New York State Department of Social Services, DAB No. 1577 (1996)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: New York State Department of Social Services
Docket No. A-96-35
Control No. A-02-93-0036
Decision No. 1577

DATE: May 21, 1996

DECISION

The New York State Department of Social Services (New
York) appealed the determination of the Health Care
Financing Administration (HCFA) disallowing federal
financial participation (FFP) in the amount of $291,981
claimed for the period January 1 through March 31, 1991
under title XIX of the Social Security Act (Act). The
costs were claimed for medical services provided to
individuals aged 22 through 64 residing in institutions
for mental diseases (IMDs) who were temporarily
transferred to acute care facilities to receive medical
services. HCFA disallowed the costs on the ground that,
under section 1905(a) of the Act, FFP is not available in
expenditures for services provided to individuals in that
age range who are patients in IMDs. New York took the
position, however, that the individuals were not patients
in IMDs at the time they received the medical services.

As explained in detail below, we find that the
individuals for whom the claims were made remained
patients in IMDs at the time they received medical
services in the acute care facilities. The Act and
regulations, considered as a whole in light of their
purpose, clearly require this finding since these
individuals were admitted to IMDs, had not been
discharged, and were not on conditional release or
convalescent leave. Contrary to New York's argument,
this reading of the Act and regulations did not represent
a change in HCFA policy which required publication
pursuant to notice and comment rulemaking. Moreover,
HCFA's determination did not deny the individuals in
question access to medical services based on a disability
or handicap. Accordingly, we sustain the disallowance.

Relevant Legal Requirements

Title XIX of the Act established a cooperative federal-
state program known as Medicaid, which provides medical
assistance to certain economically disadvantaged persons.
Section 1905(a) of the Act enumerates various services
for which payment qualifies as "medical assistance."
Following the last of the enumerated paragraphs
describing covered services is language which provides
that "medical assistance" does not include payments "with
respect to care or services for any individual who has
not attained 65 years of age and who is a patient in an
institution for mental diseases." Section 1905(a). 1/
This provision, known as the general IMD exclusion, was
modified as of January 1, 1973 to allow for coverage of
persons in IMDs who had not yet reached the age of 21,
or, in some cases, the age of 22. Section 1905(a)(16).
The IMD exclusion is also incorporated specifically into
the definition of various levels of institutional service
which qualify as "medical assistance." For example,
"medical assistance" is defined to include "inpatient
hospital services (other than services in an institution
for mental diseases)." Section 1905(a)(1). 2/ Thus,
throughout the disallowance period, the Act proscribed
payments for persons ages 22 through 64 in an IMD. 3/

An IMD is defined in the Act as "a hospital, nursing
facility or other institution of more than 16 beds, that
is primarily engaged in providing diagnosis, treatment,
or care of persons with mental diseases, including
medical attention, nursing care, and related services."
Section 1905(i). 4/ The general IMD exclusion was based
on a congressional belief that care in mental
institutions was a traditional state responsibility, as
well as on Congress' general distrust of the
effectiveness and efficiency of care in IMDs. S. Rep.
404, 89th Cong., 1st Sess., pt. 1 at 144 (1965),
reprinted in 1965 U.S.C.C.A.N 1942, 2084-87; Schweiker v.
Wilson, 450 U.S. 221, 242 (1980).

Regulations governing recipient eligibility for medical
assistance provide in pertinent part at 42 C.F.R. 
435.1008 (titled "Institutionalized individuals"):

(a) FFP is not available in expenditures for
services provided to --

(1) Individuals who are inmates of public
institutions as defined in  435.1009; or

(2) Individuals under age 65 who are patients in
an institution for mental diseases unless they
are under age 22 and are receiving inpatient
psychiatric services under  440.160 of this
subchapter.

(b) The exclusion of FFP described in paragraph (a)
of this section does not apply during that part of
the month in which the individual is not an inmate
of a public institution or a patient in an
institution for tuberculosis or mental diseases.

