Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Iowa Department of Human Services
DATE: March 7, 1991
Docket No. 89-182
Audit Control No. CIN A-07-88-00123
Decision No. 1233
DECISION
The Iowa Department of Human Services (State) appealed a determination
by
the Health Care Financing Administration (HCFA) disallowing $713,628
in
federal financial participation (FFP) claimed by the State as
Medicaid
administrative costs under Title XIX of the Social Security
Act. The
costs were for various contracts entered into by the State as
part of its
Federal Funding Enhancement Project (FFEP). HCFA originally
disallowed
the costs on the basis that they were incurred for management
studies for
which the State had not obtained required prior approval and
that the costs
were not necessary and allocable to the Medicaid program.
HCFA subsequently
allowed some of the contract costs, but continued to
take the position that
FFP of $497,936 in the remaining contract costs
was not allowable.
The State took the position that it had properly charged the costs of
the
FFEP directly to Medicaid because, among other reasons, the FFEP
enabled the
State to improve Medicaid operations, to more accurately
assess recipients'
needs, and to improve the management focus. The
State also argued that
HCFA officials were aware of the project from its
early stages and did not
mention the need for prior approval.
As discussed below, HCFA's testimony at the hearing made it clear
that
HCFA did not deny that there was some benefit to the Medicaid
program
from the FFEP. However, both in the disallowance and in the
briefing,
HCFA argued that the costs should not have been charged directly
to
Medicaid since they were not necessary for the proper and
efficient
administration of the program, and the benefit to the program was
either
incidental or negligible.
For the reasons discussed below, we conclude that these contract
costs
were not properly claimed as direct costs of the Medicaid
program. The
contracts served broader State objectives than simply to
improve
Medicaid administration, and the benefit to other State programs
was
more than incidental. Thus, we uphold the disallowance of the costs
as
direct charges.
Although the testimony of HCFA's witness indicated that at least some
of
the costs could have been properly allocated to Medicaid through a
cost
allocation plan (CAP) approved by the HHS Division of Cost
Allocation,
we express no opinion on what part, if any, of the costs the
State may
recover by allocating them to Medicaid under an approved CAP.
General history of the FFEP project
The basic facts about the genesis and development of the FFEP project
are
undisputed. In May 1985, the Iowa State Legislature enacted the
Bill of
Rights for Persons with Mental Retardation, Developmental
Disabilities or
Chronic Mental Illness. The bill set forth rights to
services and civil
protections to be afforded to persons in the target
populations, including
the right to live and receive appropriate
treatment in the least restrictive
setting. The bill also directed the
Iowa Department of Human Services
to conduct a study of the impact of
implementing the rights. The
Commissioner of the Department appointed
an advisory committee of client and
provider advocates, and several
preliminary studies were conducted.
These studies estimated increased
expenditures of over $147 million and made
some preliminary
recommendations about how to maximize federal funding for
the mentally
retarded and developmentally disabled (MR/DD) population.
The major
problem identified was that the State did not provide a sufficient
array
of services to the target populations to ensure that they were in
the
least restrictive setting possible. State Hearing Exhibit (Ex.) A,
pp.
1-2.
The State then contracted with Compass Consulting to develop a request
for
proposal (RFP) for various phases of a project to maximize federal
funding
for the MR/DD and chronically mentally ill (CMI) populations.
Contracts for
Phase I of the project and parts of Year 1 of Phase II of
the project were
awarded to the accounting firm of Deloitte, Haskins and
Sells. These
contracts are described more in detail below. Basically,
Phase I --
called "Funding Stream Analysis for the CMI Population" --
was a study of
existing services for the CMI .population similar to what
had already been
done for the MR/DD population. Year 1 of Phase II was
the beginning
steps for "Proposed Conversion and Addition of Services to
Title XIX
Funding." State Hearing Ex. A, pp. 15, 20; State Hearing Ex.
D.
