DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Oklahoma Department of Human Services
Docket No. 86-100
Decision No. 809
DATE: November 18, 1986
DECISION
The Oklahoma Department of Human Services (State) appealed a
determination
by the Office of Family Assistance (Agency) disallowing
$67,495 in federal
financial participation (FFP) claimed by the State
under Title IV-A of the
Social Security Act (Act) on its Quarterly
Statement of Expenditures filed
August 2, 1983, for expenditures made in
its Aid to Families with Dependent
Children (AFDC) program for the
period October 1, 1980 through June 30,
1981. The Agency disallowed the
costs on the basis that the claim was
filed later than the two-year time
limit provided in federal statute and
regulations. The State maintained
that the two-year time limit was not
applicable because its claim fell
within the statutory exception to that time
limit for claims resulting
from an audit exception or as an adjustment to
prior year costs.
Based on our analysis below, we reverse the disallowance on the
ground
that the State's claim did result from an audit exception, and
is
therefore not subject to the two-year claiming deadline.
Factual Background
The Health Care Financing Administration's (HCFA) Division of
Financial
Operations performed a review of the Administrative and Training
(A&T)
expenditures claimed at the 75 percent FFP rate for Skilled
Professional
Medical Personnel (SPMP) under Title XlX of the Act. 1/ State's
Appeal
File, Exhibit J. The State conceded that claims included for
certain
consultant services were erroneously charged at 75 percent. The
review
also resulted in a determination that the State was not
allocating
certain administrative expenditures in accordance with the State's
Cost
Allocation Plan (CAP).
1/ Expenditures qualifying for the SPMP rate receive FFP at
75
percent; administrative costs generally, under both Medicaid and
AFDC,
are entitled to FFP at only the 50 percent rate.
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The review involved, among other things, an examination of the
State's
financial records which traced the allocations of the costs or SPMP
to
the various programs under which they had been claimed. One program
was
the Early Preventive, Screening, Diagnostic and Treatment
(EPSDT)
program under Title XIX. As a result of the review of SPMP
costs
charged to the EPSDT program, HCFA also challenged the allocation
of
certain administrative costs charged to the Division of Services
to
Adults and Families (DSAF), a portion of whose costs were passed on
to
EPSDT. State's Appeal File, Exhibit J.
Specifically, HCFA challenged two of the three payroll locations
included
in the calculation of DSAF administrative costs. Before the
review,
three payroll locations were being combined to determine the
total DSAF costs
to be allocated to various public assistance programs,
including EPSDT.
These were payroll location 62C, which included
salaries and benefits for
workers within DSAF; payroll location 77G,
which is not involved in this
appeal; and payroll location 33A, which
included salaries and benefits for
workers in the Services and
Eligibility Unit (SEU).
The review interpreted the State's approved CAP in effect beginning
March
1982 to permit only payroll location 62C to be included in the
DSAF cost
pool. See State's Appeal File, Exhibit R. Further, HCFA
also
challenged the combination of payroll locations 77G and 33A with
payroll
location 62C from October 1980 through February 1982. 2/
After the State's own review, the State agreed that it was necessary
to
remove payroll locations 77G and 33A from DSAF and reallocate them
in
order to comply with HCFA's instructions and the State's approved
CAP.
In addition to DSAF, the reallocation affected the SEU and Division
of
Assistance Payments (DAP) cost pools. The adjustment in the
amounts
properly allocated to these cost pools would in turn affect the share
of
administrative costs properly charged to specific public
assistance
programs.
2/ HCFA did, however, acknowledge that the CAP in effect prior
to
March 1982 was silent with regard to which payroll locations should
be
combined to form the DSAF cost pool, and, In fact, payroll location
33A
had been removed from the DSAF cost pool beginning in July
1981.
State's Appeal File, Taylor Affidavit. For the purposes of this
case,
we are concerned only with the October 1, 1980 through June 30,
1981
period.
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Under the State's approved CAP for the period at issue, joint
charges,
those not solely identifiable and directly chargeable to a
single
program, were allocated among programs "on the basis of
factors
reflecting the distribution of work among programs." State's
Appeal
File, Exhibit Q. Joint charges from DAP and DSAF were
apportioned among
the relevant assistance programs according to the
percentage of county
costs charged to each program. However, joint
charges from SEU were not
apportioned immediately among programs because SEU
did not have direct
administrative responsibility for any federal/state
assistance or
services program. Instead, SEU was responsible for
establishing
policies and procedures affecting the service and financial
assistance
programs under the supervision of DSAF and DAP. Therefore,
SEU's joint
charges were divided between and charged to DAP and DSAF on the
basis of
the ratio of total costs of the respective payrolls of those
two
divisions, before being passed on to particular programs. Thus,
any
change to DSAF affected both SEU and DAP.
