Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Utah Department of Health
DATE: July 27, 1994
Docket No. A-94-57
Decision No. 1486
DECISION
The Utah Department of Health (Utah) appealed a determination by the
Health Care Financing Administration (HCFA) disallowing $20,166 in
federal financial participation (FFP) claimed for the period April 1,
1992 through March 31, 1993. HCFA determined that Utah had claimed the
enhanced rate of 75% FFP, available for costs attributable to the
operation of Utah's Medicaid Management Information System (MMIS), for
costs of services that were properly claimed only at the 50% FFP rate
available generally for administrative costs under title XIX (Medicaid)
of the Social Security Act (the Act). HCFA disallowed the amount of
Utah's claim that exceeded FFP at the 50% rate.
HCFA based its determination on a financial review performed to
determine whether Utah was claiming at the 75% rate only those MMIS
costs that qualified for such enhanced funding. HCFA questioned Utah's
claim for costs for mailroom, courier and forms control support
services, which HCFA maintained were properly claimed only at the 50%
FFP rate.
We find that the disputed costs were not allowable at the enhanced rate.
Thus, as we discuss more fully below, we uphold the disallowance in
full.
Background
Section 1903(a)(3)(B) of the Act provides for reimbursement of --
(B) 75 per centum of so much of the sums expended during such
quarter as are attributable to the operation of [MMIS] systems . .
. .
In the regulation implementing the MMIS requirements, an MMIS is defined
as follows:
"Mechanized claims processing and information retrieval system"
or
"system" means the system of software and hardware used to process
Medicaid claims from providers of medical care and services for the
medical care and services furnished to recipients under the medical
assistance program and to retrieve and produce service utilization
and management information required by the Medicaid single State
agency and Federal Government for program administration and audit
purposes. . . .
42 C.F.R. 433.111(b).
The regulation at 42 C.F.R. 433.15(b)(4) reiterates that the 75% rate
of FFP applies to the "operation" of mechanized claims processing
and
information retrieval systems. "Operation" is defined at 45 C.F.R.
95.605 as--
the automated processing of data used in the administration of
State plans for Title I, IV-A, IV- B, IV-D, X, XIV, XVI (AABD) of
XIX of the Social Security Act. Operation includes the use of
supplies, software, hardware, and personnel directly associated
with the functioning of the mechanized system.
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 administration of the state plan may be
reimbursed at the 50% rate. Section 11276.3 of the State Medicaid
Manual (SMM), applicable pursuant to 42 C.F.R. 433.110(a)(1),
provides: 1/
FFP at 75 percent is available for direct costs directly
attributable to the Medicaid program for ongoing automated
processing of claims, payments, and reports. Included are forms,
use of system hardware and supplies, maintenance of software and
documentation, and personnel costs of operations control clerks,
suspense and/or exception claims processing clerks, data entry
operators, microfilm operators, terminal operators, peripheral
equipment operators, computer operators, and claims coding clerks
if the coded data is used in the MMIS, and all direct costs
specifically identified to these cost objectives. Report users,
such as staff who perform follow-up investigations, are not
considered part of the MMIS.
FFP at the 75 percent level for operations does not cover clerical
processing operations, except as indicated. . . .
Expenditures at Issue
HCFA performed a review of Utah's Quarterly Statements of Expenditures
and found that for the period of April 1, 1992 through March 31, 1993,
Utah's claim for reimbursement at the 75% operational rate for its
approved MMIS included costs for mailroom, courier and forms control
support services provided to Utah under a contract with Utah Department
of Human Services (DHS). The mailroom services included folding,
inserting, metering, and mailing materials delivered by Utah to DHS. The
couriers were used to transport claims correction documents to and from
the site where the information they contained was entered into the MMIS.
The forms control activities involved printing, maintaining stock, and
storing and distributing forms and envelopes used by Utah, primarily for
claim corrections.
HCFA disallowed the difference between the amount claimed at the 75%
rate for operation of an approved MMIS and the 50% rate available
generally for administrative costs of the Medicaid program. HCFA
determined that these costs were inappropriately claimed as MMIS costs
because the costs were not directly attributable to MMIS operations for
which enhanced FFP is available.
