Pa. Dep't of Human Servs. v. United States

• Decision Date: 25 July 2018
• Docket Number: No. 17-2088,17-2088
• Parties: Commonwealth of PENNSYLVANIA DEPARTMENT OF HUMAN SERVICES, Appellant v. UNITED STATES of America; United States Department of Health and Human Services; Secretary United States Department of Health and Human Services
• Court: U.S. Court of Appeals — Third Circuit

897 F.3d 497

Commonwealth of PENNSYLVANIA DEPARTMENT OF HUMAN SERVICES, Appellant

v.UNITED STATES of America; United States Department of Health and Human Services; Secretary United States Department of Health and Human Services

No. 17-2088

United States Court of Appeals, Third Circuit.

Argued on March 12, 2018

Opinion Filed: July 25, 2018

W. Scott Foster, Esq. [Argued], Commonwealth of Pennsylvania, Department of Human Services, Office of General Counsel, 3rd Floor, Health & Welfare Building, Harrisburg, PA 171207, Jason W. Manne, Esq., Manne Law Office, P.O. Box 81860, Pittsburgh, PA 15217, Counsel for Appellant.

Melissa A. Swauger, Esq., Office of United States Attorney, 228 Walnut Street, P.O. Box 11754, 220 Federal Building and Courthouse, Harrisburg, PA 17108, Suzanne Yurk, Esq. [Argued], United States Department of Health and Human Services, Office of the General Counsel, 150 South Independence Mall West, The Public Ledger Building, Suite 418, Philadelphia, PA 19106, Counsel for Appellees.

BEFORE: JORDAN, KRAUSE, and GREENBERG, Circuit Judges

OPINION

GREENBERG, Circuit Judge.

I. INTRODUCTION

The Commonwealth of Pennsylvania Department of Human Services ("Pennsylvania") appeals from a decision and order of the District Court for the Middle District of Pennsylvania entered March 13, 2017, affirming a decision of the United States Department of Health and Human Services Departmental Appeals Board ("Appeals Board" or "Board"). For the following reasons, we will affirm the District Court’s order and thus will affirm the Board’s decision.

II. BACKGROUND

This case involves a reimbursement dispute between Pennsylvania and the Centers for Medicare & Medicaid Services ("CMS") over the cost of a provider training program. From 1996 to 2011 Pennsylvania claimed the costs of the training program as administrative costs under its Medicaid program. CMS reimbursed Pennsylvania for about $3 million of those costs, but, after an audit of Pennsylvania’s charges, it sought a return of the money on the ground that funds Pennsylvania spent on training programs were not reimbursable to the Commonwealth from the federal government as administrative costs under Medicaid. In reaching its decision, CMS relied heavily on a 1994 State Medicaid Director Letter ("1994 SMDL" or "the Letter"), which explained that training program costs are excluded from the definition of reimbursable administrative costs under the Medicaid statute. The Appeals Board sustained CMS’s decision. Our review of the agency’s final decision is narrow. We limit our determination to deciding whether the Appeals Board’s decision complies with the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 et seq. ¹

A. Medicaid Statutory and Regulatory Framework

To begin, we set forth some background of the Medicaid program and its reimbursement provisions for state administrative costs. With the passage of Title XIX of the Social Security Act, Congress authorized the creation of the Medicaid program, 42 U.S.C. §§ 1396 et seq.,"a cooperative federal-state program that provides medical care to needy individuals." Douglas v. Indep. Living Ctr. of S. Cal., Inc., 565 U.S. 606, 610, 132 S.Ct. 1204, 1208, 182 L.Ed.2d 101 (2012). States such as Pennsylvania that opt into the program must submit a plan that complies with the Medicaid statute and the Secretary of Health and Human Services’ ("HHS") implementing regulations. 42 U.S.C. §§ 1396, 1396a ; 42 C.F.R. § 430.15(a). Within HHS, CMS oversees state compliance with Medicaid requirements. 42 C.F.R. § 430.15(b).

Under this cooperative program, the federal government reimburses a state for a portion of its expenditures for both "medical assistance" (i.e., medical care and services) and "administration" of the Medicaid program. 42 U.S.C. §§ 1396b(a), 1396d(a). There is a statute establishing the amount of federal funding available to a state for such expenditures, known as Federal Financial Participation ("FFP"). See 42 U.S.C. § 1396b(a).

Section 1396b(a)(7) governs the administrative costs at issue in this case.