(c) an individual on conditional release or
convalescent leave from an institution for mental
diseases is not considered to be a patient in that
institution. However, such an individual who is
under age 22 and has been receiving inpatient
psychiatric services . . . is considered to be a
patient in the institution until he is
unconditionally released or, if earlier, the date he
reaches age 22. 5/

The regulations also provide that FFP is not available in
expenditures for services for "[a]ny individual who is
under age 65 and is in an institution for mental
diseases, except any individual who is under age 22 and
receiving inpatient psychiatric services . . . ." 42
C.F.R.  441.13(a)(2).

The State Medicaid Manual (SMM) issued by HCFA in
November 1990 provided in section 4390.1:

Periods of Absence from IMDs.--42 CFR 435.1008(c)
states that an individual on conditional release or
convalescent leave from an IMD is not considered to
be a patient in that institution. These periods of
absence relate to the course of treatment of the
individual's mental disorder. If a patient is sent
home for a trial visit, this is convalescent leave.
If a patient is released from the institution on the
condition that the patient receive outpatient
treatment or on other comparable conditions, the
patient is on conditional release. If an emergency
or other need to obtain medical treatment arises
during the course of convalescent leave or
conditional release, these services could be covered
under Medicaid because the individual is not
considered an IMD patient during these periods. If
a patient is temporarily released from an IMD for
the purpose of obtaining medical treatment, however,
this is not considered a conditional release and the
patient is still considered an IMD patient.

The regulation contains a separate provision for
individuals under age 22 who have been receiving
inpatient psychiatric services under 42 CFR 440.160.
This category of patient is considered to remain a
patient in the institution until he is
unconditionally released or, if earlier, the date he
reaches age 22.

On January 4, 1991, the Region II (New York City) office
of HCFA issued Medicaid State Operations Letter (SOL) 91-
1 to "clarif[y]" SMM  4390.1. That issuance essentially
repeated the provisions of section 4390.1. 6/

Other relevant provisions are identified later in this
decision.

Factual Background

The disallowance was based on an Office of Inspector
General (OIG) review of all of New York's claims for the
period January 1 through March 31, 1991 relating to
individuals aged 22 through 64 who were temporarily
transferred from State-operated psychiatric centers to
medical-surgical units located on the grounds of the
psychiatric centers. See New York Ex. 1. The OIG found
that New York claimed $291,981 FFP for medical services
provided to these individuals while they were in the
medical-surgical units, which were separately certified
by HCFA as acute care hospitals. The OIG recommended
that New York refund this amount on the grounds that the
individuals retained their status as IMD patients while
receiving the medical services and that federal
regulations prohibit Medicaid funding of medical services
to patients aged 22 through 64 who are patients in an
IMD. 7/ HCFA thereafter disallowed $291,981 on this
basis.

The OIG report indicated that the individuals under
review were residents of the psychiatric centers prior to
and after their stays in the medical-surgical units. New
York Ex. 1, at 3, 9. (While the report indicated
elsewhere that "[f]or the most part," the individuals
reviewed returned to the psychiatric centers (Id. at 2),
a possible explanation for the inconsistency is that some
individuals died in the medical-surgical units.)
Moreover, HCFA asserted in briefing before the Board that
the individuals in question were never discharged from
the IMDs. See HCFA Br. dated 3/6/96, at 6. New York did
not directly dispute this assertion (although it referred
at one point to the individuals who were transferred as
"former IMD residents" (New York Br. at 2)), nor did New
York offer any evidence to the contrary.

Analysis

New York advanced three principal arguments on appeal:
(1) that the plain language of the Act and regulations
proscribed FFP only in the cost of medical services to
individuals aged 22 through 64 who were physically
located in an IMD at the time they were receiving medical
services; (2) that HCFA's determination that FFP was not
available here constituted a change in policy which was
invalid because it was not published pursuant to notice
and comment rulemaking; and (3) that HCFA's determination
illegally denied the individuals in question access to
medical services based on a disability or handicap. We
address each of these arguments below.

1. The institutional status of the individual, not the
individual's physical location, is determinative of
whether the general IMD exclusion applies.

