GAB Decision 381
January 31, 1983 Texas Department of Human Resources; Docket No.
82-56-TX-HC Settle, Norval; Teitz, Alexander Garrett, Donald
(1) The Texas Department of Human Resources (DHR) appealed the
disallowance by the Health Care Financing Administration (HCFA) of
$178,533 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance was
based on a review of DHR's Hospital-Based Eligibility Worker Program
(program) for the period January 1, 1979 through March 31, 1981. HCFA
concluded that the federal share of program expenditures claimed by DHR
for Medicaid reimbursement should be reduced by the amount of funds
received by DHR from the participating hospitals for a portion of the
program costs. /1/
The central issue in this appeal is whether DHR can use funds from
private and public hospitals participating in the program and its
non-federal matching share for program costs charged to the Medicaid
program or must treat these funds as applicable credits under the cost
principles of 45 CFR Part 74, Subpart Q, Appendix C (1978-1980). For
reasons stated below, we find that any funds received by DHR from
private hospitals cannot be viewed as unconditional donations to DHR
because the private hospitals receive a tangible benefit from their
participation in the program. Further, these funds must be viewed as
applicable credits because they effectively reduced DHR's expenditures
for the program. As to funds received from public hospitals, we find
that these funds might have been used as DHR's share as authorized local
participation if DHR had amended its Medicaid state plan to allow for
such funding. Nevertheless, we are compelled to sustain the
disallowance because DHR failed to amend its state plan to allow for
such local participation. Because the record indicates that the program
was a worthwhile innovation, we recommend that DHR be given an
opportunity to request either a retroactive amendment of its state plan
or a waiver of the plan; HCFA could then examine whether an amendment
or waiver is possible and whether the conditions for local financial
participation have been met.
There are no material issues of fact in dispute. We have determined,
therefore, to proceed to decision based on the appeal file, the parties'
initial and reply briefs, the transcript of a hearing held before the
(2) Presiding Board Member on October 22, 1982, the parties'
post-hearing briefs, and a January 21, 1983 conference call.
Factual Background
In 1978 DHR decided to expand its Hospital-Based Eligibility Worker
Program in response to requests by hospitals to extend the 90-day filing
deadline for submitting Medicaid claims for reimbursement to DHR.
Rather than extending the deadline, DHR proposed to expand the program,
previously instituted on a limited scale, of placing its own employees
in certain hospitals to determine the Medicaid eligibility of patients.
Funding limitations prevented DHR from expanding the program, however,
until some hospitals proposed to contribute toward the cost of such an
expansion. A formula was developed whereby the hospitals would pay
one-half of the salaries of the eligibility workers stationed in the
hositals. DHR executed agreements with the hospitals, detailing the
functions of the workers, their employment status and working
conditions, and identifying the amount of funds to be provided by the
hospitals. The hospitals forwarded the amount to DHR, and DHR paid the
workers from its general funds.
The notification of disallowance identified the agreements with the
hospitals as contracts, under which DHR billed the hospitals on a
monthly basis for the eligibility workers. HCFA stated that the funds
received from the hospital were for the purposes of reducing DHR
expenditures for the program. The notification of disallowance found
the funds received from the hospitals to be applicable credits and
program income, barring DHR, under the respective prohibitions of Office
of Management and Budget Circular Number A-87 (incorporated into federal
regulations at 45 CFR Part 74, Subpart Q, Appendix C) and 45 CFR 74.42,
from claiming a proportionate federal share of an amount represented by
the funds.
Parties' Arguments
DHR stated that, consistent with the general purposes of the Medicaid
program, the placement of its employees in the hospitals was primarily
for the benefit and convenience of Medicaid applicants and recipients.
DHR denied that any funds received from the hospitals were applicable
credits or program income. DHR contended that, under Texas law, it was
authorized to accept contributions and gifts and that any such funds are
specifically appropriated to it. According to DHR, the funds received
from the hospitals were treated as donations, and were, after their
receipt, state funds for all intents and purposes. DHR therefore did
not consider it necessary to amend its Medicaid state plan or request a
waiver of its state plan to allow for local financial participation.The
funds could be used as DHR's share for obtaining Medicaid federal
matching funds. At the October 22, 1982 hearing, DHR further argued
that a HCFA representative was aware of the nature of the program (3)
and its proposed method of funding. DHR contended that this HCFA
representative informed DHR staff that claims for federal matching funds
for the program would be available.
