GAB Decision 787
September 11, 1986
New Mexico Human Services Department
Docket Nos. 85-261-86-32-86-61-86-93
Ballard, Judith A.; Settle, Norval D. Teitz, Alexander G.
(1) The New Mexico Human Services Department (State or HSD)
appealed
the decision of the Health Care Financing Administration (HCFA
or
Agency) disallowing a total of $2,387,433 in federal
financial
participation (FFP) claimed by HSD under Title XIX (Medicaid) of
the
Social Security Act (Act). The amounts disallowed represent the
federal
share of State gross receipts taxes reimbursed by HSD as part of
the
costs incurred by providers and fiscal intermediaries in
furnishing
medical and administrative services. The disallowances were
based on
HCFA's view that payments for the tax were not actual expenditures
by
the State within the meaning of applicable federal law because the
State
collected the tax from the providers and intermediaries. /1/
This is the third in a series of appeals involving the general issue
of
the availability of FFP for state reimbursement of taxes.
Our
conclusions here parallel those in the decisions resolving the
other
appeals. (See Hawaii Department of Social Services and
Housing,
Decision No. 779, August 21, 1986, and California Department of
Health
Services, Decision No. 786, September 11, 1986).
As in Hawaii and California, we conclude that federal law was
ambiguous
concerning whether State income from gross receipts taxes paid
by
Medicaid providers and fiscal intermediaries had to be deducted
from
HSD's payments to the providers and fiscal intermediaries in
determining
the amount of expenditures eligible for FFP. We also
conclude that the
State's interpretation(2) of applicable law was reasonable
under the
circumstances of this case where: (1) the approved State plan
in effect
during the disallowance period provided for reimbursement of the
gross
receipts tax; (2) program regulations supported the
State's
interpretation; and (3) HCFA had paid FFP for HSD's full
payments
including gross receipts taxes for almost 19 years. Thus, the
Agency
was unreasonable in attempting to apply a different
interpretation
retroactively. Accordingly, we are compelled to overturn
the
disallowances.
As in Hawaii and California, nothing in this decision contradicts
the
Agency's position that generally expenditures claimed for FFP must
be
"net" of any applicable credits. Furthermore, we emphasize that
nothing
in this decision precludes HCFA from promulgating a rule or
issuing
formal policy guidance giving notice of HCFA's intent to require
states
prospectively and specifically to apply gross receipts taxes
received
from providers and intermediaries as credits against Medicaid
payments
to them.
This decision is based on the written record (including comments
received
in response to a draft decision issued in Hawaii) and a
conference. We
incorporate by reference portions of the analysis in the
Hawaii and
California final decisions.
Background
New Mexico has had a gross receipts tax in effect throughout the
State's
participation in the Medicaid program (since 1966). This tax is
imposed
on the gross receipts of all for-profit businesses (with a
few
exceptions not relevant here) for the privilege of doing business in
the
State. The providers and fiscal agents involved in this case, like
all
other business in New Mexico, paid this tax on their gross receipts
as
an expense of operating in the State. New Mexico's State Medicaid
plan
did not specifically provide that State taxes, per se, would
be
reimbursed. However, the plan in effect throughout the period
in
question did specify that all costs not expressly provided for in
the
plan would be reimbursed in accordance with the terms of the
Provider
Reimbursement Manual (HIM-15), applicable to Medicare. (See
Appellant's
Brief, p. 5) Under these Medicare principles, it is clear that
the State
would reimburse providers and fiscal agents for gross receipts
taxes.
The State first calculated a rate using other provider costs and
then
added on the amount of the gross receipts tax. The State gave
two
reasons for this. First, State-owned and non-profit providers
were
exempt from paying the tax. Thus, if the tax were part of the
initial
rate calculation these providers would receive reimbursement for an
item
that was not a true cost. The second reason the State calculated
the
tax separately was that some providers paid more tax than others.
Thus,
others might be reimbursed for more than their actual costs.
This
occurred because(3) the amount of tax varied depending on
locality.
While all providers paid the base State tax rate of 3 3/4%, some
also
paid additional municipal and county rates. Under State
law,
municipalities and counties could assess their own gross receipts tax
if
they so chose. The municipal and county rates could vary within
State
set limits.
During the period in question here and the prior period not involved
in
this disallowance (i.e., 1966 to 1984), the State claimed FFP in
the
amount it reimbursed providers and fiscal agents for gross receipts
tax.
