Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Maryland Department of Health and Mental Hygiene
DATE: December 10, 1992
Docket No. A-92-112
Audit Control No. A-03-89-00235
Decision No. 1375
DECISION
The Maryland Department of Health and Mental Hygiene (Maryland)
appealed
the decision of the Health Care Financing Administration (HCFA)
to
disallow $728,396 in federal financial participation (FFP) claimed
by
Maryland for administrative costs under title XIX (Medicaid) of
the
Social Security Act (Act) for the period July 1, 1987 through June
30,
1989. The disallowance resulted from Maryland's failure to review
the
continuing Medicaid eligibility of categorically eligible
recipients
after they were terminated from the Aid to Families with
Dependent
Children (AFDC) program under title IV-A of the Act. As a
consequence
of this failure, Maryland paid medical assistance and
incurred
administrative costs for thousands of ineligible enrollees over
several
years. Under the formula in Maryland's Cost Allocation Plan
(CAP),
administrative costs were apportioned to Medicaid on the basis of
the
number of non-federally eligible enrollees in Maryland's
Medical
Assistance Program (MAP). HCFA determined that Maryland's claim
for FFP
in administrative costs had been overstated because these
ineligible
Medicaid recipients had been treated as federally eligible
enrollees
under the CAP formula. HCFA concluded that Maryland's claim
should be
adjusted downward by including these ineligibles in the count
of
non-federally eligible enrollees.
Background
Title XIX of the Act provides for the payment of federal monies to
states
to aid them in financing state medical assistance programs for
low-income
individuals. HCFA participates in a state's costs for
medical
assistance, i.e., payments for covered services provided to
eligible
individuals, and in a state's costs for administering its
Medicaid
program. Section 1903(a). The applicable cost principles
in
Office of Management and Budget (OMB) Circular A-87 provide that
costs
may be allocated to federal grant programs to the "extent of
benefits
received" and that for joint costs an allocation plan is
required. OMB
Circular A-87, Attachment A, . C.2. (This Circular
is made applicable
to HHS grants to states by 45 C.F.R. . 74.171.) The
Board has said that
these provisions do not require any particular
proportionate allocation
of joint costs so long as "costs are allocated in an
equitable manner to
programs which actually benefit from the costs" and the
state follows
its approved cost allocation methodology. Oklahoma Dept.
of Human
Services, DAB No. 963, at 4 (1988). States that choose to fund
a
Medicaid program are required to have a CAP which has been approved
in
accordance with the requirements of Subpart E of 45 C.F.R. Part 95.
42
C.F.R. . 433.34. A CAP sets forth the procedures a state will use
to
identify, measure, and allocate costs to benefiting programs. 45
C.F.R.
. 95.507(a)(1). When a state incurs administrative costs that
benefit
both its Medicaid program and other programs, such costs are
eligible
for federal reimbursement only to the extent they are allocated
to
Medicaid pursuant to an approved CAP. 45 C.F.R. . 95.517.
During the time period covered by this disallowance, Maryland operated
its
Medicaid program as the major component of MAP. 1/ MAP also
included
non-federal health care programs funded entirely by Maryland.
The
administrative costs of operating MAP were partially reimbursed by
HCFA as
part of its participation in Medicaid costs. Allocation of
MAP
administrative costs to Medicaid was determined by Maryland's
Medicaid
administrative CAP.
MAP was administered by the Maryland Department of Health and
Mental
Hygiene (DHMH). DHMH had an interagency agreement with the
Maryland
Department of Human Resources (DHR) pursuant to which DHR
reviewed
Medicaid eligibility determinations performed by local social
service
departments. DHR also administered other Social Security Act
programs,
such as AFDC, for which local departments also performed
eligibility
determinations. If a local department determined that an
applicant
qualified for AFDC, the applicant became categorically eligible
for
Medicaid. In this event, the local department notified DHMH and
DHMH
issued a Medicaid card to the recipient. Thereafter, DHMH
automatically
renewed the recipient's Medicaid eligibility unless it was
informed that
the recipient was ineligible.
DHR historically maintained its AFDC eligibility records on the
Automated
Income Maintenance System (AIMS). DHMH maintained its
Medicaid
eligibility records on the Maryland Medicaid Information System
(MMIS).
For a number of years, including 1987, 1988, and 1989, these
two automated
systems were not compatible. Therefore, an AFDC case
closed by DHR in
AIMS had to be manually reported to DHMH and DHMH had
to close that
AFDC-linked Medicaid case in MMIS.
