Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: California Department of Health Services
DATE: September 9, 1991
Docket No. 90-99
Decision No. 1274
DECISION
The California Department of Health Services (State, California)
appealed
a determination by the Health Care Financing Administration
(HCFA, Agency) to
disallow $4,948,973 in federal financial participation
(FFP) claimed under
Title XIX (Medicaid) of the Social Security Act
(Act) for the period July 1,
1984 through June 30, 1988. 1/ HCFA
determined: (1) that the
State had claimed the enhanced rate of 75
percent FFP, available for costs
attributable to the operation of the
State's Medicaid Management Information
System (MMIS), for fiscal agent
costs that were properly claimed only at the
50 percent FFP rate; and
(2) that the State had claimed FFP at the enhanced
rate of 75 percent
for certain fiscal agent costs that were not eligible for
any
reimbursement.
HCFA based its determinations on a financial review performed by
its
regional office to determine whether California was claiming at the
75
percent rate only those administrative costs for the State's
MMIS
(CA-MMIS) that qualified for such enhanced funding. The first
category
of questioned costs (costs that HCFA maintained were properly
claimed
only at the 50 percent FFP rate) included postage costs associated
with
provider manuals, manual updates, provider bulletins,
Resubmission
Turnaround Documents (RTDs), and Claim Inquiry Form
(CIF)
acknowledgement letters; 2/ freight costs associated with
provider
billing forms; and print center and related overhead and sales tax
costs
for provider manuals/bulletins, RTDs, and CIF acknowledgement
letters.
The second category of questioned costs (costs that HCFA maintained
were
not eligible for any reimbursement) included fiscal agent
corporate
overhead applied to cost reimbursable postage and freight, and
penalty
interest resulting from late payment of sales tax.
On the basis of the analysis below, we uphold the disallowance in full.
Background
In 1972, Congress amended Title XIX to include enhanced rates
of
reimbursement for administrative costs for the operation of a
mechanized
claims processing and information retrieval system.
Section
1903(a)(3)(B) of the Act provides for reimbursement of --
75 per centum of so much of the sums expended during
such
quarter as are attributable to the operation of
mechanized
claims processing and information retrieval systems . . .
.
An MMIS qualifies as such a system. In the subpart of the
regulations
implementing the MMIS requirements, an MMIS is defined as --
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.
42 C.F.R. 433.111. 3/
The regulation at 42 C.F.R. 433.15(b)(4) reiterates that the 75
percent
rate of FFP applies to the "operation" of mechanized claims
processing
and information retrieval systems. "Operation" is defined as
--
the automated processing of claims, payments, and
reports.
"Operation" includes the use of supplies, software,
hardware,
and personnel directly associated with the operation of
the
mechanized system.
42 C.F.R. 433.111. 4/
Finally, section 1903(a)(7) and 42 C.F.R. 433.15(b)(7) provide that
all
activities not qualifying for enhanced funding that are necessary
for
the proper and efficient operation of the state plan may be
reimbursed
at the 50 percent rate.
Before 1981, the Medical Assistance Manual, PRG-31, issued on June
10,
1974, and Action Transmittal, HCFA-AT-78-33, issued on April 3,
1978,
set forth Agency policy concerning the types of costs that were
eligible
for 75 percent FFP. The Medical Assistance Manual required
that a state
claim be in accordance with an approved cost allocation plan
(CAP) 5/
and contained a brief summary of costs covered by the "75%
Operational
FFP," such as "forms, system hardware and supplies"
(.7-71-50). Action
Transmittal, HCFA-AT-78-33, stated, in part,
that--
. . . all costs - direct and indirect - benefiting the
operation
of an approved MMIS are reimbursable at the 75% Federal
matching
rate.
In July 1981, the Agency issued Part 11 of the State Medicaid
Manual
(SMM). 6/ Section 11270 of the SMM required states to "document
costs
in a cost allocation plan approved by [HCFA]" and section
11275.21
stated that--
Appropriate costs, including overhead costs for the direct
costs
attributable to the operation of the system are also payable
at
. . . 75 percent FFP . . . .
Section 11275.23 contained the summary of costs, such as "forms,
system
hardware and supplies" covered under 75 percent FFP.
In February 1982, the Agency issued Transmittal No. 2 of the SMM
(Revision
2). (This Transmittal stated that its purpose was to "clarify
policy
already stated" in Part 11 of the SMM.) Revision 2, which
was
incorporated into the SMM as sections 11275.2 and 11275.26, as
here
relevant, contained a "List of Reimbursable Costs for State
Systems,"
together with language that purported to distinguish between
indirect
costs which were "directly attributable" and those which were
"not
directly attributable" to an MMIS cost center. Section 11275.26 of
the
SMM, as amended by Revision 2, provided that any cost that had not
been
listed as being eligible for enhanced funding would be funded at the
50
percent level.
Effective July 31, 1986, HCFA issued Revision 8 to Part 11 of the SMM.
The
general principle expressed in Revision 8 is that enhanced FFP
should be
available for manual intervention which is necessary to make
the computer
system perform its automated functions properly, but not
for other clerical
or manual processing activities which would be done
by a state even in the
absence of an MMIS. See SMM sections 11275.27;
11275.32.
Revision 8 also amended sections 11275.30 and 11275.31 to provide
as
follows:
11275.30 Attributable Costs Under 90-Percent and 75-Percent
for
FFP for Overhead Costs
Only the direct overhead costs resulting from the operation
or
development of an MMIS are eligible for the enhanced FFP
rates.
Such costs are usuallythe non-personnel costs such
as
electricity, rent, shared facilities, caused by the operation
of
the MMIS.
Overhead costs not directly resulting from the MMIS cost
center
are reimbursed at the 50-percent FFP rate. . . . This
applies
also with respect to a fiscal agent's costs.
