June 7, 2004

INTRODUCTION.........................................................................................................................1

STATEMENT OF THE CASE.......................................................................................................2

I. Regulatory Background..................................................................................................2

A. Medicaid Administrative Costs In Schools………………………….…...2

B. The Individuals With Disabilities Education Act…………..……………..3

II. Factual Background........................................................................................................4

ARGUMENT.................................................................................................................................9

I. Outreach in Schools is a Permissible Medicaid Administrative Activity.......................9

II. The IDEA Does Not Justify the Disallowances............................................................14

A. Medicaid Must Pay for Certain Medical Aspects of IDEA Mandates ..................................................................................................14

B. CMS Failed to Examine the Nature of Codes C1 and C2 Activities Before Categorically Disallowing Them..................................................19

CONCLUSION............................................................................................................................24

FEDERAL CASES

Bowen v. Massachusetts, 487 U.S. 879 (1988)..................................................................19

Cedar Rapids Community School District v. Garret F., 526 U.S. 66 (1999)...................15

Commonwealth of Massachusetts v. Heckler, 616 F. Supp. 687 (D. Mass 1985).......19, 20

Commonwealth of Massachusetts v. Secretary of Health and Human Services, 816 F.2d 796 (1st. Cir. 1987)...........................................................................19, 20, 21

FEDERAL STATUTES

20 U.S.C. § 1400............................................................................................................3, 15

20 U.S.C. § 1401........................................................................................................3, 4, 15

20 U.S.C. § 1412............................................................................................3, 4, 16, 17, 24

20 U.S.C. § 1414........................................................................................................3, 4, 15

20 U.S.C. § 1436..................................................................................................................3

42 U.S.C. § 1396b......................................................................................................4, 9, 16

ADMINISTRATIVE DECISIONS

California Department of Health Services., DAB No. 1256 (1991).................................11

New York State Department of Social Services, DAB No. 1636 (1997).....................10, 12

Pennsylvania Department of Public Welfare, DAB No. 777 (1986).................................20

Tennessee Department of Health and Environment, DAB No. 921 (1987)......................20

Utah Department of Health, DAB No. 893 (1987)...........................................................20

REGULATORY MATERIALS

55 Fed. Reg. 6015 (Feb. 21, 1990)....................................................................................15

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57 Fed. Reg. 54,705 (Nov. 20, 1992).................................................................................21

34 C.F.R. § 300.142...........................................................................................................17

42 C.F.R. § 433.15.....................................................................................................2, 9, 12

42 C.F.R. § 441.13.............................................................................................................20

42 C.F.R. § 441.56.............................................................................................................11

LEGISLATIVE HISTORY

H.R. Conf. Rep. No. 100-661 (1988).................................................................................16

H.R. Rep. No. 105-95 (1997).............................................................................................17

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INTRODUCTION

In this appeal, the Illinois Department of Public Aid ("IDPA" or "the State") challenges three disallowances totaling $31,334,752 in federal financial participation taken by the Centers for Medicare and Medicaid Services ("CMS") for the costs of Medicaid administrative outreach activities performed in schools.¹ The rationale for CMS’s disallowances — that the existence of the Individuals with Disabilities in Education Act ("IDEA") renders any medical and Medicaid-focused administrative activity that identifies children who might also benefit from the services prescribed by the IDEA an impermissible Medicaid cost — has been rejected by the courts and Congress. Moreover, the State has carefully defined the activities in question here so as to distinguish between outreach performed for Medicaid and other outreach, in order to limit its claims to permissible Medicaid outreach. CMS has repeatedly stressed to the States that the very outreach activities that are now being disallowed are important and effective ways to identify Medicaid-eligible children so that they can receive the Medicaid-provided health care to which they are entitled and which they need. The disallowances should be reversed.

STATEMENT OF THE CASE

The States and the federal government share the costs of the States’ Medicaid programs. Depending on the Medicaid activity at issue, the federal and State share of the expenses varies. For administrative activities that support the Medicaid program or assist Medicaid program participants or potential participants, the States and the federal government each pay one-half of the expenses, unless an enhanced federal reimbursement rate applies. See Social Security Act § 1903(a), 42 U.S.C. § 1396b(a); 42 C.F.R. § 433.15.² Examples of such administrative activities include Medicaid outreach, eligibility intake, information and referral, and coordination and monitoring of health services. See Ex. 6 at 51, Medicaid and School Health: A Technical Assistance Guide (Aug. 1997) (hereinafter "Technical Assistance Guide").

