SUBJECT: Colorado Department of Health Care
Policy and Financing

DECISION

The Colorado Department of Health Care Policy and Financing (Colorado) appealed an April 20, 2004 determination by the Centers for Medicare & Medicaid Services (CMS) to disallow $2,564,667 in federal financial participation (FFP). ⁽¹⁾ Colorado requested these funds in 2003 as reimbursement for certain expenditures made by its Medicaid managed care program between fiscal years 1995 and 1998. ⁽²⁾ Colorado had already (prior to 2003) obtained matching funds for approximately 50 percent of its fiscal year 1995-1998 Medicaid managed care expenditures. Colorado later determined that some of those expenditures were for family planning services, which qualify for a higher level -- 90 percent - of reimbursement. Consequently, in 2003, Colorado requested $2,564,667 in additional FFP for the managed care expenditures made for family planning services during those prior years. The additional amount requested is equal to the difference between the FFP Colorado received for those expenditures at the 50 percent rate, and the FFP it would otherwise have received for those expenditures at the 90 percent rate.

CMS issued the disallowance because it found that Colorado's claim for additional FFP had not been filed within two years after the quarter in which the expenditures were made, as required by section 1132(a) of the Social Security Act, 42 U.S.C. § 1320b-2(a). Among other things, Colorado contends in this appeal that the disallowance should be overturned because it is based on an agency policy letter, State Medicaid Director Letter (SMDL) #01-020, that CMS issued without complying with the notice-and-comment procedures of the Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq.

For the reasons discussed below, we find no merit in Colorado's arguments and uphold the disallowance.

Legal Background

A state that administers a Medicaid program pursuant to an approved plan is entitled to FFP for a percentage of the expenditures it makes in operating the program. 42 U.S.C. § 1396b; 45 C.F.R. § 95.505. For most Medicaid expenditures, the federal government provides FFP at a rate known as the "federal medical assistance percentage" (FMAP). 42 U.S.C. §§ 1396b(a)(1), 1396d(b). The FMAP for Colorado during the relevant period was 51.97 to 53.10 percent. See CMS Ex. 5, at 23, 38.

For certain categories of expenditures, the Act authorizes FFP at a rate greater than the FMAP. Relevant here, section 1903(a)(5) of the Act authorizes FFP at the rate of 90 percent for expenditures "attributable to the offering, arranging, and furnishing . . . of family planning services and supplies." 42 U.S.C. § 1396b(a)(5).

Section 1132(a) of the Act, which applies to several Social Security Act programs (including Medicaid), provides a two-year window for filing FFP claims with certain exceptions. This provision states:

Notwithstanding any other provision of this Act (but subject to subsection (b)), any claim by a State for payment with respect to an expenditure made during any calendar quarter by the State --

(1) in carrying out a State plan approved under title I, IV, X, XIV, XVI, XIX, or XX of this Act, or

(2) under any other provision of this Act which provides (on an entitlement basis) for Federal financial participation in expenditures made under State plans or programs,

shall be filed (in such form and manner as the Secretary shall by regulations prescribe) within the two-year period which begins on the first day of the calendar quarter immediately following such calendar quarter; and payment shall not be made under this Act on account of any such expenditure if claim therefor is not made within such two-year period; except that this subsection shall not be applied so as to deny payment with respect to any expenditure involving court-ordered retroactive payments or audit exceptions, or adjustments to prior year costs.

42 U.S.C. § 1320b-2(a). As the text of this provision indicates, the two-year rule does not apply to certain categories of expenditures -- namely, court-ordered retroactive payments and expenditures associated with "audit exceptions" and "adjustments to prior year costs." Id.

The Secretary's regulations in 45 C.F.R. Part 95, subpart A implement the two-year filing requirement established by section 1132(a). Section 95.7 states that CMS "will pay a State for a State agency expenditure made after September 30, 1979, only if the State files a claim with us for that expenditure within 2 years after the calendar quarter in which the State agency made the expenditure" (emphasis added). 45 C.F.R. § 95.7. A "claim" is defined as a "request for Federal financial participation in the manner and format required by our program regulations, and instructions or directives issued thereunder." 45 C.F.R. § 95.4 (emphasis added). The "manner and format" for filing FFP claims is the submission of a Quarterly Medicaid Statement of Expenditures (QSE). See 42 C.F.R. §§ 430.30(a)(2), 430.30(c); CMS Publication 45, State Medicaid Manual (SMM) §§ 2500(A)(1), 2500(B), 2500.2.