Year 2 of Phase II was called the Medicaid Enhancement Project (MEP)
and
included activities such as drafting Medicaid State Plan
amendments,
training Medicaid personnel, and drafting Medicaid manuals to
implement
recommendations made by Deloitte, Haskins, and Sells for addition
and
conversion of Medicaid services for the target population. The
contract
for the MEP was awarded to the Center for Health Policy Studies;
the
costs of this contract were ultimately allowed by HCFA as a
direct
charge to Medicaid.
The contract for Phase IV, called "Service and Residential
Requirements:
Planning and Implementation," was awarded to Human Services
Research
Institute. This contract is discussed in detail below.
The State also
entered into personal services contracts with two individuals
who
monitored performance of other contractors. These costs and
some
related expenses were also charged to Medicaid and disallowed by
HCFA
(except that HCFA ultimately allowed part of the personal
services
related to monitoring the MEP).
The issues
HCFA originally questioned the costs in a deferral action when the
State
shifted the costs from a general administrative account to
a
Medicaid-only account. The Office of the Inspector General
then
performed an audit of the contracts, recommending disallowance of all
of
the costs. State Ex. 1. HCFA's disallowance letter relied
primarily on
the following grounds:
o The contracts were for management
studies performed by outside
consultants, and formal prior approval for the
contracts was not
obtained even though it was required under Office of
Management and
Budget (OMB) Circular A-87, Attachment B, section c.5.
o OMB Circular A-87 also provides that
costs are (i) allowable
only if necessary for the proper and efficient
administration of grant
programs; and (ii) allocable to a particular cost
objective to the
extent of benefits received.
o The purpose of these contracts was to
shift costs from State and
other programs with limited funding to federal
programs with unlimited
funding so that the savings could be used to fund the
State's bill of
rights.
o Administrative control of the project
was assigned to an
indirect support group within the State department, rather
than the
Medicaid unit, and the programs benefitting most from the contracts
were
State and other programs with limited funding.
Disallowance letter, pp. 1-2.
The State did not deny that it had not obtained formal prior approval
for
the contracts. The State provided evidence, however, that
HCFA
officials were informed in writing that the State intended to enter
into
the contracts and that one official even participated at a meeting
where
the project was discussed. State Exs. 4-6; Tr., p. 62. The
State
argued that, under prior Board decisions, HCFA was unreasonable
in
denying retroactive approval on the basis of the State's motive
--
increasing federal funding. The State alleged HCFA had approved
similar
projects in other states. The State also contended that part of
the
project costs were for implementing study recommendations or
for
personal services which were not management studies requiring
prior
approval. Finally, the State argued that the costs were necessary
to
and of benefit to the Medicaid program because the State had to
assess
needs and impacts in order to comply with legislative, federal,
and
judicial mandates related to deinstitutionalizing the target
population
and providing community-based services in the least
restrictive
environment. The State said the project allowed the State
to plan how
to improve Medicaid operations, accurately assess recipients'
needs, and
improve the management focus.
In spite of the fact that the parties devoted much of their briefs to
the
question of approval for the contracts, it became apparent at the
hearing in
this case that this issue was a red herring. HCFA's
representative
testified that HCFA would not raise lack of prior
approval if a portion of
the contract costs were allocated to Medicaid
as part of a cost allocation
plan (CAP) approved by the HHS Division of
Cost Allocation. He
testified that HCFA was not basing its disallowance
on the State's motive of
shifting costs to Medicaid but that the real
issue here is the extent to
which the contract costs are allocable to
Medicaid. He explained HCFA's
position that the costs are not properly
charged directly to Medicaid since
the Medicaid program did not solely
benefit. He did not deny that there
was some benefit to Medicaid from
the contract activities, but said that the
State had not documented the
extent of benefit and that the costs were of an
indirect type properly
allocated through an approved CAP. Tr., pp.
72-94.