11275.31 Attributable Costs under 75-percent FFP for
Fiscal
Agent MMIS Operations
A fiscal agent may perform many additional functions
(section
11275.28) for the State beyond those related to MMIS
operations
eligible for 75-percent FFP yet bill the State at
one
all-inclusive rate per claim processed. If HCFA's review of
the
fiscal agent's contract and operations show this to be the
case,
the State will be required to develop a cost allocation
plan
through which its payments to the fiscal agent are broken
out
for matching at the appropriate FFP rates. (See
section
11275.30.)
Analysis
I. Fiscal Agent Costs Claimed at 75 Percent FFP
but Entitled Only
to 50 Percent FFP
In disallowing enhanced funding for various categories of fiscal
agent
costs, HCFA relied upon the provisions of Revisions 2 and 8 of the
SMM
that specifically identified certain costs as reimbursable at
the
enhanced rate and that further stated that all other costs would
be
reimbursed at the 50 percent rate. On appeal, the State argued that
the
Revisions were invalid based on principles espoused in prior
Board
precedents and because they were not promulgated in accordance with
the
Administrative Procedure Act (APA), 5 U.S.C. 551 et seq. The State
also
argued that HCFA staff had advised it that all costs associated with
its
fiscal agent contracts would be reimbursed at the 75 percent rate.
See
State's Exhibit (Ex.) 2, paragraph no. 11. Finally, the State
argued
that even if the Revisions were generally valid and applicable, they
did
not apply to the specific cost items at issue. In rejecting all of
the
State's arguments, we first discuss the arguments relating to
the
general applicability of Revisions 2 and 8. We then discuss each
cost
item at issue.
A. Revisions 2 and 8 to Part 11 of the SMM
The State argued that Revisions 2 and 8 were invalid and
unenforceable
because they were substantive rules that had not been
promulgated with
notice of proposed rulemaking under the APA. The State
asserted that
HCFA itself recognized the substantive nature of the provisions
of the
SMM when it incorporated Part 11 of the SMM by reference into
the
Federal Register on September 30, 1981. The State contended
that
Revisions 2 and 8, as "revision[s]" or "amendment[s]" to the
version
that had been incorporated by reference also had to be published in
the
Federal Register. State's brief (Br.) pp. 5 and 8. In
addition, the
State asserted that the list of reimbursable costs at section
11275.32
in Revision 8 not only imposed substantive requirements for
enhanced
FFP, it also conflicted with the provisions of section 1903(a)(3)(B)
of
the Act, which provides that all expenditures "attributable" to
the
operation of MMIS are entitled to 75 percent FFP, irrespective
of
whether or not such expenditures are contained on a list created
by
HCFA. The State maintained that the intent of Congress when it
amended
section 1903(a)(3)(B) of the Act to include enhanced rates
of
reimbursement for an MMIS was to help states establish and operate
a
modern and efficient Medicaid claims handling procedure. Therefore,
to
the extent that a particular expenditure contributes to or aids the
goal
of efficient mechanized claims processing and information
retrieval
systems, it should be reimbursed at the 75 percent FFP rate.
The State also argued that even if the Revision sections were
not
substantive, the State still would not be bound by them without
actual
and timely notice, which the State asserted it did not receive
here.
The State argued that it in fact had received advice from HCFA
staff
that all costs associated with the fiscal agent contracts would
be
reimbursed at the 75 percent level.
Finally, regarding Revision 2, which was issued in February 1982,
the
State claimed that the Board, in New Jersey Dept. of Human Services,
DAB
No. 648 (1985), held that Revision 2 was unenforceable for lack
of
adequate notice of changes in FFP reimbursement rules. With regard
to
Revision 8, the State argued that it became effective on July 31,
1986
and therefore could not govern disallowed costs incurred prior to
that
date. The State noted that the Request for Proposal (RFP) and
Contract
with its fiscal agent defined the State's relationship with its
fiscal
agent and were approved by HCFA in 1983. 7/
We have considered many of the foregoing arguments in prior
Board
decisions. See, e.g. New Jersey Dept. of Human Services, DAB No.
1071
(1989) upheld in New Jersey v. U.S. Dept. of Health and Human
Services,
748 F.Supp. 1120 (D.N.J. 1990). Our reasons for rejecting the
same
arguments here are as follows:
o Revisions 2 and 8 are interpretive rules which did not have to
be
published with notice of proposed rulemaking under 5 U.S.C.
553.
These rules interpret section 1903(a)(3)(B) concerning the rate
of FFP
for activities "attributable to the operation of mechanized
claims
processing and information retrieval systems," and the
regulations
implementing that section. In DAB No. 1071, at pages
10-11, regarding
the issue of whether Revision 8 was a legislative or
interpretative
rule, we said:
Although the courts have found the distinction
between
legislative and interpretative rules to be "tenuous,"
"fuzzy,"
or "baffling" and to require a case-by-case
analysis,
interpretative rules are generally regarded as explaining
the
meaning given by an agency to a statute or rule it
administers.
. . . Here, the Agency was explaining how it would
apply the
statutory and regulatory provisions providing for
enhanced
reimbursement to a specific type of administrative cost. . .
.
We conclude then that the Agency by Revision 8 engaged in
the
classic interpretative function of filling in details
not
otherwise specified by the statute or regulation. . . .
Thus,
we conclude that notice and comment rulemaking procedures
were
not required for Revision 8, an interpretative
rule.
Furthermore . . . the Board has held that it would uphold
an
Agency interpretation so long as that interpretation
is
reasonable and the State had timely notice.
o The State here had actual notice of these revisions since
during
the period at issue the State was on the Agency's mailing list
to
receive all SMM changes and updates, and the record supports
the
conclusion that all such changes and updates, including
all
Transmittals and Revisions, were mailed timely to the State by
HCFA in
the normal course of business. Declaration of Richard
Rohde, Agency
Ex. 5, pp. 1-2, paras. 4-6. Indeed, the State's
own evidence
specifically admits that portions of Revision 2 were to
be found in
the State's records. State's Ex. 6, p. 6, para.
