New York State Department of Social Services, DAB No. 1205 (1990)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: New York State Department of
Social Services
Docket Nos. 89-175 89-187 89-251
90-058 90-120 90-176
Decision No. 1205

DATE: November 7, 1990

DECISION

The New York State Department of Social Services (New York) appealed six
determinations by the Health Care Financing Administration (HCFA)
disallowing a total of $1,046,879 in federal financial participation
(FFP) claimed for the period October 1, 1988 through March 31, 1990. 1/
The disallowed amount represented the difference between the 75 percent
enhanced funding rate available for administrative costs "attributable
to the operation" of the State's Medicaid Management Information System
(MMIS) under Title XIX of the Social Security Act (Act), and the 50
percent rate generally available for Medicaid administrative costs.

HCFA determined that New York had claimed FFP at the enhanced rate for
MMIS overhead expenditures not directly attributable to the MMIS cost
center. HCFA based its determination on the State Medicaid Manual
provision limiting enhanced FFP to "[o]nly the direct overhead costs
resulting from [MMIS] operation."

These appeals follow the appeals considered in New York State Dept. of
Social Services, DAB No. 1023 (1989); HCFA disallowed FFP for the same
type of expenditure at issue in DAB No. 1023, but for subsequent
quarters. In DAB No. 1023, the Board upheld the disallowance,
concluding that HCFA had discretion to establish a policy that
distinguishes between indirect costs that originate from a state's
Medicaid agency, and thereby qualify for enhanced reimbursement, and
statewide and department-wide costs which would qualify only for the 50
percent rate.

New York stated that, while it did not agree with the Board's conclusion
in DAB No. 1023, it would accept a summary decision in these appeals for
certain of the disallowed expenditures. However, New York asserted that
other of the disallowed expenditures qualified for enhanced
reimbursement based on the analyses in two Board decisions which further
refined the proper application of the policy upheld in DAB No. 1023.
New York relied on our analysis of training costs allocated to MMIS
operations in New Jersey Dept. of Human Services, DAB No. 1071 (1989),
and on our analysis of administrative support personnel costs in
Oklahoma Dept. of Human Services, DAB No. 1188 (1990).

The record for these appeals contains extensive information about New
York's approved cost allocation plan (CAP) for MMIS operational costs.
New York provided this information to support its argument that some of
the expenditures at issue qualified for enhanced reimburse- ment and are
in fact not properly subject to the principle found controlling in DAB
No. 1023. New York provided schematic diagrams showing how costs are
accumulated in various allocation accounts before distribution to MMIS
operations. New York also submitted the information from its approved
CAP which describes the relevant allocation accounts and how costs are
accumulated and then distributed.

Below, we summarize our conclusion. We then give the statutory,
regulatory, and policy background for these appeals (including the key
Board decisions), discuss the documentary record detailing the
expenditures at issue, address New York's arguments concerning the
availability of 75 percent FFP for certain administrative costs under
our analyses in DAB Nos. 1071 and 1188, and then state a summary
decision for the expenditures where the applicability of DAB No. 1023 is
undisputed.

Summary

While we agree with New York that the expenditures at issue here are
administrative costs of MMIS operation and do not somehow have a lesser
status because they are allocated rather than charged directly, this is
not really the point here. HCFA determined that certain overhead costs
were too remote from actual operational activities to qualify for
enhanced reimbursement as costs attributable to MMIS operations under
section 1903(a)(3)(B) of the Act. Accordingly, HCFA issued a policy
which recognized the availability of the enhanced rate for overhead
costs only if they are directly associated with MMIS operation. As we
noted in DAB No. 1023, this policy determination for overhead costs is
consistent with HCFA's long-standing policy of treating a relatively
narrow and circumscribed group of costs as attributable to MMIS
operations.

That New York can establish a connection to MMIS operations for the
activities at issue simply establishes that New York's cost allocation
scheme is sound. This does not support a conclusion that these costs
are properly considered attributable to the MMIS. The cost allocation
plan descriptions for the allocation accounts at issue state that these
are general costs supporting all departmental or divisional activities.
Although some of these costs originate in the division of the state
department which administers the Medicaid program, these expenditures do
not originate in the division of the state department which operated the
MMIS system.

