DEPARTMENTAL APPEALS BOARD

UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES

REPLY brief of APPELLANT

ILLINOIS department of PUBLIC AID

July 23, 2004

INTRODUCTION *

ARGUMENT 2

I. The Codes For Which Illinois Allows Enhanced SPMP Claiming Properly Cover Only Valid Medicaid Administrative Activities. 2

II. CMS’s "Regulatory Experience" Fails To Prove That The Higher Match Rate Is Never Appropriate For SPMP In Schools. 9

III. CMS’s Enactment Of The Prohibition On Enhanced SPMP Claiming In Schools Violates Federal Law. 15

A. CMS's Blanket Prohibition On Enhanced Funding Is Contrary To The Agency's Regulations.. 15

B. Administrative Convenience Does Not Justify The Agency's Blanket Prohibition On Enhanced SPMP Claiming In Schools. 20

CONCLUSION 21

Brown v. Harris, 491 F. Supp. 845 (N.D. Cal. 1980) 21

Chief Probation Officers of California v. Shalala, 118 F.3d 1327 (9th Cir. 1997) 20

Christensen v. Harris County, 529 U.S. 576 (2000) 9

Friedrich v. Secretary of Health & Human Services, 894 F.2d 829 (6th Cir. 1990) 19

Linoz v. Heckler, 800 F.2d 871 (9th Cir. 1986) 17

Manhattan General Equipment Company v. Commissioner of Internal Revenue, 297 U.S. 129 (1936) 21

Montana Power Company v. Environmental Protection Agency, 608 F.2d 334 (9th Cir. 1979) 20

Ohio Department of Human Services v. United States Department of Health & Human Services, 862 F.2d 1228 (6th Cir. 1988) 17, 20

Ohio Valley Environmental Coalition v. Horinko, 279 F. Supp. 2d 732 (S.D.W.Va. 2003) 20, 21

Samuels v. District of Columbia, 669 F. Supp. 1133 (D.D.C. 1987) 21

Shalala v. Guernsey Memorial Hospital, 514 U.S. 87 (1995) 18, 19

 

42 U.S.C. § 1395y 19

42 U.S.C. § 1396b 2, 12

 

 

Alaska Department of Health and Social Services, DAB No. 1919 (2004) 9

Maryland Department of Health & Mental Hygiene Preliminary Analysis, DAB Docket No. 88-192 (1989) 4, 8, 9

Nebraska Health and Human Services System, DAB No. 1882 (2003) 9

New York State Department of Social Services, DAB No. 1102 (1989) 20

Oklahoma Health Care Authority, DAB No. 1924 (2004) 9

Pennsylvania Department of Public Welfare, DAB No. 1634 (1997) 19, 20

West Virginia Department of Health and Human Resources, DAB No. 1316 (1992) 3, 6, 7, 14

 

50 Fed. Reg. 46,652 (Nov. 12, 1985) 8, 16

42 C.F.R. § 432.1 15

42 C.F.R. § 432.50 2, 15, 16, 19, 21

42 C.F.R. § 433.15 15, 16, 19, 21

 

CMS’s Response Brief attempts to convince the Board that its disallowances were reasonable by relying on unsupported assertions and misinterpretations of federal law, without addressing the real issue of whether the Illinois Department of Public Aid’s ("IDPA") school-based Medicaid administrative claiming program for Skilled Professional Medical Personnel ("SPMP") complies with the federal statute and regulations and whether the agency’s announcement that the higher federal match rate is prohibited for SPMP in schools is permissible. Illinois carefully crafted its claiming codes to capture only allowable SPMP administrative activities, as set forth in the Medicaid regulations. And CMS’s so-called "regulatory experience" does not prove otherwise. The experience that CMS cites fails to provide any factual or reasoned basis for its determination that the use of SPMP professional skills and training is never appropriate in the context of schools.

Yet, CMS essentially asserts that it was entitled to make that decision because the Medicaid statute leaves the determination as to the higher match rate to the discretion of the Secretary of Health and Human Services. But whatever discretion the statute provides to the Secretary cannot sustain the policy decision on which the disallowances are based. If the agency, employing the Secretary’s discretion, wanted to enact a blanket prohibition on enhanced SPMP claiming in schools, it was required to use the Administrative Procedure Act’s notice and comment rulemaking procedures. Furthermore, it could not simply create a new rule for the sake of administrative convenience when that rule contradicts existing regulations. For all of these reasons, CMS’s disallowances should be reversed in their entirety.