HCFA argued that DHR could not use the funds received from the
hospitals as DHR's required non-federal matching expenditures for the
program. Rejecting DHR's characterization of the funds as donations,
HCFA contended that the funds were the result of contracts executed
between DHR and the hospitals, with the hospitals paying one-half of the
costs of the employees in exchange for the benefits of having the
employees stationed at the hospitals. Any funds generated by these
contracts, according to HCFA, must be considered program income or
applicable credits which are required to be deducted from DHR's total
program costs. HCFA further argued that the funds could not be
considered as allowable local financial participation because DHR was
bound by its Medicaid state plan, in which DHR specifically designated
that state funds would be used to pay all of the non-federal share of
total expenditures under the plan. In addition, HCFA contended that the
HCFA representative approved only the theory of the proposed program,
not the funding mechanism of the program, and that he lacked authority
to grant formal HCFA approval of the program.
Basis of the Medicaid Program
The Medicaid program was conceived as a cooperative federal-state
venture to provide payments for "necessry medical services" rendered
to
certain "needy individuals whose income and resources are insufficient
to meet the costs of these services." Section 1901 of the Act. States
are not required to institute a Medicaid program, but if they choose to
do so, they must submit a satisfactory state plan which fulfills all
requirements of the Act. Once the state plan is approved, the state
becomes entitled to grants of federal funds in reimbursement for a
portion of the expenditures which it makes in providing specific types
of medical assistance to eligible individuals under the plan in
accordance with certain conditions. Section 1903(a) of the Act.
The state plan must be in effect for all political subdivisions
within a state and must provide that state funds make up at least 40
percent of the non-federal share of the expenditures under the plan.
Section 1902(a) of the Act. A state has the option of using either
state-only funds for the non-federal share of the expenditures or a
combination of state and local political subdivision funds. Individuals
in similar circumstances must be treated equitably throughout a state,
and, if there is local financial participation, lack of funds from local
sources must not result in lowering the amount, duration, scope, or
quality of services or level of administration under the plan in any
part of the state. 42 CFR 433.33.
(4) Discussion
I. Should the funds from the hospitals be treated as DHR's
non-federal matching share or as applicable credits?
The threshold issue in this appeal is the characterization of the
funds received by DHR from the hospitals participating in the program.
DHR characterized the funds as donations, unrestricted by any
conditions. HCFA viewed the relationship between DHR and the hospitals
as contractual, with DHR deriving income from the placement of its
workers at the hospitals. HCFA argued that, according to 45 CFR Part
74, Subpart Q, Appendix C, this income constituted applicable credits
which reduced DHR's expenditures for the program.
At the hearing, DHR witnesses, while calling DHR's agreements with
the hospitals "contracts," denied that the hospitals were legally
obligated to contribute to the salaries of the eligibility workers.
(Tr., p. 24) The witnesses said that DHR "expected" the hospitals
to
fulfill their pledges, and that DHR had not withdrawn the eligibility
workers from hospitals which failed to make their donations. HCFA
questioned whether DHR would continue to place the workers at hospitals
which affirmatively declared that they would not contribute toward the
workers' salaries.
The subject of donated funds is not discussed in Title XIX. Both DHR
and HCFA have been able to discover only one reference to donated funds
in the Medicaid regulations. That regulation, 42 CFR 432.60, is not
applicable here. It permits privately donated funds to be used as a
state's share of training expenditures, providing that the funds are
donated without any restriction as to their use for particular
individuals or at particular institutions. During the conference call,
HCFA conceded, without citing any reference in policy guides,
regulations, or statutes, that a donation to a state's Medicaid agency
was permissible and could be used as part of a state's share for
Medicaid matching purposes as long as the donation was made
unconditionally.
We believe that we have to look behind DHR's characterization of the
funds to determine if they were truly unrestricted donations. DHR
claimed that the placement of its employees in the hospitals was a
service for the convenience of eligible Medicaid recipients, that the
hospitals received no benefit from having the eligibility workers on
their premises, and that the program had been approved by a HCFA
official.
We disagree. While there may not have been a legally enforceable
contractual obligation imposed by the agreements between DHR and the
hospitals, there was nevertheless a quid pro quo arrangement. In
exchange for the hospitals providing office space and half the workers'
salaries, DHR placed workers at the hospitals. We do not see how the
contributions from the hospitals could be viewed then as unrestricted
donations.
