Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Oklahoma Department of
DATE: August 24, 1990
Human Services Docket No. 89-114, 89-168, 89-236, 90-26, and 90-79
Decision No. 1188
DECISION
The Oklahoma Department of Human Services (State) appealed several
determinations by the Health Care Financing Administration (HCFA)
disallowing federal financial participation (FFP) the State claimed
under Title XIX (Medicaid) of the Social Security Act (Act). HCFA
determined that the State had claimed the enhanced rate of 75 percent
FFP -- available for costs attributable to the operation of the State's
Medicaid Management Information System (MMIS) -- for certain costs that
were properly claimed at the 50 percent FFP rate available generally for
administrative costs of Medicaid. HCFA disallowed the part of Oklahoma's
claims that exceeded FFP at the 50 percent rate. 1/
HCFA based its determinations on a financial review performed by its
regional office to determine whether Oklahoma was claiming at the 75
percent rate only those costs that qualified for such enhanced funding.
HCFA questioned three categories of costs: (1) costs of the State's
contract with a fiscal agent; (2) costs of personnel within the State
Division of Medical Services (in-house personnel costs); (3) overhead
costs, both statewide and department-wide, allocated to the MMIS cost
center. Pursuant to negotiations, the parties resolved the claims
involving statewide and department-wide overhead costs and reached an
agreement with regard to the majority of in-house personnel costs.
Consequently, the issues remaining in dispute are the disallowance of
$1,137,550 for payments made to the fiscal agent and the disallowance of
$334,068 for costs of general support activities incurred by the
Oklahoma Division of Medical Services (DMS). 2/
On the basis of the analysis below, we uphold the disallowance of
$1,137,550 in fiscal agent payments, subject to further adjustment
according to our discussion below, and reverse the disallowance of the
$334,069 for costs of DMS general support activities.
Background
In 1972, Congress amended Title XIX to include enhanced rates of
reimbursement for administrative costs for the operation of a mechanized
claims processing and information retrieval system. 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 mechanized claims
processing and information retrieval systems . . . .
An MMIS qualifies as such a system.
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 Medicaid 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, an
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.
"Operation" is defined as --
the automated processing of claims, payments, and reports.
"Operation" includes the use of supplies, software, hardware, and
personnel directly associated with the operation of the mechanized
system. 42 C.F.R. 433.111. 3/
HCFA has also issued Part 11 of the State Medicaid Manual (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 specific SMM provisions relevant here were promulgated as
part of Revision 8 to the SMM, effective July 31, 1986. 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; 11275.32.
Revision 8 also amended sections 11275.30 and 11275.31 to provide as
follows:
11275.30 Attributable Costs Under 90-Percent and 75-Percent 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 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.
11275.31 Attributable Costs under 75-percent FFP for Fiscal Agent
MMIS Operations
A fiscal agent may perform many additional functions (section
11275.28) for the State beyond those related to MMIS operations
eligible for 75-percent FFP yet bill the State at one all-inclusive
rate per claim processed. If HCFA's review of the fiscal agent's
contract and operations show this to be the case, the State will be
required to develop a cost allocation plan through which its
payments to the fiscal agent are broken out for matching at the
appropriate FFP rates. (See section 11275.30.)
State Exhibit (Ex.) 6.
I. Fiscal Agent Costs
A. The Issues
The State contracts with a fiscal agent, UNISYS, for operation of its
MMIS. The State claimed FFP at the enhanced 75 percent rate for all of
its payments to UNISYS. HCFA's reviewers determined that some of the
functions performed by the fiscal agent did not qualify for enhanced
funding. The draft review report does not specifically identify those
functions, but the final report identified costs commonly incurred by
fiscal agents as not qualifying for enhanced funding, including certain
indirect overhead costs. Based on interviews with UNISYS employees on
how they spent their time, the reviewers assigned percentages to the
employees representing the time spent on functions the reviewers
determined would or would not qualify for enhanced funding.
