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Department of Health and Human Services
Appellate Division

SUBJECT: Arizona Health Care
Containment System

DATE: August 7, 2001


Docket Nos. A-01-15; A-01-35; and A-01-79
Control Nos. AZ/2001/001/MAP;
AZ/2001/002/MAP; and AZ/2001/003/MAP
Decision No. 1779


The Arizona Health Care Cost Containment System (Arizona) contested determinations by the Health Care Financing Administration (HCFA)(1) disallowing Medicaid claims, for three different periods based on the same rationale. Arizona claimed Medicaid funds for the costs of services provided to Native Americans by health care providers to which the patients were referred by an Indian Health Service (IHS) facility and which had contracts with IHS to provide such services to eligible Native Americans at reduced rates. HCFA asserted and Arizona did not deny, that the non-IHS providers then billed Medicaid for services provided, i.e., the IHS facilities did not pay for or bill Medicaid for the services provided under contract. Arizona claimed reimbursement for these costs at the special 100% federal medical assistance percentage (FMAP) rate available only for services "received through" an IHS facility. HCFA found that the claims were for services not received "through" an IHS facility and were eligible only for Arizona's regular FMAP rate. The differences disallowed, and appealed by Arizona, were $28,284,805 for the period January 1, 1999 through June 30, 2000, docketed as A-01-15; $2,882,474 for the period July 1, 2000 through September 30, 2000, docketed as A-01-35; and $2,916,261 for the period October 1, 2000 through December 31, 2000, docketed as A-01-79.

To support its claims, Arizona relied primarily on one statement in a HCFA memorandum, bolstered by its arguments about why the statute should be construed in favor of the Native Americans who were its intended beneficiaries. The dispute here is not, however, about whether Native Americans will receive Medicaid services. Rather, the dispute is solely about the rate at which the Federal Government will participate in the costs of services provided by non-IHS facilities to which the Medicaid recipients were referred by IHS. To resolve that dispute, we examined in detail the language and history of the 100% FMAP provision and of HCFA's issuances interpreting the provision. Importantly, before the provision was enacted, IHS facilities were not allowed to receive Medicaid funds even for those patients who were eligible to receive Medicaid. When Congress made the IHS facilities eligible for Medicaid, Congress made clear in legislative history that the states would not then be required to share in the costs of services in IHS facilities, which had been fully supported by federal funding. In light of that history, and given the ambiguity of the phrase "received through an IHS facility," HCFA reasonably interpreted the phrase to exclude services not within the scope of services offered by an IHS facility as services of that facility and billed by that facility to Medicaid. Arizona did not reasonably rely on a different interpretation of the statute. Instead, Arizona changed its claiming practices based on an ambiguous statement in a HCFA memorandum, taken out of context. Arizona's current interpretation would result in expanding the 100% FMAP rate so it would not only protect states from bearing costs previously borne by the Federal Government, but would shift to the Federal Government costs previously borne by the states.

For the reasons explained more fully below, we conclude that Arizona was not entitled to reimbursement for these costs at 100% FMAP but only at the regular FMAP rate applicable to Arizona for the relevant periods. We therefore uphold the disallowance of the difference for each quarter.

Legal Background

Section 1905(b) of the Social Security Act (Act) states, in relevant part:

Notwithstanding the first sentence of this section, the Federal medical assistance percentage shall be 100 per centum with respect to amounts expended as medical assistance for services which are received through an Indian Health Service facility whether operated by the Indian Health Service or a tribe or tribal organization . . . .

(Emphasis added.)(2) This provision was first enacted in 1976. Indian Health Care Improvement Act (IHCIA), Title IV, Pub. L. No. 94-437 (1976). Prior to the IHCIA, eligible Native Americans were entitled to Medicaid benefits on the same basis as others, but those services which Native Americans received through IHS facilities were not eligible for Medicaid reimbursement.

In December 1996, the 100% FMAP rate was also made directly available to facilities owned by tribes or tribal organizations by a memorandum of agreement between HCFA and IHS. Ex. 1(3) (1996 MOA). The Indian Self-Determination and Education Assistance Act, Public Law No. 93-638, had provided for health care facilities to be either owned and/or operated by tribes or tribal organizations under agreements with IHS. These facilities are referred to as "638 facilities". Prior to the 1996 MOA, HCFA interpreted the term "IHS facility" in section 1905(b) of the Act to include only facilities owned or leased by the IHS, while the tribal 638 facilities not owned or leased by IHS were not eligible for the 100% FMAP rate. The MOA was executed in response to the Indian Self-Determination Act Amendments of 1994, Public Law No. 103-413. Section 150(l) of the 1994 amendments required that the Secretary (through IHS) lease tribal facilities on request, which would then have made the facilities "IHS facilities" for Medicaid purposes, but which would have required administrative processing of numerous leases. The 1996 MOA noted that states would have a strong incentive to press tribes to request these mandated lease agreements if the state would otherwise have to share in the costs of all services of 638 facilities not obtaining IHS lease arrangements. The 1996 MOA avoided this necessity as follows:

To address state financing concerns, to encourage tribal self-determination in program operation and facility ownership, and to eliminate the processing of numerous leaseback requests, HCFA reevaluated its original interpretation of section 1905(b). In light of the above amendment to 638 and underlying Federal Indian policy, HCFA concluded that the statutory language in this context permits an interpretation that tribal facilities operating under a 638 agreement are functioning as IHS facilities in performing obligations set forth under that agreement. Thus, as of July 11, 1996, the Secretary approved HCFA's proposal to adopt an interpretation that section 1905(b) allows 100-percent FMAP for Medicaid services furnished to Medicaid eligible AI/ANs [American Indians and Alaskan Natives] by any tribal facility operating under a 638 agreement. This means that the state will be reimbursed for 100 percent of the amount it pays to any 638 facility for services provided to Medicaid eligible AI/ANs only . . .

Ex. 1, at 2. The outcome was that after the 1996 MOA all 638 facilities were treated as IHS facilities that could bill Medicaid for services that Native Americans received from them and be reimbursed with 100% federal funds, instead of on a federal-state shared basis like non-IHS facilities. Consequently, for purposes of this decision, the term "IHS facilities" includes 638 facilities.