Along with other public entities, schools and other Local Education Agencies ("LEAs") participate in the Medicaid program. "School health services play an important role in the health care of adolescents and children." Id. at 4. Moreover, LEAs serve as a useful forum in which to identify, enroll, and provide Medicaid services to eligible children. The Medicaid program pays for direct services to Medicaid enrolled children performed in schools by school personnel, so long as Medicaid requirements, including provider qualifications, are met. See id. at 15. LEAs also perform a variety of functions that are necessary for the efficient administration of the Medicaid program, and Medicaid reimburses a portion of these costs. See id. at 17-18. One important administrative activity in which LEAs engage is outreach to identify

children who would benefit from Medicaid and to link Medicaid-eligible children with the necessary services.

The Individuals with Disabilities Education Act

School-based Medicaid interplays with activities mandated by the Individuals with Disabilities Education Act. The IDEA guarantees disabled children "a free appropriate public education that emphasizes special education and related services designed to meet their unique needs." 20 U.S.C. § 1400(d)(1)(A). See also Individuals with Disabilities Education Act § 612(a)(1), 20 U.S.C. § 1412(a)(1) (to receive federal assistance, States must have policies and procedures in effect to give disabled children a free appropriate public education). As part of the IDEA, States, and thus LEAs, that receive federal financial assistance must engage in "Child Find" activities. See Individuals with Disabilities Education Act § 612(a)(3), 20 U.S.C. § 1412(a)(3). Child Find requires the State to identify, locate, and evaluate all children with disabilities who are in need of special education and related services. See id.

The IDEA also requires LEAs to develop an Individualized Education Program ("IEP") for disabled children that includes education and "related services."³ Individuals with Disabilities Education Act §§ 602(11), 614(d), 20 U.S.C. §§ 1401(11), 1414(d). An IEP is a comprehensive written report that details the current educational performance and future performance targets for the child, identifies the special education and related services necessary to foster learning, and lays out a comprehensive educational plan for the upcoming year. Individuals with Disabilities Education Act §614(d)(1)(A), 20 U.S.C. § 1414(d)(1)(A). The "related services" set forth in the IEP may include medical services. Individuals with

Disabilities Education Act § 602(22), 20 U.S.C. § 1401(22). Medicaid is responsible for the reimbursement of costs due to medical services provided to a Medicaid enrolled child pursuant to an IEP. See Social Security Act § 1903(c), 42 U.S.C. § 1396b(c); Individuals with Disabilities Education Act § 612(a)(12)(A)(i), 20 U.S.C. § 1412(a)(12)(A)(i).

Through Illinois’ School-Based Health Services Program, the State claims Medicaid funds to reimburse the costs of direct services to school children and administrative activities in support of its Medicaid services. In designing and implementing its school-based administrative claiming program, IDPA sought to work closely with CMS to create a claiming methodology that was acceptable to CMS. LEAs’ administrative claims would be based on time studies, in which participating school personnel⁴ would document all of their time during a particular period using activity codes that distinguish between Medicaid-claimable administrative activities and non-claimable activities. A LEA’s time study results would then be used in conjunction with the LEA’s cost data to generate an administrative claim. See generally Ex. 17, Illinois Guide for School Based Health Services Administrative Claiming (hereinafter "Illinois Guide" or "the Guide").

IDPA worked with CMS for several years developing the parameters of its school-based administrative claiming program and the contents of its written guidance to schools

about the program, particularly the descriptions of its activity codes. One issue that was the subject of significant discussions was outreach activities — i.e., those activities intended to seek out children who would most benefit from Medicaid-funded services. In October of 1999, CMS⁵ suggested several changes to Illinois’ school-based health services claiming methodology. See Ex. 10, Letter from Dorothy Burk Collins, Regional Administrator, HCFA, to Ann Patla, Director, IDPA (Oct. 21, 1999). Among these changes, CMS asked IDPA to re-write its activity code "C," the subject of this disallowance and pertaining to the identification and referral of children who would benefit from Medicaid-funded services, to "specifically describe any activities and functions which directly support the administration of the Medicaid program and delete those activities and functions which support IDEA." See id. at Enclosure 2-3. In an effort to accommodate CMS, IDPA revised its activity codes; these revisions included changes to Code C to make it more specific to the Medicaid and EPSDT programs. See Ex. 11, Letter from Ann Patla, Director, IDPA, to Dorothy Burk Collins, Regional Administrator, HCFA (Jan. 14, 2000), Exhibit II at 8-9.