8. Thus, the Agency
clearly complied with the requirements of 5
U.S.C. 552(a)(1)(D) and
(E) by giving the State actual and timely
notice of these provisions.
o The provisions of Revisions 2 and 8 at issue represent a
reasonable
interpretation of the statutory term "attributable to the
operation of
mechanized . . . systems" and thus are clearly within the
parameters
of the Agency's policy making authority. The State
argued that there
is no limitation in the definition of "attributable"
to indicate that
something must be "close" in order to be
"attributable." The
Webster's Third New International Dictionary
defines an "attribute" as
an "essential" or "intrinsic" characteristic
or quality, or an object
"closely associated with" a person or
thing. These definitions in
fact suggest that activities
"attributable" to the operations of an
MMIS should bear a close
relation to the operations of the MMIS, and
that the Agency's
interpretation requiring closeness was a reasonable
interpretation. Moreover, since the requirement at issue concerns
an
enhanced rate of FFP and is an exception to the reimbursement rate
for
administrative activities generally, it may properly
include
reasonable limits to differentiate between costs subject to
the
ordinary rates from costs entitled to enhanced funding. 8/
o The State presented no evidence from the legislative
history to
indicate that by using the term "attributable,"
Congress intended to
include activities whose connections with
the operations of the MMIS
were not close. Moreover,
HCFA's interpretation does not conflict
with the purpose of the
enhanced funding to provide an incentive to
states to develop
and use mechanized systems. To the extent that
costs are
of a type that would be incurred even in a manual system,
their
connection with the mechanization Congress intended to
encourage
is tenuous at best. The regulations at 42 C.F.R. 433.110
define the "Operation" of an MMIS to mean "the automated
processing
of claims, payments, and reports," and as including
"the use of
supplies, software, hardware, and personnel directly
associated with
the functioning of the mechanized system."
The costs in question
here are not specifically covered by that
definition and nothing in
HCFA's prior policy issuances would
reasonably lead the State to
think that the costs would be
entitled for enhanced funding.
o The State has clearly misread the effect of the application
of
Revision 2 in a prior Board decision, New Jersey Dept. of
Human
Services, DAB No. 648 (1985). In that decision, the Board
merely
concluded that the Agency could not apply certain language
contained
in Revision 2 to create a distinction between "directly
attributable"
and "not directly attributable" indirect costs.
The Board reached
this conclusion in light of Agency policy, as stated
in the SMM and
its predecessors, to reimburse all allocable indirect
costs. This
particular provision of Revision 2 was not at issue
here. The Board
did not hold that the entire text of Revision 2
was unenforceable.
Indeed, in a subsequent case, Pennsylvania Dept. of
Public Welfare,
DAB No. 832 (1987), the Board upheld part and reversed
part of the
Agency's disallowance for enhanced FFP pursuant to section
11275.26 of
Revision 2 of the SMM.
o The SMM was specifically recognized as a source of procedures
for
implementing the regulations by 42 C.F.R. 433.110.
o Although chapter 11 was initially incorporated by reference
for the
year effective October 1, 1981 as if it were published in full
in the
Federal Register (see, 46 Fed. Reg. 47938, 47942 (Sept. 30,
1981)),
HCFA provided individual states, including California, with
actual
notice of Revisions 2 and 8, (see, e.g., Declaration of Richard
Rohde,
Agency Ex. 5, pp. 1-2, paras. 4-6) and also made the provisions
of the
Manual and Revisions available for public inspection and
copying.
o Once HCFA had clarified its position concerning which costs
were
"attributable" to the operations of a MMIS, as it did in
Revisions 2
and 8, those revisions took precedence over any advice
that may have
been provided by Agency officials in correspondence
preceding the
issuance of those revisions. Likewise, the State
is bound by the
rules regardless of the contractual arrangements that
may have been
made with its fiscal agent. In the instant case,
the State's contract
with its fiscal agent was negotiated after, not
before, the issuance
of Revision 2, so that the State had actual
notice of the HCFA's
interpretation prior to negotiation and could
have made appropriate
adjustments in the contract terms.
Clearly, the fact that a
particular cost was included in an approved
contract between the State
and the fiscal agent would not in and of
itself entitle the State to
enhanced funding for the cost.
Accordingly, we find that Revisions 2 and 8 were generally applicable
to
the costs in question in this appeal. In the sections below, we
discuss
how specific provisions of the Revisions apply to particular cost
items
included in the disallowance.
B. Postage costs
Section 11275.29 of Revision 8 of the SMM states:
Attributable Costs Under 75-percent FFP for Postage
Postage costs associated with: issuance of EOBs [explanation
of
benefits], issuance of ID cards, and issuance of
remittance
statements are allowable at the 75-percent FFP rate.
Other
postage costs are reimbursed at the 50-percent rate.
See also section 11275.26 of Revision 2, noted above.
The Agency disallowed the difference between the enhanced 75 percent
FFP
rate and the generally available 50 percent FFP rate for postage
costs
associated with RTDs, CIF acknowledgement letters, provider
manuals,
manual updates and provider bulletins. The Agency argued that
section
11275.26 of Revision 2 did not list the postage for these items
as
eligible for enhanced reimbursement, nor did section 11275.29
of
Revision 8 of the SMM.
The State argued that a RTD is a computer form specially developed for
the
CA-MMIS. The State explained that the form advises a provider that
the
provider's claim has been suspended, and it solicits missing or
corrected
claim information from the provider to enable completion of
claims
processing. California further explained that a CIF is a form
developed
for CA-MMIS which the provider uses to submit a request for
information to
the State as to the status of its claim or to request
readjudication of a
claim. The State maintained that a CIF
acknowledgement letter is
generated by the mechanized claims processing
system to notify a provider
that its CIF has been received and to inform
the provider of the status of
its claim and the action being taken to
resolve the inquiry.