New York took the position that HCFA's reading of the Act
and regulations was contrary to their plain meaning. New
York asserted specifically that the word "in" connotes
location, citing the definitions in Webster's Ninth New
Collegiate Dictionary and in Black's Law Dictionary. 8/
New York argued that the individuals in question were
therefore not patients in an IMD when they received the
medical services since they were no longer physically
located in the IMDs. At that point, New York argued, the
individuals were merely patients "of" an IMD. New York
Br. at 4. 9/

New York's argument has no merit. The Board previously
considered the identical issue in New Jersey Dept. of
Human Services, DAB No. 1549 (1995), where it stated:

Section 435.1009 of 42 C.F.R. defines the phrase
"[i]n an institution" as referring "to an individual
who is admitted to live there and receive treatment
or services provided there that are appropriate to
his requirements." The individuals in question were
clearly admitted to live in the IMDs and receive
appropriate treatment or services provided there.
Further, the individuals were never discharged from
the IMDs, nor did New Jersey allege that any other
steps were taken to alter the legal status of these
individuals as IMD patients. . . . New Jersey
pointed to nothing that showed that their
institutional status actually changed when they were
temporarily moved to acute care facilities to
receive medical services. Since their status
remained that of patients in an IMD, FFP was not
available for any services provided to them . . .
even though they were not physically present in an
IMD when the services were provided.

DAB No. 1549 at 7-8.

The Board also noted in DAB No. 1549 that various
provisions of the Act and regulations treat the IMD
exclusion as a general limit on Medicaid eligibility of
individuals, by virtue of their institutional status, as
well as a limit on particular covered services. 10/
Thus, absent a change in status, a patient in an IMD is
ineligible for Medicaid regardless of where the patient
receives medical services.

The Board further noted in DAB No. 1549 that this
conclusion is consistent with the regulatory exception to
the IMD exclusion for "an individual on conditional
release or convalescent leave from an IMD," which permits
reimbursement of the cost of services outside an IMD to
certain individuals who have not been discharged from the
IMD. The Board viewed the existence of this exception as
indicating that, as a general rule, all individuals who
receive services outside of an IMD to which they have
been admitted and from which they have not been
discharged continue to be considered patients in the IMD.
New York did not argue that the individuals in question
here were either conditionally released or on
convalescent leave within the meaning of the exception.
New York's argument that the exception for an individual
on convalescent leave or conditional release does not
mean that all other individuals are patients in an IMD is
not persuasive since there is no evidence that another
exception was intended.

New York argued further that HCFA's construction of the
word "in" is inconsistent with the statutory language
providing for reimbursement for inpatient hospital
services since "there is no reasonable construction that
would convert services `in' a general hospital into
services `in' an IMD." New York Br. at 4. However, the
Board found in DAB No. 1549 that it was not illogical to
treat the individuals in question there as patients of
both an IMD and an acute care facility inasmuch as the
individuals were arguably receiving needed professional
services from both facilities. Contrary to New York's
suggestion, it does not follow from this that all
individuals receiving inpatient hospital services would
have to be considered patients in an IMD.

New York did not provide any persuasive reasons why the
Board should not adopt the analysis of the language of
the Act and regulations discussed in DAB No. 1549. Thus,
we conclude that New York's reliance on the dictionary
definitions of the word "in" is not justified.

Moreover, as the Board noted in DAB No. 1549, section
4390.1 of the SMM expressly provides that a patient who
is "temporarily released from an IMD for the purpose of
obtaining medical treatment" is considered an IMD
patient. The Board and the courts have consistently held
that, where a statute or regulation is subject to more
than one interpretation, the federal agency's
interpretation is entitled to deference if that
interpretation is reasonable, and appropriate notice of
that interpretation has been given to the state. DAB No.
1549, at 7, and cases cited therein. New York did not
dispute that it had notice of this provision, which was
issued by HCFA in November 1990, throughout the entire
period in question here. Accordingly, even if it had
been unclear from the plain language of the Act and
regulations that FFP was not available in the costs in
question here, the costs were clearly unallowable.

Furthermore, as the Board noted in DAB No. 1549, "viewing
the individuals in question as patients in an IMD
effectuates the purpose of the IMD exclusion to ensure
that Medicaid funds are not used to finance care that has
traditionally been the responsibility of state
governments." DAB No. 1549, at 9. As the Board also
observed, "[i]f states could obtain federal funding for
medical services provided to IMD patients simply by
moving the patients to other facilities to receive the
services, this would circumvent congressional intent to
deny federal funding for individuals institutionalized in
IMDs." Id.

