GAB Decision 309
June 7, 1982 Montana Department of Social and Rehabilitation Services;
Docket No. 81-6-MT-HC Ford, Cecilia; Settle, Norval Garrett, Donald
The Montana Department of Social and Rehabilitation Services (State)
requested review of the Health Care Financing Administration (HCFA
Agency) disallowance of $11,730 in federal financial participation (FFP)
claimed under Title XIX of the Social Security Act.
HCFA disallowed the federal share of warrants issued by the State as
payment for covered services to eligible recipients. The State
cancelled the warrants after one year because they were not cashed and
transferred the funds in the amount of the warrants to a different State
account. The Agency determined that the State should have credited to
the federal government the federal share of these funds, $11,730,
because the cancellation constituted a recovery of the funds by the
State.
The issue presented is whether the State can avoid returning the
federal share of the warrants because State law provided that the State
still had the obligation to pay the amounts subject to the warrants and
gave the State authority over unclaimed property of its citizens.
For reasons stated below, we uphold the disallowance. This decision
is based on the parties' written submissions, including the State's
response to an Order to Show Cause issued by the Board.
State's Position
The State argued that, because State law provided the cancellation of
the warrants did not cancel the State's obligation to pay the amounts
subject to the warrants, the State should not have to return the federal
share of the funds subject to those warrants. The State asserted that
these funds were expended and could not be considered recovered because
the obligation to pay was unextinguished.
The State pointed out that 45 CFR 74.74(b) states that each grantee
shall report program outlays and income on the same accounting basis
which it uses in its accounting system. As such, the State argued that
"(State) accounting will not allow us on a retrospective basis to go (2)
back and adjust recorded expenses off the books when we have an
outstanding liability . . . ." (Application for review, p. 2) The State
maintained that since the State's accounting system called for the
State's method of dealing with cancelled warrants, the Agency's
disallowance of these funds was inconsistent with the provisions of 45
CFR 74.74.
The State also asserted: "The Agency would probably argue that
federal financial participation would be forthcoming whenever the State
needed to draw funds for old obligations. However, future federal
program changes, funding caps, block grants or program elimination could
block funds needed by the State to pay old obligations. (State's May 8,
1981 letter to the Board, p. 3)
In response to the Board's Order, the State took a slighty different
approach and asserted that cancellations of the warrants were mere
technical steps of the State in its purely custodial interests for
unclaimed property of its citizens. The State asserted that federal law
is not supreme in areas where Congress has not intended to occupy the
field such as the disposition of unclaimed, lost, misplaced, and
abandoned property.
The State asserted that it rightfully considers title to the warrants
to pass after issuance and mailing and that once title has passed,
actions under the State unclaimed property statutes have nothing to do
with recovery.
The State argued that the original federal share is no more the
lawful interest of the federal agency than is the original State share
the interest of the State department since the cancellation is purely a
technical step.
Agency's Position
The Agency stated that the issuance of a State warrant did entitle
the State to claim FFP because a Medicaid "expenditure" occurred when
the warrant was issued. /1/ The Agency asserted, however, that the
cancellation of the warrant was a recovery of funds requiring the State
to reimburse the Agency for the FFP represented in the cancelled
warrant. (Agency Response, p. 8)
(3) The Agency pointed out that Action Transmittal HCFA-AT-78-95
"specifies at page 9 that 'cancellations' are to be deemed a collection
by the State and deducted from the sums otherwise paid by the Federal
Government to the State for the Medicaid Program." (Agency Response, p.
17)
The Agency also relied on 45 CFR Part 74, Appendix C, which specifies
allowability of costs of grants to state governments. The Agency noted
that according to the regulations allowable costs claimed must be net of
all applicable credits, resulting from receipts or reduction of
expenditure-type transactions such as recoveries.
The Agency asserted that, while Montana law may provide for the
cancellation of warrants and the disposition of funds subject to the
cancelled warrants, Montana law does not address the issue of FFP. The
Agency maintained that if the Montana statutes attempt to govern FFP,
the Montana statutes are overridden by federal law because of the
supremacy of federal law. The Agency pointed out the two circumstances
in which federal law is supreme. The first circumstance is where
Congress has chosen to occupy the field completely. The second
circumstance is where Congress has not chosen to occupy the field
completely but where the state law conflicts with federal law. (Agency
Response, p. 12) The Agency stated, "With respect to the timing of
payments, and recovery, of FFP, the Federal Government has totally
occupied the field, leaving no room for state regulation. Thus, even in
the absence of a federal provision directly conflicting with a state
law, the state law cannot be given effect. (Agency Response, p. 13)
The Agency maintained that the cancellation of the warrants by the
State would result in a windfall to the State if the federal government
were not credited for the federal share of the funds.
Discussion
The Agency interpretation that these cancelled warrants do constitute
a recovery under sections 1903(d)(2) and (d)(3) of the Social Security
Act, /2/ 45 CFR Part 74, Appendix C, Paragraph C.1, C. 3, and (4) D.1.