Payroll location 33A, which had been incorrectly charged entirely to
DSAF,
was removed and charged to SEU. The increased SEU total then had
to be
reallocated between DSAF and DAP according to the ratio of their
respective
total payrolls, as required by the CAP. 3/ Removal of payroll
locations 33A
and 77G from DSAF also altered the payroll ratio between
DSAF and DAP, giving
DAP a larger share of the divided SEU costs. This
increase in the total
allocation to DAP increased the total DAP
administrative expenditures that
were properly charged to the AFDC
program. State's Appeal File, Exhibit
H. This also increased the total
indirect costs charged to AFDC because
those costs were calculated on
the basis of the ratio that State and local
salaries for each program
bore to the total State and local salaries in the
Department of Human
Services. State's Appeal File, Exhibit Q.
The State made adjustments to its prior period claims in its
expenditure
reports for the quarter next following the review. Although
no new
amounts of FFP were claimed, a redistribution of costs, some up and
some
down, was necessary among various Social Security Act programs.
See
State's Appeal file, Exhibit H.
3/ Payroll 77G was removed from DSAF and charged directly to
the cost
pool for the Teaching Hospital Medical Eligibility Unit. The effect
on
the cost pool for this unit is not at issue in this appeal. - 4
-
On August 2, 1983, the State filed prior period adjustments in the
AFDC
program for the period October 1, 1980 through June 30, 1981.
State's
Appeal File, Exhibit B. 4/ The Agency disallowed the State's claim
for
FFP in the AFDC program based on the State's failure to comply with
the
timely filing regulations promulgated at 45 CFR 95.7.
Statutory and Regulatory Background
Section 1132(a) of the Act requires claims by states for
expenditures
during a calendar quarter under the various public assistance
programs
to be filed "within the two year period which begins on the first
day of
the calendar quarter immediately following such calendar quarter,"
or
payment will not be made. It further provides that this requirement
is
not to 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."
These statutory provisions are implemented by 45 CFR Part 95, Subpart
A
(1981). The regulatory provisions on time limits in general track
the
statutory requirements; the exceptions in the statute are restated in
45
CFR 95.19.
4/ The State also filed at the same time the following claims
based on
the reallocation:
(1) a prior period net increasing adjustment claim
with HCFA for
$45,389 ($8,973 in FFP) for the period
October 1, 1980 through June
30, 1981, in State
administrative costs under Title XIX Medicaid;
(2) a claim with the Office of Child Support
Enforcement for an
increasing adjustment of $1,199
($899 in FFP) in State
administrative expenses for
the child support enforcement program
during the
same period; and
(3) a claim with the Children's Bureau of DHHS for a
prior period
adjustment in State administrative
costs for the Title IV Foster
Care program.
The reallocation of payroll locations for the period
October 1, 1980 through June 30, 1981, caused a net increase
in
those costs of $3,738 ($1,869 in FFP).
All of the above claims were paid without a timely
filing
objection.
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The pertinent section for this appeal is 95.4, Definitions. It
includes
the following:
Adjustment to prior year costs means an adjustment
in the amount of
a particular cost item that was
previously claimed under an interim
rate concept and
for which it is later determined that the cost is
greater or less than that originally claimed.
Audit exception means a proposed adjustment by the
responsible
Federal agency to any expenditure
claimed by a State by virtue of
an audit.
Analysis
A. THE REVIEW PERFORMED BY THE DIVISION OF
FINANCIAL
OPERATIONS WAS AN AUDIT.
The State argued that the statutory time limit does not apply because
the
adjustments at issue were made as the result of an audit. The
State
argued that although the review was not officially labeled an
"audit,"
it bore all the relevant characteristics of one. Most
importantly, the
State contended, the effect on the State was identical to
the effect of
a formal audit, and, therefore, the State is entitled to make
its
adjustment regardless of the filing deadline.
Further, the State argued that audits are reviews of State
agency
operations conducted to ensure that funds are being "properly
expended,"
45 CFR 201.12(a)(2), and to determine "the allowability of costs,"
45
CFR 201.12(b). In contrast, the State maintained that program
reviews
involve examinations of program administration, the emphasis of which
is
on examination of case records and quality control systems
monitoring
recipient eligibility. 45 CFR 201.10. The State
asserted that the
review of SPMP charges had nothing to do with case records
or
eligibility quality control. See State's Appeal File, Exhibits I and
J.
