of donated funds from
private sources. The funds at issue in these appeals are, of course,
not used for training expenditures.

Another component of the Department, the Health Care Financing
Administration (HCFA), has amended its regulations to allow donations to
be used as the state share for all aspects of Medicaid expenditures.
Originally, the Medicaid program, like AFDC, authorized, at 42 C.F.R.
432.60, the use of donated funds as a state's Medicaid share only for
training expenditures. Effective November 12, 1985, however, HCFA
replaced that regulation with 42 C.F.R. 433.45, which expanded the use
of donated funds as a state's share to cover all types of Medicaid
expenditures and eliminated an old condition on private donations that
the funds be donated "without any restriction which would require their
use for . . . particular individuals or at particular facilities or
institutions."

Accordingly, in Texas Dept. of Human Services, DAB No.381 - Amended
Decision (1986), the Board reviewed a program very similar to the one at
issue here. The Texas state Medicaid agency placed Medicaid eligibility
workers in various hospitals and the hospitals, pursuant to agreements,
paid one-half of the workers' salaries. As FSA argued here, HCFA
contended that the funds received from the hospitals constituted program
income and, as applicable credits, must be deducted from Texas' program
costs. The Board reversed the disallowance, finding that the status of
such donations was unclear under the HCFA regulations and policy then in
effect, and that under the new regulation the donations would have been
acceptable even if the hospitals had received a tangible benefit from
their participation in the program. Additionally, the Board noted that
the program was experimental and small in scale, with evidence that HCFA
had given informal approval for it during its early stages.

The Board subsequently issued two other decisions involving donations
under the Medicaid program. In West Virginia Dept. of Human Services,
DAB No. 956 (1988), West Virginia hospitals sent "contributions" to a
special fund created by the West Virginia legislature to help reduce a
backlog of unpaid hospital Medicaid claims. West Virginia then used
that money as the state share to apply for matching federal funds. The
Board found that the money sent by the hospitals did not meet the
criteria for donations in 42 C.F.R. 433.45 because West Virginia had
improperly induced the hospitals to remit the funds. Consequently, the
Board found that the funds must be treated as applicable credits. In
Tennessee Dept. of Health and Environment, DAB No. 1047 (1989),
hospitals transferred funds to Tennessee for the purpose of helping
Tennessee expand the scope of its Medicaid program. The Board found
that the funds received from private and public hospitals met the
criteria for section 433.45 donations and accordingly reversed the
disallowance.

It is against this background of Medicaid donations cases that Tennessee
here contended that the reimbursement received from the hospitals for
the eligibility workers qualified as donations that should be accepted
as the state share of AFDC expenditures. The State argued that FSA's
disallowance was arbitrary, capricious, and an abuse of agency
discretion because FSA failed to act in a manner consistent with HCFA.
The State contended that had the questioned claims for FFP been
submitted under the Medicaid program they would in all likelihood have
been approved. While acknowledging the independent administrations of
FSA and HCFA, the State argued that it was patently inconsistent for two
agencies of the same Department to have such radically different
policies on what are permissible sources of the state share for their
respective programs. Tennessee questioned why FSA has retained without
change since 1980 the limits on donations of 45 C.F.R. 235.66 while
HCFA, in 1985, recognized the scarcity of state funds and accordingly
promulgated 42 C.F.R. 433.45. The State argued that a review of the
statutory payment provisions of the AFDC and Medicaid programs, sections
403(a) and 1903(a) of the Act, respectively, discloses no rationale for
treating non-state funds differently under each program.

Tennessee also argued that FSA's attempts to distinguish these appeals
from Texas, supra, were unpersuasive and contrary to OMB Circular A-102,
the purpose of which was to establish consistent and uniform
requirements among federal agencies in the administration of grants to
states. The State therefore argued that FSA should be estopped from
acting contrary to established DHHS precedent as evidenced by HCFA's
promulgation of 42 C.F.R. 433.45 and the Board's Texas decision, given
the lack of any compelling reason by FSA to justify its failure to
adhere to this precedent. Tennessee claimed that the funds at issue
here met the criteria of the Medicaid regulations, in that the funds
were under the State's administrative control, did not revert to the
hospitals, and were not coerced from the hospitals as the Board found in
West Virginia, supra. The State also noted that the DHHS Division of
Cost Allocation had approved as an amendment to the State's cost
allocation plan the eligibility worker program and the division of its
costs among the participating programs.