(5) Furthermore, we find that the hospitals derived a tangible
benefit from having the workers on the premises. At the hearing, a DHR
witness testified that the presence of the workers expedited the
eligibility determination process, aided the hospitals in sorting out
their bills, and speeded up the reimbursement to the hospitals for the
services provided to Medicaid recipients. (Tr., pp. 22-23) The
hospitals, therefore, did receive services by having the workers on the
premises, and these services did result in a tangible monetary benefit,
quicker reimbursement, for the hospitals. We cannot agree, then, with
DHR that the funds contributed by the hospitals were unconditional
donations in the normal sense of the word. /2/ Nor would we conclude
that the actions of the HCFA official in reviewing the program should be
binding on HCFA. /3/
(6) If the funds received from the hospitals cannot be considered
donations, we believe that they should be considered applicable credits,
unless they meet the conditions for local financial participation in 42
CFR 433.33.
In order for costs to be allowable under a grant program, the costs
must be net of all applicable credits. 45 CFR Part 74, Subpart Q,
Appendix C, C.1.e. Applicable credits refer to "those receipts or
reduction of expenditure-type transactions which offset or reduce
expense items allocable to grants as direct or indirect costs." Id., C.
3.a. Section 1903 of the Act describes how a state will be reimbursed
by the federal government for its expenditures under the Medicaid
program. That section limits FFP to a share of the total amount
expended by the state. Here DHR claimed that it expended a certain
amount of dollars from its funds for the program. It is uncontested
that some of these funds came from the hospitals in exchange for the
placement of eligibility workers. We therefore question whether DHR
actually "expended" the amount it claimed. There has not really been
an
expenditure, as described by the Act, if DHR has already been reimbursed
for the activity. As HCFA reasoned, if DHR received FFP for 50% of the
costs of the workers and also received from the hospitals 50% of the
workers' costs, DHR effectively would not have contributed anything to
the program's costs, contravening statutory requirements for state
financial participation in the Medicaid program. Thus, the agreements
with the hospitals have all the appearances of being applicable credits,
a "reduction of expenditure-type transactions which offset or reduce
expense items."
We find, therefore, that any funds received by DHR from hospitals
must be considered to fall under the applicable credit provisions of 45
CFR Part 74, Subpart Q, Appendix C, unless the funds can be considered
local financial participation. As noted above, the private hospitals
received a consideration, resulting in an ultimate monetary benefit,
from their participation in the program. The funds from the private
hospitals reduced the amount of DHR's expenditures for the program.
II. Were the requirements of 42 CFR 433.33 met here?
The regulations provide, however, that funds from local political
subdivisions of a state may be used as part of a state's share. 42 CFR
433.33. At the hearing, DHR asserted that the public hospitals involved
in the program were funded through counties or hospital districts, which
are considered political subdivisions in Texas. It would appear, then,
that funds received by DHR from public hospitals, regardless of whether
the public hospitals may have received some benefit from the
arrangement, could, in certain circumstances, be used as state matching
funds.
HCFA argued that DHR failed to meet the requirements of 42 CFR 433.33
because: 1) DHR's Medicaid state plan did not provide, as required by
(7) section 433.338 for any local participation; and 2) individuals at
public hospitals participating in the program receive a higher level of
service than do "individuals in similar circumstances" throughout
Texas,
thereby violating section 433.33(c).
Section 433.33 does, as HCFA argued, mandate that a state plan must
specifically provide that local financial participation is being used
for the non-federal matching expenditures. In its post-hearing brief,
HCFA submitted copies of DHR's Medicaid state plan. At section 6.3 of
the state plan, under the heading "State Financial Participation,"
two
options were provided: 1) "State funds are used to pay all of the
non-Federal share of total expenditures under the plan"; and 2) "There
is local participation. . . ." The former option was checked. HCFA
argued that DHR, by selection of the state-only option, is precluded
from using the funds received from the public hospitals as part of the
state's matching share. During the conference call, DHR explained that
it did not change the state plan or seek a waiver of the state plan for
the program because, as stated previously, it considered the funds
donations to its general treasury.
During the conference call, HCFA maintained that the selection of the
"State Financial Participation" option was not a mere technical
requirement, but a substantive Medicaid requirement that affected the
amount of FFP.
