Massachusetts Department of Public Welfare, DAB No. 1288 (1991)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  Massachusetts Department of Public Welfare

DATE:  December 23, 1991
Docket No. 91-9
Audit Control No. A-01-89-00006
Decision No. 1288

DECISION

The Massachusetts Department of Public Welfare (State) appealed a
determination by the Health Care Financing Administration (HCFA)
disallowing $2,761,798 in federal funding claimed under title XIX
(Medicaid) of the Social Security Act (Act).  HCFA found that the State
had taken custody of the fund balances of personal needs allowances
(PNAs) from the estates of deceased Medicaid recipients and that the
State had placed the accumulated balances into its general revenues
account.  HCFA determined that the PNA balances represented Medicaid
program recoveries by the State and disallowed the full federal share of
the balances.

We find, on appeal, that the PNA balances in question represented
"recoveries" to the State within the meaning of section 1903(d)(3) and
Office of Management and Budget (OMB) Circular A-87, and that the
federal share of the recoveries constituted an overpayment to the State.
The record, however, does not establish definitively whether the
disallowance amount is overstated because the State may have returned
some of the funds to individuals with a lawful right to the funds and
because of certain other factors identified by the State.  Accordingly,
although we generally uphold the disallowance, we provide the parties a
further opportunity, as discussed below, to resolve these issues
relating to the amount of the disallowance.

Background

The Medicaid program under title XIX of the Act provides medical
assistance to certain categories of individuals whose income and
resources are insufficient to meet the cost of necessary medical
services.  The program permits.recipients at long-term care facilities
to have a personal needs allowance (PNA).  PNAs are essentially a
monthly amount of income that is disregarded by the program in
determining eligibility.  The purpose of the allowance is to enable the
recipients to buy items of clothing, toilet articles and other personal
needs items while in residence at the facilities.  See 42 C.F.R.
435.725(c)(1).  The Medicaid program permits the allowances to
accumulate up to $2000 as an "excluded" resource.

The disallowance at issue concerns the State's treatment of the PNA
balances of deceased Medicaid recipients that come into its possession
from its long-term care facilities.  The Office of the Inspector General
of this Department performed a review of the PNA balances in the State's
possession during the period July 1, 1986 through June 30, 1989.  The
objectives of the review were:

     to determine the amount of personal needs funds of deceased
Medicaid recipients deposited in MDPW's "Deceased Recipients" account;
and to determine whether MDPW [Massachusetts Department of Public
Welfare] should have credited the Medicaid program for the Federal share
of personal needs funds recovered from nursing homes.

Review Report, Attachment (Att.) B of State's Notice of Appeal, page 3.

This review and subsequent information provided by the parties during
the pendency of this appeal disclosed that the State had devised and
used the following procedures for handling the PNA balances of deceased
recipients:

o  The State Medicaid regulation, Code of Massachusetts Regulations,
Part 106, chapter 456.804(C)(14), required nursing homes to forward to
the MDPW, the Medicaid State Agency, any PNA balances for deceased
recipients within five days of the death of the Medicaid recipient.

o  The MDPW had established a suspense trust account, referred to as the
"Deceased Recipients" account, dating back to 1976.  The purpose of this
account was to maintain the PNA balances from deceased nursing home
patients following the initial transfer of these funds from the nursing
homes.

o  The MDPW used this account to make disbursements for claims from
funeral homes to cover a decedent's funeral expenses.  Review Report,
supra, p.  4.  (Although the Review Report and the State's initial brief
suggest that the MDPW also used the account to pay claims of the
decedent's surviving relatives, it appears that any such disbursements
were intended to cover only funeral expenses. Hearing Transcript (Tr.),
p. 72.  The State conceded that MDPW had no authority under its probate
procedures to make any disbursements when the probate process had not
been initiated and no estate fiduciary appointed, but argued that since
funeral expenses had the highest priority of any claim under its probate
procedures, such disbursements were appropriate and unlikely to cause
objections.  Tr., p. 23.

o  The State accumulated $3,365,775 in PNA fund balances in the
"Deceased Recipients" account from 1976 until June 22, 1987, when the
State made its first transfer of all accumulated fund balances to a
general revenue account under the State Treasurer.  Review Report,
supra, p. 5.  During the period in dispute the State made four more
transfers of additional fund balances that had accumulated at the MDPW
in the interim to the same general revenue account.  The total amount of
accumulated PNA fund balances placed in the general revenue account from
all five transfers totalled $5,523,596.