Id. § 1396b(a)(7).² Specifically, § 1396b(a)(7) sets the usual amount of FFP at 50 percent for costs that are "found necessary by the Secretary for the proper and efficient administration of the State plan." That is, states can receive 50 cents on the dollar for costs claimed under their plans that meet the definition of administrative costs in § 1396b(a)(7). To implement this provision, HHS promulgated 42 C.F.R § 433.15(b)(7), which included the statutory FFP percentage for reimbursement and a summary explanation of administrative costs. See 42 C.F.R. § 433.15(b)(7) ("All other activities the Secretary finds necessary for proper and efficient administration of the State plan: 50 percent."). But neither the statute nor the implementing regulation defines "administration" or "necessary."

B. The 1994 SMDL

In 1994 the Health Care Financing Administration ("HCFA"), CMS’s predecessor, published the 1994 SMDL. After an influx of inappropriately claimed administrative activities, HCFA issued the Letter to "reiterate [its] longstanding policy on allowable administrative costs." JA 109. The 1994 SMDL quotes § 1396b(a)(7) ’s requirement that FFP is permitted only for amounts "found necessary by the Secretary for the proper and efficient administration of the State Plan." JA 109. It then interprets that language to mean that "allowable claims ... must be directly related to the administration of the Medicaid program." JA 109.

The 1994 SMDL gives examples of administrative costs that HCFA has allowed in the past. Among other items those costs include Medicaid eligibility determinations, Medicaid outreach, prior authorization for Medicaid services, and Medicaid Management Information System development and operation.

The Letter also lists examples of expenses that are not regarded as administrative costs. Importantly for our purposes, it states that allowable costs do not include "the overhead costs of operating a provider facility, such as the supervision and training of providers." JA 113. Besides such training costs, the Letter also excludes costs for medical services. It recites that administrative costs cannot be "the cost of providing a direct medical or remedial service," or "an integral part or extension of a direct medical or remedial service. ..." Id. It states that "[s]uch services are properly paid for as part of the payment for the medical or remedial service. Because Medicaid providers have agreed to accept service payment as payment in full, such providers may not claim an additional cost as [an] administrative cost under the State plan." Id.

With this background in mind, we turn to this case.

C. Pennsylvania’s Restraint Reduction Initiative

In 1987 Congress amended Title XIX of the Social Security Act to include nursing home reforms. The amended Act provided that nursing home facilities could no longer use physical and chemical restraints on their residents for discipline or convenience reasons. 42 U.S.C. § 1396r(c)(1)(A)(ii). The regulations required nursing facilities to train their staff on these new care standards. 42 C.F.R. §§ 483.12(b)(3), 483.95(c).

In response to these reforms, Pennsylvania created the Pennsylvania Restraint Reduction Initiative ("PARRI"). The stated objective of the program which began in 1996 was "to train long term care facility staff in the use of alternative measures to physical and chemical restraints." JA 275, 298. Pennsylvania contracted with Kendal Outreach LLC ("Kendal") to supply the provider training. Kendal began by training nursing home staff at four training sites but expanded the number of sites to twenty six across the state over the next few years.

At all relevant times Pennsylvania paid for the Kendal contract through various funding methods and made claims to CMS to reimburse it for the cost of the contract. Pennsylvania consistently claimed the contract costs as Medicaid program administrative expenses. But it did so without expressly advising CMS of what it was doing for when it completed the CMS form to report administrative costs, it did not specifically itemize the PARRI payments. Instead, it lumped those payments into a larger amount that it claimed as "Other Financial Participation." JA 249. From 1996 to 2011, CMS reimbursed Pennsylvania a total of $3,001,536 for the PARRI program.

Pennsylvania’s claims for administrative costs eventually came to the attention of the HHS Office of Inspector General ("OIG"). From 2011 to 2012 the OIG conducted an audit of Pennsylvania’s claims for Medicaid administrative costs for provider training under PARRI. According to OIG, the audit was initiated because Pennsylvania relied on the CMS form’s "Other Financial Participation" section to claim large sums of FFP. For example, from 2010 to 2011, the OIG audit notes that Pennsylvania claimed $924 million in administrative costs, of which $654 million were unidentified costs lumped together as "Other Financial Participation." JA 265. OIG also noted that it previously identified two other Pennsylvania programs that failed to comply with the administrative cost requirements under the Medicaid program. In the audit, OIG concluded that the PARRI costs were not administrative costs, but rather "were for training nursing home provider staff to improve the condition of nursing home residents." JA 266. The audit report stated that "CMS explicitly prohibits claiming costs for provider training, such as that supplied by Kendal for the Initiative, as administrative costs, because they are not for the proper and efficient administration of the [Medicaid] State plan." Id. (quotation marks omitted). The OIG audit thus recommended that CMS require Pennsylvania to refund the $3,001,536 and discontinue all future claims for PARRI costs.

In June 2014 CMS sent a letter to Pennsylvania notifying it of its decision to disallow the $3,001,536 in FFP. CMS explained the administrative cost requirements under § 1396b(a)(7)...