Over the next several years, IDPA repeatedly revised its activity codes, including Code C, at CMS’s request. In April of 2000, CMS informed Illinois that it was "pleased with the direction [IDPA is] taking in the revision of the administrative claiming program" and asked Illinois to further revise its activity codes, including Code C, which it believed encompassed IDEA "Child Find" activities. See Ex. 12, Letter from Dorothy Burk Collins, Regional Administrator, HCFA, to Ann Patla, Director, IDPA (Apr. 28, 2000). Illinois again obliged CMS by making additional modifications to its Code C outreach activities and included

additional language to further clarify that only activities of a medical nature were reimbursed. See Ex. 14, Provider Notice #01-1 at 1 (Aug. 7, 2000).

When IDPA made further changes a year later in response to CMS’s requests, IDPA explained to CMS that it had "substantially revised the description of this activity in order to describe more clearly the targeted outreach function and its linkage to the Medicaid program." See Ex. 15, Letter from Lynn Handy, Deputy Director, IDPA, to Dave Brunelle, Accountant in Charge, CMS (Aug. 31, 2001). IDPA noted that as it had discussed in a meeting with CMS, "past experience of the Department clearly demonstrates that broad outreach efforts are not very effective and that by targeting those most in need of services we are much more likely to identify and enroll eligible children in the Medicaid program." Id. At the time, IDPA believed that it had satisfied all of CMS’s concerns. See id. ("As a result of the conference call, [I]DPA and CMS came to an agreement on the appropriateness of the targeted outreach activity (‘Identification and referral to access Medicaid’; code C) defined for use in time studies.").

CMS, however, sought further changes. In response to CMS’s request that IDPA "add to the general description that all Child Find and IEP development, including the medical aspects, … be reported as I-3⁶ activities," the State "further clarif[ied] the distinction between Child Find and Medicaid Outreach and … revise[d] examples in both Code C and Code I." Ex. 16, Letter from Lynn Handy, Deputy Director, IDPA, to Richard Strauss, Sina Mercado and David Brunelle, CMS (Feb. 6, 2002). Specifically, IDPA "more clearly differentiate[d] Medicaid Outreach vs. special education activities of Child Find and IEP development vs. case management." Id.

In August of 2002, IDPA sent CMS the final version of its written guidance to schools on its school-based administrative claiming program. See Ex. 19, Letter from Cheryl A. Harris, Associate Regional Administrator, CMS, to Barry S. Maram, Director, IDPA (March 6, 2003). This document was entitled the "Illinois Guide for School Based Health Services Administrative Claiming," dated August 2002. See Ex. 17, Illinois Guide.

The Illinois Guide sets forth four general categories of activity codes: (I) "Outreach activities, performed to inform and identify those in need of medical services who would benefit from the Medicaid/KidCare⁷ program;" (II) Supportive case management activities, which are "services for children enrolled in Medicaid/KidCare;" (III) General administration activities that include routine management functions such as attending school meetings; and (IV) Other daily school activities, including direct medical services and educational activities. See Ex. 17 at 15, 27, 28, Illinois Guide. Categories I, II, and III generally capture activities allowable as administrative costs, subject to certain discounting,⁸ while Category IV is not claimable as administration. Id. at 8-9.

Outreach activity codes C1 and C2 — the subject of the disallowance — are entitled "Identification and Referral to Access Medicaid/Kidcare." See Ex. 17 at 17-18, Illinois Guide. Both Codes C1 and C2 are intended to capture the time that school personnel participating in the time study spend "specifically targeting outreach efforts to inform and enroll children with medical needs." Id. at 18. Code C1 states that "[a]ll staff should use this activity code when actively identifying potentially at risk children in order to inform and assist the child

and their family to access Medicaid/Kidcare." Id. Code C2 instructs SPMP to "use this activity code when utilizing their medical expertise to identify medically at risk children, in order to direct outreach efforts to those who are most in need of medical services." Id. The Illinois Guide also includes a Code C3, a non-claimable code, with the heading "Identification and Referral to Access non-Medicaid/Kidcare Programs." Id. at 19. All school personnel must use this activity code when "identifying and referring children to non-medical educational, social, or other programs." Id.

Five months after submitting the final version of its Guide on school-based administrative claiming, CMS finally approved it. Ex. 19, Letter from Harris to Maram (March 6, 2003). CMS, however, did not approve Codes C1 and C2. Id. It maintained that the Codes C1 and C2 definitions "generally overlap" with the IDEA’s Child Find requirements to identify, locate, and evaluate all children with disabilities and that the main purpose of these activities are for Child Find. Id. CMS recognized that the State’s intent was to distinguish medical outreach from educational "Child Find activities," but ultimately concluded that Medicaid federal financial participation ("FFP") is not available for activities that are "required by and allocable to Child Find activities." Id. CMS did not identify any particular examples or words in Codes C1 and C2 that were objectionable, other than this "general[]" overlap with Child Find.