2. HCFA's reading of the Act and regulations as
prohibiting federal funding for medical services provided
to patients temporarily transferred out of IMDs to
receive medical services did not represent a change in
HCFA policy which required publication pursuant to notice
and comment rulemaking.

New York asserted, and HCFA did not dispute, that prior
to the period covered by the disallowance in question
here, "Medicaid continuously and consistently reimbursed"
New York for services provided by the medical-surgical
units to patients temporarily transferred there from the
IMDs. New York Ex. 2, at 2. New York argued that the
SMM provision referred to above thus constituted a
substantive change in HCFA policy which was not effective
absent notice and comment rulemaking. In support of its
argument, New York cited the holding in Linoz v. Heckler,
800 F.2d 871 (9th Cir. 1986), that, because a Medicare
Carrier Manual provision withdrew coverage previously
provided, it was a substantive rule and should have been
published pursuant to notice and comment rulemaking.

As previously discussed, the Act and regulations required
HCFA to disallow the costs in question; thus, the
applicability of the SMM is not dispositive here. In any
event, there is no basis for finding that the SMM
provision constituted a substantive policy change. New
York did not point to any earlier written policy which
differed from that in the SMM. Moreover, as the Board
stated in Mississippi Division of Medicaid, DAB No. 1305
(1992), we cannot "read into an omission of HCFA, i.e.,
its failure to take a disallowance at the earliest
opportunity, a representation that all the expenditures
in the [quarterly expenditure reports] were acceptable as
charged." DAB No. 1305, at 4. Thus, HCFA's payment of
the earlier claims is not evidence that, prior to the
issuance of the SMM provision, HCFA's policy was to treat
the IMD exclusion as inapplicable to the types of
individuals in question here.

Moreover, there is evidence that HCFA had an earlier
policy which was consistent with the SMM provision. As
the Board noted in DAB No. 1549, the preamble to the 1985
regulations amending 45 C.F.R.  435.1008(b) stated that
the amended regulations "do not affect Federal matching
funds for services to individuals who are not residing in
(i.e. have been discharged from)" IMDs. 50 Fed. Reg.
13196 (April 3, 1985) (emphasis added). This indicates
that HCFA regarded an individual who has been discharged
from an IMD as not residing in the IMD; thus, when these
regulations were issued, HCFA must have regarded an
individual who has not been discharged from an IMD as
still residing in the IMD. As also noted in DAB No.
1549, the same policy was evident from a Medical
Assistance Manual provision dated 9/22/76 which stated in
relevant part that an individual under age 21 receiving
inpatient psychiatric services "may be considered to be a
patient until he is unconditionally released . . . ."
See DAB No. 1549, at 13, quoting the Medical Assistance
Manual. It could reasonably be inferred from this
provision that other categories of individuals should
also be considered IMD patients until unconditionally
released, i.e., discharged. Thus, even assuming that a
change in HCFA's policy would have required notice and
comment rulemaking, there was no such change here.

3. HCFA's determination did not deny the individuals in
question access to medical services based on a disability
or handicap.

New York argued that HCFA's determination denied the
individuals in question access to medical services in
violation of section 504 of the Rehabilitation Act and
its implementing regulations, the Americans with
Disabilities Act, and the Fifth and Fourteenth Amendments
of the United States Constitution. HCFA took the
position that this argument raises issues which are
beyond the scope of the Board's review. The Board's
regulations provide that the Board is bound by "all
applicable laws and regulations." 45 C.F.R.  16.14.
This means that the Board is bound by the applicable laws
and regulations even if they are invalid under a
constitutional analysis. See, e.g., New Mexico Human
Services Department, DAB No. 1325 (1992). New York
argued, however, that the Board may properly consider the
effect of the statutes and regulations New York cited
because they are also applicable.