Factual Background

A large percentage of Medicaid-eligible Native Americans in Arizona live on reservations or in isolated areas with few health care providers other than IHS facilities. Ariz. Br. at 4. When those facilities provide covered services to a Medicaid-eligible Native American, they typically bill the state under Medicaid and the state in turn claims 100% FMAP from the federal Medicaid program for the payments it makes to the facility.

In addition to providing care directly through IHS facilities, IHS also operates a program that contracts with private providers to provide health care services to Native Americans and negotiates for payment rates which may not exceed Medicare allowable rates where applicable. See 51 Fed. Reg. 23,540 (June 30, 1986). The contract care program is governed by regulations in 42 C.F.R. Part 36 and provides funding, within limits based on priorities set by IHS and appropriations from Congress, for services on referral that IHS facilities may not be available, equipped, or licensed themselves to provide. See IHS Circular 91-7 (June 13, 1991), in our record as Ex. 4. IHS funding for the contract care program is limited and distinct from the general funding for the IHS to operate its own facilities. See, e.g., IHS Manual, Ch. 3, 2-3.4 and 2-3.7.

It is not disputed that prior to 1999, Arizona did not claim the 100% FMAP rate for Medicaid services provided to Native Americans through the contract care program. The first claim Arizona submitted for 100% FMAP for such services was for the quarter ending March 31, 1999, after a series of exchanges with HCFA officials between August 28, 1997 and September 17, 1998. The difference between the usual FMAP and the 100% FMAP rate for those claims was only $1,838 and the claims were allowed without deferral or investigation by HCFA. See HCFA Br. at 7; Exs. 5, 8, 21, 32. Arizona's subsequent claims for much larger amounts were disallowed and are at issue here.

Arizona sought 100% FMAP for services that met five criteria, which it set out in its brief as follows:

    • They involved allowable medical services that were provided to Medicaid-eligible Native Americans who had chosen IHS as their health plan as of the date of service;

    • The Medicaid-eligible Native Americans received medical services from a non-IHS provider;

    • The services were furnished pursuant to a contractual arrangement that existed between an IHS or 638 facility and the contract provider at the time the service was provided;

    • The services were limited to "facility services" as that term is used by HCFA (that is, "Inpatient hospital services" as defined in 42 C.F.R. 440.10 and "Outpatient hospital services and rural health facility services" as defined in 42 C.F.R. 440.20) and did not include "non-facility" services such as non-emergency transportation and case management services; and

    • The date of service was on or after May 15, 1997.

Ariz. Brief at 5 (footnote omitted).(4)

Issue and Arguments of the Parties

The parties agreed that Native Americans, as citizens of the United States and of the states in which they reside, are entitled to equal access to medical assistance through the Medicaid program, which is funded through a sharing arrangement between the federal and state governments. HCFA Br. at 13-14; Ariz. Reply Br. at 12-13. In addition, it is uncontested that eligible Native Americans have access to services through facilities and programs of IHS which receive direct federal funding. Some IHS facilities are operated by IHS itself and some are leased facilities operated by tribes or tribal organizations. The parties further agree that section 1905(b) permits Medicaid funds to be used to pay for services "received through" IHS facilities and for the state to claim 100% FMAP from the federal Medicaid program for those costs.

The dispute centers on whether this reimbursement rate applies even to services provided to Native Americans outside of any IHS facility through contract care referrals. Arizona argued that the plain language of section 1905(b) of the Act compels 100% FMAP for the non-IHS facility claims which it has presented because the services were "received through" IHS in the sense that the recipients were referred to contract care providers by IHS. Any other reading, according to Arizona, would conflict with congressional intent. Further, Arizona argued that HCFA's prior policy statements and payment practices, as well as IHS regulations, all conflict with the asserted grounds for the disallowances at issue.

HCFA responded that the language of section 1905(b) is ambiguous but that HCFA had consistently interpreted it to cover only services provided through an IHS facility, either on-site or "under arrangement" with contractors who provide services as part of the offerings of the particular facility (i.e., the facility may offer the service but does so by purchasing it, rather than hiring its own employees). HCFA rejected extending this to contract care cases in which IHS as an entity has negotiated with certain non-IHS providers to provide services at reduced rates for referred tribal members. In the contract care program, IHS may offer referrals to such entities for services it does not offer in its own facilities (thereby reducing the cost to the Native American from that otherwise charged), but costs of such services may or may not be paid for with IHS funds, depending on annual priorities and appropriations. HCFA asserted that its interpretation was a reasonable, permissible and long-standing one. Hence, according to HCFA, we should defer to that interpretation since Arizona had adequate notice of it and, in any case, did not reasonably rely on its own alternative interpretation.


We address first one preliminary point concerning the role of the special status of Native American interests in construing the statute here. We then consider whether the statutory language providing for 100% FMAP for services "received through" is ambiguous. Finding it so, we then discuss whether HCFA's interpretation was a reasonable and permissible one. Next, we consider whether Arizona had actual notice of that interpretation or reasonably relied on an alternative reading.

1. The ruling of liberally construing statutes affecting Native Americans does not provide support for Arizona's position.

Much of Arizona's briefing emphasized the special historical status of and important federal obligation to Native Americans, as well as the federal commitments to raise their health care status. Ariz. Br. at 2-4. Starting from these unquestionable federal responsibilities, Arizona went on to cite decisions of this Board and of various courts to the effect that any statute meant to benefit Indian tribes should be construed liberally in favor of the Indians. Ariz. Br. at 9-10, and cases cited therein. The present case, however, presents no issue of statutory construction in which Indian interests lie all on one side of the argument. The question here is not whether these services are eligible for full Medicaid funding, but only how the responsibility for the costs of the services should be divided between the state and federal governments. As the Ninth Circuit found in McNabb v. Bowen, 829 F.2d 787 (9th Cir. 1987), responsibility for health care services to Native Americans is not exclusively federal and IHS's role includes aiding Native Americans to take advantage of state and local programs. Id. at 794-95.