Having carefully drafted its outreach Codes C1 and C2 as instructed by CMS to capture only claimable Medicaid administrative activities, IDPA continued claiming for Code C1 and C2 outreach activities. In response, CMS issued a series of three disallowances to the State, citing its March 6, 2003 letter and reiterating its claim that Medicaid would not pay for these activities because they were for Child Find purposes to fulfill educational mandates. The

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disallowances total $31,334,752 to date. See supra note 1. This consolidated appeal by IDPA follows.

ARGUMENT

CMS’s disallowances in this case are not predicated on the factual nature of Illinois’ claim or on the detailed terms of its activity codes. These codes are limited to Medicaid and medical outreach activities. Rather, the sole ground for CMS’s disallowances is that Illinois is prohibited from claiming as Medicaid costs any administrative activity that identifies children who need medical and Medicaid services and might also benefit from the services prescribed by the IDEA. These disallowances should be reversed because targeted Medicaid outreach to children with health problems is a permissible Medicaid administrative cost and the State has properly distinguished between claimable Medicaid outreach and IDEA Child Find.

Under the Social Security Act, Medicaid outreach in schools — i.e., efforts by school-employees to locate and enroll students who are eligible for Medicaid and to link Medicaid eligibles with the medical services they require — is permissible, and in some instances required. The Social Security Act provides for federal match for "the amounts expended during such quarter as found necessary by the Secretary for the proper and efficient administration of the State plan." Social Security Act § 1903(a)(7), 42 U.S.C. § 1396b(a)(7); see also 42 C.F.R. § 433.15. As the Board has noted, Medicaid outreach is a permissible administrative cost and "Medicaid outreach as commonly understood involves seeking out persons or groups who may be eligible for Medicaid to inform them of that possibility in order that they may come in for eligibility determinations or may be made aware of Medicaid services available to them." New York State Dept. of Social Servs., DAB No. 1636, at 6 (1997). CMS has also described permissible outreach in similar terms, including in the context of this appeal.

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E.g., State Medicaid Manual § 4302.2 (permissible administrative claiming includes "methods to inform or persuade recipients or potential recipients to enter into care through the Medicaid system"); Ex. 6, at 51, 54, Technical Assistance Guide; Ex. 26, Letter from James P. Walsh, Assistant Regional Counsel, HHS to Charles Miller and Priti Seksaria Agrawal, Covington & Burling (Apr. 22, 2004) ("Generally speaking, appropriate and efficient Medicaid outreach may be an allowable administrative cost.").

Not only is outreach a permissible administrative activity, the Social Security Act requires States to perform Medicaid outreach regarding Early and Periodic Screening, Diagnostic, and Treatment ("EPSDT") benefits. EPSDT benefits are provided to Medicaid-eligible children. Social Security Act § 1905(a)(4)(B), 42 U.S.C. § 1396d(a)(4)(B). Among other things, the EPSDT benefits provide for all necessary health care and treatment regardless of whether such services are covered by the State plan. Social Security Act § 1905(r), 42 U.S.C. § 1396d(r). Most relevant here, the Act requires States to perform outreach regarding the EPSDT benefit: "A State plan for medical assistance must . . . (43) provide for – (A) informing all persons in the State who are under the age of 21 and who have been determined to be eligible for medical assistance including services described in section 1396d(a)(4)(B) of this title, of the availability of early and periodic screening, diagnostic, and treatment services as described in section 1396d(r) of this title and the need for age-appropriate immunizations against vaccine-preventable diseases." Social Security Act § 1902(a)(43), 42 U.S.C. § 1396a(a)(43).⁹

9 See also, e.g., 42 C.F.R. §441.56(a) (requiring state Medicaid agencies to "[p]rovide for a combination of written and oral methods designed to inform effectively all EPSDT eligible individuals (or their families) about the EPSDT program" and requiring that certain information be provided); California Dept. of Health Servs., DAB No. 1256 (1991) ("In 1967, Congress enacted section 1905(a)(4)(B) of the Act requiring each state to provide ‘early and periodic screening and diagnosis’ to persons under the age of 21 and eligible for Medicaid, to ascertain any physical or mental defects. The law also required each state Medicaid plan to provide a

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As CMS has repeatedly explained, schools are the perfect setting for outreach for Medicaid and its EPSDT program, and CMS has encouraged States to expand Medicaid outreach activities in schools. For example, CMS has described the unique role and opportunity for effective Medicaid outreach in schools:

[S]chools present a wonderful opportunity for Medicaid outreach. That is, because schools are by definition ‘in the business of serving children,’ they can be a catalyst for encouraging otherwise eligible Medicaid children to obtain primary and preventive services, as well as other necessary treatment services. Even if a school does not directly furnish medical services, we encourage efforts to inform potential eligibles about the Medicaid program and the EPSDT benefit.

means for informing all persons under 21, who were eligible for Medicaid, of the ‘availability of early and periodic screening, diagnostic, and treatment’ services.").