o  The transfers represented 12,873 PNA balances averaging $429 each.
State Brief (Br.), p. 3.

o  The State conceded that the PNA balances became part of a decedent's
estate upon the death of the decedent and that the Medicaid program
could make a claim as a creditor against a decedent's estate under State
law.  Tr., p.  30.  (This claim would be based on the fact that the
Medicaid program had become a creditor because it had provided the
individual with medical assistance during the individual's lifetime.)

o  The State asserted that the MDPW had an Estate Recovery Process,
which attempted to recover from decedents' estates.  The State
represented that it had been able to recover over $6 million of Medicaid
benefits under its Estate Recovery Process in one fiscal year.  Sheehan
Affidavit (Aff.), para. 7, pp. 2-3.  The State asserted that it did not
use that process for PNA balances because the State believed that it
would not be cost effective to claim these funds under those procedures.
The State never indicated how large an estate must be for it to apply
its Estate Recovery Process.  Tr., p. 64.

o  The State disavowed ever having made a claim on behalf of the
Medicaid program against these funds under its probate procedures.

o  The State asserted that after the State Treasurer took custody of the
PNA balances, the funds were held in a general revenue account subject
to all lawful claims, and that there was no time limit for claiming the
funds.  Sheehan Aff., para. 6, p. 2.  The State further asserted that
the State Treasurer was required to seek the rightful owner or owners of
the funds by following its abandoned property procedures.  These
procedures included a publication in all major newspapers notifying the
public of the Treasurer's custody of these funds.  Tr., pp. 60-3.

o  The State alleged that as of June 6, 1991, the State Treasurer's
Abandoned Property Division had paid $909,027.56 of transferred funds
(including interest) to claimants, such as the decedent's spouse, heirs
or estate creditors.  State Br., p. 23.

Arguments of the Parties

HCFA's primary position was that when the State took custody of the PNA
balances under its procedures, the State had in fact recovered medical
assistance benefits provided to deceased recipients.  HCFA asserted that
such recoveries constituted an "applicable credit" under OMB Circular
A-87, C.1.g., or that, under section 1903(d)(3) of the Act, HCFA was
entitled to recoup the federal share of the recoveries as an
overpayment.  HCFA conceded, however, that if the State Treasurer had
paid any of the fund balances to rightful claimants under the abandoned
property procedures, the State would be entitled to a reduction in the
disallowance.

The State argued that the PNA funds at issue were not Medicaid estate
recoveries and that the factual prerequisites for recovery had not been
established.  The State asserted that federal law permits, but does not
require, the State to recover Medicaid benefits from estates, especially
where it may not be cost-effective to do so.  The State asserted that no
overpayment determination had been made by the Secretary of this
Department as required by section 1903 and the funds in question had not
been recovered with respect to the Medicaid program.  The State also
argued that HCFA's claim against these funds must be made in another
forum and in the form and manner prescribed by the applicable State law
and that such law would grant the MDPW complete statutory immunity
against any action or claim such as this disallowance. Finally, the
State argued that the amount of the disallowance was in any event
undemonstrated, unsupported and overstated.

Analysis

Section 1903(d)(3) provides that amounts "recovered . . . by the State .
. . with respect to medical assistance furnished under the State plan
shall be considered to be an overpayment" to the State.  Moreover, OMB
Circular A-87, C.1.g.  provides that a state's program costs must be
reduced by all "applicable credits," and includes "recoveries" as an
example of an applicable credit. 1/

We find that the State's procedures for taking custody of the PNA funds
at issue were "recoveries" of medical assistance provided to deceased
recipients within the meaning of section 1903(d)(3) and OMB Circular
A-87.  Our reasons are as follows:

o  The reference to "recoveries" in the statute and the OMB Circular is
not qualified in any way and therefore reasonably encompasses the
State's actions here when it takes custody of the PNA funds by placing
them initially in an account with MDPW and then by placing them in a
general revenue account for unrestricted use by the State under its
abandoned property procedures. 2/  All of the funds were initially
transferred to MDPW under the State's own regulations because of MDPW's
basic responsibility to oversee the proper administration of these
funds.  All of the decedents in question had in fact received Medicaid
benefits and all had been permitted to have a personal needs allowance
by virtue of special income and resource exemptions in the Medicaid
program.  The State indisputably had the authority under its laws to
claim and recover these funds as medical assistance furnished by the
Medicaid program under its State plan.  The State, however,
intentionally chose not to make a claim on the program's behalf under
the probate procedures for any of the PNA balances. The State chose
instead to rely on its abandoned property procedures in order to take
custody of these funds and to gain unrestricted use of the funds. 3/