California argued that the distinctions made in sections 11275.29
and
11275.26, regarding types of postage costs for which 75 percent FFP
is
allowable, are arbitrary and unreasonable and ignore the
statutory
standard of "attributable." The State maintained that there
is no
rational basis for allowing 75 percent FFP for postage of EOBs
and
remittance statements while disallowing the enhanced rate for RTDs
and
CIF acknowledgement letters. California asserted that RTDs and
CIF
acknowledgement letters are terms that it chose to use for
certain
system-generated documents. The State contended that those
documents
may be known by other names in other state MMIS systems, and HCFA
may
allow 75 percent reimbursement for postage because the documents use
a
title recognized by HCFA. Further, the State alleged that RTDs and
CIF
acknowledgement letters are, in fact, equivalent to
remittance
statements and, on that basis alone, the postage on these
documents
should be reimbursed at the enhanced rate.
Further, California asserted that HCFA could not think of every
possible
document that would qualify for HCFA's list. Therefore, by
limiting 75
percent FFP for postage only to those items listed in section
11275.29
(or section 11275.26), HCFA's action is mechanical and
unreasonable.
California maintained the same position for provider manuals and
provider
bulletins. The State contended that it is entitled to 75
percent FFP
for producing provider manuals and provider bulletins
because they are
attributable to, or benefit, the operation of the
CA-MMIS. California
maintained that because these costs for provider
manuals and provider
bulletins are entitled to 75 percent FFP, so should
related postage
costs.
In light of the applicable provisions and prior Board precedent, we
find
that the Agency properly disallowed the difference between the
general
50 percent FFP rate and the enhanced 75 percent FFP rate for the
costs
at issue here.
The Board in DAB No. 832, supra, at page 14, found that --
the Agency can reasonably disallow [the enhanced portion of]
75
percent reimbursement for postage costs other than
those
specifically listed in the Manual as reimbursable at that
rate.
See, also, DAB No. 1071 (1989). The Board's reasoning in
these
decisions is applicable here. The postage costs claimed by the
State
are not identified on the Agency's list for costs that are eligible
for
the enhanced rate. Consequently, these costs fall within the scope
of
the provisions of the Revisions that provide for the regular rates
of
FFP for all other costs. Moreover, the Agency's list of costs
entitled
to enhanced funding may reasonably recognize that postage
costs
generally are a type of cost that would be incurred by a state
whether
or not its system was mechanized, and that enhanced funding for
postage
costs should be related to factors such as the technological advances
in
the way claims are processed.
In DAB No. 832, supra, the Board considered the nature of postage
costs
incurred by a fiscal agent carrying out some of the state
claims
processing functions and found that items that were not the
equivalent
of items specifically included on the list for enhanced funding
should
not receive enhanced funding. In that case, the items that were
not
entitled to enhanced funding were related to invoices and forms
that
could not be processed by the MMIS. Id. Similarly in this
case, the
State conceded that RTDs are used to return suspended claims,
claims
that cannot be processed completely, to the provider for correction
and
resubmission to the fiscal agent. Likewise, the CIF
acknowledgement
letter is used to respond to provider inquiries regarding
the
disposition of a claim. We agree with the Agency that claims
are
processed regardless of a CIF acknowledgement letter, and that the
CIF
acknowledgement letter is "essentially extraneous to the operation
of
MMIS." Agency Br., p. 21.
In addition, we find that the State's argument for postage
costs
associated with provider manuals and bulletins is based on an
incorrect
premise that costs of producing provider manuals and provider
bulletins
receive 75 percent reimbursement and therefore the postage for
such
manuals and bulletins are also entitled to 75 percent FFP.
Section
11275.26, and its successor section 11275.32, specifically provide
that
provider manuals and provider bulletins are entitled to only 50
percent
FFP. Finally, as indicated above, sections 11275.26 and
11275.29
expressly permit enhanced funding in postage costs for specified
items;
all other postage costs are only entitled to 50 percent
reimbursement.
Thus, we reject the State's argument that postage for provider
manuals
and provider bulletins are entitled to 75 percent FFP.
C. Freight costs
The State maintained that "freight costs" are not the same as
"postage
costs" and therefore HCFA is in error in relying on sections
11275.26
and 11275.29 that do not include freight costs within their
express
terms. California contended that since these sections were
drafted by
HCFA, contain arbitrary distinctions among allowable postage
costs, and
are applied by HCFA in a hard and fast mechanical manner, HCFA
should be
limited to the express language of the sections, and not allowed to
rely
on references in the State's RFPs to define freight costs. The
State
also argued that "postage" and "freight" are distinct concepts, and
the
State treats them separately in the cost reimbursement
invoices
submitted by its fiscal agent.
The State here failed to cite any authority which provides that
freight
costs are entitled to an enhanced rate. As we have explained
repeatedly
above, both Revisions 2 and 8 provide that unless a cost is
specifically
identified as entitled to enhanced funding, it is entitled only
to 50
percent funding. Moreover, the Board has held that when a state
is
claiming reimbursement of costs at a rate higher than 50 percent,
the
state has the burden of showing that the costs are entitled to
the
higher rate of reimbursement. See, e.g., DAB No. 1008,
supra.
Revisions 2 and 8 make no reference to freight costs, and indeed do
not
provide enhanced funding for the postage costs of the same items
if
shipped through the mails. 9/
D. Print center and related costs
1. Printing costs associated with provider
manuals,
manual updates, and bulletins
The State argued that printing costs associated with provider
manuals,
manual updates, and provider bulletins were entitled to the enhanced
75
percent reimbursement. While the State noted that the provider
manual
issue was raised and rejected in DAB No. 832, the State continued
to
maintain that such items were entitled to 75 percent FFP.