2. The meaning of services "received through" IHS facilities is ambiguous.

The first substantive question is whether the language of section 1905(b) of the Act -- providing 100% FMAP for services "received through" an IHS facility -- is ambiguous. Arizona argued that the plain meaning of "through" is that services be received "by means of; by the help of agency of; or by the intermediary of." Ariz. Br. at 8, citing Websters Third New International Dictionary (Gove Ed. 1993). Further, Arizona asserted that "through" must mean something broader than only services "in" IHS facilities, because when Congress wanted to convey a limitation to only services provided "in," "by" or "at" particular facilities and/or billed to Medicaid by those facilities, it has used those terms elsewhere in Medicare and Medicaid law. Ariz. Br. at 8-9, and statutory language examples cited there. The broader meaning, in Arizona's view, can only be services obtained by Native Americans from providers under contract with IHS who provide services to them upon referral from an IHS facility. Thus, Arizona considers the statutory language to be unambiguous in support of its position. In Arizona's view, its reading accords with the goal of the statute because a main purpose of the IHCIA is to improve the range and quality of services available to Native Americans on reservations without shifting to the states the federal government's historical responsibility to provide health care to Native Americans.

While "through" includes the meanings listed by Arizona, the term has other definitions. HCFA pointed to Black's Law Dictionary (6th Ed. 1990), which defines "through" to mean "in" and "within," in addition to the senses cited by Arizona. HCFA Br. at 11. The phrase "received through" an IHS facility is thus susceptible to either the reading that the services be obtained by the agency of an IHS facility or that they be obtained in an IHS facility.

While this duality suffices to establish ambiguity, a less obvious ambiguity fundamentally underlies the dispute here. Specifically, we must consider what it signifies that the services must be received through an IHS "facility." Arizona treated "facility" as descriptive of the nature of the services and concluded that facility services were those that by regulation could be provided in a facility (as opposed to services provided outside of any facility, such as non-emergency transportation or case management). HCFA instead treated the phrase as meaning that the service must be of a kind that the particular IHS facility could offer (within the regulatory definition of services performed by its type of facility), either directly or by means of a contractual arrangement by which in essence the facility purchases the service in order to provide it to patients of the facility. We focus further on resolving this dichotomy below in determining whether HCFA's interpretation of section 1905(b) was reasonable and permissible.

At the least, it is evident that the language of the Act is not unambiguous on its face. We must therefore weigh the competing interpretations of its meaning.

3. HCFA's interpretation was reasonable and permissible.

The Board has long held that it would defer to the federal agency's published interpretation of ambiguous language in the statutes it administers so long as that interpretation is reasonable. Where the interpretation has not been published in the Federal Register, however, we defer to it if the state had actual and timely notice of that interpretation. Even in the absence of proof of actual notice, we will defer if the state fails to show that it reasonably relied on its different interpretation. See, e.g., New Jersey Dept. of Human Services, DAB No. 1773 (2001); Louisiana Dept. of Health and Hospitals, DAB No. 1772 (2001); and Community Action Agency of Franklin County, DAB No. 1581 (1996), and decisions cited therein; see also 5 U.S.C.  552(a)(1). The issue before us, therefore, is not what is the best possible interpretation of the language at issue. Rather, the issues are: (1) whether HCFA's interpretation was a reasonable and permissible one; (2) if so, whether Arizona had notice of it; and (3) if not, whether Arizona in fact reasonably relied on a different interpretation to its detriment.

Arizona highlighted portions of the legislative history of the IHCIA referring to the goal of increasing access to health care service to Native Americans without shifting to the states costs already undertaken by the federal government. Ariz. Br. at 10-12. From these references, Arizona argued that HCFA could not reasonably interpret the statute to preclude full federal payment for non-IHS Medicaid services to Native Americans upon a referral from IHS to a facility with which IHS had a contract care rate agreement. A close reading of the legislative history of the provision in context gives a different picture.

Clearly, Congress intended to broaden access to and improve the quality of the health care services for Native Americans (especially those on reservations and in other remote locations). Nothing in the legislative history, however, establishes that Congress elected to do so by removing from the states the responsibility for sharing in the normal costs of medical assistance for eligible recipients seeking care from Medicaid providers whenever the recipients were Native Americans. Rather, much of the focus was on the problems of Native Americans located where few providers or health care resources existed apart from IHS and tribal facilities, many of which were found to have limited funding and less than adequate quality. See generally H.R. Rep. 1026, 94th Cong, 2d Sess. (1976) reprinted in 1976 U.S.C.C.A.N. 2652 (1976 House Report). Eligibility for Medicaid had little meaning in that context because IHS facilities could not receive reimbursement under Medicaid for services they provided to eligible recipients. To address this, the IHCIA sought to remove the "current prohibition against [Medicaid] reimbursement for services performed in IHS facilities" and to authorize "payments through the two programs to qualified Indian Health Service hospitals and long-term care facilities for services rendered to Medicaid and Medicare patients." 1976 House Report at 2665, 2746 (emphases added).

The essential effect of the IHCIA was to re-channel some Medicaid funds to be of practical benefit to these recipients by allowing states to use Medicaid funds to pay for services offered in IHS facilities that had not previously been permitted to receive Medicaid funds. Thus, section 402 of the IHCIA provided for 100% FMAP for the costs of "services provided to any Indian in an IHS facility, if that Indian is eligible for both Medicaid coverage and coverage through the [IHS] programs." 1976 House Report at 2746 (emphasis added). Because IHS already received direct federal funding for its facilities and services, the IHCIA also specifically mandated that new funds received as a result of Medicaid reimbursement for services to Medicaid-eligible Native Americans must not replace existing IHS allocations but rather be used to improve quality and expand services for those recipients.(5)

Had the IHCIA provided only that IHS facilities could now bill for Medicaid reimbursement, this would have shifted to the states (which had previously had no responsibility for the services of IHS facilities) part of the costs previously borne by the federal government. The legislative history indicates that Congress thought this result would be unfair and inequitable. Congress also was concerned that making IHS facilities eligible for Medicaid reimbursement might thereby actually reduce federal support of health care services to Indians. Thus, the IHCIA created a 100% FMAP rate for reimbursement. 1976 House Report. The House Report, in discussing the budget effects of the bill, specifically stated that, since the 100% FMAP funds --

are available under Medicaid only for services for Medicaid-eligible Indians in Indian Health Service facilities (where care is already provided without cost to these Indians), the Committee notes that this represents primarily a shift in Federal expenditures from the [IHS] budget to the Medicaid (title XIX) budget.