Moreover, the State maintained that during the "program review,"
the
Agency reviewed financial and payroll records in order to trace
charges
made for SPMP at the enhanced 75 percent matching rate. The
State
asserted that these activities bear a closer resemblance to
the
regulations' description of an audit than to a program
review.
Moreover, the State cited previous Board decisions for its position
that
the review performed here comports with all the characteristics of
an
audit that the Board has identified in past decisions. See
State's
brief, p. 14.
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Finally, the State argued that the fact that the regulations at 45
CFR
201.12 describe only audits performed by the Audit Agency of
the
Department of Health and Human Services does not preclude the Board
from
recognizing that de facto audits are performed by other federal
offices.
The Agency did not address the question whether the review was an
audit.
In maintaining that the disallowance should be upheld, the Agency
made
its arguments on the assumption ("arguendo") that the review was
an
audit.
We are persuaded by the State's argument on this issue and find that
the
review, for all practical purposes, was an audit. Neither the
statute
nor the regulation providing for the audit exception define the
term
"audit." However, an audit is commonly understood to involve the
formal
inspection of accounting or financial records. See definition
of
"audit" in Black's Law Dictionary, Fifth Edition; Webster's New
World
Dictionary, Second College Edition, cited in Illinois Department
of
Public Aid, Decision No. 715, January 6, 1986. In this case, the
review
examined the same financial and accounting records that would have
been
inspected during an audit by the HHS audit agency. Moreover, to
find
that this review was not an audit because it was not conducted by
the
HHS Audit Agency would ignore the facts of this case and set a
standard
that is unduly restrictive.
B. THE STATE'S CLAIM WAS AN AUDIT EXCEPTION.
The Agency maintained that the Board should uphold the
disallowance
because the review did not question the State's cost allocation
system
but, rather, sought to determine the appropriate FFP rate to
match
Medicaid costs allocated to a specific function. Therefore, the
Agency
maintained that the claim at issue does not fall within the
"audit
exception" of 45 CFR 95.19.
The Agency argued that the review had only the effect of causing
appellant
to remove certain non-qualifying costs from its claim for 75
percent Medicaid
FFP and to properly claim them elsewhere within the
Medicaid program at the
proper 50 percent FFP rate. The reviewers did
not look at or in any way
concern themselves with the State's claims for
FFP under the Title IV-A AFDC
program. The Agency argued, therefore,
that no audit exception is
available for claims under the State's Title
IV-A AFDC program.
Further, the Agency argued that a federal review of expenditures
resulting
in an "audit" exception in one federal program does not waive
the timely
filing requirement for expenditures under a different federal
program.
Illinois Department of Public Aid, supra.
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The State argued that, unlike the situation in Illinois, supra, there
was
a direct cause and effect relationship between the audit exception
and the
claim. In this case, the State argued it did not choose
unilaterally to
shift claims from one program category to another after
claims under one
program category were denied. Moreover, the State
reasoned that it
could not refuse to remove the challenged payroll
costs. If it had not
done so, HCFA would have disallowed them. Nor
could the State refuse to
reallocate the removed costs because that
would have put it in violation of
its CAP, which in turn would have
invited a disallowance of other
administrative costs by the Division of
Cost Allocation.
Although the review was initially instituted to examine
expenditures
claimed under the enhanced SPMP FFP rate, the audit directly
impacted on
the AFDC-related costs. In Illinois. supra, we said that
the
"regulatory language 'any claim resulting from an audit
exception'
implies a direct cause and effect relationship between the
audit
exception and the claim." However, this does not stand for
the
proposition that the costs must always be within the same program
to
have such a relationship. The specifics of each case must be
examined
and judged on its own merits. In the present case, we find a
direct
cause and effect relationship between the audited costs and the costs
at
issue. When the Agency directed the State to remove two
payroll
locations from DSAF, it was clearly foreseeable that, if DSAF costs
were
interrelated with costs of other units, as is the case here, those
costs
would be reallocated to other units to reflect the ordered change.
C. THE STATE'S CLAIM WAS NOT AN ADJUSTMENT TO
PRIOR
YEAR COSTS.
Additionally, the State argued that the adjustment at issue here
is
analogous to the claim at issue in Maryland Department of
Human
Resources, Decision No. 483, November 30, 1983. 5/ The State
maintained
that the specific cost items at issue in this case are
those
administrative costs incurred by the Oklahoma Division of
Assistance
Payments and properly charged to the AFDC program under the
State's
approved CAP. The State maintained that it had
5/ The Board found that restrictions in the appropriations act
did not
bar Maryland's $2,344 claim resulting from clerical errors that
caused
its initial timely claims for the same expenditures to be either over
or
understated. The Maryland case did not deal with the
claiming
restrictions of section 1132, as in this case.