HCFA initially disallowed a total of $3,791,831, the difference between
all the fiscal agent amounts claimed at the 75 percent operational rate
and the same amounts claimed at the 50 percent administrative rate. 4/
HCFA disallowed this amount on the basis that the State was required to
allocate the costs under SMM section 11275.31, but had failed to provide
calculations of MMIS fiscal agent costs using the reviewers'
percentages, as HCFA had requested.
The State initially argued that the entire amount paid to its MMIS
fiscal agent was reimbursable at the enhanced rate. The State provided
an affidavit by the State official responsible for monitoring the UNISYS
contract, stating that the "current UNISYS contract is solely for the
operations of the required MMIS subsystems." State Ex. 13 (Moore
Affidavit). The State also provided a copy of the request for proposal
(RFP) leading to the contract, which the State said showed that UNISYS
was performing only functions directly attributable to MMIS operations.
State Ex. 13, Att. A.
The Moore Affidavit explains that the State has a firm fixed price
agreement with UNISYS; the State pays UNISYS based on one all-inclusive
rate per claim processed. 5/ The State contended that HCFA's treatment
of the fiscal agent costs violates government contracting principles
applicable to fixed price contracts. In support of this contention, the
State provided an affidavit by the former HHS Deputy Assistant Secretary
for Procurement, Assistance, and Logistics (Kirschenmann Affidavit).
The Kirschenmann Affidavit states that, under accepted government
contract principles, the provider of services under a firm, fixed price
contract is not required to divulge on a continuous basis the costs
incurred in performing the contract. The Kirschenmann Affidavit further
states:
[HCFA] has issued policy guidelines under which state governments
would be required to segregate for allocation purposes the costs
incurred by contractors who perform any functions related to MMIS
operations for the state, even if the contract under which these
functions are performed was a single purpose, firm, fixed price
contract. This policy is inconsistent with federal administrative
practice in comparable areas with which I am familiar.
State Ex. 15, p. 4.
The State also argued that the SMM standards regarding overhead costs
were improperly promulgated, and that, even if these overhead standards
are valid, they have been improperly applied to the fiscal agent costs.
B. The Board's Preliminary Analysis on the Fiscal Agent Costs
The Board issued a Preliminary Analysis based on the parties' arguments
and the record. We concluded that --
o section 11275.31 of the SMM is consistent with the Medicaid
statute and regulations, and may be reasonably applied to fixed
price contracts;
o the record established that the fiscal agent was performing
other direct program functions for the State in addition to
those MMIS operations eligible for 75 percent FFP, so that the
State is required to develop a plan to allocate the fiscal agent
payments between 75 percent functions and 50 percent functions;
o HCFA erred in examining the underlying fiscal agent costs as
though they were costs incurred by the State rather than by the
fiscal agent;
o requiring the State to account for fiscal agent overhead costs
is inconsistent with the SMM provision which talks about
allocating the payments;
o the key issue is what percentage of the price paid the fiscal
agent for activities the fiscal agent performs for the State
under the contract reflects functions reimbursable at 75 percent
and what percentage reflects functions reimbursable at 50
percent; and
o HCFA's disallowance of the full amount of the difference between
the 75 percent State and the 50 percent rates was unreasonable.
Preliminary Analysis (PA), pp. 5-12. The parties' comments on the
Preliminary Analysis focused on issues related to treatment of the
fiscal agents' overhead costs. As explained below, nothing in the
comments persuades us that our reasoning in the Preliminary Analysis was
incorrect. Thus,we affirm and adopt our conclusions in the Preliminary
Analysis and incorporate that analysis by reference here.