Illinois has carefully designed its school-based SPMP claims to comply with the applicable federal statute and regulations. Section 1903(a)(2) of the Social Security Act provides for 75 percent federal financial participation ("FFP") for the activities of SPMP as found necessary by the Secretary for proper and efficient plan administration. See Social Security Act § 1903(a)(2), 42 U.S.C. § 1396b(a)(2)(A). The Medicaid regulations, upon which Illinois’ school-based administrative claiming program is based, reflect the Secretary’s determination as to when the enhanced rate is needed to promote proper and efficient administration of State plans.

Consistent with the regulations, Illinois limits SPMP claims to only those staff who meet the professional education and training requirements of the regulations. See 42 C.F.R. § 432.50(d)(1)(ii) and Ex. 6, Guide at 13. School-based SPMP must also provide specific documentation as to why their professional training and skills are being used to claim at the enhanced match rate. See Ex. 6, Guide at 9. Moreover, Illinois does not permit SPMP to claim at the higher match rate if the activity that the SPMP is performing could reasonably be delegated to a non-SPMP. See 42 C.F.R. § 432.50(d)(1)(iii) and e.g. Ex. 6, Guide at 23. Illinois’ Guide also instructs that activities "that are integral functions of a direct service" must be reported by SPMP as non-claimable activities. See 42 C.F.R. § 432.50(d)(1)(i) and Ex. 6, Guide at 19, 23, 26, and 28. These, among other measures explained in IDPA’s opening brief, were designed to ensure that school-based SPMP in Illinois are only claiming the enhanced match rate for activities that comply with the federal regulations. See IDPA Opening Brief at 13-18.

More importantly, the three activity codes for which Illinois allows SPMP to claim at the enhanced rate are proper Medicaid administrative activities for which SPMP skills are necessary. Code C2 focuses on targeted outreach to "identify medically at-risk children" who are "most in need of medical services," but may not be receiving them. Ex. 6, Guide at 18. CMS asserts that SPMP skills are not necessary for targeted outreach under Code C2 because Medicaid eligibility does not depend on a child’s medical condition, but on financial need. CMS Brief at 46. IDPA does not dispute that Medicaid is a needs-based eligibility program, but this does not mean that the medical skills and training of SPMP are not useful in finding children most in need of medical services who might otherwise not enroll.

The types of general outreach activities that can be conducted by non-SPMP, such as distributing information about the Medicaid program and helping complete eligibility forms, are not always effective in capturing those children who most need medical services. Thus, IDPA has created Code C2 to allow SPMP to use their professional skills to conduct targeted outreach activities to identify medically-needy children who might otherwise fall through the cracks. Through its targeted outreach efforts, Illinois is engaging in more effective and efficient State plan administration.

To illustrate, Code C2 allows a physical therapist to develop a medical protocol based on a checklist of symptoms and behaviors, such as deficiency in mobility, gait, muscle strength or posture, that indicates that a child is in need of physical therapy. See Ex. 6, Guide at 18. Such a child may have been missed by IDPA’s general outreach efforts, but when the medical protocol developed by the physical therapist is used, the child will be identified and targeted for Medicaid enrollment. And CMS has recognized that states’ efforts to seek out Medicaid eligibles and inform them of available services are allowable administrative costs. See Maryland Dep’t of Health & Mental Hygiene Preliminary Analysis, DAB Docket No. 88-192 at 18 (1989) (not published because agency disallowance withdrawn).