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previously claimed, and been reimbursed, $215,629 in FFP for
AFDC-related
administrative costs in DAP for the period October 1, 1980
through June 30,
1981. State's Appeal File, Exhibit H.
The Agency contended that the claim at issue was not an adjustment
to
prior year costs. The Agency asserted that an "adjustment to prior
Year
costs means an adjustment in the amount of a particular cost item
that
was previously claimed under an interim rate concept and for which it
is
later determined that the cost is greater or less than that
originally
claimed." Agency brief, p. 6. The Agency argued that the
Title IV-A
AFDC program does not utilize interim rates; therefore, the
exception
for adjustment to prior year costs is simply not applicable to the
facts
of this appeal.
Although the State primarily argued that it was entitled to an
audit
exception, it also argued, in the alternative, that it was entitled
to
claim the costs at issue as an adjustment to prior year costs.
We
cannot accept the State's position. The regulation at 45 CFR
95.4
defines an adjustment to prior year costs as an adjustment in the
amount
of a particular cost item that was previously claimed under an
interim
rate concept. The costs at issue were not originally claimed
based on
an interim rate and later adjusted. Therefore, as advanced by
the
Agency, the adjustment to prior year costs exception does not apply
in
this case. However, since we find for the State on other
grounds,
further discussion of this issue is not necessary.
D. THE DECISION IN OKLAHOMA DEPARTMENT OF
HUMAN
SERVICES, DECISION NO. 484, IS NOT APPLICABLE TO
THIS
APPEAL.
The Agency maintained that the decision in Oklahoma Department of
Human
Services, Decision No. 484, November 30, 1983, is directly applicable
to
this case. The Agency argued that in the former Oklahoma case, as
here,
the State claimed certain costs in other programs and sought to
transfer
and reclaim those costs in the Title XX program after two years from
the
incurrence of the costs. Further, in the present appeal, as in
the
former, the Agency maintained that the subject costs were eligible to
be
filed in either program but were transferred between programs after
the
filing limitation had run.
The State argued that the Board's ruling in Oklahoma, Decision No.
484,
supra, does not support the disallowance in the present case. The
State
maintained that Decision No. 484 involved a series of purely
voluntary
State adjustments in which the State first inadvertently caused
a
shortfall of valid claims under the Title XX social services program
and
then attempted to
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cover that shortfall by submitting entirely new categories of
claims
transferred from non-Title XX programs. The state argued that
the
critical difference between the cases is that a State may control
the
distribution of service costs among programs with overlapping
purposes
but it has no control over the exact distribution of
administrative
costs governed by an approved CAP, so long as that particular
plan is in
effect.
Although Decision No. 484 briefly discussed adjustments to prior
year
costs, the main focus of the decision involved audit exceptions
and
claims. ln Decision No. 484, the State attempted to transfer claims
for
expenditures from two separate programs to its Title XX program
after
the filing deadline. Further, in that case, the Board found that
no
audit had occurred, and that the State had no basis on which to
pursue
its claim for an exception after the filing deadline. In the
present
case, as discussed above, we have found that the Agency's
review
constituted an audit, and, as a result of the audit, the State
is
entitled to an audit exception for the costs at issue here.
Our
Decision Nc. 484 does not preclude the State's claim for an
audit
exception as an exception to the timely-filing limitation.
E. OTHER AGENCY ARGUMENTS.
Finally, the Agency maintained that "while a state must claim
allocated
costs according to its approved CAP, the existence of an approved
CAP
does not: (1) require a state to claim a cost which it may
properly
allocate under its approved cost allocation plan, or (2) obviate
the
requirement that the allocated cost be otherwise allowable under
program
requirements." Agency brief, p. 9.
Of course the State was not required to claim the increased
AFDC
administrative costs resulting from the HCFA review. A state is
never
under compulsion to claim FFP for costs it has incurred. However,
that
is no reason why it should not be entitled to FFP in costs it
properly
elects to claim.
So, also, the allocated costs claimed must be "otherwise allowable"
under
program requirements. The Agency, however, seems somewhat
circular in
its argument that the allocated costs were not eligible to
be claimed in the
AFDC program because they were not timely filed in
that program. If the
costs come under the audit exception to the timely
filing requirements, there
is no time limit on their filing in any
program.
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Conclusion
Based on the foregoing reasons, we reverse the Agency's disallowance
of
$67,495.
________________________________ Cecilia Sparks Ford
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
Presiding
Board