The State additionally contended that, as the AFDC regulations are
silent about whether private sources of state funding outside the
category of training can constitute the state share, this silence should
not be interpreted as limiting private sources of funding to training.
The State asserted that FSA failed to provide Tennessee with any clear
guidance in this area when Tennessee proposed its eligibility worker
program.

Moreover, the State contended, OMB A-87 and its applicable credit
provisions are not applicable to the facts of these appeals since
superseding regulations permit third-party donations to be used to
satisfy a matching requirement. The State referred to 45 C.F.R. Part 74
which lists the uniform requirements for DHHS grants. Specifically,
section 74.52, under Subpart G --Cost Sharing or Matching, provides that
a cost sharing or matching requirement may be satisfied by "cash
donations from non-Federal third parties."

Analysis

I. AFDC regulations permit donations to be used as the state share
for training expenditures only.

The State insisted that the funds received from the hospitals were
donations. The fact that the funds were contributed pursuant to an
agreement does not, according to the State, deny the funds their status
as donations because the Board in Texas viewed similar transfers under
agreements as acceptable donations under the Medicaid regulations.

Even if we were to accept the proposition that the funds in question may
be thought of as donations in the ordinary sense of that word, we find
that under the structure of the AFDC program the funds are ineligible
for use as the state share and must be considered applicable credits.
The AFDC program simply does not allow the funds to be used for the
purpose the State proposes. As mentioned above, the only reference to
donations in the regulations pertaining to the AFDC program is 45 C.F.R.
235.66(b), which concerns training expenditures. The funds at issue
were for costs associated with eligibility workers, not training.
Insofar as the AFDC regulations are thus explicit on the purpose for
which donations may be used, we are required to accept the limitation
FSA put on the use of donations. The Board is bound by all applicable
laws and regulations. 45 C.F.R. 16.14.

We do not consider it reasonable, as the State argues, to infer that,
because the AFDC regulations make no further mention of donations, this
silence allows donations to be used as the state share. We consider it
more reasonable to infer that, since FSA has specifically permitted
donations to be allowed as the state share in only one area of AFDC
expenditures, FSA intended donations to be prohibited in all other areas
as the state share. The Agency's reasonable interpretation of its own
regulation is entitled to deference. See, e.g., Illinois Dept. of
Public Aid, DAB No. 440 (1983).

If the funds from the hospitals cannot therefore be considered donations
under the AFDC regulations, what are they? The State, through the
eligibility worker program, clearly induced the hospitals to remit the
funds to the State. Without the program the hospitals certainly would
not have remitted the funds to the State. Under these circumstances, we
find that the program generated the funds, and the funds must
accordingly be considered program "receipts," which reduced the State's
AFDC expenditures. As such, we find that the hospital funds must be
considered applicable credits under the standards set forth at section
C.3.a. of OMB A-87. While the remittances represented by the hospital
funds are not specifically cited in the examples of applicable credits
in section C.3.a., that listing was not all-inclusive and the hospital
funds can reasonably be interpreted as "receipts" within the scope of
section C.3.a.

Moreover, contrary to the State's assertions that FSA gave it ambiguous
advice on the how the funds received from the hospitals should be
treated, the record indicates that FSA clearly told the State its
concerns about the program. The Agency letter, cited by the State as
evidencing FSA's ambiguity, declares:

[W]e do question the allowability of your proposed
method to file expenditure claims for . . . FFP for the
costs of the project. . . .

* * *

[Tennessee] will technically be incurring costs or expenditures
for the direct salaries and benefits of the hospital based
workers (as well as associated indirect costs) since it will be
processing their salaries and benefits through its payroll
system. However, [Tennessee] will be reimbursed by the
hospitals for the 50 percent non-Federal share of these costs.
This reimbursement could be interpreted as a negation of the
expenditures by [Tennessee]. . . Because FFP can only be
authorized to match expenditures of the "State" or "grantee",
the expenditures incurred by the hospitals could not generally
be used to draw down FFP. The only exceptions to this would be
those hospitals, if any, which are funded 100 percent by State
funds. . . .