In 1988, DHMH became aware of discrepancies between the eligibility
files
maintained in AIMS and those maintained in MMIS: former AFDC
recipients who
were ineligible for AFDC in the AIMS continued to be
shown as eligible for
Medicaid in the MMIS. A joint DHR/DHMH work group
was convened to
reconcile the discrepancies and implement a system to
prevent similar errors
from occurring. As a result of this AFDC
Reconciliation Project,
Maryland found over 20,000 Medicaid recipients
who retained their Medicaid
eligibility after being determined
ineligible for AFDC. Eligibility
redeterminations were then conducted
for these recipients. The
redeterminations established that 6,493
recipients in state fiscal year 1987
and 11,007 recipients in state
fiscal year 1988 were listed in DHMH's files
as Medicaid eligible when
they had, in fact, lost their eligibility for
Medicaid at the same time
they lost their AFDC eligibility. Maryland
Ex. 1 at 6. These
individuals were then removed from the DHMH MAP
rolls.
The Office of the Inspector General conducted an audit of
Maryland's
Medicaid administrative costs for state fiscal years 1988 and
1989.
During those years, HCFA reimbursed Maryland $59 million FFP
for
administrative costs. The auditors found the vast majority of
these
costs to be allowable and allocated in accordance with the
CAP.
However, in the course of the audit, DHMH provided the auditors with
the
data from its AFDC Reconciliation Project showing that
substantial
numbers of enrollees had been retroactively determined to be
ineligible
for Medicaid. The auditors then recalculated MAP
administrative costs
allocated to Medicaid by substituting corrected data in
three elements
of the CAP formula used to distribute DHMH costs to
Medicaid. The
auditors included in the non-federal enrollee category
the individuals
who were retroactively determined to be ineligible for
Medicaid
(Maryland had treated these enrollees as federally eligible
when
calculating its claims for FFP). The auditors also used a lower
total
number of MAP enrollees and a higher amount of MAP payments
than
Maryland had used. 2/ On the basis of this recalculation, the
auditors
determined that Maryland had improperly claimed federal funds in
the
amount of $295,785 in 1988 and $432,611 in 1989. Pursuant to the
audit
recommendations, HCFA disallowed $728,396 FFP in Medicaid
administrative
costs. The majority of the costs disallowed resulted
from reclassifying
enrollees found to have been ineligible for Medicaid to
the category of
non-federal enrollees.
Discussion
Maryland argued that this disallowance should be overturned for
two
reasons. First, Maryland asserted that HCFA's application of the
CAP
formula was based on the incorrect assumption that Maryland
transferred
ineligible Medicaid recipients to the state-only medical
program.
Second, Maryland argued that the disallowance was inequitable
and
arbitrary and capricious. For the following reasons, we reject
these
arguments.
1. In allocating administrative costs associated with
these
non-Medicaid eligible enrollees to Maryland, HCFA applied
the
cost allocation formula appropriately.
The Maryland Medicaid administrative CAP sets forth a formula for
the
allocation of DHMH administrative costs of MAP to Medicaid. The
formula
relies primarily on the proportion of non-federally eligible
enrollees
in the MAP program to develop a percentage which is used to
allocate
administrative costs to Medicaid. That formula provides:
1. Total Non-Federal
Enrollees
=
Percentage of Non-Federal Total MAP Enrollees
Enrollees to Total
Enrollment
2. Percentage of
Non-Federal
X
Total MAP =
MAP Payments Attributable Enrollees to Total
Enrollment
Payments
to Non-Federal Enrollees
3. MAP Payments
Attributable
+
Pharmacy
Assistance Program = Total Payments to Non-Federal
Enrollees
Provider
Payments
Attributable to
Non-Federal Enrollees
4. Total Payments Attributable to
Non-Federal Enrollees =
Non-FFP Percentage
Total MAP Payments
5. 100 Percent
-
Non-FFP Percentage =
FFP Percentage
6. Gross Medicaid Administrative
Costs X FFP Percentage X
Federal Matching
Rate =
Net Amount Claimed for
Federal
Reimbursement
In its comments on the results of the audit, Maryland had asserted
both
that its state-only MAP program was insignificant and should not
bear
additional administrative costs and that "little if any activity
in
program payments resulted from these ineligible recipients".