1976 House Report at 2798 (emphasis added).

On the other hand, before the IHCIA, Native Americans were entitled to Medicaid, if otherwise eligible, and could seek services from Medicaid providers. The costs of such medical assistance provided to Medicaid-eligible Native Americans by Medicaid providers fell under the normal FMAP rate. The legislative history contains no indication that Congress intended to alter this, nor any expectation that the federal government was undertaking costs previously borne by the states for medical assistance to Native Americans. Since the costs claimed by Arizona here involve services by non-IHS providers in non-IHS facilities, they are not the costs referred to as "normally borne by" the federal government prior to the IHCIA.(6)

Arizona drew on legislative history associated with a 1973 bill that never became law to support its assertion that Congress intended to expand services to Native Americans by providing 100% FMAP for services received in non-IHS facilities by referral. Ariz. Br. at 12, n.4. The 1976 House Report does quote some language from the earlier legislative history. See 1976 House Report at 2746. While congressional concerns about federal responsibility for poor quality health care for Native Americans were mentioned in relation to both bills, more relevant to the question before us is the difference in the means taken to address the problem in the law as passed compared to the earlier bill. Specifically, the 1973 bill would have extended a 100% FMAP rate to all Medicaid services provided eligible Native Americans who lived on or near reservations. See House Rep. No. 93-533, on HR 3153, 2d Cong., 1st Sess. (1973). Obviously, Congress knew how to provide the 100% FMAP rate for all services to Native Americans if that was its intent. In 1976, Congress passed a law which indisputably did not do so. Instead, IHCIA provided the 100% FMAP rate only for those services Native Americans received through IHS facilities. In that context, and given the other references in the legislative history to services in IHS facilities, we agree with HCFA that the language in the final law can reasonably be read to limit the 100% FMAP rate to the IHS facility services which had previously been fully federally funded.

We also find that, contrary to Arizona's argument, HCFA's interpretation better conforms to the purposes of the IHS contract care program. Arizona recognized that provisions of the IHS contract care program specifically treat that program as a payer of last resort for contracted care, after Medicaid. Contrary to what Arizona argued, however, this payment provision does not support Arizona's reading of section 1905(b) of the Act.

IHS's manual provides that an IHS employee may refer a patient "when the medical care required cannot be provided at the IHS facility," but that the referral does not imply that IHS will pay for the care. Ex. 34, at 5. Payment will be authorized only for a Native American individual who lives within specified delivery areas (generally in or near a reservation) and "is not eligible for or does not have an alternate resource." Id. Alternate resource is defined specifically to include Medicaid. Id. at 2. The requirement to seek and use available alternate resources for contract care predated IHCIA. Hence, the costs of contract care referrals were a joint federal-state burden for states participating in Medicaid, rather than in the category of costs exclusively borne by the federal government before IHCIA.

Arizona mistakenly suggested that IHS had no incentive to encourage Medicaid enrollment by Native Americans prior to the passage of IHCIA because IHS facilities could not then bill Medicaid for "services delivered to Native Americans" and hence could not recoup from Medicaid. Ariz. Reply Br. at 10-11. The fallacy here is that it begs the question by describing services provided by non-IHS facilities on referral as being delivered by IHS. In fact, IHS's relation to the costs of this care was always that of default payer for a subset of eligible Native Americans with no alternative resources, i.e., not eligible for Medicaid or other health care support programs. IHS had clear incentive to ensure that those patients eligible for Medicaid should enroll in order to conserve IHS's limited contract care funds for those who could not obtain any alternative resources.

4. HCFA's interpretation regarding these kinds of claims was communicated repeatedly to the states prior to May 1997.

a) Overview of issue regarding HCFA's policy statements

Arizona presented a picture of confusing and entirely contradictory communications from HCFA, culminating in a memorandum issued in May 1997, which Arizona said expressly authorized these kinds of claims. Ariz. Reply Br. at 2-10, citing Ex. 8 ("May 1997 HCFA Memorandum"). Arizona described as "undisputed" facts the following assertions:

    • HCFA officials informed states that the May 1997 Memorandum authorizes 100% FMAP for off-site referred services such as those at issue in this appeal. (Exh. 15 4; Exh. 16 6.)

    • States have been claiming 100% FMAP for off-site referred services for years with the knowledge and express approval of HCFA. (Exh. 15 4-6; Exh. 16 4-6; Exh. 17 at 2-3.)

    • HCFA officials have specifically examined claims for off-site referred services and concluded that they are eligible for 100% FMAP. (Exh. 15 5; Exh. 16 5; Exh. 17 at 2.)

    • Before these disallowances, HCFA neither articulated nor applied a policy limiting 100% FMAP for referred services to those provided "in" or "by" or "on the premises of" IHS facilities. (Exhs. 15, 16, 17.)

Ariz. Reply Br. at 4 (references are to exhibit numbers that we have cited as record exhibits).

Each of these "facts" is not only disputed but unsupported on the record before us. The three exhibits cited are all affidavits from officials of other states. We discuss their content more below, but point out initially that none includes any example of written approval or policy from HCFA. They refer merely to oral conversations with HCFA Regional staff or auditors.(7) Arizona did not claim to have been a party to any of these alleged conversations and expressly disclaimed any effort to rely on them to attempt to estop HCFA. Ariz. Reply Br. at 4. Nevertheless, Arizona asserted that this evidence disproved the existence of a long-standing HCFA interpretation precluding payment of claims like those here, i.e., off-site referrals by IHS to contract care providers who bill Medicaid for their services to Native American recipients.