Ex. 6 at 13, Technical Assistance Guide; see also id. at 51, 54. In July of 2000, the Secretary of Health and Human Services recognized that "[b]ecause of their unique role in local communities, schools are effective in identifying and educating uninsured families and motivating them to seek health insurance and utilize health services for their children." Ex. 13 at iv, Report to the President on School-Based Outreach for Children’s Health Insurance (July 2000); see also id. at 3 (noting that there are approximately 4 million children who are potentially eligible for Medicaid but not enrolled), also available at http://www.fns.usda.gov/cnd/ SCHIP/report.pdf. HHS and the Department of Education have explained that "there may be no better way to reach uninsured children than in schools through those individuals who come into contact with children and families every day -- school principals, nurses, teachers, guidance counselors, and school lunch staff. . . . States may claim federal matching funds through CHIP¹⁰ and Medicaid when financing outreach activities at schools." Ex. 9, Letter from Donna Shalala, Secretary,

* * *

The fundamental premise behind CMS’s disallowance of Codes C1 and C2 activities is that if the activities fulfill educational mandates, they cannot be reimbursed by Medicaid. Both the Medicaid statute and the Individuals with Disabilities Education Act prove that this premise is wrong. Contrary to CMS’s position, both of these statutes state in clear terms that Medicaid must fund certain activities required by the IDEA, an education statute.

As is explained above (p. 3), the IDEA guarantees disabled children "a free appropriate public education that emphasizes special education and related services designed to meet their unique needs" and requires schools to develop an Individualized Education Program ("IEP") for disabled children that includes education and "related services." Individuals with Disabilities Education Act §§ 602(11), 614(d), 20 U.S.C. §§ 1400(d)(1)(A), 1401(11), 1414(d). The "related services" required by the IEP may include medical services. Related services are broadly defined to include developmental, corrective, and supportive services such as speech-

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language pathology, psychological services, physical and occupational therapy, counseling, and medical services. Individuals with Disabilities Education Act § 602(22), 20 U.S.C. § 1401(22). See also Cedar Rapids Comm. Sch. Dist. v. Garret F., 526 U.S. 66, 73-76 (1999).

Prior to 1988, CMS’s policy was that Medicaid would not reimburse expenditures for medical services that were provided pursuant to an IEP because these services were primarily educational in nature and were required by the IDEA. See 55 Fed. Reg. 6015, 6015 (Feb. 21, 1990) ("We adopted the approach that all services described in the Individualized Education Plan (IEP) and all services required under State and Federal education laws were excluded from Medicaid reimbursement because these services are the responsibility of the State.") and Ex. 8, Testimony of Richardson (June 17, 1999) (before 1988, Medicaid did not pay for medical services in schools, aside from routine screenings and treatment of acute, uncomplicated problems). In 1988, Congress rejected CMS’s interpretation and clarified that Medicaid must pay for services given to disabled students as part of their IEP. Congress instructed:

Nothing in this subchapter shall be construed as prohibiting or restricting, or authorizing the Secretary to prohibit or restrict, payment … for medical assistance for covered services furnished to a child with a disability because such services are included in the child’s individualized education program established pursuant to part B of the Individuals with Disabilities Education Act.

Social Security Act § 1903(c), 42 U.S.C. § 1396b(c); see also Medicare Catastrophic Coverage Act of 1988, Pub. L. 100-360, § 411(k)(13)(A) (adding 1903(c)).

In deciding to amend the statute, Congress recognized that even though the medical services were required by an education statute, these expenses are most appropriately borne by Medicaid because they are medically-related. Congress’s intent is confirmed by the legislative history of section 1903(c), which states:

The conference agreement clarifies that Federal Medicaid matching funds are available for the cost of health services,

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covered under a State’s Medicaid plan, that are furnished to a handicapped child or a handicapped infant or toddler, even though such services are included in the child’s individualized education program …While the State education agencies are financially responsible for educational services, in the case of a Medicaid-eligible handicapped child, State Medicaid agencies remain responsible for the "related services" identified in the child’s IEP if they are covered under the State’s Medicaid plan, such as speech pathology and audiology, psychological services, physical and occupational therapy, and medical counseling and services for diagnostic and evaluation purposes.