Case Background

Colorado's Medicaid program operates partly on a managed care model. Colorado Brief at 2. Under this model, Medicaid recipients receive their medical care, including family planning services, from private managed care organizations (MCOs). Id. For each Medicaid-eligible managed care recipient, Colorado makes a monthly risk-based capitation payment. Id. A capitation payment is a fixed amount that is paid to the MCO as compensation for any health services delivered to the resident during the month. Id.

For each quarter between October 1, 1994 and September 30, 1998 (fiscal years 1995-1998), Colorado filed, within two years after the end of the quarter, a QSE that reported the Medicaid program's "total computable" managed care expenditures (capitation payments) for that quarter. ⁽³⁾ See Colorado Brief at 1-3. In each of these timely filed QSEs, Colorado calculated the total federal share of these expenditures -- that is, the amount of FFP requested -- by applying the FMAP rate to the "total computable" amount; no portion of the total federal share was computed by applying the 90 percent rate applicable to family planning services. Id. Based on these QSEs, CMS approved FFP for Colorado's fiscal year 1995-1998 managed care expenditures at the FMAP rate. Id.

On July 31, 2003, Colorado filed the QSE that triggered the disallowance now under review. CMS Ex. 5, at 1. In addition to seeking FFP for expenditures made in the quarter ending June 30, 2003, the QSE contained "adjustments" ⁽⁴⁾ to the amounts of FFP previously claimed for Colorado's fiscal year 1995-1998 managed care expenditures. Id. at 2 (lines 7 and 10B), 15-38. The adjustments were prompted by Colorado's determination that some of those managed care expenditures had been made for family planning services and were therefore eligible for FFP at the 90 percent rate instead of at the lower FMAP rate. Colorado Brief at 2. In order to obtain the higher level of reimbursement for those expenditures, Colorado made two adjustments in its July 2003 QSE for each of the prior fiscal years (1995-1998). First, Colorado increased the amount it previously reported as the federal share of its managed care expenditures at the 90 percent rate (as explained in the previous paragraph, the amount of FFP previously reported at the 90 percent rate was zero). ⁽⁵⁾ CMS Ex. 5, at 24, 30, 34, 38 (line 18A, columns D and G). Second, Colorado made a corresponding reduction in the amount previously reported as the federal share of its managed care expenditures at the FMAP rate. ⁽⁶⁾ Id. at 25, 28, 32, 36 (line 18A, column B and G). The net result of these adjustments was an increase in the amount that Colorado reported as the total federal share of its fiscal year 1995-1998 managed care expenditures. The amount of the increase was $2,564,667. CMS Ex. 1.

CMS disallowed the adjustments just described. In a formal notice of disallowance (dated April 20, 2004), CMS advised Colorado that $2,564,667 in FFP had been disallowed because the request for these funds had not been filed within the two-year period prescribed by section 1132 of the Act and its corresponding regulations in 42 C.F.R. Part 95. CMS Ex. 3. CMS also stated that Colorado's claim for additional FFP was not an "adjustment to prior year costs" because the family planning expenditures in question had not been claimed initially based on an "interim rate concept." Id. In support of the latter finding, CMS cited to State Medicaid Director Letter (SMDL) #01-020, dated July 3, 2001, which states in relevant part:

This letter is to inform you of our policy regarding timely filing of claims at amended Federal matching rates under the Medicaid and State Children's Health Insurance (SCHIP) programs in light of various Departmental Appeals Board (DAB) decisions and questions on this issue. This situation arises when a State timely files a claim for Federal financial participation (FFP) at one matching rate (e.g., Federal medical assistance percentage), and much later decides that all or a portion of that claim could have been claimed appropriately at a higher rate (e.g., the 90 percent family planning matching rate). The State files a claim for the higher match rate beyond the 2-year timely claims filing limits in Section 1132 of the Social Security Act and the implementing regulations at 45 C.F.R., Part 95, Subpart A. The Departmental Appeals Board (DAB) ruled in Decision 1655 [New Jersey Dept. of Human Services, 1998] (enclosed) that this second claim "constituted a new and separate request for FFP," and concluded that the second claim would not be considered timely filed and therefore is unallowable.