Although the State ostensibly treated the funds as "abandoned," it
clearly was aware at all times of the Medicaid program's potential
ownership claim for the funds under its probate procedures.  Moreover,
the State intentionally, indeed aggressively, invoked the abandoned
property procedures to gain use of these funds. The procedures generally
viewed property to be abandoned when the property remained unclaimed for
a period of five years.  Tr., pp. 45-6; 60-3.  Here, the MDPW
transferred at least a portion of the PNA funds to the State Treasurer
after the passage of less than a year after the Medicaid recipient had
died.  Tr., p. 72.

Under these circumstances, the State's abandoned property procedures can
reasonably be viewed as an alternative recovery method applied by the
State to recover the payments for medical assistance provided to these
decedents.  The State's use of these procedures should not be a basis
for ignoring the Medicaid program's underlying claim for these funds and
cannot serve as a basis of depriving HCFA of its rightful pro rata share
of these funds.

o  Under the abandoned property procedures, the State placed the PNA
funds in its general revenues account and gained unrestricted use of the
funds.  Although the State argued that it never acquired an
unconditional title (since the funds were always held subject to claims
from potential creditors and estate heirs), the reality of the situation
was that the State has unrestricted use in perpetuity of any funds that
remain unclaimed.  HCFA, moreover, agreed to give the State a credit for
any portion of the disallowed funds the State did in fact pay back to
claimants through the abandoned property or probate procedures.  The
disallowance amount purports to represent only those funds that the
State in fact retains for its unrestricted use.  Thus, we conclude that
the State may not hide behind the abandoned property procedures and
argue that no recovery has been made when the reality of the matter is
that the State has taken custody of these funds for its own unrestricted
use.

This Board has held under different but essentially comparable
circumstances that where a State takes custody of funds under its
abandoned property procedures, such custody is tantamount to acquiring
title, and the funds in question could reasonably be viewed as program
income.  See Maryland Dept. of Human Resources, DAB No. 1247 (1991).

o  While the State ostensibly used the abandoned property procedures so
that it could avoid the administrative expenses related to the recovery
of the PNA balances under the probate procedures, the abandoned property
procedures themselves involved considerable administrative expenses,
including publications in all .major newspapers and a comprehensive
claiming and appeals process.  Tr., pp. 60-2. Further, the State
indicated that it had no authority under the abandoned property
procedures simply to turn over estate funds to a claimant if the probate
process had not already been invoked.  Tr., p. 73.  Therefore, even
where a potential claimant for the funds appeared under the abandoned
property procedures, that claimant would still have to use the very
probate procedures the State ostensibly wished to avoid in order to take
possession of the funds.  Consequently, the State's approach is
potentially more costly than the probate process alone, since it could
involve both the abandoned property procedures and the probate
procedures.

o  The State argued that its actions should not be viewed as a
"recovery" because the Medicaid program nowhere requires it to
effectuate recoveries in every instance.  This argument, however, misses
the point.  The State conceded that it has authorized itself under its
plan to recover Medicaid benefits from the estates of deceased
recipients. The issue here is not whether the State may forego making a
recovery in a particular instance but whether the actions the State in
fact took constituted a recovery. (Moreover, while a State may have
discretion to forego recoveries in particular instances under its
program rules, the State must still exercise that discretion reasonably
and in a manner consistent with its basic responsibility to administer
the program properly.)

While this Board might ordinarily be inclined to defer to a state's
characterization of the meaning and effect of its own procedures, we
would not normally defer in instances where the characterization is
itself unreasonable. 4/

o  The State argued that the funds in question should not be considered
estate "recoveries" because the State never considered whether any of
the funds came from estates which are protected from Medicaid recoveries
by virtue of section 1917. Section 1917 protects the estates of deceased
Medicaid recipients from recoveries of medical assistance correctly paid
on behalf of the decedent in three circumstances:  the benefits being
recovered were received before the decedent attained age 65; the
decedent has a surviving spouse; and the decedent has surviving children
under age 21 or surviving children who are blind or permanently or
totally disabled.  The State indicated that in taking custody of the PNA
balances, it intentionally does not develop whether the deceased
recipient has a surviving relative that would preclude a Medicaid
recoupment under section 1917, and that its actions under its abandoned
property procedures cannot therefore be viewed as a Medicaid recovery.