California
argued that the state in DAB No. 832 had conceded the validity
of
section 11275.26 of Revision 2, which is contrary to
California's
position here. 10/ Additionally, California maintained
that section
11241 of Revision 8 of the SMM recognizes that such manuals
are
necessary to meet the performance requirements for HCFA certification
of
an MMIS system.
As we discussed above, we find that section 11275.26 of Revision 2
is
generally applicable. Further, we find that section
11275.26
established that costs for provider manuals and publications
necessary
for the maintenance of the Medicaid program are eligible for only
50
percent FFP. The same level of funding applies under Revision 8.
Also,
section 11241 is not availing to the State since it merely discusses
the
first of three phases of the federal review process for enhanced
funding
for MMIS operations and does not address the level of funding
available
for any of the documentation required for that process, such as
provider
manuals, or imply that those items would receive enhanced
funding.
Moreover, a provider manual would be a necessary cost to a
state
regardless of the type of system a state was using.
Therefore, the costs at issue are entitled only to 50
percent
reimbursement.
2. Costs relating to RTDs and CIF
acknowledgement
letters
The State argued that HCFA merely concluded, without any discussion,
that
print center costs relating to RTDs and CIF acknowledgement letters
were the
kind of functions which would occur regardless of the MMIS.
The State
contended that reliance upon such a generalization is
insufficient
justification, by itself, for denial of 75 percent FFP.
Further, California
maintained that a declaration submitted by one of
its employees shows that
the CIF acknowledgement letters and RTD forms
were designed specifically for
CA-MMIS and are necessary and unique to
the MMIS system. See State's
Ex. 4, p. 5. California argued that the
design and development of these
documents would not have occurred
without the incentive of enhanced
FFP. The State concluded that these
documents enable computer
processing of functions that would otherwise
have to be handled through
cumbersome manual procedures or, more likely,
could not be performed at
all.
We uphold the disallowance of these costs based on the relevant
provisions
of Revisions 2 and 8. Moreover, as the Agency argued:
The rationale [in DAB No. 832] concerning the
fundamentally
peripheral nature of costs generated in obtaining
further
information from providers in order to correct or
complete
incorrect or incomplete claims mandates the conclusion here
that
print costs related to RTDs are reimbursable at 50-percent
FFP.
Agency's Br., p. 26. Indeed, the State's own explanation of
the
documents at issue indicate their relationship with the MMIS. The
State
explained that a RTD --
advises a provider that the provider's claim has been
suspended,
and it solicits missing or corrected claim information from
the
provider to enable completion of claims processing.
State's Br., p.16. Further, the State explained that a CIF is a form --
the provider uses to submit a request for information to
the
State as to the status of his claim or to request
readjudication
of a claim.
Id. A CIF acknowledgement letter is a letter issued by the State to --
notify a provider that his CIF has been received and to
inform
the provider of the status of his claim and the action
being
taken to resolve the inquiry.
Id.
RTDs are analogous to provider claims that cannot be processed, and
the
State did not show why it should receive enhanced funding for
its
attempts to obtain more information. CIF acknowledgement letters
are
forms of communication with providers that are not directly related
to
the operation of the MMIS system. As the Agency noted, the
system
processes a claim whether or not a provider makes an inquiry
concerning
that claim. While these documents are part of claims
processing in
general, they are not necessarily unique to a mechanized
system, and
thus reasonably may be reimbursed at the 50 percent level.
3. Costs relating to provider claim forms
Although the Agency agreed that, except for freight costs, print
center
costs associated with provider claim forms are eligible for 75
percent
FFP under section 11275.23 of the SMM, it maintained that
California
failed to provide a methodology for identifying print center
costs
relating to claim forms. See Agency Br., p. 27 quoting
State's Ex. 4,
pp. 10-13. The Agency argued that the State did not
provide data from
the review period and, on that basis alone, the State's
data was
unacceptable as an impermissible estimate of costs under the
program.
The Agency also argued that even if "approximate" data from a
later
period were acceptable, the State produced no time studies or
other
information that justifies the breakdown by percentages of the
total
costs.
We do not decide here whether the State's data from a later
period
represents an impermissible estimate since the State did not in
any
event meet its burden to demonstrate that the data relied upon from
the
later period is a reliable demonstration of the State's experience
for
the period at issue. (See, e.g. Colorado Dept. of Social Services,
DAB
No. 1239 (1991) and the cases cited therein for a discussion of
this
burden.) Moreover, we agree with the Agency that the State also
did not
substantiate the basis for its percentage breakdown of the time spent
by
certain employees on MMIS-related functions eligible for enhanced
FFP.
Accordingly, we find that the Agency reasonably determined on either
of
two grounds that the State has not sufficiently met its burden
of
documentation.
4. Fiscal agent corporate overhead
In regard to fiscal agent corporate overhead applied to print
center
costs, the State maintained that provisions of Revision 8 are invalid
or
unenforceable. The State argued that in Oklahoma Dept. of
Human
Services, DAB No. 1188 (1990), the Board held that the language
in
section 11275.30 limiting FFP to 50 percent in relation to
certain
indirect costs associated with "statewide overhead . . . and .
. .
associated with the State agency's overhead functions" had
no
application to indirect overhead costs incurred by fiscal agents,
and
that the Board noted that these fiscal agent overhead costs are
not
"State-incurred costs, nor do they fit within the section's
description
of public agency indirect costs." State's Br., pp.
25-26. Therefore,
the State asserted that HCFA may not separately break
out and disallow
the State fiscal agent's overhead cost from the print center
functions
which the State pays the fiscal agent to perform. Since
fiscal agent
overhead is part of the contract price for performing print
center
functions, the State alleged that the fiscal agent overhead costs
must
be reimbursed at the same 75 percent FFP rate that the rest of the
print
center costs are entitled to receive.