Full review of the HCFA documents in the record, including those relied on at various times by Arizona as demonstrating conflicting HCFA positions, leads to a different conclusion. While not every communication employed the most felicitous phrasing, none of them, including the May 1997 HCFA Memorandum, informs states that HCFA intends to expand the 100% FMAP rate to referrals to contract care facilities for services that are not and could not be provided by a particular IHS facility within its scope of services. Moreover, the communications were clear in limiting the 100% FMAP rate to services billed by IHS facilities. Generally, Arizona pulled out of context language from letters and memoranda that, read as a whole, restated HCFA's interpretation limiting the special 100% FMAP rate to the cost of services offered by IHS facilities and billed by the facilities to Medicaid.

b) Historical context

We look in more detail at HCFA's communication record below, but first reiterate the historical perspective. The IHCIA has been in effect since 1976. The only relevant statutory change was the 1996 mandate to IHS to lease facilities of tribes and tribal organizations, which triggered the 1996 MOA between IHS and HCFA. That 1996 MOA simply treated the 638 facilities as "IHS facilities" for Medicaid purposes rather than requiring IHS to execute actual leases. Yet, Arizona did not identify a single instance -- over 20 years, between 1976 and 1997 -- where Arizona or any other state sought the 100% FMAP rate for a claim of the kind it now puts forward. Nor has Arizona identified any such claim paid by HCFA during that period.

Arizona's reference to state claims expressly approved by HCFA "for years" was based only on the three affidavits from officials in Alaska, North Dakota, and South Dakota. Exs. 15, 16, and 17. The gravamen of each affidavit was: (1) that each state began claiming referred services provided by non-IHS facilities only after HCFA had issued its May 1997 Memorandum; (2) that the claims of each state were not initially deferred or disallowed; but (3) that HCFA had notified each state some months before the affidavits (all dated March 2001) that such claims were not payable at the 100% FMAP rate and would be disallowed. Id. However imperfect any particular HCFA communication may have been, it thus appears that, for more than two decades, it was well understood by Arizona and other affected states that HCFA did not pay at the 100% FMAP rate for services provided to Native American recipients by non-IHS facilities and billed by them to the state Medicaid program. Furthermore, in its brief, Arizona conceded that in "the early years" of Arizona's participation in the Medicaid program (via a demonstration waiver), HCFA "took the position that all services provided to Native Americans by providers other than the [IHS] itself would be subject to the regular state match." Ariz. Br. at 15, n.6.

c) HCFA's policy prior to May 1997

Arizona asserted that HCFA "modified" that position and "by the early 1990's . . . recognized the availability of 100% FMAP for certain services provided by contract providers." Id. We turn next to the HCFA policy statements prior to May 1997 which Arizona relied on as indicating some modification of the long-standing HCFA policy. In the following section, we then consider the May 1997 HCFA Memorandum in some depth, since all four states treated that as the main indicator of a new willingness by HCFA to consider 100% FMAP rate for these types of services.

i. 1992 HCFA Memorandum

The first document cited by Arizona was a memorandum dated September 25, 1992 from the Director of the HCFA Medicaid Bureau responding to a request from the Regional Administrator's Office for assistance in responding to an Arizona inquiry about the meaning of "through an IHS facility." Ex. 18, at 1. The memorandum stated that the 100% FMAP rate depends on the "ownership of the facility," and that IHS had communicated to HCFA that it equated facilities which it leased with those that it owned outright. Id. Hence, the memorandum stated that the state would be provided with a list of all IHS-owned and IHS-leased facilities, and that costs of services normally covered under the state's Medicaid plan "which are offered by any of these facilities" would be eligible for the 100% FMAP rate. Id. (emphasis added). This statement is entirely consistent with HCFA's interpretation that the IHS facility must itself offer the service, not simply refer the patient to some external Medicaid provider to obtain the service. The memorandum went on, however, to state the following:

If the operating body of the IHS-owned or leased facility, be it IHS, an Indian tribe or tribal organization, enters into contracts to achieve the performance of services offered by the facility, the services may be considered to have been provided through the facility and therefore qualify for the 100-percent.

Id. Arizona viewed this as a statement, never withdrawn by HCFA, that referrals to contract providers would be eligible for 100% FMAP rate with "no mention of indirect billing through IHS." Ariz. Br. at 15. This formula reflects Arizona's consistent mischaracterization of HCFA's interpretation of contractual arrangements for care to be those services that a particular facility may offer under arrangement to be in the nature of a "pass-through billing" or "indirect billing" requirement. Instead, HCFA asserted that the fact that a service is offered by a facility, even when using contractual arrangements, is a prerequisite for the special 100% FMAP, not a matter of form in routing or channeling bills. HCFA Br. at 22-23.(8)

In our opinion, Arizona misread the memorandum and misconstrued HCFA's interpretation. HCFA's position is not fairly characterized as an improper requirement for "indirect billing through IHS," nor has HCFA required that every service offered by a facility invariably be provided within its physical confines, although such provision is the most common and clear evidence that the facility is the party offering the service.(9) The quoted language allows only certain contracts to qualify, i.e., those that "achieve the performance of services offered by the facility." Id. (emphasis added). We find this language best fits HCFA's explanation that the contemplated contracts are not contracts with outside parties to accept patient referrals but rather what is termed in the Act "arrangements." "Arrangements" in Medicare, and derivatively in Medicaid, are "limited to arrangements under which the receipt of payment by the [facility] (whether in its own right or as agent), with respect to services for which an individual is entitled to have payment made under this title, discharges the liability of such individual or any other person to pay for the services." Section 1861(w)(1) of the Act. In other words, the facility must bill Medicaid directly for the services it offers, taking sole responsibility for compensating the contractor independently. An example is a physician with whom a facility contracts to provide care to its patients, which the facility thereby offers as part of its services. See HCFA Br. at 16-17.

ii. 1993 HCFA correspondence

In 1993, Arizona inquired further about whether the 100% FMAP rate would apply to services provided by a tribe (or 638 organization) under contract with IHS but not in an IHS-owned or leased facility. HCFA responded:

[T]he services must be offered through one of the IHS owned or leased facilities. If the services are contracted out to a tribe or tribal organization, IHS must be in control of or responsible for the services, i.e., claim them as part of its facility services, even if the services are performed outside the facility. In evaluating whether or not 100% FMAP applies in specific situations, we would discuss with the IHS facility in question, whether or not it is responsible for and controls the services, i.e. considers the services part of its facility services.