Utah's arguments
While Utah asserted generally that these mailroom, courier and forms
control support services costs should be reimbursed as direct costs of
MMIS operations, it never asserted that these costs were covered by the
specific provisions of section 11276.3 of the SMM listing the types of
costs for which enhanced reimbursement is available. Utah contended,
however, that Congress authorized enhanced reimbursement "for the
operation of a complete package of services tied to an approved MMIS" if
those services improved claims processing. Utah argued that while
HCFA's initial interpretation of Congress' mandate would have allowed
the disputed costs at the 75% enhanced rate, HCFA had "progressively
reduced the types of services" considered attributable to the operation
of a MMIS. Utah Brief at 10 and 11. Utah, therefore, contended that
HCFA's present interpretation was inconsistent with the statute and
regulations. Moreover, Utah argued that the disputed costs were
allowable at the enhanced rate because the MMIS was required to have a
mechanism for correcting claims, particularly for fraud and utilization
control purposes. Alternatively, Utah claimed that the disputed costs
were allowable at the enhanced rate available for utilization review
activities.
Analysis
The statute provides that states will be reimbursed at the 75% enhanced
rate for only "so much of the sums expended during such quarter as are
attributable to the operation of [MMIS] systems." Section 1903(a)(3)(B)
of the Act. The statute states a general standard to be applied and
leaves it to HCFA to determine by regulation and policy what costs
qualify for funding as costs "attributable" to the operation of MMIS
systems. The Board has described HCFA's overall policy as considering a
circumscribed group of costs as being attributable to the operation of
the MMIS. New York State Dept. of Social Services, DAB No. 1023 at 8
and 9 (1989).
HCFA defined "operation" by regulation as the automated processing
of
data which includes the use of supplies, software, hardware, and
personnel directly associated with the functioning of the mechanized
system. The relevant provision of the SMM provides explicitly that 75%
FFP is available only for direct costs directly attributable to the
Medicaid program for ongoing automated processing of claims, payments,
and reports and that the enhanced rate of reimbursement does not apply
to clerical processing operations except as specifically provided for in
the SMM provision. SMM, section 11276.3. Moreover, as we stated in New
York State Dept. of Social Services, DAB No. 1205 (1990), the "general
principle expressed in Part 11 [of the SMM] is that enhanced FFP should
be available only 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." DAB No. 1205 at 5. Accordingly,
HCFA's policies provide that "attributable" costs are those closely
associated with ongoing automated processing, specifically excluding
costs of activities done even without MMIS systems.
The costs in question were clearly not direct costs eligible for
enhanced FFP under these criteria. Utah here contended, and HCFA did
not dispute, that the couriers were used to transport claims correction
documents to and from the site where the information they contained was
entered into the MMIS, and mailroom and forms control activities
involved preparing for mail the required claim corrections forms
necessary to gather information to update a claim. While it is not
contested that these activities are necessary to properly administer the
Medicaid program, these activities would also be performed without a
mechanized system in order to assure the correct documentation of
claims. Although under the applicable regulations and SMM provision the
costs of actually inputting the returned information into the system are
direct costs directly attributable to the operation of the system
reimbursable at the enhanced rate, the disputed services do not have the
necessary direct association with the automated processing of data by
the mechanized system, i.e., the services are not necessary to make the
automated system perform its functions properly.
Utah alleged generally that HCFA's initial interpretation would have
allowed the disputed costs at the enhanced rate. However, Utah did not
explain how section 11276.3 of the SMM differed from HCFA's "initial
interpretation" or specify the initial interpretation to which it
referred. Thus, Utah failed to present any support for the proposition
that these costs were ever regarded as costs attributable to the
operation of an MMIS. Even if there was a prior policy which was
different, the Board concluded in several prior cases that HCFA could
issue a clarification of its reimbursement policy. The Board stated
that such a clarification was not invalid simply because it was less
advantageous to the State than the prior policy. 2/ See DAB No. 1023;
New Jersey Dept. of Human Services, DAB No. 1071 (1989), aff'd, N.J.
Dept. of Human Services v. Secretary of HHS, 748 F. Supp. 1120 (D.N.J.
1990); and California Dept. of Health Services, DAB No. 1274 (1991),
aff'd, Coye v. Sullivan, 1993 WL 122284 (E.D.Cal.) (Utah's Brief, Tab
D).
Utah also contended that HCFA's current interpretation in the SMM of
"attributable" is invalid because it conflicts with the statute. We
disagree. The Board found consistent with the statute HCFA's
interpretation of "attributable" in the SMM to restrict the availability
of enhanced reimbursement for certain remote overhead costs. The Board's
rationale was that the statute merely provides the general standard to
be applied and that HCFA in its SMM expressly established a guide for
determining which costs qualified for enhanced funding within the
meaning of the statutory term "attributable." See New Jersey, DAB
No.