We disagree.  The State's custody of the PNA funds under its abandoned
property procedure is conditional and the ultimate ownership status of
the funds is left in perpetual suspense.  Any heir (including heirs
protected by section 1917) may make a claim against these funds at any
time, and HCFA has agreed to simultaneously relinquish its claim if the
State in fact pays any of the funds to a protected heir.  We should also
note that the State's efforts to locate the rightful owners of the PNA
funds while the MDPW has control of the funds or as part of the State's
implementation of its abandoned property procedures serve at least in
part as an effort to locate the surviving relatives protected by section
1917.  The fact that no such relatives step forward to make a claim
would seem to suggest that the relatives either do not .exist or are not
inclined to pursue a claim. 5/  Their potential claims, nevertheless,
would be protected in perpetuity by the State's abandoned property
procedures. Ultimately, the State's failure to take any additional
affirmative efforts to locate protected heirs and to ensure that they
receive the PNA balances results from the State's own decision and
clearly does not justify the State's position that the procedures
actually used were not "recoveries." 6/

In any event, contrary to State's arguments here, section 1917 clearly
does not limit a state to the use of probate procedures in carrying out
estate recoveries.  The case cited by the State on behalf of such an
interpretation of section 1917 held only that Medicaid recoveries were
restricted to assets that could pass through the decedent's probated
estate and not to assets that would pass outside the estate to a joint
tenant. See, Citizens .Action League v. Kizor, 887 F.2d 1003 (9th Cir.
1989).  The court's position was based on the reference in section 1917
to a "recovery" from an individual's "estate."  This decision does not
address the issue raised here, which is whether a state must always
recover estate assets through its formal probate procedures.  The State
here, moreover, has never disputed that the accounts in question are in
fact part of a decedent's estate and could have passed through a
probated estate if the State had chosen to institute the probate
process.

o  The same analysis would also apply to the State's argument that the
abandoned property procedures should not be viewed as estate recoveries
because they do not ensure that all potential estate creditors and heirs
receive what is due them under the probate rules.  All potential probate
claimants are fully protected by the abandoned property procedures
because they may at any time make a claim under those procedures by
invoking the probate process.  Thus, if claimants with higher priority
than the Medicaid program wished to step forward and make a claim under
the probate process, they could still do so and receive payment of their
claim.  HCFA moreover conceded that the State is entitled to an
adjustment for any claim it ultimately pays.  The record in any event
suggests that with the passage of time, the possibility of any claims
from these other sources becomes extremely unlikely.

Again, however, the State's intentional decision to forego further
development of the existence of potential claimants under the probate
process does not justify the position that the procedures used were not
recoveries.

o  The inherent irony of the State's decision to use its abandoned
property procedures here is that when the State follows the procedures
and, for example, publishes its lists of abandoned PNA accounts in major
newspapers, it is to a large extent searching for itself as the estate
creditor with a priority claim for these PNA funds by virtue of the
Medicaid benefits it paid to the decedent.  In other words, while one
organ of the State is searching for the rightful owner of "abandoned"
funds, another organ of the State is declining to step forward with its
rightful ownership claims. The State intentionally chooses not to step
forward as a claimant and willingly leaves ownership status of the funds
in suspense even though it expects and encourages other claimants to
step forward when it becomes aware of those claimants.  7/

o  Contrary to what the State argued, HCFA has properly made an
overpayment determination under section 1903(d)(3) and does have the
authority to recoup that overpayment from the State under section 1903
of the Act. 8/  The State argued that HCFA had not established that
anyone was overpaid and that in any event only the Secretary of this
Department may determine whether there has been an overpayment as
required by section 1903.  Finally, the State argued that the MDPW has
complete statutory immunity against HCFA's disallowance and that HCFA's
claim against these funds must be made in the form, manner, and forum
prescribed by State law.  We disagree on all counts.

We have already discussed at length why the PNA funds may reasonably be
viewed as "recoveries" with respect to medical assistance furnished
under the State plan and have concluded that the State was the entity
that was overpaid under the program by virtue of its recovery of the
medical assistance that had been furnished without having paid HCFA its
pro rata share of the recovery.  The Secretary of this Department has
delegated to HCFA the responsibility to administer the Medicaid program
on his behalf and this responsibility necessarily includes the authority
to make the determination of overpayment that is at issue here.
Furthermore, the Secretary has delegated to this Board the
responsibility to review on his behalf any disallowance decision
resulting from such a determination by HCFA.