C. The Parties' Responses to the Board's Preliminary Analysis and
Our Conclusions
In our Preliminary Analysis, we stated that SMM section 11275.31
requires allocation of the payments to the fiscal agent only where
additional functions are performed, even though a fiscal agent would be
incurring "overhead-type" costs no matter what functions it was
performing. See PA, p. 11. HCFA disputed this arguing:
By this statement the Board apparently concludes that all species
of "overhead-type" costs incurred by the fiscal agent relative to
the MMIS function are eligible for 75 percent FFP irrespective of
whether those overhead-type costs are "directly attributable" to
the processing of claims, payments, and reports. Such a conclusion
is contrary to the consistent logical scheme of the Departmental
regulations and HCFA interpretations discussed above which require
that the subject activity cost bear a direct "association,"
"engagement," or "attribution" to the automated processing
of
claims, payments and reports.
HCFA Response to the PA, p. 20.
HCFA's argument misconstrues the point of our analysis. Under SMM
section 11275.31, only costs incurred by the State, for payments to the
fiscal agent, are potentially eligible for FFP. No costs incurred by
the fiscal agent are eligible for 75 percent funding. While the fiscal
agent may incur costs similar to the State overhead costs discussed in
SMM section 11275.30, they are not State- incurred costs, nor do they
fit within the section's description of public agency indirect costs
allocated among benefiting programs in a statewide or department- wide
cost allocation plan. HCFA's argument totally fails to address the fact
that HCFA's own SMM provision permits a state to claim 75 percent FFP
for payments to a fiscal agent contracting to perform only 75 percent
functions, even though that fiscal agent's price will certainly reflect
the fiscal agent's increased "overhead-type" activities, such as budget
preparation or legal services.
This Board has recognized that it should defer to HCFA's reasonable
interpretation, in the SMM, of the statute and the regulations as
providing FFP only in those costs which clearly arise because of a
state's implementation of an MMIS, rather than in every cost which is
allocable to operation of an MMIS system, in an accounting sense. We
have upheld disallowances of costs which clearly fit within the
description of SMM section 11275.30. See New York Dept. of Social
Services, DAB No. 1023 (1989); New Jersey Dept. of Human Services, DAB
No. 1071 (1989). We do not, however, consider HCFA's position here to
be a consistent, logical one. HCFA's SMM clearly would provide enhanced
funding for the full payments to a fiscal agent performing only MMIS
functions (including that part of the contract price which reflects the
fiscal agent's estimate of its increased overhead costs). Yet, once a
determination is made that payments to a fiscal agent must be allocated
among functions, because the fiscal agent is performing functions in
addition to MMIS ones, HCFA would suddenly treat these overhead costs as
costs which cannot be reflected in the part of the contract price for
which 75 percent funding is available. The practical effect of HCFA's
approach is that any state which chooses to have a fiscal agent
operating the state's MMIS also perform any non-MMIS functions would not
get enhanced funding for the full percentage of the price the fiscal
agent charges for performing MMIS functions (unless, of course, the
state avoided this result by establishing two prices, one for MMIS
functions and one for non-MMIS functions).
HCFA argued that it is immaterial whether the costs are incurred by the
fiscal agent or by the State. To the contrary, however, the regulations
and provisions relied on by HCFA make such a distinction necessary. For
example, HCFA quoted from its regulation at 42 C.F.R. 432.50. Yet,
this regulation clearly applies only to staffing and training costs of
the state Medicaid agency or other public agencies. Personnel costs
incurred by a fiscal agent are not covered by the regulation -- a
difference which is material here. Moreover, the SMM provision on
indirect costs at 11275.30 refers to certain indirect overhead costs
(statewide and department-wide central services costs) included in
statewide or public agency cost allocation plans. Again, this provision
has no clear applicability to costs incurred by a fiscal agent. Even
more important, the SMM treats payments to a fiscal agent under contract
for operating an MMIS as a separate category of costs, recognizing that
this is a type of cost incurred by a state which is different from state
personnel or indirect costs. Such payments would be treated as a direct
cost of MMIS operations, would not be included in a state cost
allocation plan, and are a type of cost which a state would not incur
were it not for the state's MMIS. 6/
HCFA argued that it is "inconceivable that HCFA intended to permit
enhanced FFP for an activity when done by a fiscal agent under contract
and deny enhanced FFP for the same activity if performed by the state."