1071, aff'd, New Jersey, 748 F. Supp. 1120; and California, DAB No.
1274, aff'd, Coye, 1993 WL 122284. Furthermore, in Coye, the court
stated that HCFA's construction that costs must be directly attributable
to the operation of an MMIS was a permissible one and was entirely
consistent with the regulatory definition of "operation." In any event,
Utah did not explain how HCFA's interpretation conflicts with the
statute other than to state that the disallowed costs "support the
payment of claims, as well as the gathering of complete information to
support fraud and utilization review activities." Utah Brief at 16.
The statute, however, does not use the term "support the payment of
claims" but uses the term "attributable to the operation of systems."
When Congress provided for enhanced reimbursement for an MMIS, it did so
as an incentive to states to use mechanized systems as opposed to manual
processing of claims. Thus, the statute does not recognize enhanced
reimbursement for costs that generally support the payment of claims
because those costs could be incurred whether or not a state had a
mechanized system. Rather, the statutory language provides for the
congressionally authorized incentive and authorizes 75% reimbursement
only for costs attributable to the operation of a mechanized system.
We also find no support in the language of the statute or in the
legislative history for Utah's "package" theory. If Congress had
intended all costs associated with the payment of claims to be
reimbursed at the enhanced rate it could have provided for that, but it
did not. Congress provided generally for reimbursement at the 50% rate
for Medicaid administrative costs, with certain exceptions such as the
75% rate available for amounts expended attributable to the operation of
the system. Moreover, the legislative history specifically states that
the statute provides for federal matching at the 75% rate for operation
of the MMIS system. See H.R. No. 92- 231, 92nd Cong., 1st Sess., May
26, 1971, at 103-104, reprinted in 1972 U.S.C.C.A.N. 4989, at 5089-90.
Utah did not cite any language in the legislative history which
specified that states will receive this enhanced rate for a "package of
services" somehow tied to an MMIS. Therefore, we find no basis to
conclude that Congress authorized reimbursement at the enhanced rate for
a complete package of services tied to claims payment activities.
Moreover, we reject Utah's argument that these costs were reimbursable
at the enhanced rate because Utah's MMIS was required to have a
mechanism for correcting claims for fraud and utilization control
purposes. Utah contended that because certain information is needed to
process a claim and to provide information for reports generated by the
system, consistent with its package theory, it should be reimbursed for
the cost of activities used to get the required information physically
to and from the MMIS site. As we stated previously, however, there is
no support for Utah's "package theory." Instead, HCFA has exercised
the
discretion given to it by statute and limited (in a duly published
regulation and in an interpretation of the regulation of which Utah had
timely notice) costs eligible for enhanced funding to direct costs
directly attributable to the operation of an MMIS.
Finally, these costs are not reimbursable at the enhanced rate as
medical and utilization review costs under the Act. The Act specifies
that the costs reimbursable for utilization review are those
"attributable to the performance of medical and utilization review . .
.
by a utilization and quality control peer review organization." Section
1903(a)(3)(C) of the Act. These services were not incurred as part of a
review performed by a peer review organization. Thus, these services
costs were properly paid at the 50% rate available for administrative
costs of the Medicaid program.
Conclusion
Based on the above analysis, we uphold the disallowance in full.
_____________________________ Donald F. Garrett
_____________________________ M. Terry Johnson
_____________________________ Cecilia Sparks
Ford Presiding Board Member
1. HCFA first identified the types of costs "attributable" to the
operation of an MMIS which qualified for enhanced reimbursement in the
Medical Assistance Manual, PRG-31, issued in June, 1974. These
provisions were replaced in 1981 by Part 11 of the SMM. Since that time,
HCFA has issued several revisions to Part 11. Both parties cited
section 11276.3 of the SMM as the relevant provision applicable to the
disputed costs. The parties did not submit a copy of the actual SMM
transmittal and the Board's reprint is from Transmittal 15, issued in
February, 1992. Neither party argued, however, that the text of the
provision had changed during the period at issue.
2. The United States District Court found that HCFA's clarifying
revisions to the State Medicaid Manual provisions regarding enhanced
reimbursement for MMIS did not constitute a reversal of HCFA's
longstanding policy. Rather, the revisions were a further refinement of
HCFA's interpretation of the statute from which one could reasonably
discern HCFA's overall policy. N.J. Dept. of Human Services v.
Secretary of HHS, 748 F. Supp. 1120, 1125 (D.N.J.