To support the availability of 75 percent FFP for the disputed
expenditures, New York relied on the personnel costs regulation at 42
C.F.R. 432.50. This reliance was misplaced. The personnel costs
included in the disallowance were clearly incurred for overhead type
activities which HCFA has reasonably determined are too remote from
actual system operation to qualify for enhanced FFP. The availability
of enhanced FFP for costs for personnel directly engaged in MMIS
operations does not establish the availability of the enhanced rate for
any personnel whose costs are allocated down to MMIS operations. New
York's attempt to recast the costs at issue to fit within the rationale
of DAB No. 1071 is unpersuasive since it is the nature of the function
not the type of cost alone that determines the FFP rate.

Accordingly, as we explain in greater detail in the analysis below, we
uphold the disallowance in full.

Background

In 1972, Congress amended Title XIX to include enhanced rates of
reimbursement for administrative costs for, inter alia, the operation of
an MMIS. Section 1903(a)(3)(B) of the Act provides for reimbursement
of:

75 per centum of so much of the sums expended during such quarter
as are attributable to the operation of [MMIS] systems . . . .

Section 1903(a)(7) of the Act provides for reimbursement of:

an amount equal to 50 per centum of the remainder of the amounts
expended . . . as found necessary by the Secretary for the proper
and efficient operation of the State plan.

Section 433.15 of 42 C.F.R. implements the various FFP rates for
expenditures for administration. Section 433.15(b)(4) provides simply:

Operation of mechanized claims processing and information retrieval
systems: 75 percent . . . .

In the subpart of the regulations implementing the MMIS requirements,
MMIS is defined as:

a system of software and hardware used to process Medicaid claims,
and to retrieve and produce utilization and management information
about services that is required by the Medicaid agency or Federal
Government for administrative and audit purposes. 42 C.F.R.
433.111(b).

"Operation" is defined as:

the automated processing of data used in the administration of
State plans for Title . . . XIX of the [Act]. Operation includes
the use of supplies, software, hardware, and personnel directly
associated with the functioning of the mechanized system. 45
C.F.R. 433.111(a) (which incorporates by reference this term as
defined at 45 C.F.R. 95.605).

Section 432.50 of 42 C.F.R. sets the FFP rates for Medicaid staffing and
training costs. This is the regulation which New York asserted was the
basis for claiming the enhanced FFP rate for the contested overhead
costs. That regulation provides in pertinent part --

(a) . . . FFP is available in expenditures for salary or other
compensation, fringe benefits, travel, per diem, and training at
rates determined on the basis of the individual's position . . . .

* * *

(b)(2) For personnel engaged directly in the operation of
mechanized claims processing and information retrieval systems, the
rate is 75 percent.

* * *

(6) For all other staff . . . the rate is 50 percent.

In New Jersey Dept. of Human Services, DAB No. 648 (1985), and its
Reconsideration Ruling, the Board found that HCFA had a long-standing
policy that 75 percent FFP was available for all costs of MMIS
operations, whether charged directly or indirectly. The Board further
found that HCFA had not clearly established a policy that denied the
enhanced funding rate for certain overhead costs, based on the concept
that these costs were too remote.

Subsequently, on July 11, 1986, HCFA issued Revision 8 to Part 11 of the
State Medicaid Manual (SMM), effective on July 31, 1986. HCFA issued
Part 11 of the SMM to further define system requirements for an MMIS and
to assist states in identifying what costs would be reimbursed at the 75
percent operational rate. The general principle expressed in Part 11 is
that enhanced FFP should be available for manual intervention which is
necessary to make the computer system perform its automated functions
properly, but not for other clerical or manual processing activities
which would be done by a state even in the absence of an MMIS. See SMM
sections 11275.27 and 11275.32.

In relevant part, Revision 8 provides:

11275.30 Attributable Costs Under 90-Percent and 75-Percent FFP
for FFP for Overhead Costs

Only the direct overhead costs resulting from the operation or
development of an MMIS are eligible for the enhanced FFP rates.
Such costs are usually the non-personnel costs such as electricity,
rent, shared facilities, caused by the operation or development of
the MMIS.