Until a deferral notice issued on July 9, 1985 (almost 19 years
after
the start of the program), HCFA always paid the State's claims for
FFP
in the amounts paid providers for medical services and fiscal agents
for
administrative costs. /2/
Thereafter, HSD published a notice that it proposed to stop the
tax
reimbursements to providers and, on August 21, 1986, HSD issued a
final
regulation to that effect. Two days later, the New Mexico Health
Care
Association brought suit in Federal District Court to enjoin both
HSD
and the Agency from withholding reimbursement of gross receipts tax.
On
September 13, 1985, the Court issued a preliminary injunction
barring
HSD from withholding payments for the tax to long-term care
providers.
No such relief was ordered against the federal government. /3/
On November 7, 1985, HCFA issued its first disallowance of
$1,289,764
for the period January 1, 1984 through March 31, 1985.
This
disallowance covered the State's claims for State gross receipts
tax
only, not county or municipal gross receipts tax. Subsequently,
on
January 8, 1986, HCFA disallowed an additional $337,378 for the
same
time period. This disallowance covered the State's claims
for
reimbursements of county and municipal gross receipts
taxes.
Thereafter, the Agency disallowed an additional $760,291 covering
State,
county, and municipal taxes for the following quarters ending
September
30, 1985. The State appealed all the disallowances,
totalling
$2,387,433.
I. Did "federal law" mandate the disallowances here?
As in the Hawaii and California appeals, HCFA based the disallowances
on
its view that "federal law" (i.e., section 1903(a) of the Act and
Office
of Management and Budget Circular A-87) required the(4)
disallowances.
In those cases, we concluded that section 1903(a) and the
Circular
simply are not that specific; while HCFA's interpretation is
not
necessarily inconsistent with them (and thus might reasonably be
imposed
through a regulation or guideline), it is unreasonable to conclude
that
the Act and the Circular themselves required the disallowances so as
to
justify retroactive action.
The parties' arguments here are essentially the same as in Hawaii
and
California, and we incorporate the applicable discussion
and
conclusions. Below, we calrify how the analysis in those cases
applies
here, and discuss arguments raised solely by New Mexico.
A. The statute did not mandate the disallowances.
The Agency here cited section 1903(a)(1) as the statutory basis for
its
disallowances of State expenditures for gross receipt taxes
reimbursed
to providers for medical services. The Agency also cited the
analogous
section, 1903(a)(7), as the basis for its disallowances of
gross
receipts taxes reimbursed to fiscal agents for administrative
costs.
We concluded in Hawaii that section 1903(a)(1), on its face, did
not
compel the disallowances. (Hawaii, supra, pp. 3-5) We concluded
in
California that section 1903(a)(7) did not compel the
disallowances
either. (California, supra, p. 5) We adopt the analyses
on pages 3-5 of
Hawaii and page 5 of California and conclude that neither
section of the
Act compels the disallowances here.
B. OMB Circular A-87 did not mandate the disallowances.
As in Hawaii and California the Agency argued that OMB Circular
A-87
compelled the disallowances and the State argued that it did not.
The
arguments presented by the parties here were essentially the same as
in
those cases.
In Hawaii and California, we decided that the Circular did
not
conclusively establish that taxes paid by providers had to be treated
as
"applicable credits" against reimbursements to providers.
(Hawaii,
supra, pp. 5-8 and California, supra, p. 6) HCFA did not argue
that
there was any difference between Hawaii's excise tax and New
Mexico's
gross receipts tax which should produce an analysis or result
different
from that in Hawaii (and we do not see any such difference).
The only
possible difference in the circumstances surrounding the two
States'
taxes is that Hawaii's tax was reimbursed indirectly through a
rate,
whereas New Mexico's tax may have been reimbursed directly in
part.
HCFA did not argue that this should produce a different result, and
we
see no reason why it should. Accordingly, we conclude that the
analysis
regarding A-87 at pages 5-8 in Hawaii applies here as well.
The
Circular did not compel the disallowances here, and, indeed,
as(5)
discussed in Hawaii, contained language which reasonably could have
led
the State to believe the tax was an allowable cost eligible for
FFP.
/4/
II. Was the State's interpretation reasonable under the
circumstances
of this case?
As in Hawaii and California, we conclude that, in addition to
the
ambiguity and mixed messages in A-87, there are other factors which
set
a context in which New Mexico reasonably determined that it did not
have
to treat the gross receipts taxes as "applicable credits"
offsetting
State payments to the providers and fiscal intermediaries for
medical
services and administrative costs. Below we address similar
factors
present in this case.