Since the DAB is the final administrative decision [making] body of the Department and is interpreting for the Secretary Section 1132 of the Social Security Act and the implementing Departmental regulations at 45 C.F.R., Part 95, Subpart A, the DAB decision is applicable to the Medicaid and SCHIP programs. Therefore, when a State files a claim timely at one Federal matching rate and later determines that it could have claimed a higher Federal matching rate, any new claim at the higher rate must itself be filed timely under the law and regulations (unless it meets one of the timely claims filing exceptions specified in 45 C.F.R. 95.19). If the new claim is not timely filed and is not within a specified exception, it is unallowable. Note that such a claim does not constitute an adjustment to prior year costs as defined in the timely claim filing regulation.

CMS Ex. 4. SMDL #01-020 was not published in the Federal Register or the Code of Federal Regulations, and public comments were not solicited before it was issued. SMDL #01-020 states that it is "applicable to all claims filed on or after" July 3, 2001. Id.

The Parties' Contentions on Appeal

Colorado contends that the disallowance should be overturned because it was based on an agency policy letter -- SMDL #01-020 -- that should have been issued in conformance with APA notice-and-comment procedures. Colorado Brief at 3-7. Colorado argues that SMDL #01-020 is not an "interpretative rule" exempt from notice-and-comment procedures because it does not purport to clarify or explain the applicable statute and regulations. Id. at 4-6. Even if SMDL #01-020 is an interpretative rule, says Colorado, CMS should have followed notice-and-comment procedures because the letter altered CMS's interpretation of the regulations -- particularly 45 C.F.R. § 95.7 -- that implement the statutory two-year filing requirement. Id. at 6-7; Reply Brief at 3. According to Colorado, prior to SMDL #01-020's issuance, CMS did not apply the two-year filing requirement to "claims for enhanced FFP" (that is, claims based on an increase in the FFP rate for expenditures previously claimed at a lower rate). Id. at 5-6.

Finally, Colorado contends that SMDL #01-020 establishes an agency policy that is contrary to the regulations and is therefore invalid under the APA. Colorado Brief at 7; see also 5 U.S.C. § 706(2)(A) (providing that an agency action should be set aside if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law). In particular, Colorado asserts that SMDL #01-020 misconstrues the language in 45 C.F.R. § 95.7, explaining:

[Section 95.7] provides for payment to a state when a "claim" is filed with CMS within a two-year period for an "expenditure" by the state for a covered program, such as Medicaid. SMDL #01-020 irrationally confuses the concept of a procedurally compliant and properly formatted "claim" for a particular matching rate with the concept of a claim for an "expenditure." Regardless of whether the Department initially broke out portions of program expenditures which may have been eligible for an enhanced matching rate, it nevertheless submitted a claim for all of its expenditures that complied with programmatic instructions and requirements. The fact that the Department subsequently revised its request with regard to the enhanced FFP does not change the fact that a claim for the entirety of the Department's "expenditure" was timely filed.

Colorado Brief at 7 (citations omitted).

CMS responds that Colorado's request for additional FFP in its 1995-1998 family planning expenditures is a "new claim" that was filed well outside the two-year period prescribed by section 1132(a), and that none of the statutory exceptions to the two-year rule apply. Response Brief at 7-10. As for Colorado's APA argument, CMS contends that SMDL #01-020 is not a "rule" within the meaning of the APA and that notice-and-comment procedures therefore do not apply. According to CMS, SMDL #01-020 is merely a "policy statement" that "restates the plain meaning of the Act" or "transmits the DAB's interpretation of section 1132(a) of the Act on behalf of the Secretary as the final administrative decision body of the Department." Id. at 13-15. CMS contends that even if SMDL #01-020 is a rule, it is only an "interpretative rule," a type of rule that the APA expressly exempts from its formal rulemaking procedures. Id. at 15-16. Finally, CMS contends that SMDL #01-020 is not arbitrary, capricious, or contrary to law because it describes a situation that the statute and regulations were designed to prevent -- namely, the submission of a claim many years after the state's expenditures were made. Id. at 16-17.