Overhead costs not directly resulting from the MMIS cost center are
reimbursed at the 50- percent FFP rate. Such costs are the
statewide overhead (A-87) costs and the costs associated with the
State agency's overhead functions (personnel staff, budget staff,
legal staff, commissioner's office, etc.) assigned to the MMIS cost
center through the State agency's cost allocation plan. This
applies also with respect to a fiscal agent's costs.

In upholding HCFA's disallowance of the same expenditures at issue here
based on section 11275.30 of the SMM, the Board stated in New York State
Dept. of Social Services, DAB No. 1023 (1989), that --

. . . the result in this case is not controlled by the decision
reached in DAB No. 648. In that case, we found that the Agency's
long- standing policy, during the relevant time period, was to pay
75 percent for all statewide and department-wide indirect costs
allocated to the MMIS. Thus, having determined to allow 75 percent
FFP for all of these indirect costs, we found no basis to conclude,
in the absence of a public reversal of that policy, that some
statewide and department-wide indirect costs were less equal, i.e.,
more remote, than others and therefore not eligible for 75 percent
FFP.

After the issuance of DAB No. 648, however, the Agency implemented
a policy, in Revision No. 8, as a "NEW POLICY" that does expressly
preclude 75 percent FFP for indirect costs which do not originate
in the State's Medicaid agency. The holding in DAB No. 648 did not
preclude the Agency from this subsequent action. Indeed, what the
Board found . . . was only that the Agency could not use a
non-substantive "clarification" of its policies to create a
distinction between indirect costs, and then base a disallowance on
that distinction. DAB No. 1023, p. 5.

The Board found in DAB No. 1023 that HCFA's policy to limit indirect
cost reimbursement was consistent with HCFA's overall policy of
regarding a narrow and circumscribed group of costs as being
attributable to the operation of the MMIS. The Board further determined
that where a state had actual notice of HCFA's reasonable policy
interpretation, the Board will not substitute its judgment for HCFA's.
2/

In New Jersey Dept. of Human Services, DAB No. 1071 (1989), the Board
reversed the disallowance of certain training costs allocated to MMIS
operations. The Board found that training was not identified in section
11275.30 of the SMM as a remote overhead function for which only the 50
percent rate was available. Based on the record in that case, the Board
concluded that New Jersey's approved allocation "established a specific
relationship between [the] training costs and MMIS operational
personnel." We noted that HCFA had not found in that case that the
costs at issue did not equitably reflect the costs of training actually
received by MMIS operational personnel. We concluded that the
disallowance was based on an unfounded, conclusory finding that training
costs were allocated in a fashion similar to statewide and
department-wide costs. Accordingly, we applied the FFP rate set in 42
C.F.R. 432.50(b)(2) and reversed HCFA's determination that only the 50
percent rate was available.

In Oklahoma Dept. of Human Services, DAB No. 1188 (1990), the Board
reversed a disallowance of enhanced reimbursement for "in-house
personnel costs . . . for supportive activities performed by MMIS unit
staff, such as recording leave, submitting payroll forms, participating
in employee evaluations, requisitioning and distributing supplies, and
distributing mail." DAB No. 1188, p. 12. We discussed the application
of the 75 percent rate set by 42 C.F.R. 432.50(b)(2) and reversed the
disallowance, concluding that --

While HCFA intended its policy in SMM section 11275.30 (which
provides for enhanced reimbursement of only "direct overhead costs
resulting from the operation . . . of an MMIS") to modify its
[former] policy . . . that all indirect costs of MMIS functions
were reimbursable at 75 percent, that section does not preclude
reimbursement for personnel costs of an indirect nature incurred by
the unit operating the MMIS and which are not statewide or
department-wide costs allocated through a cost allocation plan.

DAB No. 1188, p. 15.

Expenditures at Issue

Above, we explained the distinction drawn by HCFA between direct
overhead costs of MMIS operations, for which the enhanced rate is
available, and those overhead costs which are matched at the 50 percent
rate generally available for Medicaid administrative costs. The key
issue in this case is whether personal services and travel costs for
certain overhead functions are appropriately reimbursed at the 75
percent rate. New York's expenditures for these overhead functions are
captured in two of the twelve allocation accounts from which overhead
costs are distributed to MMIS operations. In order to evaluate the
proper matching rate for the disputed expenditures, we now describe the
structure of the state department and the method used to accumulate and
distribute the disputed expenditures to MMIS operations.