Despite CMS’s insistence to the contrary, the case management activities set forth in Codes E2 and F2 are also properly claimable as Medicaid administrative activities and are not direct services in disguise. The State Medicaid Manual defines case management as "an activity which assists individuals eligible for Medicaid in gaining and coordinating access to necessary care and services appropriate to the needs of an individual." State Medicaid Manual § 4302(A). Code E2 addresses case management for non-IEP/IFSP-related medical services and is used for SPMP time spent on "making referrals for, coordinating, or monitoring the delivery of Medicaid/Kidcare services." Ex. 6, Guide at 23. Code F2 captures similar case management activities, but for IEP/IFSP-related services. See id. at 26-27. The State Medicaid Manual also specifies that FFP for case management activities may be claimed as administration: "Case management may be provided as a function necessary for the proper and efficient operation of the Medicaid State plan, as provided in §1903(a) of the Act." Id. at § 4302(A)(2). Moreover, the Manual provides that the payment rate for case management as administration is at "the 75 percent FFP rate for skilled professional medical personnel, when the criteria in 42 CFR 432.50 are met." Id. at § 4302(A)(2).

Although CMS contends that case management activities must be provided as services, agency guidance, including the Technical Assistance Guide cited by CMS, unequivocally and repeatedly states that case management may be claimed as either services or administration. See id. at § 4302.2(G) ("There are certain case management activities which may appropriately be eligible for FFP at either the administrative or service match rate. Examples of case management activities that may be claimed at either the administrative or the service match rate entail providing assistance to individuals to gain access to services listed in the State plan, including medical care and transportation. In cases where an activity may qualify as either a Medicaid service or an administrative activity, [the state] may classify the function in either category." State Medicaid Manual § 4302.2(G). See also Maryland, DAB Docket No. 88-192 at 9 (the State Medicaid Manual provides that case management activities may be claimed as either a direct medical service or "as a routine administrative function.") (emphasis in original); CMS Ex. 7, Medicaid and School Health: A Technical Assistance Guide at 59 ("FFP for case management services may come from either administrative matching funds, or from medical assistance matching funds, depending on how the case management service is characterized. In some instances, the case management is appropriately reimbursed from either source. In cases where an activity may qualify as either a medical service or an administrative activity, states have the latitude to classify the function in either category.").

Not only is agency guidance on case management as an administrative cost clear, the Board has explicitly rejected CMS’s argument in the instant case. In West Virginia Dep’t of Health and Human Resources, DAB No. 1316 (1992), CMS (then the Health Care Financing Administration or "HCFA") maintained that certain activities provided by social workers to clients were direct services and must therefore be claimed as case management services. CMS argued "that the scope of case management activities allowable as administrative costs may be restricted to those types of activities which could not be direct services," but the Board found that the agency’s position did not "accurately reflect the written policy expressed in the applicable State Medicaid Manual." Id. Thus, the Board held, "the State is not precluded from claiming case management services at the 50% administrative rate merely because, with different documentation, the services could have been claimed at the FMAP rate." Id.

CMS’s more specific claim that in the EPSDT context case management may only be provided as a service is also incorrect. See CMS Brief at 9. While case management may be offered as a service under the EPSDT program, it is not a requirement. Rather, even EPSDT case management may be provided as administration, as clearly explained in the State Medicaid Manual:

While case management is required under the expanded EPSDT program when the need for the activity is found medically necessary, this does not mean § 1915(g) targeted case management services. Therefore, when the need for case management activities is found to be medically necessary, the State has several options to pursue: [including]… Administration.-- Case management services may be provided to EPSDT participants by the Medicaid agency…Administrative case management activities must be found necessary for the proper and efficient administration of the State plan and therefore must be limited to those activities necessary for the proper and efficient administration of Medicaid covered services. FFP is available at the administrative rate. State Medicaid Manual § 4302.2(H).

Finally, while CMS claims that IDPA conflates case management activities that are properly administrative with those that are services, it is CMS that is confused about these activities. See CMS Brief at 51, n. 26. IDPA’s opening brief cited several examples found in the preamble to the SPMP regulations as proper SPMP administrative costs at the enhanced rate and demonstrated how these examples are closely analogous to case management activities captured by its Codes E2 and F2. See IDPA Opening Brief at 16-17. CMS picks out a few of these examples and twists their meaning. For instance, CMS claims that "[a]ssessing, through case management activities, the necessity for and adequacy of medical care and services required by individual recipients," focuses only on "reviewing treatment that has already been prescribed, and for the limited purpose of ensuring efficient use of Medicaid’s resources." CMS Brief at 51, n. 26. Yet, CMS provides no basis for asserting that this example has as its sole purpose to ensure efficient use of Medicaid resources. In fact, it is not this example in the preamble, but the one directly above it, which is "[a]sessing the necessity for and adequacy of medical care and services provided, as in utilization review" that speaks to the use of Medicaid resources. 50 Fed. Reg. 46,652, 46, 656 (Nov. 12, 1985).