The Agency argued that while DAB No. 1188 is instructive in this case,
it
is essential to understand that DAB No. 1188 dealt with a
fixed-price
contract in which there was a comprehensive contract price for
the
fiscal agent's performance. Thus, there remained in DAB No. 1188
only
to determine the percentage of the fixed price properly allocable
to
operation of the MMIS. In this case, the Agency maintained, and
the
State did not deny, that there were fixed-price and
cost-reimbursable
portions of the fiscal agent's contract. The
disallowance here
concerned only the cost-reimbursable portion.
Moreover, the Agency
contended that the fiscal agent also performed non-MMIS
functions for
the State. The Agency concluded that it is not possible
simply to
allocate a percentage of a comprehensive contract price to
performance
of the MMIS function, as was the case in DAB No. 1188.
We find that funding for these costs is available only at the 50
percent
level under section 11275.30 of the SMM. Moreover, we agree
that DAB
No. 1188 does not apply here for the reasons identified by the
Agency.
Thus, we conclude that the Agency was reasonable in examining
separately
each category of reimbursable cost paid by the State to
determine
whether the cost was attributable to a MMIS or a non-MMIS
function
because non-MMIS functions are not entitled to enhanced
funding. The
operation of the print center was an example of a non-MMIS
function
performed by the fiscal agent on a cost-reimbursable basis,
and
consequently, there is no basis for the State's claim for
enhanced
funding in these costs.
5. Sales tax
To justify its claim for 75 percent FFP for sales tax on print
center
costs, the State maintained that if, as it argued, the disallowed
print
center costs for provider manuals/bulletins, RTDs and
CIF
acknowledgement letters are entitled to 75 percent FFP, under HCFA's
own
reasoning, sales tax on these items is entitled to 75 percent
FFP.
(These taxes are levied on services provided by the fiscal agent,
and
the fiscal agent in effect acts as a conduit for the flow of the
tax
from the Department of Health Services to the State Board
of
Equalization.)
As discussed above, we find that costs relating to provider
manuals,
provider bulletins, RTDs and CIF acknowledgement letters are
not
entitled to enhanced funding. See sections 11275.26 and 11275.32 of
the
SMM. Thus, using the reasoning advanced by both parties, sales
taxes
paid on such costs are also ineligible for enhanced funding. 11/
II. Unallowable costs
A. Fiscal agent corporate overhead applied to cost
reimbursable
postage and freight
The State argued that the only reason there is an issue concerning
fiscal
agent general and administrative (G&A) overhead costs and
corporate
overhead applied to postage and freight is because the State,
not HCFA, was
initially concerned that the fiscal agent's charging of
G&A on postage
and freight was not appropriate. The State explained
that its
Department of Health Services initially did not pay these
costs, and the
State Controller later questioned payment. However, the
Department,
which first raised the issue, later satisfied itself through
a legal opinion,
meetings with its fiscal agent staff, and review of the
fiscal agent's
proprietary corporate information that these charges were
appropriate.
The State claimed that even the State Controller's office,
whose opinion is
the primary basis for the disallowance, later backed
off from its position
and agreed to authorize payment of the costs.
Further, the State alleged that HCFA is unfairly attempting to use
the
State's diligence against the State by taking the State's
interim
position and mischaracterizing that position to find a basis
for
disallowing costs.
Moreover, the State contended that the audit report is also
misleading
because it relies on a section in the State's RFP, section 8.8.1,
which
governs only the last two months of the entire four-year audit
period
and which was drafted specifically to resolve this issue.
Contrary to the State's arguments, the State's own contract provisions
do
not support its position. The State's 1983 RFP, Addendum 12,
section
8.9.1, which was incorporated by reference into its contract, and
which
is applicable to the period in question, provided:
Postage refers only to U.S. Postal rates, common carrier
rates
and parcel services utilized to mail documents to providers,
the
State or the Federal government. All other postage shall
be
included in the Operations bid. This item excludes as a
cost
reimbursable item postage equipment and related
employees'
salaries or overhead required to mail or distribute
mail.
Further, in addition to the section quoted above, the
Agency's
disallowance letter referenced the State's March 1987 RFP, Addendum
9,
section 8.8.1, and the State's Technical Proposal, section 13.1.3.
Both
of these were also incorporated by reference into the State's
contract
and both provided that overhead required to mail or distribute
mail
would not be allocated to cost reimbursement.
It is apparent from the State's own RFPs and its Technical Proposal
that
corporate overhead was not applicable to postage and
freight.
Therefore, the State is not entitled to claim FFP for these
costs.
B. Fiscal agent overhead costs applied to sales tax
The State maintained that fiscal agent G&A overhead costs applied
to
sales tax, like G&A overhead costs applied to postage, was first
raised
and later resolved by the State when it concluded it had to pay
the
fiscal agent these costs. Further, California argued that, contrary
to
the assertions in the disallowance letter, sales tax was an
expense
under the fiscal agent contract for which G&A overhead costs
were
properly chargeable. Finally, the State argued that HCFA's cite
to
section 2493 of the SMM has no relevance to this issue because
that
section deals with payment of sales tax by providers, not fiscal
agents.
This review does not concern Medicaid reimbursement to providers.
The Agency maintained that there are actually two different kinds of
sales
taxes at issue here. First, there is the sales tax which the
fiscal
agent collects from the Department of Health Services in
connection with the
sale of its product to the Department of Health
Services and which is
attributable to the fixed-price portion of the
contract. These taxes
are collected by the fiscal agent from the
Department for remission to the
State Board of Equalization, and the
fiscal agent simply acts as a conduit
for the flow of the tax from one
State body to another. Next, there is
the sales tax which the fiscal
agent pays to third party vendors when it
purchases goods and services
that are necessary to its business and are
attributable to the
cost-reimbursable portion of the contract. The
Agency argued that the
former category of sales tax is not an "actual
expense" of the fiscal
agent, as specified in the contract between the fiscal
agent and the
State, citing the Technical Proposal, Volume 10, section
13.2.5. This
provision authorizes overhead only in proportion to the
"actual"
expenses. Thus, the Agency concluded that the fiscal agent is
not
permitted to apply corporate overhead to such taxes, and FFP is
not
available in such payments by the State.