New York State's Department of Social Services (DSS) is the single State
agency responsible for the administration of the Medicaid program.
Within the State department, the Division of Medical Assistance
administers the medical assistance program (both the federally funded
and the state-only components), and the Division of Operations is
responsible for "overseeing administration of centralized operational
functions" including the MMIS system. New York Supplemental Appeal
File, Attachment B (New York Att. B) -- Division of MA-MMIS Operations
at II.22.4-5. These two divisions are peer components of the
department. Telephone Conference, October 3, 1990. The Division of
Medical Assistance was described as "fiscally and programmatically
accountable for" Medicaid as well as "responsible for monitoring the
Medicaid claims payment functions" related to the MMIS system. New York
Appeal File Exhibit (Ex.) 2 at II.18.1.

New York's approved Central Office CAP (COCAP) established a separate
program account, "MA-MMIS Operations," for administrative costs of MMIS
operations. This program account collects the costs of MMIS operations
assigned to the federally participating medical assistance program
(88.83 percent of allocated MMIS operational costs). New York Att. B --
MA MMIS Operations. The corresponding allocation account, "Division of
MA-MMIS Operations" is where costs are accumulated and distributed
between federal and non- federal accounts. The approved COCAP for the
allocation account noted --

The Department has opted to contract with a fiscal agent for
operation of the MMIS but remains directly involved in activities
regarding monitoring, payment functions, maintenance of the
provider and eligibility files, and policy concerning operation of
the system.

New York Att. B -- Div. MA-MMIS Operations at II.22.1.

The expenditures accumulated in the Division of MA-MMIS Operations
allocation account consist of personal and non-personal services costs
directly charged to MMIS operations, which are not at issue here, and
allocated overhead costs which have been accumulated in twelve different
allocation accounts and then distributed to MMIS operations. HCFA
determined that the expenditures accumulated in two of the twelve
allocation accounts did not qualify for 75 percent FFP. The two
allocation accounts at issue are "Administrative Support Overhead" and
"Division of Medical Assistance Overhead." The COCAP contains a
description of the types of costs accumulated in each account as well as
an explanation of the methods whereby the costs are distributed to the
Division of MA-MMIS Operations allocation account. 3/ New York Exs. 1
and 2 and New York Att. B -- Program Support Overhead.

New York submitted a schematic representation of this cost allocation
methodology. These appeals concern the same expenditures for a number
of quarters; consequently, New York chose the January through March of
1989 quarter as representative and provided extensive cost allocation
and expenditure data with specific reference to that quarter. The
schematic shows the various levels of cost allocation from the HCFA 64
(the quarterly expenditure report whereby FFP is claimed) down to the
twelve allocation accounts. For the two allocation accounts at issue,
the schematic details the types of costs accumulated in each account.
The parts of the schematic which detail the costs accumulated in the two
allocation accounts at issue are included in this decision as appendices
A and B. New York color coded the schematic to show (1) those costs for
which it did not dispute the application of DAB No. 1023, and would
thereby accept a summary decision upholding the disallowance, and (2)
those costs for which it asserted that 75 percent reimbursement was
available under DAB Nos. 1071 and 1188 (these costs are identified in
the schematic as personal services (salary and fringe benefits) and
travel). The appendices to our decision show in bold the costs not at
issue and asterisk the costs for which New York asserted the enhanced
rate applied. See New York Atts. A-1 and A-2.

Approved COCAP for Administrative Support Overhead

For the Administrative Support Overhead allocation account, the
background section of the approved COCAP provided that --

The purpose of this cost allocation account is to provide a
claiming mechanism for expenditures arising from those overhead
units that support all Departmental staff.