We do not need to reach the issue here of the scope of
Board review if the program statute or the program
regulations are in conflict with other laws or
regulations because no such conflict exists here. In
Schweiker, the Supreme Court held that a provision in
title XVI of the Act which made SSI benefits unavailable
to IMD patients who were not receiving Medicaid (i.e.,
IMD patients aged 22 through 64) "made a distinction not
between the mentally ill and a group composed of non-
mentally ill, but between residents in public
institutions receiving Medicaid funds and . . . residents
in such institutions not receiving Medicaid funds."
Schweiker at 232. Since the general IMD exclusion has
the same effect as the provision considered by the Court
in Schweiker, there is no basis for New York's argument
that the general IMD exclusion unlawfully discriminates
against the individuals in question here on the basis of
their mental illness.
Conclusion

For the foregoing reasons, we conclude that HCFA properly
applied the general IMD exclusion in the Act and
implementing regulations to preclude Medicaid
reimbursement for services to the individuals in question
here. Accordingly, we sustain the disallowance in full.

_________________________
M. Terry Johnson

_________________________
Norval D. (John) Settle

_________________________
Judith A. Ballard
Presiding Board Member


1. This provision appears in the current version of
the Act after section 1905(a)(25).

2. The other definitions which include the
parenthetical exclusion of services "in an institution
for mental diseases" are in sections 1905(a)(4)(A),
1905(a)(14), and 1905(a)(15).

3. For ease of reference, we refer below to this
exclusion as covering individuals aged 22 through 64 even
though, in some circumstances, the exclusion also covers
individuals between ages 21 and 22.

4. This provision was effective July 1, 1988. Prior
to that time, essentially the same definition appeared in
the regulations.

5. Except for subparagraph (b), which was amended in
1985, these regulations have been essentially unchanged
since originally issued in 1968. See 33 Fed. Reg. 16165
(November 5, 1968). However, their organization was
altered in 1978 when the Agency rewrote all existing
Medicaid regulations "in clearer simpler language." 43
Fed. Reg. 45176 (September 29, 1978).

6. SOL 91-1 stated in pertinent part:

Conditional release and convalescent leave are types
of leave that are part of the patient's psychiatric
treatment and are designed to encourage increasing
independence in preparation for eventual
unconditional release from the institution.
Convalescent leave means an extended trial visit at
home. A conditional release is a release from the
institution on the condition that the patient
receive outpatient treatment or on other comparable
conditions.

If an emergency or other need to obtain medical
treatment arises during the course of convalescent
leave or conditional release, any covered services
received could be paid for by Medicaid because the
individual would not be considered an IMD inpatient
during those periods. If, however, a patient is
temporarily released from an IMD for other purposes,
such as to obtain medical treatment either at a
hospital on the institutional grounds or in the
community, this would not be considered a
conditional release or convalescent leave and the
patient would still be considered to be an IMD
patient, subject to IMD payment restrictions.

7. The OIG also gathered evidence that showed that
New York had claimed FFP for individuals aged 22 through
64 who were temporarily released from State-operated
psychiatric centers to general acute care hospitals. The
OIG requested that New York voluntarily compute the
unallowable FFP amount.

8. New York quoted the following definition in
Webster's:

In: 1a - used as a function word to indicate
inclusion, location, or position within limits.

Webster's Ninth New Collegiate Dictionary, Merriam-
Webster, Inc. (1991). New York also quoted the following
definition in Black's:

In . . . An elastic preposition . . . expressing
relation of presence, existence, situation,
inclusion, action, etc.; inclosed or surrounded by
limits, as in a room . . . ."

Black's Law Dictionary, Sixth Edition, West Publishing
Co. (1990).

9. New York also argued in its reply brief that HCFA
"is attempting to prohibit reimbursement for individuals
who are inmates of public institutions." New York Reply
Br. at 3 (emphasis in original). This appears to be an
argument that the exclusion in section 435.1008(a)(2) for
patients "in" an IMD is necessarily narrower than the
exclusion in section 435.1008(a)(1) for individuals who
are inmates "of" public institutions. New York did not
point to any evidence that Congress intended the
exclusions to operate differently by virtue of its use of
the different prepositions, however, and the regulations
treat both patients in an IMD and inmates of a public
institution as "institutionalized" individuals.

10. The language cited by the Board is found in
sections 1905(a), (a)(1), (4)(A), (14) and (15) of the
Act as well as HCFA's longstanding regulation at 42
C.F.R.  441.13(a)(2).