As to the latter category, the sales tax attributable to
the
cost-reimbursable portion of the contract, the Agency conceded that
this
tax is a legitimate expense of the fiscal agent and could be included
in
the pool of costs to which the corporate overhead rate would be
applied.
The Agency argued and we agree, however, that the cost data
submitted by
the State did not recognize the distinction between the
fixed-price
sales taxes collected by the fiscal agent and the
cost-reimbursable
sales taxes paid by the fiscal agent. The Agency had
originally
indicated that it would review additional data which would permit
an
accurate determination of the amount of sales taxes attributable to
each
portion of the contract. However, in response to the State's
position
that no distinction should be made regarding the origin of sales
tax
under the fiscal agent contract, the Agency maintained that
the
disallowance should be upheld
We agree with the Agency's position. The State's funding for
services
provided by the fiscal agent is based on costs authorized by
the
contract between the State and the fiscal agent. The State
itself
initially questioned whether overhead for the sales tax attributable
to
the fixed-price portion of the contract would be payable under
the
contract since the tax was not a "cost" to the intermediary and
was
merely "passed through" to the Board of Equalization. State Ex. 5,
pp.
11-15, and Att. H, p. 6-9. The State's position here was
based on a
legal opinion that concluded that overhead for this type of sales
tax
was payable under the contract because the tax was viewed as
cost
reimbursable under the contract and because the fiscal agent is
liable
to the State for the tax as the "seller" of property. Id.
We find this opinion unpersuasive for several reasons. Even if the
tax
is viewed as a cost reimbursable item under the contract, we
question
whether the tax would represent any net cost to the fiscal
agent.
Under the procurement standards concerning the allowability of
costs,
which were expressly made applicable to the contract (see Att. H, p.
2),
any "cost" to the fiscal agent for its payment to the Board
of
Equalization should be reduced by State's initial payment of the tax
to
the fiscal agent.
41 C.F.R. 1-15.201-5 provides that--
The applicable portion of any income, rebate, allowance,
and
other credit relating to any allowable cost, received by
or
accruing to the contractor, shall be credited . . . as a
cost
reduction . . . .
Thus, the actual cost to the fiscal agent for this tax would be reduced
by
the State's initial payment of the tax to the fiscal agent. The
State
did not allege that its payments to the fiscal agent failed to
fully
compensate the fiscal agent for its payments to the Board
of
Equalization. For the same reason, we think it is irrelevant that
the
fiscal agent may ultimately be liable for the tax under State law
since
the State still was obliged to pay the full amount of the tax to
the
fiscal agent. Thus, in accord with the Agency's position, we fail
to
see how these taxes could be viewed as an "actual" expense of
the
contractor.
Moreover, we question whether overhead for a sales tax, which is
merely
passed from one State body to another by the fiscal agent, is
necessary
for the proper and efficient administration of the program as
required
by section 1903(a)(7) of the Act. 12/
Accordingly, since the State has failed to document its claim, by
not
providing the Agency with sufficient data to determine the
unallowable
costs associated with the cost-reimbursable portion of the
State's
contract, we uphold this part of the disallowance in full. The
Agency,
of course, is free to permit the State a further limited period of
time
following the issuance of this decision to make this
demonstration. The
State should notify the Agency within 30 days of
receiving this decision
if it is requesting a further opportunity to submit
documentation.
C. Penalty interest
The Agency, in its disallowance letter, notified the State that
penalty
interest resulting from late payment of sales tax was
unallowable
pursuant to Office of Management and Budget (OMB) Circular
A-87,
Attachment B, paragraph D.5, which provides:
Fines and penalties. Costs resulting from violations of,
or
failure to comply with Federal, State and local laws
and
regulations are unallowable.
Further, OMB Circular A-87, Attachment B, paragraph D.7, provides:
Interest and other financial costs. Interest on
borrowings
(however represented), bond discounts, cost of financing
and
refinancing operations, and legal and professional fees paid
in
connection therewith, are unallowable except when authorized
by
Federal legislation and except as provided for in
paragraph
C.2.a of this Attachment.
The State argued that OMB Circular A-87 is not binding authority upon
the
State. Furthermore, California asserted that the payment of
interest on
sales tax does not come within the proscriptions of OMB
Circular A-87,
Attachment B, D.5. and D.7. With regard to section D.5.,
the State
maintained that interest cannot be equated with a fine or
penalty. The
State argued that a penalty is a sanction, and the payment
of interest is not
a sanction, it is the cost of using someone else's
money. Further, the
State argued that section D.7. concerns
money-borrowing transactions and
there was no borrowing agreement in
this instance. Therefore, because
sales tax is a cost for which the
State is entitled to FFP, so should the
cost associated with late
payment of sales tax be entitled to FFP.
Although the State argued that OMB Circular A-87 did not apply to it,
the
State did not allege that the interest costs would be an allowable
cost under
the procurement standards applicable to a cost-type
contractor whose
reimbursement is funded under a grant from this
Department. (See 45 C.F.R.
74.175 and 74.176, which authorize
application of the Federal Procurement
Regulations at 41 C.F.R. Subpart
1-15.2 to a for-profit contractor. The
State's contract with its fiscal
agent makes these principles applicable to
the fiscal agent. See Att. H
of Ex. 5, p. 2.) We find that
regardless of whether we apply the
principles of OMB Circular A-87 (which,
under 42 C.F.R. 433.112(b)(7)
specifically apply to the costs of an MMIS) or
the Federal Procurement
Regulations at 41 C.F.R. Subpart 1-15.2, the interest
costs for late
payment of sales tax would not be an allowable cost.