New York Ex. 1. This allocation account accumulated the direct costs of
DSS's administrative support units. The direct costs of this account
represent "such activities as maintenance of all staff on the
departmental payroll, processing of payments to employees for such items
as travel, accounting for rental space for all employees, supplies and
purchases associated with staff needs, etc. which serve all department
staff." Indirect costs were distributed to this account from five other
accounts, such as "A-87 WTC Rent" -- which reflects the workspace for
the administrative units. For the representative quarter, 7.42 percent
of the costs accumulated in this allocation account were distributed to
MMIS operations based on staff count. 4/

The New York schematic shows three offices as direct costs of this
function: Human Resources Management; Office of Support Services; and
Accounting. See New York Atts. B-1, B-2, B-3, and B-4. New York
asserted that personal services costs (salary and fringe benefit costs)
for the support services and accounting offices qualified for 75 percent
FFP. 5/ New York asserted that certain other costs accumulated in this
account also qualified for enhanced reimbursement -- direct travel costs
as well as the personal services and travel costs accumulated in two
indirect accounts (ITM Overhead and Upstate Computer Operations) and
distributed to the Administrative Support Overhead allocation account.
6/

Approved COCAP for Division of Medical Assistance Overhead

The approved COCAP provides an overview of the costs accumulated in the
Division of Medical Assistance Overhead allocation account. It stated
--

. . . there is a grouping of employees whose activities benefit all
of the programs administered by the division. . . . the allocation
account will accumulate personal services costs for employees
identified as Division of MA overhead, along with non- personal
services and indirect costs associated with the division and
distribute these costs to appropriate program accounts. The
distribution will be based on staff assignments for line staff
within the division who are directly charged to one of the MA
program areas. . . .

New York Ex. 2 at II.18.2. The rationale given for a separate
allocation account for these costs is that "management and
administration staff within the division support all of the program
areas for which the division is responsible." New York Ex. 2 at
II.18.5. As illustrated in New York's schematic, New York asserted that
personal services and travel costs for the Division's Deputy
Commissioner and his/her management and administrative staffs qualified
for enhanced reimbursement. 7/ New York asserted that, among the
indirect costs allocated to the Division of Medical Assistance Overhead
account from Program Services Overhead, costs identified as "All Other"
and "Travel" qualified as well. See New York Att. B (COCAP for Program
Support Overhead). 8/ For the representative quarter, 20.77 percent of
the costs accumulated in this allocation account were distributed to the
Division of MA-MMIS Operations allocation account.

Analysis of Contested Salary, Fringe Benefit, and Travel Costs

In its notice of appeal, New York requested the opportunity to argue in
support of its position that certain costs included in the disallowance
qualified for enhanced reimbursement in light of the Board's analysis of
training costs in DAB No. 1071. While these appeals were pending, the
Board issued DAB No. 1188 which in part concerned the availability of
enhanced reimbursement for allocated support costs incurred by the
division of the Oklahoma state department responsible for the operation
of the MMIS system. Thus, at issue here is whether the analyses in
these cases support New York's assertion that enhanced reimbursement was
available for the salary, fringe benefit, and travel costs which New
York identified in the schematic and which New York asserted pertain
directly to MMIS operations.

As HCFA pointed out, it did not question the availability of the
enhanced rate for New York's fiscal agent overhead costs or for the
overhead costs which were incurred within the Division of Operations or
were distributed to the Division of Operations Overhead account (also
one of the twelve allocation accounts for Division of MA-MMIS
Operations). July 12, 1990 Dunstan affidavit, paragraph 5. HCFA
disallowed costs from only two of the twelve allocation accounts. On
the face of the COCAP, described at length above, these allocation
accounts by definition consist of activities that support all
departmental or divisional activities. Notwithstanding that New York
can establish a relationship to MMIS operations for the activities where
costs are disallowed, this is not enough. This relationship only
confirms that New York's cost allocation methodology was sound, not that
the costs qualify for enhanced reimbursement under section 11275.30 of
the SMM. 9/

In DAB No. 1071, we reversed the disallowance of training costs
allocated to MMIS operations. That decision turned on the narrow point
that under 42 C.F.R. 432.50, training costs for personnel directly
engaged in MMIS operations qualified for the enhanced rate. As
explained in the decision, New Jersey allocated training costs based on
staff count. There was no basis in that record for concluding that the
costs disallowed did not equitably reflect costs of training actually
received by MMIS operational personnel. That decision did not concern
personnel or travel costs for overhead functions. Accordingly, we
conclude that New York misread DAB No. 1071. That decision does not
support an assertion that 42 C.F.R. 432.50 provides a general basis for
claiming the enhanced rate for salary, fringe benefit, and travel costs
allocated to MMIS operations. The affidavit submitted by New York
stated its understanding that DAB No. 1071 stood for the proposition
that --