Then CMS asserts that Codes E2 and F2 are not comparable to the former example in the preamble, which it says focuses on treatment that has already been prescribed, but two sentences later it acknowledges that Codes E2 and F2 capture time that SPMP spend working "to ensure that a child has received the necessary medical services for a health problem." CMS Brief at 51, n. 26 (citing IDPA Brief at 16-17) (emphasis supplied). CMS also maintains that the preamble’s example of acting as a liaison with service providers only applies in a general sense and not when a SPMP is discussing the status of a particular child. This example, however, contains no such qualification. See 50 Fed. Reg. at 46, 656. See also CMS Ex. 6, Title XIX Financial Management Review Guide: #1 Skilled Professional Medical Personnel at 11 (citing "[a]cting as a liaison on the medical aspects of the program with providers of services and other agencies that provide medical care" as an example of SPMP administrative activities entitled to the higher match rate).

In light of the above, CMS’s contention that IDPA must claim Code E2 and F2 case management activities as services, rather than administration, lacks any legitimate basis. As the Board has found, "locating, coordinating, and monitoring necessary and appropriate services" is part of the definition of case management activities that "have traditionally been performed in the administration of Medicaid state plans." Maryland, DAB Docket No. 88-192 at 13. Since Codes E2 and F2 capture precisely these sorts of activities, they are proper Medicaid administrative expenses that should be reimbursed at the enhanced match rate because they employ SPMP skills.

CMS argues that the Board must defer to its interpretation of the statute and regulations and its "regulatory experience." While the Board may defer to CMS’s judgment on whether certain costs are necessary for the efficient administration of a State plan, it need not do so when the agency applies "general principles in a manner inconsistent with the statute, regulations, and its own written policies" and its "findings on the particular activities appear, in general, conclusory." Maryland, DAB Docket No. 88-192 at 10. As IDPA established in its opening brief and will explain in further detail in Section III, CMS’s new prohibition on enhanced SPMP claiming in schools violates the statute and regulations. Moreover, the Board owes no deference to the agency’s "regulatory experience" because its conclusory findings have no basis in fact and fail to prove that the enhanced match rate for SPMP is never appropriate in school settings.

First, CMS relies on the prohibition by some regional offices of enhanced school-based SPMP claims. CMS Brief at 14, 28. But simply because some regional offices did not allow SPMP in schools to claim the higher match rate does not mean that school-based SPMP were not engaged in administrative activities that required them to use their professional skills. It only shows that states in these regions were not being reimbursed at the higher rate.

On a related note, CMS claims that "some states (for example Michigan) agreed that SPMP claims were unnecessary in the school setting. CMS Ex. 9, Declaration of Richard Strauss, ¶6. While CMS generically refers to "some states," the only example it offers is Michigan. As IDPA has already explained in its opening brief, Michigan agreed to refrain from enhanced SPMP claiming as a part of a global settlement of a large disallowance raising multiple issues. See IDPA Opening Brief at 21 and Ex. 10, Michigan School Based Services Settlement Agreement (Oct. 15, 2003). But the settlement agreement did not require the State to cease using SPMP for activities they were qualified to perform.

Second, CMS maintains that its Medicaid Claiming Guide "reveals" that the administrative activities performed in schools do not require the use of SPMP professional skills and training. CMS Brief at 27. As IDPA pointed out in its opening brief, this revelation is not grounded in any fact. See IDPA Opening Brief at 19, 22. During discovery, IDPA sought to learn the factual basis for CMS’s decision that SPMP skills are not needed in school settings, but CMS only offered general assertions not grounded in fact. See id. Even now, CMS continues to speak in generalizations, but provides no facts in support of its claim.