HCFA response, p. 13. Nothing in our preliminary analysis suggested any
difference in treatment of an activity according to who performs it. To
the contrary, we said it is the function which must be examined. Our
point was that the cost to the State of MMIS functions performed by a
fiscal agent is measured by that portion of the contract price allocable
to those functions, and that the type of examination of the contractor's
activities and costs which HCFA would have us do is not warranted, in
light of HCFA's own SMM provisions. In our view, separating out the
fiscal agent's overhead-type costs, as HCFA did, results in a distortion
of the allocation of the contract price between functions, allocating to
non-MMIS functions part of the price which is allocable to MMIS
functions. 7/
In its reply to the State's response, HCFA proposed that --
the fiscal agent be allowed to complete the percentage
classifications of their operating costs according to qualifying
and non-qualifying functions after this Board's decision on issues
relating to the MMIS criteria. HCFA will then review the
percentage determinations and request any necessary adjustments.
The fiscal agent can then provide the State with the percentages
representing the break out of total operating costs into the 50 or
75 percent matching categories, which the State should apply to the
fiscal agent payments.
HCFA reply, p. 15.
The parties did not contest the Board's Preliminary Analysis to the
extent it resolved issues related to the criteria for determining what
are qualifying and non- qualifying functions. HCFA, however, appears to
be saying that fiscal agent employees performing overhead- type
activities are not engaged in qualifying functions. This is true, but
beside the point. The State does not contract with the fiscal agent to
perform administrative support or overhead-type activities; these
activities are but a necessary by-product of the performance of the
contract. The State contracts with the fiscal agent to perform certain
functions such as operating the various MMIS subsystems, producing the
necessary reports, providing on-line inquiries and data input and
corrections. In order to accomplish these qualifying functions,
however, the fiscal agent must incur overhead costs necessary to support
the staff performing these functions. Therefore, these overhead-type
costs will be reflected in the contract price, but are not a contract
activity. These costs are not "functions" within the meaning of the
SMM; functions refer only to the program activities performed by the
fiscal agent under the contract.
Thus, proper application of SMM section 11275.31 requires allocation of
the final payments to the fiscal agent based on the ratio between MMIS
and non-MMIS program activities. This ratio would be applied to
payments to the fiscal agent, resulting in a proportional allocation of
both overhead and direct costs.
We note that HCFA agreed with our Preliminary Analysis that the full
amount of the payments to the fiscal agent should not be disallowed, and
reduced the disallowance by 70 percent, leaving a disallowance of 30
percent of the FFP claimed for the payments to the fiscal agent. If the
parties' allocation of payments pursuant to our discussion above results
in less that 30 percent of the payments being allocated to non-MMIS
functions, then a further corresponding reduction in the disallowance
should be made. On the other hand, if more than 30 percent is allocated
to non-MMIS functions, HCFA may increase the disallowance amount
accordingly.
II. In-House Personnel Costs
A. Background Related to the In-House Support Activity Costs
Issues
HCFA disallowed $1,902,741 FFP for the period October 31, 1986 through
December 31, 1989 for in-house personnel costs incurred by the Division
of Medical Services (DMS), the unit within Oklahoma's Department of
Human Services that administers Medicaid and the MMIS. HCFA disallowed
these costs because its review indicated that the Random Moment Time
Study (RMTS) method Oklahoma used to allocate its personnel costs within
DMS did not result in the proper allocation of in-house personnel costs
to the MMIS. The reviewers assigned specific percentages of time to DMS
staff positions to be charged to MMIS, either on a position by position
basis or by operating unit. As a result of the review, HCFA asked the
State to calculate for each quarter in the review period the amount of
MMIS in-house personnel costs, using the percentages assigned to MMIS
activities by the HCFA reviewers. In its disallowance letter, HCFA
stated that it was disallowing the entire enhanced portion of the
State's claim because the State did not provide this information.