Maryland
Ex. 1, April 8, 1991 letter of Nelson J. Sabatini at 2 and 3.
In
response, the auditors stated that the approved allocation method
was
based on caseload and that Maryland was continuing to claim FFP
for
administrative costs associated with these ineligible recipients.
The
auditors also refuted Maryland's assertion of "little activity"
by
finding that during state fiscal year 1988 MAP medical
assistance
payments of $2,393,306 ($1,202,060 FFP) were attributable to
these
enrollees and that such payments continued in subsequent
years.
Maryland Ex. 1, at 11. Maryland did not renew these points on
appeal.
During the Board's proceedings, Maryland argued that HCFA's application
of
the CAP formula was based on the erroneous assumption that
Maryland
transferred all the recipients who were determined to have
been
ineligible for Medicaid to the state-only programs.
Maryland
represented that these enrollees were in fact removed from MAP
entirely
and should not be counted as non-federal enrollees in the CAP
formula.
3/
As a result of Maryland's administrative failure, thousands of
ineligible
enrollees participated in MAP and were treated as Medicaid
eligible.
Their participation generated medical assistance costs and
related
administrative costs. Maryland presented no evidence to show
that
administrative costs associated with these ineligibles were lower
than the
administrative costs incurred for other enrollees in its
caseload.
Accordingly, the fact that Maryland removed these enrollees
retroactively
from the MAP rolls does not change the fact that Maryland
incurred
administrative costs associated with the medical assistance
provided to these
enrollees. Therefore, the retroactive removal of
these enrollees is
irrelevant.
Given the facts of this case, we conclude that Maryland's application
of
the CAP formula, treating these recipients as federally
eligible,
resulted in a significant inequity to the Medicaid program by
allocating
costs to Medicaid that did not benefit that program.
The CAP's description of the formula explains that it is based
on
"determining the total MAP payments attributable to
Non-Federally
eligible enrollees." HCFA Ex. 1. HCFA's application
of the formula is
consistent with this description of how the formula
operates. The
enrollees at issue were found by the AFDC Reconciliation
Project to have
been ineligible for Medicaid and yet they participated in the
MAP
program. They are non-federally eligible enrollees and
appropriately
added to the category of non-federal enrollees in the
formula. Since
the object here is to allocate administrative costs to
the Medicaid
program, it is irrelevant that only some of these recipients
would have
been eligible for state-only programs had Maryland properly
determined
their eligibility. (Maryland indicated that approximately
10% would
have been eligible for the state-only programs. Maryland Ex.
4,
Affidavit of John P. Stewart at 2.) Maryland chose in its approved
CAP
to use caseload data in the formula used to allocate
administrative
costs. Underlying Maryland's approved allocation method
is the
assumption that it is equitable to allocate administrative costs
to
Medicaid on the basis of the proportion of Medicaid recipients to
other
recipients in the MAP caseload. There is a general presumption
that
approved allocation methods are valid. New York State Dept. of
Social
Services, DAB No. 1358, at 55 (1992). Therefore, the burden was
on
Maryland to submit evidence that this assumption was not validly
applied
to those enrollees retroactively determined ineligible for
Medicaid.
Absent evidence that Maryland did not incur administrative costs
for
these ineligibles or that these costs were somehow different from
other
administrative costs, it was reasonable for the auditors to use
the
approved caseload allocation method to allocate
associated
administrative costs away from Medicaid. The auditors'
calculation is
not, as Maryland argued, equivalent to a determination that
these
administrative costs are necessarily associated with the
state-only
programs but rather that these costs are not costs of the
Medicaid
program.
The auditors used the formula in the approved CAP to recalculate
allocable
administrative costs using corrected data, including the
adjusted count of
non-federally eligible enrollees. Maryland did not
argue that the terms
of the CAP precluded the recalculation of
administrative costs using
corrected enrollee data. In DAB No. 1358, at
58 (1992), the Board said
that where administrative costs were allocated
based on the caseload count of
program eligibles, absent evidence that
the parties agreed that no subsequent
adjustment for eligibility
determination errors would be made, it was
reasonable to assume such
adjustments were not precluded.
Furthermore, in view of the facts of this case, we find that
this
treatment of administrative costs associated with
enrollees
retroactively determined ineligible for Medicaid is
particularly
appropriate. Maryland's entitlement to administrative
costs in
accordance with its approved CAP is based on section 1903(a) of the
Act.