/3/ and Action Transmittal HCFA-AT-78-95 is reasonable. Since the
issuance of a warrant by the State was considered to be an expenditure,
the cancellation of the warrant must be considered a cancellation of
that expenditure, because a warrant, when cancelled, is no longer due to
the payee. Therefore, the cancellation of the warrant amounts to a
recovery by the State.
The section of the Action Transmittal cited by the Agency indicates
that "cancellations" are considered "collections" requiring
a decreasing
adjustment on a state's report of Medicaid expenditures. The State has
not refuted the Agency's assertion that the Action Transmittal applies
to the facts in this appeal. /4/ In this context, there is no practical
difference between a collection and a recovery.
(5) Section 1903(d)(3) of the Social Security Act; 45 CFR Part 74,
Appendix C, Paragraph C.3; and Action Transmittal HCFA-AT-78-95 call
for the recovery by the State to result in a decrease of FFP to the
extent of the federal share, and therefore the Agency acted properly
disallowing the funds involved in this appeal.
The State's argument that, since the obligation was not extinguished
by the cancellation of the warrants, the cancellation of the warrants
could not be considered a recovery, is not convincing. Under the
State's interpretation, the funds subject to the cancelled warrants
could never be considered recovered. Unless the rightful recipient of
the warrant came forth to claim the funds due that recipient, the State
could hold the funds indefinitely without returning the federal share.
By the State's own admission, the cancellation of a warrant is
predicated on the presumption that the recipient is dead or has
abandoned the property. (State's response to the Order to Show Cause,
p. 2) Thus, the likelihood of further claiming is minimal, and the
Agency is correct that the State may benefit from a windfall.
The Agency did not respond to the State's assertion that program
changes, funding caps, block grants, and program elimination may block
federal funds for the State to pay old claims. Those factors, however,
cannot overcame the statutory mandate of Section 1903(d)(3).
Furthermore, the State did not argue that it is powerless to prevent
such losses. The State could limit the time for making a claim against
a cancelled warrant.
Although the State's assertion that federal law does not preempt
state legislation on the question of the disposal of unclaimed and
abandoned property is correct, Montana law does not attempt to control
the subject of FFP.There is no mention of the subject of FFP within the
statutes referred to by the State. Therefore, there was no intention
that Montana laws govern FFP. The question of when a recovery of funds
calls for state return of the federal share is a question decided by
federal law not state law governing the disposition of unclaimed
property.
The State's argument that the State should hold the funds subject to
the cancelled warrants indefinitely is premised on State policies that
(1) title passes to the recipient at the time of the issuance of the
warrant, and (2) the State has a custodial interest for its citizens in
the cancelled warrants as abandoned property. These considerations are
not persuasive in light of the strong presumption that the rightful
recipient will not come forward to make a new claim and the fact that
the State has use of the funds after the warrants are cancelled.
(6) The State is correct in its assertion that 45 CFR 74.74(b)
requires the State to report program outlays and program income on the
same accounting basis which is used in its accounting system. However,
the State has lost sight of the fact that it may not retain the federal
share of recovered funds solely on the basis that it could not otherwise
be consistent within its accounting system. There is not reason why the
State cannot both be consistent in its accounting and properly reflect
the recovery of funds. The funds disallowed in this appeal were not
disallowed because the provisions of 45 CFR 74.74(b) were not complied
with but rather because the State failed to credit the federal
government for the federal share of monies that had been recovered by
the State through the cancellation of state warrants.
Conclusion
For the reasons stated above, we uphold the disallowance of $11,730
by the Agency. /1/ Although the Agency did not base its disallowance on
alleged nonexpenditure of the funds (in that the warrants were never
cashed), it is possible that such a position might apply to the facts
here, at least at the point where the warrants were cancelled. (See,
New York Department of Social Services, Decision No. 261, February 26,
1982) /2/ Section 1903(d)(2) provides that Title XIX payments to
the states, based on estimates of quarterly expenditures, shall be " .
.
. reduced . . . to the extent of any overpayment . . . which the
Secretary determines was made . . . ." Section 1903(d)(3) provides: The
pro rata share to which the United States is equitably entitled, as
determined by the Secretary, of the net amount recovered during any
quarter by the State or any political subdivision thereof with respect
to medical assistance furnished under the State plan shall be considered
an overpayment to be adjusted under this subsection. /3/ Applicable
credits. a. 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. Examples of such
transactions are: . . . recoveries. . . . D. Composition of Cost 1.
Total Cost. The total cost of a grant program is comprised of the
allowable direct cost incident to its performance, plus its allocable
portion of allowable indirect costs, less applicable credits. /4/ The
State did not deny that it had actual notice of HCFA-AT-78-95,
dated October 30, 1978, and we presume that the State did have notice
since action transmittals are part of the Agency's regular system of
issuances and HCFA-AT-78-95 was addressed to state agencies
administering Medicaid programs.
OCTOBER 22, 1983