Ex. 1, H.R. Conf. Rep. No. 100-661, at 268 (1988).

Congress reiterated that Medicaid was responsible for funding the medically-related activities provided to disabled children under the IDEA when it amended the IDEA in 1997. The amendment required state Medicaid agencies and state education agencies to enter into cooperative agreements, whereby Medicaid paid for school-based health costs incurred as a result of an IEP. Specifically, it stated, "to ensure a free appropriate public education to children with disabilities, …the financial responsibility of the each public agency…including the State Medicaid agency and other public insurers of children with disabilities, shall precede the financial responsibility of the local education agency (or the State agency responsible for developing the child’s IEP)." Individuals with Disabilities Education Act § 612(a)(12)(A)(i), 20 U.S.C. § 1412(a)(12)(A)(i) (emphasis added); see also 34 C.F.R. § 300.142(a)(1).

Congress thus clarified "that the State agency or [local education agency] responsible for developing a child’s IEP can look to non-educational agencies, such as Medicaid, to pay for or provide those services [for which] they (the non-educational agencies) are otherwise responsible." Ex. 5, H.R. Rep. No. 105-95, at 92 (1997). Congress placed particular emphasis in the statute "on the relationship between schools and the State Medicaid Agency in order to clarify that health services provided to children with disabilities who are Medicaid-eligible and meet the standards applicable to Medicaid, are not disqualified for reimbursement by Medicaid

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agencies because they are provided services in a school context in accordance with the child’s IEP." Id. Congress’ intent is effectuated in the IDEA regulations, which provide that a "noneducational public agency described in paragraph (b)(1)(i) of this section may not disqualify an eligible service for Medicaid reimbursement because that service is provided in a school context." 34 C.F.R. § 300.142(b)(1)(ii).

Moreover, section 612(e) of the IDEA provides, "[n]othing in this chapter permits a State to reduce medical and other assistance available … under titles V and XIX of the Social Security Act …with respect to the provision of a free appropriate public education for children with disabilities." Individuals with Disabilities Education Act, § 612(e), 20 U.S.C. § 1412(e). Part of the "assistance" provided under Title XIX, or Medicaid, involves outreach activities. See Ex. 6 at 51, Technical Assistance Guide ("Medicaid reimburseable related activities performed by school districts and schools may include items such as Medicaid outreach"). Thus, the IDEA prohibits Illinois from limiting the Medicaid outreach activities that may be associated with the care of disabled students.

In light of both the Medicaid statute and the IDEA, it is clear that Medicaid is responsible for the provision and reimbursement of Medicaid activities even when these activities are specifically required by the IDEA. Both statutes provide that the nature of the activities — i.e., whether they are in support of the Medicaid program — determines whether Medicaid must pay for them. Neither statute contains any language that supports CMS’s argument that an otherwise covered Medicaid activity becomes uncovered because it is also required by the IDEA.

Whether these health related-costs are services or administration is irrelevant to Medicaid’s obligation to pay them. As CMS has repeatedly explained, administration must be in

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support of Medicaid services in order to be claimable. See, e.g., Ex. 20 at 3, CMS Medicaid School-Based Administrative Claiming Guide (May 2003) (Medicaid claimable administrative activities "are those associated with and in support of the provision of medical services reimbursable under Medicaid."); Ex. 3, Letter from Sally Richardson, Director, Medicaid Bureau, HCFA to State Medicaid Directors (Dec. 20, 1994) (CMS has "consistently held that allowable claims under [Section 1903(a) of the Social Security Act] must be directly related to the administration of the Medicaid program."); Ex. 26, Letter from Walsh to Miller and Seksaria Agrawal (Apr. 22, 2004) (Medicaid outreach may be claimed as an administrative cost if the expenditures "directly relate to the services under the State Medicaid plan and [are] attributable to Medicaid-eligible individuals (or at the very least, potentially Medicaid-eligible individuals)."). Medicaid administrative activities in support of the Medicaid (i.e., medical) services prescribed in an IEP provide exactly that support. And the activities at issue here — Medicaid outreach activities — constitute such support activities. As such, Medicaid, and not LEAs, must bear its share of the costs of these activities.