Ex. 19, at 1 (emphasis in original). This discussion is entirely consistent with HCFA's present interpretation, namely that "received through an IHS facility" essentially means that a particular IHS facility must buy, take responsibility for, and bill for a contracted service in order to get 100% FMAP rate for it.(10) The letter, however, went on to give an example of a tribe contracting with IHS to provide behavioral health services(11) and stated that in that case-

Where the service is provided and the fact that a contract exists are not the governing factors in determining whether or not 100% FMAP applies. In this situation, we would have to determine whether or not there is an IHS facility in the area which claims the services as provided through its facility.

Id. at 2. Arizona relied on this statement as demonstrating that HCFA at least at one point did not impose any requirement that a service be provided in an IHS facility, and instead had switched its emphasis to merely whether the "contract provider was located near an IHS facility." Ariz. Br. at 15. In fact, however, even now, as we have observed, HCFA does not state an absolute requirement that the service be physically provided within the confines of the IHS facility but rather requires that it be a service properly offered by and claimed by a particular IHS facility. This position is clear too in the second example in the letter which involves services not provided by IHS. Thus, HCFA stated: "If there is no IHS facility in the area, then there can be no services provided thru an IHS facility, and 100% FMAP would not apply." Ex. 19, at 2.

iii. 1994 HCFA correspondence

Again in 1994, HCFA explained in a letter to Arizona that the availability of the 100% FMAP rate depended on the ownership of the facility providing the services and applied only to services provided by IHS facilities. That letter goes on to say that -

If the operating body of the IHS-owned or leased facility, be it IHS, an Indian tribe or a tribal organization, enters into contracts to achieve the performance of services offered by the facility, the services may be considered to have been provided through the facility and therefore qualify for the 100 percent rate.

Ex. 20, at 3. Arizona claimed that this language, very similar to that discussed above from Exhibit 18, demonstrated that HCFA had previously accepted the concept that services for which IHS contracted, regardless of where they were actually provided, could be eligible as "received through" IHS. However, Arizona's reading conveniently omits the emphasis on the contract being made by a specific facility's operating body to accomplish a service that that facility offers. The letter also pointed out that section 402 of the IHCIA (codified in section 1911 of the Act) provided authority for Medicaid payments only to IHS facilities (that is, IHS-owned or -leased, regardless of whether IHS or a 638 organization operated them). Id. at 2. Payments to other non-IHS facilities (which at that time included 638 tribal facilities without IHS leases) had to be based on provisions of the Act other than sections 1905(b) and 1911. "Thus, unless the facilities are IHS facilities, no Medicaid reimbursement - much less 100 percent reimbursement - is available unless they meet the general Medicaid requirements for that type of facility." Id. at 3.

iv. Inference from Arizona's conduct

As we have noted, prior to May 1997, Arizona apparently never attempted to claim 100% FMAP rate for services provided in non-IHS facilities, despite its present allegation that it understood these statements to alter HCFA's prior position. While this fact alone may not demonstrate that Arizona fully understood HCFA's interpretation of "received through," it certainly establishes that, up until at least that point, Arizona had not acted in reliance on any alternative interpretation. It can also reasonably be inferred that Arizona understood the information it had received from HCFA well enough to determine that HCFA would not be likely to pay such claims.

We conclude that (1) for many years prior to 1993 Arizona admittedly knew of HCFA's position that claims such as those at issue were not reimbursable under section 1905(b), and (2) the policy statements issued in the early 1990's in response to Arizona's inquiries reinforced rather than overturned the notice that Arizona had of that position. We turn next to whether Arizona had a basis to believe that HCFA's policy changed in 1997.

5. The May 1997 HCFA Memorandum did not herald a change in policy on Medicaid payments to non-IHS contract care facilities.

Based on the record before us, it appears that after the 1996 MOA was executed between HCFA and IHS, Arizona began again exploring the breadth of services now reimbursable at 100% FMAP rate even though not provided in an IHS-owned or leased facility. The Regional Administrator then sought clarification from HCFA headquarters. The immediate question asked by Arizona and addressed by the Regional Administrator was about non-emergency transportation services, but the response was broader. The relevant part read:

Our position on this issue is that in order for IHS services to qualify for 100% FMAP, the service must be (1) provided by IHS, or a contractual agent of an IHS or tribal facility; (2) considered as a 'facility service'; that is, a service that would be within the proper scope of services which can be claimed by that facility; and (3) claimed by the IHS facility as a service of that facility. Those services are referred to in regulation at 42 C.F.R. 440.10 ("Inpatient hospital services") and 42 C.F.R. 440.20 ("Outpatient hospital services and rural health facility services").

Ex. 8, at 2 (emphasis added). Contrary to Arizona's arguments, we find this interpretation consistent with HCFA's long practice. As with the policy statements above, the focus is on services offered by a particular IHS facility.

The May 1997 HCFA Memorandum went on to explain further about the applicability of this reasoning to the services directly in question (non-emergency transportation) and stated that most 100% FMAP rate services would be provided on-site in an IHS facility but that-

[r]eferred services, provided through a contractual arrangement, can also be considered provided 'through an IHS facility' and reimbursed at the 100% FMAP rate as long as these are services that could be provided as a facility service, as referenced by regulation above. Any other type of services, such as non-emergency transportation, are not considered to be 'facility services', and therefore should be reimbursed [only at the normal FMAP].