Finally, we conclude that HCFA's disallowance here is not a specific
attempt to recoup from MDPW any of the funds that were literally
transferred to the State Treasurer, but rather is a recognition that
since the State has made a recovery of the PNA funds by virtue of its
transfer of these funds to its Treasurer for unrestricted use by the
State, an adjustment should be made in the amount of the ongoing federal
funding due the State in accordance with section 1903(d) of the Act.
See, e.g., North Carolina, supra.  We should also add that the State as
an entity receives funding for the Medicaid program under the Social
Security Act, and the State as an entity is held accountable under
section 1903 when the Secretary determines that an overpayment has been
made under section 1903.  This disallowance has been issued in the name
of MDPW only because that Department is the agency designated by the
State to administer the Medicaid program on its behalf. 9/  Thus, the
State cannot here reasonably argue that it or the MDPW has immunity from
this disallowance or that HCFA's claim must be made in a manner
consistent with State law.

The State's Arguments concerning the Amount of the Disallowance

The State also argued that even if the Board finds that the PNA funds
were Medicaid recoveries, the amount is overstated as follows:

     (i) $909,027.57, including interest, which has been paid by the
State Treasurer as of June 6, 1991 to individuals having a lawful right
to the funds, such as the decedent's spouse or estate creditors;

     (ii) HCFA's proportional share of the expenses relating to the
custody, transfer and subsequent administration of the funds; and,

     (iii) an amount representing funds which are not Medicaid
recoveries, but which the auditors admit are being "inadvertently
recovered."

State Br., pp. 23-4.

In response to this argument, HCFA stated that it is willing to make an
adjustment in the disallowance to the extent that any alleged
overstatement "can be audited or otherwise properly verified."  HCFA
Br., p. 9.  HCFA did not clarify whether it would be willing to make
adjustments in response to all three categories, however.

In view of the foregoing positions of the parties, we find that HCFA
should provide the State with a reasonable amount of time to demonstrate
that the disallowance amount was overstated.  If the parties are still
unable to reach agreement on whether the disallowance was overstated,
the State may return to the Board on this issue alone, by filing a
notice of appeal within 30 days of receiving HCFA's decision.

Conclusion

On the basis of the foregoing, we uphold the disallowance in full,
subject only to an adjustment in amount in accordance with the
procedures described above.

 


                          ___________________________ Judith A. Ballard

 


                          ___________________________ Alexander G. Teitz

 


                          ___________________________ Donald F. Garrett
                          Presiding Board Member


1.  45 C.F.R. 74.171 provides that the principles to be used in
determining the allowable costs of activities conducted by governments
in the administration of Department programs such as Medicaid are
contained in OMB Circular A-87.

2.  This Board has considered the effect of section 1903(d) in numerous
previous decisions and has specifically held that section 1903(d)(3)
applies in instances, as here, where a State has recouped benefits that
have been correctly paid to recipients.  See New York Dept. of Social
Services, DAB No. 311 (1982) and Massachusetts Dept. of Public Welfare,
DAB No. 262 (1982).  We have also held that where a State has earned
interest on recoveries from Medicaid providers that had been placed in a
holding account pending their return to HCFA, that interest was
attributable to the Medicaid program and should have been credited
against program expenditures even though the State argued the interest
was attributable solely to its investment activities.  North Carolina
Dept. of Human Resources, DAB No. 361 (1982).  In North Carolina, the
Board concluded that the interest constituted an applicable credit under
OMB Circular A-87, C.1.g., resulting in an overpayment under section
1903(d) of the Act.

3.  The State admitted that the only reason it did not rely on its
probate procedures forthese recoveries was because it believed that
those procedures "take administrative resources away from more lucrative
recoveries and often cost more than they recoup."   State's Brief (Br.),
p. 4 citing Sheehan Affidavit (Aff.), Exhibit (Ex.) A, Para. 8.  The PNA
funds in question here total $5,523,596, including a federal share of
$2,761,798 and a State share of the same amount from 12,873 PNA
accounts.  The State did not deny that it could have used modified or
abbreviated probate procedures and that it might have been able to
effect cost savings by consolidating its recovery efforts against these
balances, many of which had been pending for several years.  Any such
effort would also have been aided by the fact that claims from other
sources would have been unlikely in many instances because of the age of
the balances.