. . . the DAB created a two prong test for the allocation of costs.
If a cost is included as one of the four costs set forth in
transmittal No. 8, Part 11 of the [SMM] [presumably New York refers
to the enumeration of "State agency overhead functions (personnel
staff, budget staff, legal staff, commissioner's office, etc.)"
contained in the SMM], it is a item of overhead and must be
allocated to a 50 percent account. This would be the NYSDSS MA-All
Other Account. However, if a cost is not one of the four Revision
8 costs and is a specified cost set forth as 42 C.F.R. 432.50(a);
salaries, fringe benefits, other compensation and training, the
cost is properly allocated to a 75 percent account, if the
personnel perform activities directly related to the operation of
the MMIS. . . .

February 5, 1990 Nelligan affidavit, paragraph 23.

The error in applying the holding in DAB No. 1071 that New York made was
to regard as "directly related" almost every activity for which costs
are allocated to MMIS operations. The availability by regulation of the
enhanced rate for personnel costs associated with Medicaid Agency staff
directly engaged in MMIS operations does not establish the general
availability of that rate for all personnel costs solely because they
benefit MMIS operations.

DAB No. 1188 provides no support for New York either. That decision held
that overhead costs associated with the direct MMIS operational costs of
the part of a state department responsible for the operation of the MMIS
system qualified for the enhanced rate. As explained earlier, DAB No.
1188 concerned --

supportive activities performed by MMIS unit staff, such as
recording leave, submitting payroll forms, participating in
employee evaluations, requisitioning and distributing supplies, and
distributing mail.

DAB No. 1188 at 12 found that section 11275.30 of the SMM "does not
preclude reimbursement for personnel costs of an indirect nature
incurred by the unit operating the MMIS and which are not statewide or
department-wide central services costs allocated through a [CAP]." 10/
DAB No. 1188 at 15.

Here, HCFA did not disallow support services costs associated with the
Division of Operations, the part of the state department more directly
responsible for the operation of the MMIS system (which was actually
operated by the fiscal agent). In New York, however, application of the
SMM provision is complicated by the fact that two divisions within DSS
have responsibilities for the MMIS system. The question presented then
is whether, in light of the MMIS functions of the Division of Medical
Assistance, the analysis in DAB No. 1188 would support the enhanced rate
for costs accumulated in the Division of Medical Assistance Overhead
allocation account and distributed to MMIS operations.

Upon consideration of the detailed record here explaining the types of
costs at issue and their relationship to MMIS operations, we conclude
that the costs found eligible for the enhanced rate in DAB No. 1188 are
not analogous to the overhead costs distributed to MMIS operations from
the Division of Medical Assistance Overhead allocation account.

The critical factor here is that the overhead functions at issue, as
described in the COCAP, fall logically within the preclusion of enhanced
reimbursement for statewide and department-wide overhead activities. 11/
The State's other evidence is not sufficient to show that this account
includes the costs of support activities provided to staff directly
engaged in operating an MMIS; instead, these are more remote overhead
activities like those described in the SMM.

We note that the fact that New York splits the responsibility for its
MMIS system between the two peer divisions is of course its choice under
the applicable cost principles in Office of Management and Budget
Circular A-87 (Attachment A at 2.C.), and, in any event, organizational
structure is not determinative of the FFP rate for administrative costs.
See February 5, 1990 Nelligan affidavit, paragraph 14. We point out,
however, that the types of policy oversight activities provided by the
Division of Medical Assistance or DSS, and reflected in this allocation
account, would be provided whatever system New York used to perform its
claims processing and management information functions. Moreover, New
York did not argue that these activities were regarded as direct
operational activities and enumerated as such in the regulations and SMM
provisions.