CMS’s next contention that all of the administrative activities in which SPMP are involved are conducted in conjunction with direct services and should thus be treated as a part of these direct services is also incorrect. The agency’s position largely turns on its argument that case management activities must be claimed as services, but as Illinois has fully explained in Section I, these activities may also properly be reimbursed as administrative costs. See CMS Brief at 23, 28 and supra Section I. Moreover, case management cannot always be linked to the direct provision of services because often case management activities occur as follow-up, after the services have already been rendered by a service provider distinct from the SPMP involved in the case management. This would be the case, for instance, when a SPMP monitors and provides "follow-up contact to ensure that a child has received the prescribed medical service for a health problem" or explains "to other practitioners and teachers results of diagnoses or other EPSDT screens." Ex. 6, Guide at 23.

Occasionally case management activities also take place before any services are rendered, again by a SPMP who is not the same as the one providing the service. For instance, a SPMP may prepare "discipline-specific medical information that may be required in advance of referrals or evaluations, including observation, interviews, and health records specific to potential EPSDT and Medicaid/KidCare service delivery participation." Id. Likewise, outreach activities occur prior to the provision of any services, to find children who are in need of Medicaid, and thus they are not a part and parcel of direct services. Id. at 18. Moreover, contrary to CMS’s suggestion about the large number of service providers in schools, most of the direct services that students receive through case management efforts are provided outside of the schools, rather than onsite. As Illinois’ Guide illustrates, SPMP may be involved in "[c]oordinating and consulting with…Medicaid providers at a hospital or other health care agency to discuss the child’s health problems that may require clinical intervention or therapy needs." Id. at 26.

Furthermore, CMS’s argument that SPMP must be engaged in direct services any time they are employing their SPMP skills proves too much and would effectively eliminate all enhanced SPMP administrative claiming, even outside of schools. SPMP by definition possess professional medical skills and training. But that does not mean that they are involved in the direct provision of services whenever they are using their skills. As Congress recognized in drafting the Medicaid statute, there are some circumstances when SPMP would be using their skills for administrative activities. And in those circumstances, SPMP are entitled to the higher match rate. See Social Security Act § 1903(a)(2), 42 U.S.C. § 1396b(a)(2)(A) and IDPA Opening Brief at 23.

Finally, CMS relies on the Government Accounting Office ("GAO") reports on school-based administrative claiming as a rationale for prohibiting all enhanced SPMP claiming in schools without understanding the reasons that Medicaid administrative costs might be higher in schools than in other parts of the State, such as state Medicaid agencies, particularly in Illinois. Illinois has recognized that schools are uniquely situated in identifying children in need of medical services. Thus, in creating its new school-based claiming Guide, it decided to undertake extensive efforts to target medically-needy children in schools and then stay actively involved in the provision of their health care through case management and other activities. Engaging in targeted outreach to locate medically-needed children is a major endeavor that requires much more effort and professional time on the part of a SPMP, than for instance, a SPMP in a state agency monitoring Medicaid utilization. In light of the foregoing, it is inappropriate for CMS to bar payment at the enhanced rate when SPMP are engaging in legitimate activities that require the use of their professional skills in furtherance of a core statutory goal of extending coverage to all needy children.

CMS also offers statistics in an effort to convince the Board that its disallowances are valid, but CMS’s figures do not tell the whole story. CMS argues that Illinois’ costs are unreasonable because SPMP administrative costs are much higher in schools than in other Medicaid settings. CMS Brief at 52-53. While SPMP in other parts of the Medicaid program often remain isolated from Medicaid recipients, school-based SPMP serve as the primary point of contact with children needing medical care. Thus, they are more actively involved in administration than SPMP in state Medicaid agencies, for example, because they participate in activities such as identifying medically-needy children, assisting them in gaining access to services, and providing case management to ensure that their medical care is being properly handled. This individualized assistance requires more administrative time on the part of school-based SPMP than of their counterparts in other Medicaid agencies.

Also flawed is CMS’s argument that Illinois’ school-based Medicaid administrative claims must be unreasonable because the schools engaged in more administrative activities than services, particularly when compared to the rest of the Medicaid program. CMS Brief at 52-53. As IDPA has already explained above, it is logical that administrative costs are higher than direct service costs in schools because much of the provision of services occurs outside the school setting.