Id. (emphasis added). From this excerpt, Arizona highlighted the concept of "referred services," treating that phrase as extending 100% FMAP rate to any services for which a Native American received a referral from IHS to a provider with which IHS had a contractual care rate agreement. Neither party has identified any statutory, regulatory or other official usage or definition of "referred services," but the word "arrangement" has, as discussed above, a narrow meaning specified in the Act. In light of the history of HCFA's earlier communications, of the special meaning of this term in the Act, and the context of the May 1997 HCFA Memorandum as a whole, we conclude that the meaning of this portion of the memorandum is that the referred services that could qualify as received through an IHS facility are those that the facility offers by "arrangement" and seeks Medicaid reimbursement for directly.

Arizona also sought to read expansively the term "facility service" to encompass any service which could under the regulations be provided in any facility. Reading the two parts of the letter together, however, supports HCFA's position that a "facility service" was meant to refer only to a service for which the particular IHS facility contracted by arrangement (even if actually provided in an off-site location) in order to offer it within the category of services that that facility could provide under the applicable Medicaid regulations. The phrase a facility service was defined, as quoted earlier, in the May 1997 HCFA Memorandum as "a service that would be within the proper scope of services which can be claimed by that facility; and (3) claimed by the IHS facility as a service of that facility." Id. (emphasis added). Facility service can reasonably be read only as referring to a service that is within the scope of either "inpatient hospital services" or "outpatient hospital services" if the IHS facility is a "hospital" or within the scope of "rural health clinic services" if the IHS facility is a "rural health clinic."

Of course, at least as of the first deferral letter, Arizona was obviously aware that HCFA did not interpret "received through" to cover referred services except those provided by an IHS facility under arrangement. Sometimes this point was made by reference to whether the service was billed by the IHS facility or was a service of the facility, but these criteria are merely simpler ways of conveying the requirement that the IHS facility either provide the service with its own staff or have "arranged" to offer a service contractually in order to qualify it as a service received through the facility. Based on all the communications discussed above, we conclude that Arizona had actual notice of HCFA's interpretation and no reasonable basis to believe that that interpretation had altered in relevant substance in the 1990's.

6. Even if HCFA's communications were less than clear, Arizona has not shown reasonable reliance on its alternative interpretation.

We find no evidence that Arizona relied to its detriment on an alternative reasonable interpretation as a consequence of any uncertainty about the meaning of HCFA's communications. It is not disputed that the services in question were payable under the state plan and were provided to Medicaid-eligible individuals. Arizona could not have selected Native American recipients and precluded them from obtaining services provided for under the state plan merely because they obtained the services outside of IHS facilities. Hence, Arizona could not have acted differently to avoid incurring the costs had it fully understood HCFA's interpretation. Arizona is simply responsible for the share of those costs which Medicaid law assigns to it, and has shown no step which it took based on its misunderstanding that worsened its liability from that which it would otherwise have incurred.

Further, telling evidence that Arizona did not actually rely on the interpretation it has put forth to justify these claims is an agreement which Arizona negotiated and signed with IHS as long ago as August 5, 1994. Ex. 22. The agreement discusses how Medicaid-covered services provided by IHS will be identified, how data will be collected and how the costs will be billed. IHS agreed to forward and maintain lists of IHS facilities, 638 facilities, and contract care providers and not to reduce its service effort in the state except as appropriations or national resource requirements or changes required. The agreement recognizes that IHS payments for contract care depend on IHS medical priorities and appropriated resources. Section 8 of the agreement, entitled "Federal Medical Assistance Percentage," provides as follows:

IHS and [Arizona] agree that medical assistance for Title XIX [Medicaid] covered services which are received through an IHS facility, whether operated by the IHS, a tribe, or tribal organization, will be considered by both parties as 100% federal pass through dollars if approved by the Health Care Financing Administration. Once approved by HCFA, tribal programs who bill through IHS for covered services will be identified on all claims by their respective tribal provider number(s).

IHS will bill [Arizona] directly for all covered services provided through an IHS facility, whether operated by IHS, a tribe, or tribal organization.

Ex. 22, at 3. Arizona did not argue that it ever abrogated or altered this agreement, which specifies that the claims which qualify as received through an IHS facility will be billed directly to the state by the IHS.

Clearly, Arizona long understood that the 100% FMAP rate applied only to services that were billed by IHS facilities, even if provided in tribally-operated programs. Arizona argued that HCFA could not rely on this evidence because HCFA was not a party to the agreement and the principal purpose of the agreement was data sharing between IHS and Arizona. Ariz. Reply Br. at 10, n.12. The fact that HCFA was not in privity to the agreement would prevent HCFA from being bound by its terms but in no way compromises the probative weight of the agreement as evidence of the interpretation actually employed by Arizona in implementing section 1905(b). Further, the purpose of the agreement is stated on its face as "to better coordinate the health care delivery systems of" IHS and Arizona's Medicaid program, to which end it addresses many elements in addition to data collection and sharing, among them expressly including the applicability of the 100% FMAP rate.

In addition, HCFA submitted without objection a managed care demonstration proposal by Arizona to create a program covering Native Americans residing on reservations. In describing the existing Medicaid program in Arizona, the document which was sent to HCFA in July 2000 states that --

IHS facilities are reimbursed with 100% federal pass-through funds for some Medicaid services provided through an IHS or 638 tribal facility for Native American AHCCCS members who choose the IHS as their Medicaid acute care provided. When tribal members who reside on-reservation require health care services only available from a non-IHS provider, HCFA does not reimburse the State with 100% pass-through funds; rather the Federal-State match applies.

Attachment to HCFA letter to the Board dated May 24, 2001, at 3. The proposal also notes that Arizona seeks to expand the 100% FMAP rate to cover all services under the managed care demonstration project, in place of the two existing "funding methodologies for Medicaid services provided to Native American members," that is, (1) services provided "through an IHS facility" for which Arizona collects 100% FMAP for the costs and "reimburses the IHS based on the established rate, and (2) "Medicaid services provided outside an IHS facility" which are "reimbursed on a fee-for-services basis with Federal/State matching funds." Id. at 7.