It also became clear at the hearing that HCFA was not saying that none
of
the contract costs were necessary to Medicaid administration. The
State
had pointed out that HCFA had recognized the costs of the MEP as
necessary to
the Medicaid program. It is anomalous, the State argued,
to allow the
costs of actually making changes in the Medicaid program
but to disallow the
costs of activities which permitted the State to
plan how to do so. At
the hearing, however, HCFA's representative
indicated that HCFA was not
questioning whether planning activities were
necessary for the Medicaid
program. HCFA's representative testified
that HCFA officials had
examined the project from the standpoint of
necessity and benefit and "felt
that it was necessary for the proper and
efficient administration of all
those . . . programs [of the] Department
of Human Services . . . ."
Tr., pp. 73-74 (emphasis added). Stated
differently, HCFA was not
saying that planning costs were not the type
of costs necessary to a Medicaid
program, but was saying that the
specific planning here benefited not only
Medicaid, but all department
programs for the target populations, so that not
all of the costs were
necessary costs of a Medicaid program.
Below, we examine in more detail the specific contracts at issue
and
explain why we conclude that HCFA reasonably determined that
the
contract costs could not properly be treated as a direct charge
to
Medicaid.
Phase I - Deloitte, Haskins and Sells
The State claimed FFP in costs of $148,278 for the contract with
Deloitte,
Haskins and Sells for Phase I of the FFEP. The contract was
for "a
comprehensive study of the funding streams currently involved in
service
provision to the chronically mentally ill." RFP, State's
Hearing Ex. A,
p. 15, section 30.100. In addition to identifying
funding being used
for the CMI population, the contractor was to
identify alternative uses of
federal funds for the CMI population and to
determine the impact of those
alternatives on the funding mix and on
other client populations such as
children and the elderly. Id., p. 16,
section 30.110; see also Tr., p.
37. The contractor was to deliver two
products by January 2,
1987: a final report on "Funding Stream
Maximization" and an
"Implementation Work Plan." Id., p. 16, section
30.120.
At the hearing, the State's witness, who was the manager of the
FFEP
project, admitted that not all members of the CMI population
were
eligible for Medicaid. Tr., pp. 52, 54. He also admitted
that other
funding streams in addition to Medicaid were being considered in
the
Phase I study. Tr., pp. 54-55. Moreover, an examination of
the report
to the Iowa legislature on Deloitte, Haskins and Sells'
recommendations
resulting from Phase I indicates that they were directed at
the CMI
population as a whole. They included recommendations that the
State
implement better case management and information systems, develop a
new
service continuum encompassing a range of community-based services,
and
extend the Medicaid quality assurance function to embrace
non-Medicaid
clients. State Ex. 4, p. iii.
In our view, the State provided no convincing justification for why
these
costs should be allocated solely to Medicaid. The study was done
at the
request of the State Legislature, addressed the State's entire
CMI population
-- not only Medicaid eligibles -- and was not limited to
Medicaid as a
funding source. Thus, HCFA is clearly reasonable in its
position that
the State could not properly treat all of the contract
costs as a direct
charge to Medicaid.
Phase II - Deloitte, Haskins and Sells
Deloitte, Haskins and Sells was also awarded the contract for Year 1
of
Phase II of the FFEP. The State claimed FFP under Medicaid in
$619,307
paid for this contract. The RFP developed by Compass
Consulting
describes both years of Phase II, but the contract with
Deloitte,
Haskins and Sells indicates what parts of Phase II were to be
conducted
by Deloitte, Haskins and Sells. Essentially, Deloitte,
Haskins and
Sells was to perform the preliminary tasks associated with the
following
objective: transfer and addition to Medicaid of services
funded through
State or local programs in instances where this would lower
overall
State and county contributions for providing services to the MR/DD
and
CMI populations, without risking future audit exceptions. RFP,
State
Hearing Ex. A, p. 17, section 30.200. This was to result in
four
deliverables, described in the RFP as "Service Identification
Document,"
"Service Impact Analysis and Cost," "Service Conversion and
Addition
Work Plan," and "Iowa Administrative Rules." Id., p. 20,
section
30.212.
Under the contract, Deloitte, Haskins and Sells developed options for
how
the State could define services for the target populations and then
change
its Medicaid State Plan to either amend or add various service
definitions,
or obtain a home and community-based services waiver to
provide the services
under Medicaid. These options were based on
assessments of what had
been approved by HCFA in other states, whether
HCFA was likely to approve the
changes for Iowa, and what the associated
costs would be. State Ex.