In analogous circumstances, the Board has rejected agency efforts to support a disallowance based on numerical comparisons that the agency maintained showed that the State’s claims were unreasonable. See West Virginia, DAB No. 1316. In West Virginia, the agency pointed out that after the State began claiming for case management and implemented a new time study methodology, the "percentage of the State’s social worker time charged to Medicaid ‘administrative activities’ quadrupled," going from between 6 to 12 percent to between 42 to 46 percent. "The Agency maintained that it ‘fairly strains credulity’ that the social workers would spend almost half of their time on one program." Id. The Board remained unconvinced, finding that "[w]hile the increase in the percentage of time attributed to the Medicaid program by the social workers under [the new time study methodology] could legitimately lead the Agency to question the time study, the increase is not in and of itself an indication that the time attributed is incorrect." Id. Here too, while SPMP costs in the school setting are undoubtedly significant, that does not mean that the time claimed was unreasonable or involved improper cost-shifting on the part of the schools and the State.

Moreover, as the Board posited in West Virginia, the increase in the State’s claims "could simply indicate that the State was underclaiming under the previous method." Id. In Illinois’ case as well, prior to the implementation of its school-based claiming Guide, the State lacked a comprehensive system to identify all eligible SPMP costs. In West Virginia, when deciding that the State had engaged in no improper cost claiming, the Board considered it relevant that the time study "instructions clearly direct the social workers to charge their activities to the case management codes only if the client is Medicaid eligible, the client is also a member of a target population…, and the activity qualifies under the specified definition of case management." Id. Likewise, Illinois’ Guide contains detailed instructions on which activities may be claimed at the higher rate and specifically provides that the enhanced match rate is not available to SPMP if a non-SPMP could conduct the same activity. See Ex. 6, Guide at 18, 19, 23, 26 and IDPA Opening Brief at 8-9.

In sum, a close analysis of CMS’s "regulatory experience" demonstrates that CMS lacked a reasoned basis for its decision to categorically deny enhanced SPMP claiming in school settings. As such, the disallowances, which are based solely on that decision, should be reversed in their entirety.

A. CMS’s Blanket Prohibition On Enhanced Funding Is Contrary To The Agency’s Regulations.

In arguing that its new prohibition on enhanced SPMP claiming in schools is legal, CMS points out that the Medicaid statute makes enhanced funding contingent on the Secretary’s determination that these costs are necessary and proper for efficient state plan administration. CMS Brief at 33. While Illinois does not dispute that the statute gives some discretion as to enhanced SPMP claiming, the Secretary has already exercised that discretion in the agency’s SPMP regulations. See 42 C.F.R. § 432.1 et. seq. They set forth the conditions for receiving 75 percent FFP for the administrative activities of SPMP. See 42 C.F.R. §§432.50(b)(1) and 433.15(a)(5). But the regulations contain no qualification that would categorically preclude such enhanced funding in school settings. Before such a policy could be lawfully adopted, the Secretary would have to follow the same rule-making procedures that were used when the SPMP regulations were enacted. See IDPA Opening Brief at 25-27 and the cases cited therein. These procedures, under the Administrative Procedure Act ("APA"), require notice and comment rulemaking. The failure to utilize such procedures in connection with the policy pronouncement on which the agency relies renders that policy of no effect.

CMS puts forth a semantic argument as to why its new pronouncement is valid — the regulations only set "limitations" or minimal requirements for SPMP and CMS is free to add to those requirements as it sees fit through interpretation of the regulations. See CMS Brief at 35-36. CMS asserts that its letter "does not create ‘new law’[,] add new legal requirements that are in conflict with the statute and existing regulations, … or change any of the specific limitations set forth in 42 C.F.R. 432.50(d)." Id. at 37. It further claims that the letter "does not conflict with or modify any of the provisions of the existing regulations." Id. at 38.

The Board should reject CMS’s argument. Contrary to the agency’s contention, it is clearly adding new conflicting legal requirements to the existing regulations. These regulations specify that the 75 percent match rate is available for specified activities of SPMP. See 42 C.F.R. §§432.50(b)(1) and 433.15(a)(5). CMS’s new pronouncement modifies the regulations by dictating that the enhanced match rate is not available for SPMP in schools. CMS is adding a new qualification to the regulations that previously did not exist, and this qualification conflicts with the regulations’ broad mandate to provide enhanced federal match for SPMP administrative activities.