Discussion

In Connecticut Department of Social Services, DAB No. 1982 (2005) (Connecticut), the Board upheld a disallowance in circumstances materially indistinguishable from those in this appeal. For quarters between July 1995 and December 1999, Connecticut filed timely claims for FFP at the FMAP rate for its Medicaid managed care expenditures, which included expenditures for family planning services. In 2003, more than two years after the end of the quarters in which those expenditures were made, Connecticut filed a QSE with "prior period" adjustments that sought to increase the level of FFP for the family planning services previously -- and timely -- claimed at the FMAP rate. CMS disallowed Connecticut's request for additional FFP as untimely, citing the regulations in 45 C.F.R. Part 95, subpart A, and SMDL #01-020.

Before the Board, Connecticut made most of the arguments that Colorado now makes. Connecticut contended that CMS's reliance on SMDL #01-020 was improper because CMS issued that letter without following APA notice-and-comment procedures. Connecticut argued that those procedures were required because SMDL #01-020 altered CMS's interpretation of the regulations that implement the statutory two-year filing requirement. Connecticut also alleged that, prior to SMDL #01-020's effective date, CMS had a policy or practice of not applying the two-year rule to "claims for enhanced FFP." In addition, Connecticut argued that SMDL #01-020 is not only procedurally but also substantively "erroneous" because it conflicts with certain CMS regulations (particularly 42 C.F.R. § 430.30) and program instructions that, according to Connecticut, illustrate that the two-year filing rule's purpose is to encourage timely "reporting" or identification of "expenditures." Noting that it had claimed (at the FMAP rate) all of the expenditures at issue within the relevant two-year periods, Connecticut suggested that section 95.7 of the regulations permits a state to request "enhanced rate" FFP in an expenditure at any time -- that is, without regard to the two-year filing rule -- as long as a timely claim at some lower rate (such as the FMAP) is made for that expenditure.

We rejected all of these arguments in our Connecticut decision, which, in turn, relied on analysis in our prior decision in New Jersey Dept. of Human Services, DAB No. 1655 (1998). We found that a request to increase the level of FFP in previously claimed expenditures is a "claim" for payment within the meaning of the applicable statute and regulations and therefore subject to the two-year filing requirement. In addition, we rejected Connecticut's APA argument for the following reasons: (1) SMDL #01-020 does not purport to clarify, amplify, or explain the meaning of section 95.7 or any other regulation but merely advises state Medicaid directors that CMS intends to follow Board precedent concerning applicability of the two-year rule in these circumstances; (2) even assuming SMDL #01-020 is an interpretative rule, such rules are not subject to APA notice-and-comment requirements; (3) there was insufficient evidence from which to conclude that CMS had ever interpreted the regulations as exempting the type of retrospective adjustment at issue from the two-year filing requirement ⁽⁷⁾; and (4) to the extent that SMDL #01-020 communicates an interpretation of the regulations, that interpretation arose from agency "adjudication" (the Board's decision in New Jersey), which itself is not subject to notice-and-comment procedures. We also rejected Connecticut's argument that SMDL #01-020 is inconsistent with CMS's regulations and program instructions, finding nothing in either to support Connecticut's view of how the two-year filing rule should be implemented. Finally, we found Connecticut's interpretation of section 95.7 to be at odds with the statute, other provisions of the governing regulations (including section 95.4's definition of the term "claim"), and Congress's purpose in enacting the two-year filing rule.

With one exception, all of Colorado's contentions were expressly addressed in the Connecticut decision. ⁽⁸⁾ The exception is Colorado's contention that SMDL #01-020 is invalid under the APA because it "misconstrues" section 95.7 of the regulations. The basis for this contention is Colorado's belief that the two-year filing requirement, as expressed in section 95.7, does not cover requests to increase the level of FFP paid to the state for previously claimed expenditures. Colorado Brief at 7. In Colorado's view, section 95.7 does not prohibit a state from seeking to increase the level of FFP in an expenditure as long as the expenditure was claimed at some lower rate within the two-year period allowed by section 1132(a). Id. Connecticut advanced a similar interpretation of section 95.7, albeit not in the context of an APA argument, and we rejected that interpretation there, as we do here. Far from misconstruing the regulations, the decision made by the Board in New Jersey and communicated to the states in SMDL #01-020 is fully consistent with section 1132(a) and the regulations (including section 95.7) that implement the statute. We therefore conclude that SMDL #01-020 is not contrary to the regulations and is therefore not invalid on that ground. Because we fully addressed in Connecticut all of the other issues and arguments raised by Colorado, and because the facts in both cases are materially indistinguishable, we conclude that our analysis in Connecticut (which we incorporate by reference ⁽⁹⁾), along with our brief discussion of Colorado's argument about the substantive validity of SMDL #01-020, is sufficient to dispose of this appeal.