* * *

If on the other hand we apply the more literal interpretation to
this situation, that the costs of this project should
technically be considered expenditures of [Tennessee], then the
50 percent reimbursement received from the hospitals for the
eligibility workers stationed there would have to be treated by
[Tennessee] as revenue or income. . . .

* * *

In summary, we find that regardless of how the costs of your
hospital-based eligibility worker program are treated, their
allowability for FFP will be at question.

State Ex. B (October 26, 1987 letter from FSA Regional Administrator),
pp. 4-6 (emphasis added).

This letter unambiguously shows that FSA knew how the proposed program
would be funded and told the State that, under either of two theories,
FFP for the project's costs would be questioned. Yet the State
proceeded with the program.

This letter, however, makes one point that FSA has repeated several
times in the record: funds from State-owned hospitals could be used as
the state share. In this regard, Tennessee has presented evidence that
one of the 45 hospitals that participated in the program, the University
of Tennessee Memorial Hospital, was State-owned and State-funded.
Accordingly, based on FSA's statements that funds from a state-owned
hospital may be used as the state share of AFDC expenditures, we direct
FSA to adjust its disallowance to reflect any funds remitted by the
University of Tennessee Memorial Hospital.

II. HCFA's policy on donations is irrelevant to the facts of these
appeals.

Tennessee contended, in essence, that the hospital funds in issue should
be judged under HCFA's regulations, and not FSA's. The State claimed
that the funds met all the standards of HCFA's regulation, 42 C.F.R.
433.45, and that this was shown by HCFA's failure to disallow that share
of the hospital funds attributable to the eligibility workers' time
spent on the Medicaid program. HCFA's regulation, promulgated in 1985,
shows, according to the State, a clearer perception of the difficulty
states are experiencing in meeting state matching requirements than does
FSA's "old" 1980 regulation.

We find the State's arguments unpersuasive. Tennessee has proposed a
theory that is attractive on the surface -- all agencies of the
Department should be bound by the same regulations on the sources of the
state share -- but totally ignores the practical realities of a
Department charged with the responsibility of administering a variety of
assistance programs.

Each program of the Department, be it Medicaid, AFDC, Foster Care, or
whatever, had its origin in its own particular congressional
authorization. Congress established the parameters of each of these
programs, setting each program's goals and funding mechanisms and
establishing separate management structures with separate discretion to
implement the various programs. Each program carries its own separate
budget. The agency within the Department responsible for the
administration of each program has developed its own expertise in how
the program should be most efficiently and effectively run.

The considerations that compelled HCFA to amend its regulations to
permit a wider range of sources for the state share may not apply
equally to FSA and the AFDC program. An agency would be reluctant to
promulgate a needed regulation for a program it administered (or to
experiment with new procedures) if it believed that the regulation could
be held binding on all the Department's varied programs. The Secretary
of the Department would be averse to authorizing any regulation for the
same reason. Moreover, it must be recognized that the applicable credit
provision is a government-wide rule, and that HCFA's regulation
permitting donations is but an exception to that rule.

Nor does the fact that the DHHS Division of Cost Allocation (DCA)
approved Tennessee's cost allocation plan amendment concerning the
division of costs for the eligibility worker program among the
participating programs have any bearing on FSA's disallowance
determination. The regulations at 45 C.F.R. Part 95, Subpart E, cited
by Tennessee to support its position, concern only the approval of cost
allocation plans. As FSA pointed out, this Board has previously held
that approval of a cost allocation plan does not constitute approval for
charging any item of cost to a particular program since a plan functions
to delineate the proper cost allocation and by its nature does not
address all the substantive aspects of a particular program. See, e.g.,
New York State Dept. of Social Services, DAB No. 759 (1986), p. 7; and
Oregon Dept. of Human Resources, DAB No. 729 (1986), p. 16. Thus, the
cost allocation plan approval relates only to the allocation of costs
for the eligibility workers among the various programs that receive
benefits from the workers' activities; it simply does not address (and
cannot be viewed as approving) the question of whether donated funds may
be used to fund the state share of the workers' costs in any of the
programs involved.