B-9. Deloitte, Haskins and Sells also
recommended some changes to
Iowa's Administrative Code. State Ex. B-14.
At first blush, it appears that these costs have the kind of connection
to
the Medicaid program which would permit treatment as a direct charge
to
Medicaid. A closer examination, however, reveals the reasonableness
of
HCFA's position that the benefit to other State programs was more
than
incidental. In context, the contract was clearly undertaken to
serve
broader State goals than merely administering a Medicaid program.
Deloitte, Haskins and Sells viewed the recommendations and presentation
of
options they developed as proposing a continuum of care for the
entire target
population designed to fit with the State's bill of rights
and to ensure that
clients would be placed in the least restrictive
environment. State Ex.
B-15. The manager of the FFEP project admitted
at the hearing that,
while the .service definitions were developed
primarily to enlarge the scope
of the Medicaid program, the State was
also trying to redefine in general how
it would reimburse providers --
based on services, rather than according to
the type of setting. Tr.,
pp. 55-56. The recommended changes to
the Iowa Administrative Code were
in the standards for Work Activity Centers
and Community Mental Health
Centers. State Ex. B-14. Not all of
the target population who would
benefit from these proposals were Medicaid
eligible. While some of the
effort was devoted to how Medicaid
requirements could be met so that the
State would not risk disallowance, this
can reasonably be viewed as part
of the overall State effort to restructure
its services to the target
population without having to make more State and
local funds available.
The State argued that some of the contractor's activities were not
study
functions; the State pointed out that the contractors appeared
at
advisory committee meetings, created service definitions,
recommended
changes to administrative rules, met with HCFA officials and
visited
other states to learn about their programs. This argument is
mostly
relevant to whether prior approval was required (which, as we
indicated
above, is not really the issue here). The State also seemed
to be
saying, however, that these were the type of implementation
activities
performed in the MEP and allowed by HCFA.
We think that HCFA could reasonably distinguish between these
activities
and the MEP project, however. At the MEP stage, the State
had made some
decisions about specific ways it wished to change its Medicaid
program.
The earlier contract, however, was part of the planning process for
the
structure of all services to the target population in the
State.
Indeed, the contractor's duty of reporting to the advisory
committee,
set up to help implement the bill of rights, supports a conclusion
that
the contractor's activities had broader objectives than merely
to
improve administration of the Medicaid program.
HCFA also noted that the contracts were administered at a level within
the
State department where associated costs are allocated through a
cost
allocation plan, not directly charged to Medicaid. The manager of
the
FFEP project testified that he was chosen as manager because he
had
previous experience as director of the Medicaid bureau. Tr., pp.
17-18.
His testimony also shows, however, that he had experience in
other
programs as well, and that the costs of his salary and that of the
work
group assisting him in the FFEP project were not directly charged
to
Medicaid. Tr., pp. 16-17, 44-45; see .also Tr., p. 28. This
also
supports a conclusion that the contract costs were part of a
planning
process not limited to the Medicaid program.
Thus, we conclude that HCFA reasonably determined that the costs of
this
contract were not allowable as direct charges to Medicaid.
Phase IV - Human Services Research Institute
The State claimed FFP in $193,610 paid to Human Services
Research
Institute for a contract for Phase IV of the FFEP. This phase
was
called "Service and Residential Requirements: Planning
and
Implementation" and was described in sections 30.400 through 30.421
of
the RFP. See State Hearing Ex. C. The contractor was to
perform two
major tasks. The first task was to develop two plans for
the proposed
restructuring of the State's residential care facility (RCF)
program.
One plan was to focus on services provided to RCF residents and
services
which could be added to RCFs and paid for by federal funds.
The other
was to rank each RCF according to its potential for conversion to
an
intermediate care facility for the mentally retarded (a type of
facility
certified to provide services under Medicaid) or to a facility of
less
than 16 beds whose residents might then be eligible for the
federally
administered Supplemental Security Income program. These
plans were to
be based on a survey of existing State facilities and on
the
contractor's technical expertise. RFP, State Hearing Ex. A, pp.