DHR has argued, and HCFA has not denied, that the placement of
eligibility determination workers in hospitals constitutes an innovation
to the Medicaid program goal of providing needy individuals with quality
health care. DHR, not having considered it necessary, did not, however,
so amend its state plan or seek a waiver of the plan to allow for local
participation. Under such circumstances, we cannot ignore DHR's
Medicaid state plan and HCFA's resulting inability to pay FFP for
activities inconsistent with the state plan. HCFA noted during the
telephone conference that, in certain circumstances, a waiver to a state
plan can be granted to allow for some local participation. HCFA
questioned whether it was possible to have a retroactive plan amendment,
/4/ but did not indicate that such an amendment is absolutely precluded
under circumstances where a state merely seeks to gain recognition for
the source of funding and does not seek to change the substance of its
program. In considering an amendment request, HCFA of course would have
to consider whether the regulatory conditions for local participation
(8) were present in this situation. As stated above, DHR has not
requested a waiver or sought a plan amendment. We believe that DHR
should have the opportunity to do so.
As to HCFA's second argument, section 433.33(c) was promulgated to
carry out section 1902(a)(2) of the Act in order to ensure that eligible
individuals throughout a state would be offered the same quality and
level of care and services. Because only a relatively small percentage
of the hospitals in Texas participated in the program, HCFA contended
that certain Medicaid recipients received a higher quality and level of
services than other Medicaid recipients treated at non-participating
hospitals.
If DHR should submit a plan amendment or seek a waiver, HCFA could
then determine whether the program complies with the requirements of
section 433.33(c). We believe, however, that HCFA's interpretation of
this requirement, as applied to the facts of this case, may be
erroneous. It is undeniable that the hospitals where the eligibility
workers were placed in a more favorable position than the
non-participating hospitals. But as to the Medicaid recipients
themselves, the individuals for whom the Medicaid program was created,
we question whether the fact that their Medicaid eligibility was
determined at the participating hospitals or at DHR offices would
substantially affect the type of service contemplated in section 1902(
a) of the Act. The purpose of that provision was to guarantee that the
quality of health care and the types of health services provided did not
vary within a state. HCFA has not argued that the Medicaid recipients
at the participating hospitals received superior health care. At best,
they may have received a more convenient administrative service. We do
not, therefore, think that DHR's program would necessarily violate the
equitable treatment provisions of section 433.33(c).
Conclusion
For the reasons stated above, we sustain the disallowance in the full
amount of $178,533. We recommend, however, that HCFA consider any state
plan amendment or waiver, submitted by DHR, that allows for local
financial participation by the public hospitals in the program. /1/ DHR
claimed expenditures of $983,032 ($491,516 FFP). DHR received
reimbursements from the hospitals in the amount of $357,065. Using a
50% FFP rate, HCFA thus disallowed $178,533 in FFP (one-half of
$357,065). /2/ We emphasize that our discussion of whether the
contributed funds were unconditional or not is necessitated by HCFA's
concession that an "unconditional" donation can be charged as a state
expenditure for purposes of FFP in the Medicaid program. HCFA did not
provide a definition of "unconditional" donation, nor did it argue
that
a "conditional" donation per se violates the applicable credit
regulation or any other legal authority applicable to the Medicaid
program. /3/ DHR contended that its employees discussed the
program, prior to its inception, with a HCFA representative, Mr. Craig
Howser, a Fiscal Management Specialist. According to DHR, Mr. Howser
voiced no objections to the program. At the hearing, Mr. Howser
testified that DHR verbally explained the program to him as being
financed by the hospitals with unrestricted donations. Mr. Howser
stated that it was not until after the program was implemented, when DHR
submitted a copy of the standard contract with the hospitals, that HCFA
became aware of the actual method of financing the program. Mr. Howser
further testified that he did not have the authority to approve or
disapprove new programs. DHR presented nothing to directly contradict
this testimony. Based on this evidence we conclude that DHR could not
have reasonably relied on whatever statements Mr. Howser may have made
as formal HCFA approval of the program and its method of financing. The
elements of an estoppel defense, as discussed in previous Board
decisions, are not present here. See, e.g., Washington Department of
Social and Health Services, Decision No. 282, April 23, 1982. Mr.
Howser did not appear to have actual knowledge of how the program was to
be financed, nor did he have the authority to approve programs.
Furthermore, there is no evidence here of any affirmative misconduct, a
requirement for the assertion of equitable estoppel against the federal
government. Schweiker v. Hansen, 450 U.S. 785 (1981). /4/
Section 201.3(g) of 45 CFR generally provides that the effective date of
a new state plan or an amendment may not be earlier than the first date
of the quarter in which an approvable plan or amendment is submitted.
OCTOBER 22, 1983