Arizona responded that this proposal merely reflected its understanding of HCFA's position after Arizona had received notice of it by means of the terms of the deferral letters that preceded the disallowances in this case, and not a statement of Arizona's own interpretation. Letter from Arizona to Board, dated June 12, 2001. We agree, but HCFA did not rely on the document to show that Arizona had agreed to HCFA's interpretation, but only to show "an indication of [Arizona's] understanding of [HCFA's] interpretation of section 1905(b) in July 2000." HCFA letter to the Board dated May 24, 2001, at 2. For that limited purpose, it provides another marker of notice to Arizona.


We conclude that: (1) HCFA's reasonable and long-standing interpretation of the costs eligible for 100% FMAP was limited to those "received through" an IHS facility which offers, is responsible for and bills Medicaid for the services provided; (2) Arizona was notified of and long operated consistently with this interpretation; (3) HCFA did not change this policy in its memorandum of May 1997; (4) Arizona did not reasonably rely on an alternative interpretation; and (5) the costs disallowed here were not eligible for 100% FMAP rate under HCFA's interpretation.(12)

We therefore uphold all three disallowances at issue here.


Cecilia Sparks Ford

Marc R. Hillson

Judith A. Ballard
Presiding Board Member


1. Although HCFA has been renamed the Centers for Medicare & Medicaid Services (CMS), we continue to use "HCFA" below since that acronym was used to refer to the agency at the time the actions at issue here were taken. See 66 Fed. Reg. 35437 (July 5, 2001).

2. The first sentence of the section explains how each state's regular FMAP is calculated. It is undisputed that the regular FMAP for Arizona was 62.5 in federal fiscal year (FFY) 1999 and 65.92 in FFY 2000. HCFA Br. at 4, n.3.

3. The parties submitted appeal files with consecutive exhibit numbers. The first 26 of 34 exhibits were submitted by Arizona; the remaining 8 were submitted by HCFA. HCFA also submitted one supplemental exhibit. No objections were made to any exhibits. For simplicity, we refer to all exhibits by exhibit numbers.

4. Arizona described this set of services as "eligible referred services." Ariz. Br. at 5. The criteria set out in the brief are not identical to those described in the claiming procedures which Arizona submitted to HCFA on September 30, 1999 but are substantially the same. Ariz. Ex. 6.

5. The importance that Congress placed on assuring that the Medicaid funds being made available to IHS facilities supplement rather than replace IHS funds supports our conclusion that IHS facilities were expected to bill the state Medicaid program themselves for services they offered. Otherwise, it would be difficult to see how the IHS could track the funds to be sure they were used to improve and expand services rather than to supplant the use of IHS funds. Indeed, the legislative history specifically refers to payments to IHS facilities, implying that the facilities were expected to bill Medicaid.

6. Arizona argued that Congress was actually concerned that making it possible for IHS facilities to receive Medicaid funds would result in greater incentives for IHS to assist Native Americans in enrolling in Medicaid and therefore an expansion in Medicaid enrollment that would increase state costs for general Medicaid services to Native Americans who had been less likely to enroll in Medicaid previously. Ariz. Reply Br. at 11-12. Arizona identified nothing in the legislative history that supports the position that Congress used the word "through," instead of "by" or "in," as an indirect means of lessening the impact of Native Americans increasingly exercising their unquestioned preexisting entitlement to Medicaid enrollment. The legislative concerns, instead, appear to have been two-fold: (1) preventing shifting costs previously paid by IHS to the states when IHS began billing services of its facilities to Medicaid, and (2) assuring that IHS would use the Medicaid funds received to expand and improve its services and not to offset expenditures it already incurred. See Ex. 2, at 2. Nor is it relevant that Arizona did not opt to participate in the Medicaid program until after 1976. Eligible Native Americans in all states that did participate in the program prior to that time could receive Medicaid services in the same manner as all other recipients, as Arizona recognized, regardless of whether they also exercised their option to access the IHS system. See Ariz. Reply Br. at 12, n. 14. They could not, however, receive Medicaid-covered services from IHS facilities. We see no basis for assuming that Congress was seeking to convince Arizona to join the Medicaid program by passing the IHCIA, as opposed to doing just what the legislative history suggests, that is, assuring that those states that were participating would not be required to undertake contributing to the IHS program for services provided to Native Americans by the federal government through IHS facilities.

7. None of the affidavits provides a specific date for a particular conversation, referring to "sometime in 1997 or 1998" or after the May 1997 HCFA Memorandum. See, e.g., Ex. 15, at 4 and 5. In some cases, the purported HCFA representative is not identified at all. The content of the oral statements described in the affidavits sometimes does not purport to go nearly as far as Arizona's assertions about them. See, e.g., Ex. 16, at 5 (HCFA's "Denver Regional Office" reviewed claims in 1999; affiant recalls discussing "with HCFA" how the state selected the claims but does not assert any statement of approval by a HCFA official).

8. For this reason, also, we agree with HCFA that its interpretation of which services qualify for 100% FMAP does not violate the requirement to make prompt payments under 25 U.S.C.  1621s, as Arizona asserted. HCFA Br. at 22-23; cf. Ariz. Br. at 22. Services offered and billed by an IHS facility qualify; services of non-IHS providers do not qualify. In either case, the billing is directly to Arizona. The non-IHS service costs do not qualify by virtue of some channeling through IHS.

9. It is Arizona that equated services provided "by" a facility with services provided "within the 'physical confines' of" a facility. Ariz. Reply Br. at 3.

10. The facilities involved were tribal/638 facilities which contracted with IHS. Under present law, they are treated as IHS facilities, but at the time of the 1993 communication they were in the same status as non-IHS facilities are now.

11. This 1993 letter was issued at a point when HCFA did not treat tribal facilities as equivalent to IHS facilities unless they were IHS owned or leased. There is no question that HCFA's interpretation in that regard changed as part of the 1996 MOA. The present relevance of this example, though, is that at the time the tribal facility involved was a non-IHS facility, and the response presumably still applies to other non-IHS facility services.

12. Arizona did not allege that any of the costs at issue were for services that were billed by an IHS facility or that met the requirements discussed above for services provided under arrangement through an IHS facility.