Accordingly, we conclude that HCFA's application of its SMM policy is
reasonable given that the overhead costs accumulated in this allocation
account were either department-wide costs or analogous to
department-wide overhead costs; the accounts distributed costs of
overall program management of a division not directly responsible for
MMIS operations.

Summary Decision Based on DAB No. 1023

As was noted earlier, New York requested that the Board issue a summary
decision based on DAB No. 1023 except for the salary, fringe benefit,
and travel costs that it asserted qualified for enhanced reimbursement
under DAB Nos. 1071 and 1188. HCFA agreed to the issuance of a summary
decision.

New York acknowledged that the Board had decided the question of the
availability of enhanced reimbursement for indirect overhead costs
associated with MMIS operation in DAB No. 1023. Accordingly, we
incorporate the analysis in that decision by reference and uphold the
uncontested part of the disallowance. 12/

Conclusion

Based on the above analysis, we uphold the disallowance in full.

_____________________________ Judith A.
Ballard

_____________________________ Norval D.
(John) Settle

_____________________________ Cecilia Sparks
Ford Presiding Board Member.
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87 � � � � Ten Eyck � � ITM � � Update � � WTC �
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Appendix A.
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� MA Overhd. � � $404,737 �
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��Ŀ � ��Ŀ � � � Salaries
� � � All � � ��Ĵ � �
� Other ��
��Ŀ � � � *Deputy Comm.* � � �Ĵ Div MA
� � � �� Ŀ � � �
*Div MA* � � �Ĵ Mgmt. Staff � � �
�� Ŀ � � � *Div MA*
� � �Ĵ Admin. Staff � � ��
��Ŀ
��Ŀ ��Ŀ ��Ŀ � Ten Eyck
� � Program � � Admin. � � Rent � �
Support � � Support � � � � Overhead �
� Overhead � ��
�� Ŀ
��Ŀ ��Ŀ ��Ŀ � Personal
� � Allocated � � Non-Personal� � Services � �
Costs � � Services � ��
�� Ŀ � �
��Ŀ � � Fringe � � � �
*Travel* � �Ĵ Benefits � � �Ĵ
� � ��
��Ŀ � � ��Ŀ � �
Salaries � � � � All � �Ĵ
� � �Ĵ Other � ��
� �� Ŀ �
��Ŀ � � Commissioners � � � A - 87
� �Ĵ Office � �Ĵ � �
��
��Ŀ � ��Ŀ � � Legal
� � � ITM � �Ĵ Affairs � �Ĵ
Overhead � � ��
� ��Ŀ � ��Ŀ � �
Budget � � � Update � �Ĵ Management �
�Ĵ Computer � � � � � � Operations � �
�� Ŀ
� ��Ŀ � � *All* � � �Administrative� �Ĵ
Other � �Ĵ Support � � � �
Overhead � ��

Appendix B

1. The disallowed amounts by docket number are:

89-175 -- $159,589 89-187 -- $171,920 89-251 -- $161,295
90-058 -- $187,203 90-120 -- $170,577 90-176 -- $196,295

New York stated that HCFA's calculation of the amount for Docket No.
89-187 was erroneous since HCFA made a mistake in the federally
participating percentage it used. New York said the correct amount was
$171,882. February 5, 1990 Nelligan affidavit, paragraph 24. HCFA did
not address this. Presumably HCFA will reduce the amount for this
quarter if appropriate.

2. We note that the holding in DAB No. 1023 is stated in terms of a
distinction between indirect costs which originate from a state's
Medicaid agency and those that do not. We based this description of the
principle in that case on our understanding that the SMM revision at
issue was intended to implement the policy applied and rejected
previously by the Board in DAB No. 648. However, it is apparent from
the more detailed record in these appeals, in contrast to the record for
DAB No. 1023, that this description is not accurate for New York,
although it was an accurate description of the distinction at issue in
the earlier New Jersey case (the subject of DAB No. 648). See February
5, 1985 Dunstan affidavit for DAB No. 648, paragraph 7. In New York,
two peer divisions of the New York department have responsibilities for
administering the MMIS. In New York, HCFA applied section 11275.30 of
the SMM not based on the distinction referred to in DAB No. 1023 but
based on the type of function involved. Nevertheless, our overall
conclusion in DAB No. 1023 that HCFA could reasonably set a policy
restricting enhanced reimbursement for remote overhead costs is
unaffected by the need to refine how we described the specific
application of the policy. In any event, the question we have to
resolve here is whether HCFA applied its policy appropriately in taking
these disallowances, and we find that it did.