We agree with the Agency that the interest imposed on the contractor
for
its failure to make timely sales tax payments is in effect a
cost
resulting from failure to comply with State tax laws or an interest
cost
on borrowings. See OMB Circular A-87, Attachment B, Paragraphs D.5
and
D.7 and the parallel provisions in the procurement standards, 41
C.F.R.
1-15.205-13 and 1-15.205-17. The Board has previously found that
late
payment charges constitute unallowable interest charges. See
Economic
Opportunity Council of Suffolk, Inc., DAB No. 714 (1985);
Marshalls
Community Action Agency, DAB No. 328 (1982).
Finally, section 1903(a)(7) authorizes funding for
administrative
expenditures only "as found necessary by the Secretary for the
proper
and efficient administration of the State plan." In prior
decisions,
the Board has upheld the Agency's determination that any late
payment
arising from the failure to pay a bill on time was not a cost that
would
be incurred by a prudent person or be considered to be "ordinary
and
necessary" for the performance of a grant. See Economic
Opportunity
Council of Suffolk, Inc., supra, at p. 7; Marshalls Community
Action
Agency, supra, at p. 4. We find that the expenditures here were
not
necessary for the proper and efficient administration of the
State's
program.
Based on the above, we find that the Agency correctly disallowed
the
cost.
Conclusion
Based on the foregoing analysis, we uphold the Agency's disallowance
in
its entirety.
Judith A. Ballard
Cecilia Sparks Ford
Donald F. Garrett
Presiding
Board Member 1. HCFA also
di
sallowed $210,232 for costs related to improper classification
of
taxable items. The State did not, however, contest this part of
the
disallowance.
2. The State noted that although the disallowance letter referred
to
the disallowance of CIF postage costs, it is actually the postage on
CIF
acknowledgement letters that is the subject of the disallowance.
3. Unless otherwise noted, the regulations cited in this decision
were
those in effect for the period covered by the disallowance.
4. This definition was amended on December 18, 1986. 551 Fed.
Reg.
45321. The new definition refers to the definition of "operation"
at 45
C.F.R. 95.605, which applies to automated data processing in
other
programs as well as Medicaid, but which is substantively the same as
the
definition quoted here.
5. A CAP is a narrative description of the procedures that the
State
agency will use in identifying, measuring, and allocating all
State
agency costs incurred in support of all programs administered
or
supervised by the State agency.
6. The SMM specifically noted that it replaced the Medical
Assistance
Manual and other Medicaid instructions (including the Action
Transmittal
noted above). The SMM provided that it:
. . . constitutes a major restructuring and updating of
Sections
7-71-00 through 7-71-60, Medicaid Assistance Manual and
other
Action Transmittals, Information Memoranda,
Policy
Interpretation Questions, and other specifically
related
material.
7. The "RFP" or a Request for Proposal is the document that
solicits
responses from potential contractors as the first step in the
process
leading to the selection of a contractor. The ultimate contract
may
incorporate the RFP by reference, and the RFP is relevant as
a
description of the functions to be performed by the contractor,
here
termed the fiscal agent.
8. In DAB No. 1071 (1989), we reached this same conclusion, stating
on
page 7 as follows:
Attributable connotes a close association. This
statutory
language contrasts with the basic reimbursement provision for
50
percent FFP, which speaks simply of "the remainder of
the
amounts expended." Thus, the statute on its face
anticipates
the exercise of discretion in the designation of those
"closely
associated" costs considered subject to the
enhanced
reimbursement provisions.
9. The Agency's brief on p. 23 cites two instances where the
State's
own definition of "postage" or postage charges would not include
freight
costs.
10. The State also asserted that since there was no predecessor
rule
dealing specifically with allowable FFP for provider manuals,
the
"benefits MMIS" rule of AT-78-33 must govern the situation before
the
effective date of Revision 8. This position is based on the
State's
argument that the Board declared Revision 2 of the SMM unenforceable
in
total, which we did not. Moreover, AT-78-33 contained no
provisions
concerning what types of direct costs were "directly associated"
with
MMIS operations. (This AT stood for the proposition that states
could
receive the enhanced rate for all indirect costs benefiting,
i.e.,
allocable, to a MMIS, and established no basis for determining
which
direct costs were closely associated with a mechanized system,
and
therefore eligible for 75 percent FFP.) Therefore, we reject
this
argument without further discussion in the text. We also note that
the
State did not in any event establish how printing costs "benefit"
an
MMIS.
11. HCFA noted in its disallowance letter that the disallowance
here
concerned only the enhanced portion of federal funding for sales tax
on
printing costs, and not the propriety of the regular funding rate of
50
percent for these costs. HCFA noted that section 2493 of the SMM,
which
was effective September 11, 1987, may make at least a portion of
these
costs unallowable in total, but HCFA reserved the right to evaluate
this
issue as part of a separate review. Our decision here,
therefore,
concerns only the enhanced portion of the State's claim for these
costs.
12. The State in its reply brief argued that a prior Board
decision,
California Dept. of Health Services, DAB No. 786 (1986),
had
dispositively resolved this issue. That decision concerned
the
allowability of the payment of the sales tax by the Department of
Health
Services to the fiscal agent for services provided to the Department
by
the fiscal agent. The Board concluded that payment of this tax by
the
Department of Health Services represented an allowable cost under
the
program. The Board clearly did not conclude, however, that the
fiscal
agent's transfer of the tax to the State Board of Equalization
also
represented an allowable cost incurred by the fiscal agent. As
we
concluded above, the fiscal agent does not incur any net cost for
this
tax since it is fully reimbursed for its sales tax obligation by
the
Department of Health