We also find no merit in Tennessee's assertion that FSA should be
estopped from its disallowance because FSA's action is inconsistent with
the actions of other agencies of the Department. Under Heckler v.
Community Health Services of Crawford County, 467 U.S. 51 (1984), for
estoppel to apply against the Federal Government, a party must
demonstrate that the traditional elements of estoppel are present.
Furthermore, Schweiker v. Hansen, 450 U.S. 785 (1981), suggests that, if
estoppel applies at all to the Federal Government, at the very least it
requires a showing of "affirmative misconduct" on the part of federal
officials.

We find that Tennessee has not established any of the traditional
elements of estoppel, let alone any affirmative misconduct on the part
of federal officials. There has been no showing of a definite
misrepresentation. In fact, the record, as shown above, indicates that
FSA made its position known to the State from the start and that this
position comports with FSA's published regulations. As for DCA's
approval of the program, the central point is that approval of a cost
allocation plan goes only to the issue of the allocation of costs of the
employees to a particular program. It clearly does not address the
question of donated funds being used as the state share. Thus, we see
no basis for concluding that DCA's approval of how the program's costs
could be allocated was any type of misrepresentation on which Tennessee
could reasonably have relied.

Moreover, FSA has not acted inconsistently with the Board's holding in
Texas. The circumstances of these appeals are readily distinguishable
from those in Texas. In Texas the Board found that HCFA's policy could
reasonably be interpreted by Texas to permit its donations program. The
Board relied on the following factors among others: HCFA's concession
that its policy at the time permitted donations outside the training
context; HCFA's informal approval of the state's program during its
initial stages; HCFA's subsequent publication of a regulation allowing
donations as the state share in these circumstances; and HCFA's approval
of comparable programs in other contexts. Here, in contrast, the State
has not provided any evidence that FSA ever waivered from its policy of
allowing only donations for training expenditures to be used as the
state share, as provided in the regulations. Indeed, FSA was explicit
in expressing its misgivings about Tennessee's program from the outset.
In these circumstances, we find that the Texas decision simply does not
apply.

Nor would sustaining this disallowance be, as the State argued, contrary
to Title IV-A. The State insisted that denial of FFP for its program
would prevent Tennessee from ensuring that all individuals qualified for
the AFDC program have the opportunity to apply for AFDC assistance as
mandated by section 402(a)(10)(A) of the Act. Quite simply, these
appeals are restricted to the question of whether the hospital funds may
be used as the state share. Our decision does not preclude Tennessee
from devising other methods to ensure that all AFDC-eligibles are
registered for the AFDC program.


III. Section 74.52 of 45 C.F.R. is inapplicable to the facts of these
appeals.

While Tennessee is correct that section 74.52 generally permits
third-party donations to be used to satisfy a matching requirement, that
regulation does not apply to the AFDC program. As FSA pointed out, 45
C.F.R. 201.5(e) specifically excludes Subpart G of Part 74, which
contains section 74.52, from applying to grants to states for public
assistance programs such as AFDC.

The State's insistence that the funds at issue here are not "grants to
states" but donated funds misses the point. Section 201.5(e) excludes
Subpart G from applicability in the administration of the program as a
whole, and this would surely exclude its applicability for such issues
as the treatment by states of donations received in the course of
administration. Moreover, although Part 74 was designed to establish
uniform requirements for the administration of grants, to the extent
that exceptions are expressly specified, they must be applied by the
Board. The exclusion in section 201.5(e) applies to the public
assistance programs, such as AFDC, that are cooperative ventures of the
states and the Federal Government. In these programs, the financial
responsibility is shared between the states and the Federal Government.
The applicable credit provision in OMB A-87, which applies here by
regulation, only serves to ensure that the Federal Government, as well
as the states, benefits from any financial receipts that accrue to the
program. While the Department may allow what is in effect a broader
exception to the applicable credit provision in the Medicaid program,
the regulations in effect here, which the Board is bound to uphold,
provide that Subpart G does not apply to the AFDC program and that
donations may be used as the state share only for training activities.

Conclusion

For the reasons stated above, we sustain the disallowance of $168,452,
subject to a downward adjustment to reflect the amount of funds provided
by the State-owned hospital, the University of Tennessee Memorial
Hospital.

_____________________________ Norval D. (John) Settle

_____________________________ Alexander G. Teitz

_____________________________ Donald F. Garrett
Presiding Board