3. By affidavit and in several telephone conferences, New York
explained the nature of the activities at issue and their relationship
to MMIS operations. These appeals were also stayed to permit New York
to provide further information to HCFA about the personnel and the MMIS
functions at issue. While we have considered the additional discussion
in the affidavits and telephone conferences, we do not find that this
further information adds materially to what is provided in the COCAP.
In any event, as a formal state document the COCAP is authoritative, and
we refer to it in the text when discussing the disputed costs.

4. We note that the COCAP also shows that the Division of Operations
Overhead allocation account receives an allocation of costs from the
Administrative Support Overhead allocation account. According to the
New York schematic, HCFA did not question the 75 percent FFP for the
costs accumulated in the Division of Operations Overhead allocation
account and distributed to MA-MMIS operations.

5. New York explained that the support services component "negotiates
leases . . . provides environmental and safety services . . . maintains
the telephone system . . . provides warehousing . . . printing,
photocopying . . . courier services . . . mail and supply services . .
." etc. Also included in this allocation account were costs of
reflecting MMIS related transactions in the statewide accounting system.
Processing all fiscal transactions to and through the Office of State
Controller and handling general ledger and appropriations accounting for
DSS are also included. February 5, 1990 Nelligan affidavit, paragraph
12.

6. We note that the ITM Overhead and WMS Operations accounts are also
among the twelve allocation accounts from which costs are distributed to
the Division of MA-MMIS Operations allocation account. What is at issue
here are costs accumulated in these accounts which are distributed to
MMIS operations based on the benefit to another allocation account.

7. Beyond the information in the COCAP, New York explained that the
Division of Medical Assistance employees who act as liaison with the
fiscal agent on software changes "report thru the chain of command
within the Division" and are "directed by the Deputy, and . . . receive
administrative and management support." February 5, 1990 Nelligan
affidavit, paragraph 11.

8. The Program Support Overhead account accumulates administrative
overhead costs at the departmental level as well as the associated
overhead costs. Included as noted on the schematic are costs associated
with the Commissioner's office, legal affairs, and other administrative
functions. See New York Att. B -- Program Support Overhead. The
overhead functions accumulated in this account include legal and
budgetary support, personnel policies such as minority employment
programs, processing of MMIS fiscal agent payment vouchers, and other
general fiscal functions. February 5, 1990 Nelligan affidavit,
paragraph 13.

9. We note that HCFA's assertion that the costs at issue were for
activities unrelated to MMIS operations is clearly unfounded. While the
activities did not involve staff directly engaged in MMIS operations,
the activities in question clearly provided a benefit in an accounting
sense to MMIS operations. These allocated costs are no less costs of
MMIS operation simply because they are allocated or overhead type costs.
See July 12, 1990 Dunstan affidavit and August 6, 1990 Nelligan
affidavit.

10. In that decision, the Board rejected HCFA's assertion that the
State Medicaid Manual stood for the proposition that "only facility or
non-personnel components of overhead costs qualify for enhanced
matching" and that personnel costs associated with activities (such as
supervision or personnel evaluations) which are not listed as MMIS
operational activities must always be distributed to 50 percent FFP
accounts. DAB No. 1188 at 13.

11. One factor that underscores the reasonableness of HCFA's
application of its FFP policy in this case is that the impact of this
disallowance is not to preclude all administrative costs of the DMA from
the enhanced rate. There are administrative costs for staff of that
division which are charged directly to MMIS operations and where the
availability of 75 percent FFP was not questioned. Indeed, staff count
for such personnel is the allocation base for the overhead costs at
issue.

12. For the October -- December 1988 quarter, New York calculated that
the amount appropriately disallowed based on DAB No. 1023 was $74,088.
For that quarter, New York contested the disallowance of $85,501.
However, since we uphold HCFA's disallowance in its entirety, we do not
need to calculate the disallowed amount which the State did not contest
for each quarter included in the

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