CMS erroneously pigeonholes Illinois’ Codes C1 and C2 outreach activities as educational and maintains that it therefore need not pay for them. CMS claims that Activity Codes C1 and C2 are "Child Find" activities meant to fulfill the requirements of the IDEA to identify, locate, and evaluate all children with disabilities, rather than activities necessary for Medicaid. See, e.g., Ex. 22, Letter from DuPre to Maram (Jan. 2, 2004). According to CMS, "Medicaid is not responsible for paying for ‘Child Find’ activities that fulfill educational mandates." Id.

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CMS errs in its characterization of codes C1 and C2, because CMS has failed to consider the nature of activities captured by these codes, as it is required to do. In the only court case to have examined the issue, both the District of Massachusetts and the First Circuit Court of Appeals have determined that in deciding whether Medicaid must pay for a particular activity, the Department of Health and Human Services ("HHS") must look to the nature of the services being provided; both courts rejected the argument that a service cannot be medical because it is required by the IDEA.¹² See Commonwealth of Massachusetts v. Heckler, 616 F. Supp. 687, 693-694 (D. Mass 1985); Commonwealth of Massachusetts v. Sec. of Health and Human Services, 816 F.2d 796, 802-803 (1st. Cir. 1987), aff’d in part and rev’d in part, Bowen v. Massachusetts, 487 U.S. 879 (1988) (not addressing this particular issue).

The dispute in Heckler centered upon whether certain rehabilitative services provided at an intermediate care facility for the mentally retarded by the State Department of Education could be reimbursed by Medicaid. See Heckler, 616 F. Supp. at 690-693. The district court noted that "HHS defined ‘education’ by reference to state and federal education statutes and to the Commonwealth’s method of administering the services in question, rather than to the nature of the services themselves." Id. at 693-694. It then held that this "approach errs on the side of administrative convenience at the expense of compliance with the Medicaid statute." Id. at 694. The court further explained that merely because the services at issue were "provided by an agency of the [State’s] education department does not bar their classification as Medicaid covered habilitative services." Id. at 694. Likewise, in the instant case, simply because LEAs are providing the targeted outreach at issue and because the IDEA may require similar activities does not mean that they are not properly claimable Medicaid administrative costs.

The First Circuit Court concurred with lower court’s decision in Heckler.¹³ It held that "the Secretary [of HHS] may not determine whether a service is included in the Medicaid program by sole reference to a state’s special education law. The Secretary must make an inquiry into the nature of the services, not just into what they are called or who provides them." Commonwealth of Massachusetts, 816 F.2d at 804 (emphasis in original). At the conclusion of this litigation, CMS formally acknowledged that its prior interpretation that any activity mandated by the IDEA would not qualify for Medicaid funding was no longer valid.¹⁴

13 Prior to Congress’s clarification in section 1903(c) of the Social Security Act that Medicaid was responsible for the payment of medical services provided under the IDEA, the Board stated that it disagreed with the First Circuit’s decision in Heckler. See Tennessee Dep’t of Health and Env’t, DAB No. 921 (1987). See also Utah Dep’t of Health, DAB No. 893 (1987); Pennsylvania Dep’t of Pub. Welfare, DAB No. 777 (1986). These cases also involved intermediate care facilities for the mentally retarded ("ICF/MRs"), and in that context, a regulation exists that governs FFP for educational activities. See 42 C.F.R. § 441.13. The Board followed this regulation, which at the time of the three aforementioned decisions, stated that no FFP was available to ICF/MRs for "vocational training and educational activities." See 42 C.F.R. § 441.13 (1987). Since that time, CMS has revised section 441.13 to clarify that this restriction on FFP applies only to "formal educational services or for vocational services" provided by ICF/MRs. See 42 C.F.R. § 441.13 (2003). See also infra n. 14 for more detail. No such regulation exists in the school context. And in any event, the passage of section 1903(c) demonstrates that Congress considered the reasoning and approach of Heckler correct.

CMS’s current disallowance of Codes C1 and C2 as educational activities repeats the same error the agency made in Heckler. A careful examination of these two codes reveals that the nature of the activities that they are designed to capture are properly claimable Medicaid administrative costs. Codes C1 and C2 are both designed to focus only on medical outreach activities. They are entitled "Identification and Referral to Access Medicaid/Kidcare," with the former for non-SPMP and the latter for SPMP. See Ex. 17 at 17-18, Illinois Guide. Both of these codes are to be used "when specifically targeting outreach efforts to inform and enroll children with medical needs." Id. at 18. Code C1 is for all staff when "actively identifying potentially at risk children in order to inform and assist the child and their family to access Medicaid/Kidcare" and Code C2 is for SPMP when "utilizing their medical expertise to identify medically at risk children, in order to direct outreach efforts to those who are most in need of medical services." Id. Moreover, both Codes C1 and C2 provide that "Education-related activities required for Child-Find or for the development of an Individualized Education Program (IEP) are to be reported in Code C3," which is a non-claimable code. Id. Pursuant to CMS’s request, another non-claimable Code (I-3) also lists educational Child Find activities. Id. at 29. By virtue of these provisions, Codes C1 and C2 do not capture the educational activities that concern CMS.