A. The State plan as support for the State's interpretation.
In Hawaii the approved State Medicaid plan applicable during most of
the
disallowance period adopted the use of Medicare principles
of
reimbursement, and under those principles it was clear that the taxes
in
question were allowable costs. The Board concluded that, in the
absence
of any Agency issuance stating clearly that taxes had to be treated
as
applicable credits, the State plan supported the State's
interpretation.
(Hawaii, supra, pp. 9-10)
As in Hawaii, New Mexico's State Medicaid plan also adopted
Medicare
principles of reimbursement. The parties' arguments were
essentially
the same here as in Hawaii. Accordingly, we adopt the
analysis on pages
8-10 of Hawaii here and conclude that New Mexico's State
plan supported
the interpretation that gross receipts taxes received by the
State did
not have to be netted
B. The program income regulations as support for the
State's
interpretation.
In this case the parties presented the same arguments as in the Hawaii
and
California appeals with regard to the effect of the program
income
regulations. We incorporate by reference the analysis on pages
10-12 of
Hawaii here. (In California we also adopted that
analysis.)
(6) III. Notice.
A. The documents.
In the cover letter to the draft decision issued in Hawaii, sent
for
comment to the parties here, the Board noted that if the Board's
initial
conclusions were adopted as the final decision, then FFP would
be
available to the State until such time as the State had actual notice
of
the Agency's present interpretation. The Board noted that actual
notice
was required before a party could be adversely affected by
an
unpublished change in Agency policy. (See Alabama Department of
Pension
and Security, Decision No. 128, October 31, 1980; Oregon
Department of
Human Resources, Decision No. 129, October 31, 1980; Utah
Department of
Social Services, Decision No. 130, October 31, 1980; New Mexico
Human
Services Department, Decision No. 382, January 31, 1983; and see
5
U.S.C. 552(c)(1)(D) and (E)). The Board asked the parties in New
Mexico
to comment on whether certain documents in the Hawaii cases should
be
considered notice of a change in Agency policy. The documents
included
(1) a letter from the Agency advising the State that its claim for
FFP
was being deferred pending further consideration, and (2) the
subsequent
disallowance letters.
The parties' arguments in response were essentially the same here as
in
Hawaii. We incorporate the analysis at pages 15-22 of Hawaii
and
conclude that neither the deferral nor the disallowance letters can
be
considered notice under the circumstances of this case.
B. The Administrative Procedure Act.
At the close of the conference in this case, the Board suggested that
the
parties brief the effect on this case, if any, of two provisions of
the
Administrative Procedure Act (APA) pertaining to notice, sections
552 and 553
of 5 U.S.C.
The two sections pertain to different requirements for notice.
Section
553 deals with notice and comment requirements for rule making;
section
552 is the Freedom of Information Act section, and states when
there
must be publication in the Federal Register.
The Agency throughout these proceedings relied on a provision in
section
553(b). This section first states that notice of proposed rule
making
shall be published in the Federal Register, but then goes on to
say:
Except when notice or hearing is required by statute, this
subsection
does not apply - (A) to interpretative rules, general statements
of
policy, or rules of agency organization, procedure, or practice;. . .
.
(7) The Agency's position was that there was no change in Agency
policy
pertaining to taxes since there never was any definite official
policy
to pay FFP; any statement of policy that FFP was not available
was
simply an interpretive (or "interpretative") rule, not requiring
notice
and comment rule making. The Agency relied on Cabais v. Egger,
690 F.
2d 234 (D.C. Cir., 1983), which rejected the "substantial impact"
test
in considering whether notice and comment was required.
New Mexico differed sharply with the Agency's position on section
553,
insisting that rules which change agency practice must be
promulgated
under 553, even if the Agency labels them interpretative or
general
policy statements. New Mexico relied, in addition to 553, on
the
requirements for publication in the Federal Register under section
552(
a)(1), which apply to:
(D) substantive rules of general applicability . . . and
statements
of general policy and interpretations of general
applicability
formulated and adopted by the agency;. . . .
The subsection provides further that:
Except to the extent that a person has actual and timely notice
of
the terms thereof, a person may not in any manner be . . .
adversely
affected by, a matter required to be published. . . .
On their face these provisions seem directly applicable here.
However,
the Agency attempted to distinguish this case, by saying that
subsection
(D) is not applicable where a statute is "self-effectuating,
and
therefore no interpretation by an agency is required."
(Respondent's
supplemental brief, July 30, 1986, p. 6) The Agency continued
further
that the Agency has not "formulated and adopted" the policy where
"the
statutory provision has a single meaning" and the statute
implements
itself and "provides notice of the policy to the public." (Id., p.