A rule that adds a new requirement to a set of existing requirements is substantive, not interpretative, and requires the use of the APA’s notice and comment procedures before it can be validly enacted. See Ohio Dep’t of Human Services v. United States Dep’t of Health & Human Services, 862 F.2d 1228, 1235 (6th Cir. 1988). The facts of Ohio are closely analogous to the instant case. There, HHS enacted a regulation in 1974 regarding the use of Medicaid funds for the maintenance of noninstitutionalized spouses of institutionalized Medicaid recipients, and in 1978, it amended this regulation without using notice and comment rulemaking. This amendment placed a ceiling on the amount of funds that could be used for the maintenance of noninstitutionalized spouses of institutionalized Medicaid recipients. After the agency initially approved Ohio’s State Plan that ignored the ceiling in 1974 and then tried to impose a ceiling on the State based on its 1978 regulation, the State brought suit alleging that the 1978 amendment was a substantive rule that required the agency to follow the APA’s notice and comment procedures. Id. at 1229.

The Sixth Circuit Court of Appeals agreed, finding that: "The 1978 rule with which we are concerned in the case at bar did not ‘remind’ states of a pre-existing regulatory limit on the amount to be applied for maintenance of a non-institutionalized spouse. The rule imposed a ceiling ex proprio vigore. The rule was mandatory, not advisory, and the mandate was a new one." Id. at 1234. Thus, the court held: "If, as we have concluded, the ceiling was not implicit in the regulation from the beginning, it could not be imposed later on without compliance with the notice and comment requirements of the Administrative Procedure Act." Id. at 1236. See also Linoz v. Heckler, 800 F.2d 871, 877 (9th Cir. 1986) (concluding that an HHS provision excluding payment for ambulance services from one hospital to another solely to obtain the services of a specialty physician was a substantive rule subject to APA requirements where "instead of simply clarifying a pre-existing regulation, [it] carved-out a per se exception"). Likewise, in the instant case, CMS imposed a new mandate on states — a per se exclusion of the enhanced match rate for SPMP in schools — and this mandate was not implicit in the existing regulations. In fact, until the letter was issued, as in Ohio, CMS routinely paid for such claims. See Ex. 2, Medicaid and School Health: A Technical Assistance Guide, Aug. 1997, at 52. A policy pronouncement that makes impermissible what had always been permitted previously under the applicable regulation cannot be passed off as a mere "interpretation" of that regulation.

Furthermore, all of the cases on which CMS relies to support its contention that its letter announcing the prohibition of enhanced SPMP claiming in schools was properly interpretive are easily distinguishable from the instant case. In none of the cases cited by CMS did an agency issue a formal regulation (i.e. a legislative or substantive rule), and then attempt to alter that regulation by making an informal pronouncement, as CMS did with the letter at issue here. And rather than proving that notice and comment rulemaking was not needed, the cases cited by CMS demonstrate that in this case, the change the agency seeks to make can only be done through the use of the APA’s rulemaking procedures.

Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87 (1995), relied on by CMS, in fact supports the State’s position. Guernsey dealt with Medicare reimbursement calculations for defeasance losses arising from the reissuance of certain bonds. Id. at 90-92. The regulation on which the hospital relied did not address the specific issue dealt with in the agency’s informal guidance in the Provider Reimbursement Manual ("PRM") § 233. CMS Brief at 38, citing Guernsey, 514 U.S. at 96. The Court concluded that "[b]ecause the Secretary’s regulations do not bind her to make Medicare reimbursements in accordance with GAAP, her determination in PRM § 233 to depart from GAAP by requiring bond defeasance losses to be amortized does not amount to a substantive change to the regulations." Id. at 101. But it was at pains to say that "[w]e can agree that APA rulemaking would still be required if PRM § 233 adopted a new position inconsistent with any of the Secretary’s existing regulations." Id. at 100. It is this latter aspect of the Court’s opinion in Guernsey that governs the present case.