The examples provided in the Illinois Guide of proper C1 and C2 activities further prove that they are medical in nature and as such, are proper Medicaid activities. For instance, Code C2 states that it includes time spent "[d]esigning strategies to identify children who have specific health care needs, or are potentially at high risk of poor health outcomes." Id. To further illustrate this concept, the Guide explains, "[a] physical therapist may develop a medical protocol based on a checklist of symptoms and behaviors (deficiency in mobility, gait, muscle

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strength, or posture), which would be indicative of a child in need of physical therapy. The medical protocol would be used to identify students who are medically needy and possibly eligible for Medicaid/KidCare enrollment." Id.

Code C1 includes a similar example in which non-SPMP may use SPMP-designed protocols to recognize a need for physical, occupational, or speech/language therapy based on a certain physical symptoms. Another Code C1 illustration that further demonstrates that these activities are clearly medically-related is when school employees assist the Medicaid/Kidcare agency in targeting outreach efforts by fulfilling the objectives of the EPSDT program. Id. These outreach efforts may include informing parents and children about the benefits of preventative health care, helping them to use health resources, and assuring that health problems are referred for early treatment before they become more serious and costly to treat. Id. Certainly, all of these examples of Code C1 and C2 activities focus on identifying medical needs, rather educational ones.

In light of the above, it is clear that Illinois carefully drafted its time study codes to distinguish between medical and educational activities. As IDPA explained to CMS in defending its codes, it differentiates "those conditions that school personnel may be seeking to identify, to lead to assessment for special education program, versus conditions that indicate a health risk, and thus an urgency to enroll the child in Medicaid so that medical care may be obtained." Ex. 16, Letter from Handy to Strauss et al. (Feb. 6, 2002). IDPA also, however, recognized "the complexity of attempting to dissect an activity that is initially intended to identify symptoms of medical need leading to assistance in enrolling children in Medicaid and helping them to access special education" because "[s]uch a series of activities could also result in a referral to be assessed for special education." Id. Likewise, "Child Find activities could

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result in referrals for Medicaid enrollment." Id. Nonetheless, IDPA made its best effort "to define categories that are clear-cut when classifiable activities occur (e.g., reading assessments are Child Find; observing children for respiratory problems are medical)." Id. And for activities that may overlap, IDPA explained "the circumstances under which the activity should be reported as Child Find and others which should be reported as Medicaid Outreach." Id. Given IDPA’s thorough measures to ensure that its codes capture only medical outreach, CMS should be prohibited from disallowing properly claimable Medicaid administrative costs simply because both the Medicaid statute and the IDEA require certain outreach efforts. CMS’s rationale is the very same as that which was rejected by the courts in the Massachusetts cases discussed above.

Moreover, to further ensure that Codes C1 and C2 captured only medically-related outreach activities, IDPA implemented a discounting formula to remove costs associated with the Individualized Education Programs required by the IDEA. See Ex. 18, Provider Notice #03-6 (Feb. 6, 2003), also available at http://www.sbhsillinois.com/assets/020603_sbhs-pn_code_c_discount.pdf. This formula is as follows: (Codes C1 + Code C2 costs) x (1- (total number of students with IEPs/IFSPs)/ (total number of students)). See id. Certainly, CMS’s allegation that Codes C1 and C2 fulfill educational mandates lacks merit given that in addition to crafting carefully drawn codes, IDPA specifically excludes IDEA education-related activities from its claim using a discounting method.

CONCLUSION

IDPA has effectively made a distinction between claimable Medicaid outreach and non-claimable educational outreach mandated by the IDEA. CMS has recognized that targeted Medicaid outreach activities are efficient and effective. CMS’s rationale for the

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disallowance is that because Child Find is mandated by the IDEA, medical outreach is not claimable under Medicaid. CMS’s disallowance rests on an interpretation of the IDEA that ignores section 1903(c) of the Social Security Act and section 1412 of the IDEA. Moreover, the only courts to have addressed the issue of the relationship between Medicaid and the IDEA have rejected the premise of CMS’s argument that any activity that overlaps with the IDEA cannot be a Medicaid activity. For the foregoing reasons, the disallowances should be reversed.

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