Section 1903(a) authorizes federal participation in administrative
costs
which are necessary for the proper and efficient administration of
the
state plan. Because of the high cost of achieving a hundred
percent
eligibility accuracy, some level of administrative costs associated
with
ineligible enrollees could be considered a necessary cost
of
administering a Medicaid program. However, that is not the
situation
presented by this case. Here Maryland failed to integrate its
AFDC and
Medicaid computer systems and failed to institute a reliable method
by
which the Medicaid system processed recipients who lost their
AFDC
eligibility. This failure went on for years and caused thousands
of
ineligible enrollees to be treated as if they were eligible
for
Medicaid. Therefore, the administrative costs associated with
these
ineligibles cannot be considered necessary for the proper and
efficient
administration of the state plan and should not be allocated
to
Medicaid.
2. The disallowance is not inequitable or arbitrary
and
capricious.
Maryland argued that "even if the re-calculation of the
administrative
costs were correct," the disallowance is inequitable and
arbitrary and
capricious. Maryland Brief at 8. It pointed out
that the auditors'
recalculation of the number of non-federal enrollees was
based on the
work product of the AFDC Reconciliation Project and, by the time
HCFA
made its findings, Maryland had corrected the problem. It also
argued
that the Medicaid quality control (QC) system precluded recovery
of
these costs. As discussed below, Maryland's arguments have no
merit.
As a general rule, a state must claim costs only in accordance with
its
approved CAP. 45 C.F.R. . 95.517. However, the Board has
concluded
that it would not uphold an allocation method which was
clearly
inequitable, which had been approved based on incorrect, inconsistent
or
incomplete data, or which was prohibited by statute or regulation.
DAB
No. 963, at 6 (1988). We conclude that none of these factors apply
to
this case.
The following facts of this case are undisputed. This
disallowance
resulted from Maryland's failure to integrate, or to compensate
for the
lack of integration of, its two major public assistance computer
systems
which tracked AFDC/Medicaid recipient eligibility.
Maryland's
administrative failure caused thousands of ineligible enrollees to
be
treated as if they were eligible for Medicaid.
Maryland's
administrative failure persisted for years: the auditors
found that
some ineligible enrollees had been treated as eligible since
1984.
Maryland Ex. 2 at 8. Under these circumstances, it is
entirely
equitable for the associated administrative costs to be allocated
to
Maryland rather than to Medicaid.
Maryland had control of and the responsibility for administration of
its
Medicaid program. In cases involving other types of
Medicaid
disallowances, the Board and reviewing courts have concluded that it
is
equitable to place the risk of loss on the party who has the ability
to
prevent or minimize that loss. See Massachusetts Dept. of
Public
Welfare, DAB No. 262 (1982); aff'd Massachusetts v. Secretary, 749
F.2d
89 (1984). That principle is appropriately applied here:
Maryland had
control over its eligibility determination process and automated
systems
which recorded those determinations; Maryland was the party best able
to
minimize eligibility determination errors; HCFA had no ability to
reduce
those errors. Therefore, it is not inequitable to place the
burden of
paying the administrative costs associated with enrollees
later
determined ineligible for medical assistance on Maryland.
Further, the fact that Maryland identified the problem and worked
to
correct it does not make the disallowance inequitable. States, as
the
administrators of their Medicaid programs, have a responsibility
to
review their management of those programs. We note that
the
reconciliation project which Maryland conducted was also in
Maryland's
interest because these ineligible Medicaid recipients were
draining
state dollars in addition to federal dollars. For example,
DHMH told
its legislature it expected removal of ineligible enrollees
from
Medicaid rolls to save over 4.2 million dollars in fiscal year
1990.
Maryland Ex. 1 at 11.
Maryland argued that, because of the Medicaid QC system, HCFA is
not
entitled to disallow the erroneous medical assistance payments made
on
behalf of these ineligible enrollees or the related
administrative
expenses. It is unclear whether Maryland meant (1) that
administrative
costs are part of the QC system and therefore cannot be
disallowed
except through that process, or (2) that, since HCFA must use the
QC
process to recover medical assistance payments made on behalf of
these
ineligible enrollees, it is inequitable for HCFA to disallow
these
administrative costs. 4/ In either case, Maryland has
misunderstood the
scope and effect of Medicaid QC.
The Medicaid QC system is authorized by section 1903(u) of the
Act.