To demonstrate the inadequacy of HCFA's review, the State developed its
own survey of DMS staff time. The State argued that the results of its
new survey demonstrated that the HCFA reviewers' percentages of time
substantially underestimated the time properly charged to MMIS
activities reimbursable at the enhanced rate. 8/
In our Preliminary Analysis, we found that HCFA was not justified in
disallowing the entire amount of enhanced funding for all in-house
personnel costs. Pursuant to negotiations entered into after we issued
our Preliminary Analysis, the parties agreed to use the State's new
survey, revised in accordance with the Board's comments in a mutually
acceptable fashion, as a basis for allocating in-house staff time
between MMIS and non-MMIS activities. The parties agreed to use the
agreed upon method for 90.2 percent of the costs in dispute, and will
determine the amount of the disallowance that will be withdrawn.
The parties, however, did not agree on the disposition of the remaining
in-house costs, $334,068. The remaining 9.8 percent of in-house
personnel costs represents the percentage of time devoted to costs of
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.
State's Comments, pp. 14-15. These functions are captured in the
State's survey under the category "General Support Activities."
The State explained that it has not claimed all of DMS's overhead at the
higher MMIS rate. Rather, the State indicated that only that proportion
of the Medicaid agency's overhead costs (personnel and non-personnel)
that corresponds to the ratio of directly chargeable MMIS staff time to
all directly chargeable staff time is claimed at the 75 percent rate.
State's reply to HCFA's response, p. 12; State Ex. 14. The State
indicated that the general support activities are separate from, and do
not duplicate, support functions that are performed at the
department-wide level. 9/
HCFA's position with respect to DMS's overhead is based on HCFA's view
that (1) only facility or non-personnel components of overhead costs
qualify for enhanced matching; and (2) that the costs involved here are
"personnel" costs and that the persons are engaged in activities
(supervision, personnel evaluations, approving leave slips, etc.) which
are not 75 percent reimbursable under HCFA's regulations at 42 C.F.R.
Part 432, Subpart C, section 432.50 and the SMM.
HCFA also argued that Chapter 11 of the SMM establishes only two
categories of costs that may be claimed at the higher 75 percent FFP
rate as costs attributable to MMIS- -"costs resulting directly from
staff functions . . . which are directly attributable to the automated
processing of claims, payments and reports," and "costs resulting
directly from specific staff and computer functions which benefit the
operation of the MMIS, although not directly attributable to claims
processing." HCFA Response to Preliminary Analysis, pp. 13-14. HCFA
contended that only the personnel costs that fall within these two
categories, and that are specifically listed as eligible for enhanced
match in SMM section 11275.32, may receive the enhanced FFP. HCFA
contended that because costs of administrative personnel included in DMS
overhead do not fall within these categories and are not listed in
section 11275.32, they cannot be claimed at the 75 percent rate.
B. Administrative Support Personnel Costs Are Not Direct Program
Costs.
There are flaws in HCFA's arguments. HCFA relied on 42 C.F.R. 432.50
and SMM sections 11275.23 and 11275.32, which pertain to personnel costs
that may be identified and charged to an MMIS cost center as direct
program costs. The problem here, however, is that the costs at issue
are not ordinarily charged as direct program costs but as indirect
overhead costs.
The Board has previously held, based on HCFA's own Action Transmittal
(HCFA-AT-78-33), that the purpose of 42 C.F.R. 432.50 is limited to
establishing reimbursement rates for certain staffing and training
expenditures when treated as direct program costs. See Reconsideration
ruling in New Jersey Dept. of Human Services, DAB No. 648 (1985); New
Jersey Dept. of Human Services, DAB No. 1071 (1989)(New Jersey II).
Subpart C of 42 C.F.R. Part 432 addresses rates of FFP under Medicaid
for "Staffing and Training Expenditures." Section 432.50 states in
pertinent part:
(a) Availability of FFP. 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, as specified in paragraph (b) of this section.