Apart from its contention that CMS’s new guidance was merely interpretive, the agency’s only basis for not pursuing the APA’s procedures is that notice and comment rulemaking is not required when "the policy being amended was not itself embodied in a formal rule or regulation." CMS Brief at 39 (citing Pennsylvania Dep’t of Public Welfare, DAB No. 1634 (1997)). CMS then claims that its policy of paying the higher federal match rate for SPMP "was never codified in any regulation or rule having the force of law." Id. at 40. This assertion is wrong. CMS’s policy of paying the enhanced rate in any setting is codified in 42 C.F.R. § 432.50(b), which provides that "the rate [of FFP] is 75 percent" for SPMP. See also 42 C.F.R. § 433.15(a)(5) (the "75 percent" rate is available for "[c]ompensation and training of skilled professional medical personnel… if the criteria specified in § 432.50(c) and (d) are met"). CMS cites no cases upholding informal action to foreclose coverage that was historically provided under a formally adopted regulation.

CMS’s assertion that it is allowed to adopt a bright line rule for administrative convenience is fundamentally misconceived. CMS may not simply adopt a rigid rule prohibiting a whole category of activity — enhanced SPMP claiming in schools — when the regulations specifically permit that very activity with no qualifications as to where it must occur. Although, as CMS suggests, an agency may sometimes have discretion to chose a particular method of implementation over others in the interest of administrative efficiency, it cannot chose a methodology that violates federal law. See, e.g., Ohio Valley Envtl. Coalition v. Horinko, 279 F.Supp.2d 732, 748 (S.D.W.Va. 2003) ("The agency charged with implementing the statute is not free to evade the unambiguous directions of the law merely for administrative convenience.") (citing Brown v. Harris, 491 F. Supp. 845, 847 (N.D. Cal. 1980), citing in turn Manhattan Gen. Equip. Co. v. Comm’r of Internal Revenue, 297 U.S. 129, 134 (1936)) and Samuels v. Dist. of Columbia, 669 F. Supp. 1133, 1142 (D.D.C. 1987) ("Arguments of administrative convenience are an insufficient basis for violating clear federal requirements."). Here, however, CMS attempts to do just that by prohibiting the higher match rate for school-based SPMP in the face of federal regulations that unequivocally state that for SPMP, "the [FFP] rate is 75 percent." 42 C.F.R. § 432.50(b). See also 42 C.F.R. § 433.15(a)(5).

In furtherance of its administrative convenience argument, CMS also asserts that "there is no absolute requirement for case-by-case determinations." CMS Brief at 29. CMS, however, cannot create a bright line rule when the pertinent regulations specifically contemplate a case-by-case determination of whether the higher match rate is permissible. See 42 C.F.R. § 432.50(c)(1) (the enhanced SPMP rate only applies to "those portions of the individual’s working time that are spent carrying out duties for which the higher rate is authorized"). If CMS now wishes to change this, it must amend the regulations, rather than announcing a new "policy interpretation." Accordingly, the agency’s administrative convenience rationale for its blanket prohibition on 75 percent FFP for SPMP in schools fail to justify the disallowances, and they must therefore be reversed.

Based on the foregoing and on its Opening Brief, Appellant Illinois Department of Public Aid respectfully requests that the Board reverse CMS’s disallowances in their entirety.

Respectfully submitted,

Nancy Shalowitz

General Counsel

Illinois Department of Public Aid

201 South Grand Avenue East

Springfield, Illinois 62763-0002

 

_________________________________

Charles A. Miller

Priti Seksaria Agrawal

Covington & Burling

1201 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-2401

(202) 662-6000

Attorneys for Appellant

Illinois Department of Public Aid

 

July 23, 2004

I, Priti Seksaria Agrawal, hereby certify that on this date I caused a true and correct copy of the Reply Brief of Appellant Illinois Department of Public Aid to be served by United States first-class mail, postage prepaid, upon the following:

Ted K. Yasuda

Assistant Regional Counsel

Office of the General Counsel, Region V

U.S. Department of Health & Human Services

233 North Michigan Avenue, Suite 700

Chicago, Illinois 60601

 

Dated: July 23, 2004

_____________________________

Priti Seksaria Agrawal