Section 1903(u)(1)(A) provides that "[n]otwithstanding
subsection
(a)(1), if the ratio of a State's erroneous excess payments for
medical
assistance . . . exceeds 0.03 . . . for any full fiscal year"
the
Secretary is to impose certain reductions in payments.
(Emphasis
added.) Section 1903(a)(1) authorizes Medicaid
reimbursement for
amounts expended by a state for medical
assistance. Section 1905(a)
defines the term "medical assistance"
as the cost of certain types of
care and services. Therefore, the
QC process reaches only erroneous
excess payments for medical
assistance as defined by section 1903(a)(1)
and 1905(a). This
disallowance concerns administrative costs to which
Maryland was
entitled by virtue of section 1903(a)(2)-(7). The QC
process set
forth in section 1903(u) is not applicable to these
administrative
costs. 5/
Maryland did not offer any authority or reasoning in support of
its
statement that the QC system made it inequitable for HCFA "to reclaim
a
fictitious, ephemeral portion of MAP's administrative
costs
theoretically attached to these erroneous payments." Maryland
Brief at
8. We see no basis for Maryland's position. First, the
QC system is
unrelated to the recovery of administrative costs. Second,
these are
not "fictitious" or "ephemeral" costs: Maryland incurred them
and
claimed them from HCFA. Third, HCFA has not "theoretically
attached"
these administrative costs to the erroneous medical assistance
payments
made on behalf of these enrollees. Rather, HCFA applied
Maryland's CAP
formula to determine the allocability of shared administrative
costs.
Under that formula, these costs should not be allocated to
Medicaid.
Conclusion
For the foregoing reasons, we uphold HCFA's disallowance of $728,396
FFP
claimed by Maryland for the administration of its Medicaid program.
_____________________________ Judith
A.
Ballard
_____________________________ M.
Terry
Johnson
_____________________________
Cecilia Sparks
Ford Presiding Board
Member
1. The facts stated in this section of the decision are undisputed
and
are set out in "Review of Medicaid Administrative Costs Claimed by
the
Maryland Department of Health and Mental Hygiene for the Period July
1,
1987 through June 30, 1989," submitted as Maryland Exhibit (Ex.) 1,
or
"Review of the Department of Health and Mental Hygiene's Efforts
to
Reduce Medicaid Payments for Ineligible Recipients," submitted
as
Maryland Ex. 2.
2. In the record there are indications that Maryland administrators
did
not agree with or did not understand some of the figures
and
methodologies used by the auditors. See Maryland Ex. 1, April 8,
1991
letter of Nelson J. Sabatini, and Maryland Ex. 4, Affidavit of John
P.
Stewart. However, except for the issue of transferring
ineligible
enrollees to the non-federally eligible category, Maryland
abandoned
these concerns on appeal, neither raising them in its briefing
nor
presenting alternative figures or methodologies.
3. Maryland's position before the Board appeared to be different
from
the position it took when commenting on the audit results. In its
audit
response, Maryland asserted that "[t]hese individuals were in
fact
federally eligible and they are not nor have they been `State
only'
recipients." Maryland Ex. 1, April 8, 1991 letter of Nelson J.
Sabatini
at 3. This would seem to indicate that Maryland believed the
ineligible
people should remain in the pool of federally eligible
enrollees.
However, in its brief before the Board, the State asserted that
"[t]he
persons determined to be ineligible by the AFDC Reconciliation
Project
were ineligible for any MAP assistance; they were removed from
MAP
rolls." Maryland Brief at 6 and 7. This would seem to
indicate that
Maryland believed these ineligible people should be removed
from the
formula calculation entirely.
4. HCFA disputed Maryland's representation that the recovery of
medical
assistance payments made on behalf of these ineligible people
was
governed by the QC process. HCFA represented that
Maryland's
AFDC-linked Medicaid QC review is based on samples drawn from open
cases
in the AIMS system. According to HCFA, since these cases were
closed in
AIMS, they would not show up in a Medicaid QC review. We make
no
finding as to the effect of the QC system on recovery of
erroneous
medical assistance payments associated with these ineligibles.
5. We note that Maryland did not respond to HCFA's extensive
discussion
of the QC process and why it is unrelated to the disallowance
of
administrative costs. Specifically, Maryland did not dispute
HCFA's
representation that HCFA calculates Maryland's QC disallowances
solely
on the basis of its medical assistance