On the other hand, the approach actually taken by the State clearly was
the most efficacious for it under the circumstances. As HCFA stated:

     [I]t appears superfluous for the State to file a claim when it has
     already collected the PNA funds and knows that the funds will
     remain with the State except in those few instances when another
     claimant can prevail.  HCFA Br., p.  7.

4.  HCFA referred to possible incentives behind the characterization as
follows:

     [The State] argues that it is not cost effective for it to file a
     formal claim against the many small estates represented by the
     funds in the PNA account.  . . . [I]t is, instead, lucrative for
     the State to decline to bear the expense of filing claims because
     it knows that it will keep almost all of the funds anyway.  If the
     State's failure to file claims is designed to prevent the federal
     Medicaid program  from being credited with an equitable share of
     the State recoveries, then the policy is even more lucrative.
     Because the State recovers funds from the PNA accounts of deceased
     Medicaid recipients and has a means for keeping those funds without
     filing claims against the decedents' estates, the funds should be
     deemed to be recovered from the estates by a means available to the
     State other than probate.  Under the circumstances, it would be
     completely inequitable to the federal government if it were
     precluded from sharing in the benefit which the State itself
     obtains from not filing formal claims.   HCFA Br., p. 7, n. 2. 5.
     The Review Report referred to this possibility as follows: The MDPW
     staff indicated that they estimate the chances that a surviving
     spouse would come forth or a disabled child or child under age 21
     would be identified after the [initial] six month period to be less
     than one-half of one percent. Review Report, supra, p. 6.

Although the State questioned the accuracy of this estimate, which was
apparently derived from MDPW staff (Tr., p. 74), the State did not
attempt to provide the Board with a more definitive estimate.

6.  The State also argued that it never developed whether the decedent
had been receiving Medicaid while over the age of 65 as required by
section 1917.  HCFA argued, and we agree, that the likelihood that any
decedents here had not been receiving Medicaid over the age of 65 was
very slight.  Nevertheless, as with the possibility that there existed
protected survivors and priority claimants, the State itself must chose
how much development is appropriate under the circumstances and indeed
can still carry out that development at this late hour and receive a
credit from HCFA if any such decedents can be identified.

7.  The State did allege that it had paid over $900,000 of transferred
funds to claimants, such as the decedent's spouse, heirs or estate
creditors.  The State did not clarify whether even in those instances,
it made any affirmative effort to ensure that the Medicaid program's
claim as an estate creditor was properly considered in conjunction with
these other claims under the probate process, at least in those
instances where the other claims did not involve solely survivors
protected under section 1917.  Without such effort, it is at least
conceivable that in some instances, the State transferred funds to heirs
or creditors with claims that were at the same level or lower in
priority than the Medicaid program's.

8.  The State also argued that HCFA may not rely on section 1903 because
it was not cited in the disallowance letter.  This Board, however,
consistently permits parties to modify and clarify their positions when
the opposing party has been given a reasonable opportunity to respond
during the course of the appeal.  Here, HCFA discussed and relied upon
section 1903 in its brief, and the State was given the opportunity to
respond to that position in its reply brief and during a hearing
conducted by telephone in this appeal.  The Board also raised questions
for the parties' benefit concerning the effect of this provision in its
Notice of Hearing dated August 30, 1991. The Board in any event must
consider the effect of this provision if it is applicable to the facts
of the appeal since the Board is bound by all applicable laws under 45
C.F.R. 16.14.

We should also note that this particular ground for the disallowance is
essentially the same as the applicable credit position cited by HCFA in
the disallowance notice and is relied upon by HCFA as an alternative
legal basis for the disallowance.

9.  In rules applicable to the administration of grants funded by this
Department, including formula grants for the Medicaid program, the term
"grantee" is defined as follows:

     'Grantee' means the government . . . to which a grant is awarded
     and which is accountable to the Federal Government for the use of
     the funds provided.  The grantee is the entire legal entity even if
     only a particular component of the entity is designated in the
     award document.  For example, a grant award document may name as
     the grantee an agency of a State . . . .  In these cases, the
     granting agency usually intends, or actually requires, that the
     named component assume primary or sole responsibility for
     administering the grant-assisted project or program. Nevertheless,
     the naming of a component of a legal entity as the grantee in a
     grant award document shall not be construed as relieving the whole
     legal entity from accountability to the Federal  Government for the
     use of the funds provided. 45 C.F.R. 74.3 (Emphasis