24-25,
section 30.410.
The second task under this contract was called
"Capitalization/Transition
Study, Financing, and Technical Assistance
for All Categories of Living
Arrangements." The RFP stated:
Under this task, the contractor shall explore capital
funding
needs, start-up costs for new services and
facilities,
transitioning costs as clients are moved from existing
services
and living arrangements to new and different ones,
and
downsizing costs associated with reducing the size of
large
facilities such as the state institutions.
The contractor was to submit a report on the capitalization study
and
provide technical assistance. RFP, State Hearing Ex. A, p. 25,
section
30.420.
The manager of the FFEP project testified that a major part of what
the
contractor did was related to proposing and implementing new
standards
for intermediate care facilities for the mentally retarded.
Tr., p. 58.
He also testified -- in support of the State's assertion that
this
contract related to the federal goal of having community-based
services
-- that the contractor's plan called for slowly removing people from
the
State institutions into home and community-based settings and
for
actually closing down the State mental health institutions and
State
hospital schools in five to ten years. Tr., pp. 59-60.
We find that, like the contracts discussed above, this contract
served
broader State objectives and did not solely benefit the
Medicaid
program. While HCFA did not deny that several initiatives in
the
Medicaid program promoted deinstitutionalization of the
target
populations and moving them into community-based facilities, this
was
also a goal of the State's bill of rights. Not all of the
facility
residents were eligible for Medicaid. Indeed, as HCFA pointed
out,
residents of State mental institutions between the ages of 22 and 64
are
excluded from coverage under Medicaid. See section 1905(a) of
the
Social Security Act.
Moreover, the reason new standards were needed for the
State's
intermediate care facilities for the mentally retarded was that
existing
State standards were more stringent than federal standards.
Tr., pp.
58-59; State Ex. B-15, para. 26. Thus, the contractor was
addressing
how to qualify more RCFs as Medicaid facilities by lowering of
State
standards, not only by upgrading some facilities to meet
Medicaid
requirements.
Thus, we conclude that HCFA reasonably determined that the costs of
the
contract with Human Services Research Institute were not allowable
as
direct charges to Medicaid.
Other costs associated with the FFEP
The State paid Compass Consulting $9,500 for developing the RFP for
the
FFEP project. Since we find above that the project costs are
not
allowable as direct charges to Medicaid, we reach a similar finding
with
respect to the costs of the RFP.
The State also paid $22,500 in Year 1 and $10,664 in Year 2 to a
Deborah
Ozga, as well as a total of $2,160 to a Pam Brown, under
personal
services contracts for them to assist the State in monitoring
the
activities of other contractors and in reporting to the
advisory
committee and Iowa Legislature. HCFA allowed FFP in the
$10,664
associated with Deborah Ozga's activities in monitoring the
MEP. The
State provided evidence that Pam Brown was an intern who
assisted
Deborah Ozga. Tr., p. 43. The State did not allege,
however, that this
assistance related to the MEP project. Thus, we
conclude that the
remaining costs of the personal services contracts are not
allowable as
direct charges to Medicaid.
An additional $518 was identified by the auditors as costs associated
with
the FFEP. The auditors did not specifically identify what these
costs
were, but the State's witness testified at the hearing that they
were for
travel expenses (for visits to the institutions and some other
facilities)
and supplies associated with the project. Tr., pp. 60-61.
We conclude
that, like other project costs, these costs are not
allowable as direct
charges to Medicaid.
Conclusion
For the reasons stated above, we uphold HCFA's disallowance of $497,936
in
FFP. We express no opinion on what part, if any, of the costs the
State
may recover by allocating them to Medicaid through a cost
allocation plan
approved by the HHS Division of Cost Allocation.
_____________________________
Donald
F. Garrett
_____________________________
Alexander
G. Teitz
_____________________________
Judith
A. Ballard
Presiding
Board