(b) Rates of FFP.
* * *
(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 of the Medicaid agency or other public
agencies providing services to the Medicaid agency, and for
training and other expenses of volunteers, the rate is 50
percent.
(c) Application of rates. (1) FFP is prorated for staff time that
is split among functions reimbursed at different rates.
(2) Rates of FFP in excess of 50 percent apply to those portions
of the individual's working time that are spent carrying out
duties in the specified areas, or another methodology approved
by HCFA.
(Emphasis added.)
HCFA's Action Transmittal indicated that 42 C.F.R. 432.50(c)(2)
referred only to such staffing costs when directly charged to a program
function, but did not preclude charging those costs to an overhead cost
pool which would then be allocated among all benefitting functions.
This interpretation of the regulation is consistent with the wording of
the regulation which refers to "staff time split among functions"
and
rates applying to the portion of a person's working time spent on
"duties in the specified areas." The language of the regulation refers
to program functions and program duties; it does not refer to the
overhead costs supporting the time directly worked on those functions.
The State alleged and HCFA did not deny that in a time measurement
system, administrative support costs are not direct charged. Rather, a
time measurement system would allocate time spent in administrative
support to an indirect cost pool which would then be allocated to
program functions according to the proportion of time spent on the
program function. Costs charged in an indirect manner to a function are
no less a cost of that function than a cost direct charged to that
function. It is inconsistent with the language of the regulation to
read this regulatory provision, as HCFA now does, to require that staff
time spent on administrative support be direct charged to a cost
objective reimbursable only at 50 percent.
The Manual provisions (sections 11275.23 and 11275.32) cited by HCFA
also pertain to limitations on enhanced FFP for certain activities that
would only be claimed as direct program costs. These provisions do not
address overhead costs associated with the direct program costs in
issue. Rather, section 11275.30 is the only section of the SMM that
addresses different rates of FFP for different kinds of overhead costs.
C. Section 11275.30 of the SMM Does Not Preclude Enhanced
Reimbursement for DMS Administrative Support Personnel
Overhead Costs.
While HCFA intended its policy in SMM section 11275.30 (which provides
for enhanced reimbursement of only "direct overhead costs resulting from
the operation or development of an MMIS") to modify its policy in the
Action Transmittal 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 central services
costs allocated through a cost allocation plan. In fact, HCFA explained
that it implemented the SMM provision to disallow costs for statewide
and department- wide indirect costs, but to allow indirect costs of a
state's Medicaid agency unless they were the kind of central services
costs that are traditionally allocated through a statewide and
department-wide cost allocation plan and are expressly described in
section 11275.30 (that is, personnel staff, budget staff, legal staff,
or Commissioner's office, assigned to the MMIS cost center through the
State agency's CAP). See New York State Dept. of Social Services, DAB
No. 1023 (1989); accord, Georgia Dept. of Medical Assistance, DAB No.
1055 (1989). Thus, HCFA's disallowance of these overhead costs is
inconsistent with the policy in section 11275.30. Therefore, in the
absence of any notice to the State of HCFA's change in policy, we
conclude there is no basis for denying the enhanced 75 percent rate for
these overhead costs, and reverse the disallowance for DMS overhead
costs for general support activities.
III. Conclusion
For the reasons set forth above, we reverse and uphold in part HCFA's
disallowance with regard to the fiscal agent costs of approximately
$1,137,550, subject to further adjustment according to our discussion
above, and reverse the disallowance for DMS overhead costs of $334,068.
If HCFA does not accept the fiscal agent proposed allocation of the
contract price, and a further dispute arises, the parties may return to
the Board. 10/
_____________________________ Cecilia Sparks
Ford
_____________________________ Donald F.
Garrett
_____________________________ Judith A.
Ballard Presiding Board Member
1. HCFA originally disallowed $2,526,911 for the period October 1,
1986 through March 31, 1988 (Docket No. 89-114); $1,578,124 for the
period April 1, 1988 through March 31, 1989 (Docket No. 89-168);
$518,814 for the period April 1, 1989 through June 30, 1989 (Docket No.