Conclusion

For the reasons stated above, we find that Colorado's July 2003 request for $2,564,667 in FFP for its 1995-1998 managed care expenditures was a "claim" within the meaning of section 1132(a) of the Act and the applicable regulations and was not filed within two years after the end of the quarters in which those expenditures were made, as required by section 1132(a). Because the claim was untimely, and because the claim is not covered by any exception to the two-year filing rule, we affirm CMS's disallowance of $2,564,667 in FFP.

Judith A. Ballard

Donald F. Garrett

Sheila Ann Hegy
Presiding Board Member

1. "Federal financial participation" means the "Federal government's share of an expenditure made by a State agency" under various Social Security Act programs. 45 C.F.R. § 95.4.

2. Colorado's fiscal year begins on October 1.

3. Form CMS-64.9, a component of the QSE, lists a state's Medicaid expenditures by type of service. See, e.g., CMS Ex. 5, at 6. Payments to MCOs are reported on line 18A of this form. Id. For each category of service listed on form 64.9, the state reports "total computable" expenditures in the first column (column A). Id. This amount is equal to the total expenditures reported by the state for the period before application of a federal matching rate. In the succeeding columns (columns B, C, and D), the state indicates the amount of FFP being sought for the service at each of the relevant matching rates - e.g., the FMAP, 100 percent for Indian Health Service facilities, and 90 percent for family planning services. Id. The amounts in each of these matching rate columns are summed, with the total placed in the column designated for the "total federal share" (column G). Id.

4. In CMS's program instructions, the term "adjustment" refers generically to increases or decreases in amounts previously claimed by a state for a "prior period" (that is, a period prior to the quarter for which the QSE was filed). See SMM § 2500. The Act recognizes one particular type of adjustment -- an "adjustment to prior year costs," defined in the regulations as an "adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept" -- as an exception to the two-year filing requirement. 42 U.S.C. § 1320b-2(a). To the extent that we use the term adjustment in this decision, we do so in the generic sense, unless otherwise indicated.

5. Upward adjustments to amounts claimed in prior quarters are reported on line 7 of form CMS-64.9P. SMM § 2500.1(B).

6. Downward adjustments to amounts claimed in prior quarters are reported on line 10B of form CMS-64.9P. SMM § 2500.1(B).

7. As evidence of the alleged prior interpretation, both states pointed to an alleged "admission" by CMS in a prior Board proceeding. Colorado Ex. 4; Colorado Brief at 5-6; Connecticut at 17-18. The "admission" consisted of CMS's negative response ("no") to an interrogatory that asked "[w]hether CMS dispute[d] that claims for enhanced FFP were not treated as new claims prior to July 3, 2001." Colorado Ex. 4. We rejected Connecticut's characterization of this response as well as its conclusion that it evidenced the existence of a prior agency interpretation inconsistent with SMDL #01-020. Connecticut at 18.

8. Although CMS notes that Colorado "has not asserted in its appeal to the Board that its claim for additional FFP is covered by any of the exceptions to the statutory two-year filing requirement," CMS argues in its response brief that Colorado's claim for FFP under the enhanced rate for family planning services did not fall under any such exception, including the exception for "adjustments to prior year costs." Response Brief at 3, 9. In its reply brief, Colorado does not dispute that its appeal does not seek coverage under a statutory exception. Accordingly, we conclude that Colorado did not raise any issue concerning a statutory exception. If Colorado had attempted to assert, as it did before the agency, that its 2003 claim was an "adjustment to prior year costs," we would have found that exception inapplicable for the reasons stated in two prior decisions in which this precise issue was considered. Maryland Dept. of Health and Mental Hygiene, DAB No. 1909 (2004); New Jersey Dept. of Human Services, DAB No. 1655, at 5 n.2 (1998).

9. In Connecticut, the Board rejected a contention that CMS's reliance on SMDL #01-020 violated the notice requirements of the Freedom of Information Act (FOIA), 5 U.S.C. § 552(a)(1). The Board also declined to entertain Connecticut's request for a "good cause" waiver pursuant to section 1132(b) of the Act. We do not incorporate Connecticut's analysis of the FOIA and good cause issues because Colorado did not raise these issues in its appeal.