7) In
any event, argued the Agency, New Mexico had "actual notice."
We have decided above, as we did in Hawaii and California, that
neither
the statute itself, nor the statute read together with A-87, clearly
and
unambiguously precluded FFP for taxes; the states were not
on
constructive notice that FFP was unavailable. Thus, subsection (D)
of
section 552(a)(1) applies because the statute simply was
not
"self-effectuating."
We have also dealt in Hawaii and California with the Agency's
argument
that there was no change in policy since the Agency never had a
formal
written policy on the issue. The Agency argued that FFP
for
expenditures for taxes was paid inadvertently or erroneously, and
that
its present position on taxes was an(8) initial interpretation of
the
Act. The fact that the Agency provided FFP for taxes for 18 years
in
the Hawaii cases and here, and some six years in the California
cases,
seriously undermines the argument, however. (See also, fn. 2
above)
Even if we agreed with the Agency, however, we would conclude
that
subsection (D) of section 552(a)(1) applies, since application of
that
subsection does not depend on whether the interpretation was an
initial
one or a changed one.
We need not decide the further issue of whether the requirements
for
notice and comment rule making of section 553 of the APA apply
here,
because we have determined that the publishing or actual
notice
requirements of section 552 do apply, which is dispositive.
Actual
notice was required before the State could be adversely affected.
/5/
We have found above, as we did in Hawaii and California, that
neither
the deferral letters nor the disallowance letters constituted
"actual
notice." Since actual notice was required, and New Mexico did
not
receive it, the disallowances must be reversed.
We need not reach the issue of what would constitute actual notice,
since
that is not necessary for our decision. We indicated in Hawaii,
and we
repeat here, that an action transmittal might well be sufficient
but we have
also stressed that the making of policy and the method of
promulgating it is
for the Agency.
(9) Conclusion
Based on the foregoing, we sustain the State's appeal. /1/ We
use
"HSD," "New Mexico," and
"State" interchangeably when referring
to the appellant in this
decision. Nevertheless, it is useful in
picturing what happened in this
case to note that, while HSD paid the
providers for medical services, the
providers did not pay gross receipts
taxes back to HSD. Rather, the
providers paid gross receipts taxes to
the New Mexico Taxation and Revenue
Department; the money went into the
"tax administration suspense fund"
for transfer later either to the
State general treasury or the local
jurisdiction in which the taxable
transaction occurred, as provided by State
statute. /2/ For several
years prior to this, Agency representatives had expressed
concerns about the
State's reimbursement of gross receipts tax but had
taken no steps to
terminate FFP for the reimbursements. (Appellant's
Ex.
18) /3/ The Court issued a final
order on March 7, 1986,
continuing injunctive relief against HSD. The
order granted injunctive
relief against HCFA only if its basis for denying
FFP was that payment
of the gross receipts tax was not an allowable cost to
the providers.
Further action was stayed, at the suggestion of the parties,
pending
Board decision. /4/
The parties appeared to agree that, even for
institutional Medicaid
providers, the tax was treated as an "add-on" and
was not reimbursed as part
of a per diem rate. (Transcript of
Conference, pp. 63-64) The matter is
not entirely clear, however, since
under Medicare principles (which the State
plan used), reimbursements to
institutional providers must be based on a per
diem rate calculated
using the underlying provider costs, including
taxes. Thus, it may have
been that the parties simply meant that an
overall per diem rate was
calculated using other provider costs and then the
increment of the rate
attributable to taxes was calculated separately since
it could vary from
locality to
locality. /5/ We referred in
Hawaii to the internal
memorandum of February 1983 from an attorney in the
Office of the
General Counsel, which gave an opinion that FFP was not
available for a
Georgia state sales tax on pharmaceuticals for Medicaid
patients (the
State was exempt by state statute), and which indicated that
FFP might
not be available for sales taxes generally. (Respondent's Tab
30, Ex.1)
The memorandum went on to say that arguably the "new policy" of
not
allowing FFP for sale taxes constituted an interpretative rule,
not
subject to the notice and comment provisions of section 553. But
the
memorandum also went on to say that, given the uncertain state of
the
law notice and comment was the appropriate action. HCFA was advised
to
give actual notice to all jurisdictions that participated in
the
Medicaid program, and to "proceed along both avenues, addressing
the
problem in the short term by actual notice, and in the long run,
by
publication." Id., p. 5. 394 APRIL 25, 1987