89-236); $537,209 for the period July 1, 1989 through September 30, 1989
(Docket No 90-26); and $667,994 for the period October 1, 1989 through
December 31, 1989 (Docket No. 90-79).
2. The State withdrew its appeal of statewide and department-wide
indirect costs subject to HCFA's agreement to withdraw its disallowance
of these Oklahoma indirect costs if New Jersey ultimately prevails on
its court appeals of New Jersey Dept. of Human Services, DAB No. 1071
(1989). As for the in-house personnel costs, the parties reached
agreement with respect to a method for allocating 90 percent of the
costs originally in dispute. Thus, the Board dismissed without
prejudice the appeals of those in-house personnel costs. Only the
remaining approximately 10 percent of in-house personnel costs related
to general support activities of DMS are considered here.
3. On December 18, 1986, section 433.111 was amended. 51 Fed. Reg.
45321. The amended section now refers to a definition of "operation"
at
45 C.F.R. 95.605, which applies to automated data processing in other
programs as well as Medicaid, but which is substantively the same as the
definition quoted here.
4. After the Board issued a Preliminary Analysis, HCFA determined
that a majority of the State's payments to the fiscal agent would
qualify for enhanced FFP. HCFA indicated that while there was no
clear-cut basis for identifying unallowable costs within the fiscal
agent payments, HCFA's experience with other states in Region VI showed
that the percentage allocation of fiscal agent payments to the non-MMIS
qualifying reimbursement rate ranges from 20 to 30 percent. HCFA
therefore reduced the amount of the disallowance for fiscal agent
payments by 70 percent, from $3,791,831 to $1,137,550. HCFA response to
State's comments, p.22, and Ex. DD.
5. The contract also has a ceiling on the volume of claims to be
reimbursed because State law prohibits an open-ended contract. The
State presented unrebutted evidence that this did not alter the fixed
price nature of the contract.
6. The State may, coincidentally, incur less costs itself for
personnel, space, central support services, etc., by reason of
contracting out the MMIS functions rather than performing those
functions itself. But there is not necessarily a direct relationship
between this cost avoidance by the State and what the fiscal agent
charges for its services.
7. In Georgia Dept. of Medical Services, DAB No. 1055 (1989), the
Board sustained a disallowance of fiscal agent home office expenses at
the 75 percent rate. In Georgia, the State merely argued that this
issue had not been considered by the Board in New York Dept. of Social
Services, DAB No. 1023 (1989). Georgia provided no further information,
argument, or support for its challenge to the disallowance. Therefore,
the Board sustained the disallowance on the basis of the general
validity of section 11275.30 (as revised in Revision 8). The Board did
not consider the issue of fiscal agent overhead costs in light of the
nature of a fixed price contract, nor discuss section 11275.31 of the
SMM.
8. The State administered its survey to 65 DMS staff members who,
the State said, held the positions to which the HCFA reviewers had
assigned MMIS percentages. The State excluded from the survey DMS staff
which the State felt either devoted no time to MMIS operational
functions or staff that the HCFA reviewers agreed were full time MMIS
staff. State Ex. 14.
9. The State provided, as an example, the fact that while
distribution of mail to DMS is a department-wide central service, the
distribution of mail within DMS is an in-house support function.
10. HCFA pointed out that the State's request for proposal for the
fiscal agent contract required that the fiscal agent records be open to
State and federal audit. HCFA Ex. BB; see 45 C.F.R. 74.161; OMB Circular
A-102, Att. O. This would authorize HCFA to examine the fiscal agent's
records if HCFA questions the reasonableness of the price charged or the
fairness of the allocation of the price, but any such examination should
be consistent with our discussion