State of N.Y. Dept. of Social Services v. Shalala

• Decision Date: 04 April 1994
• Docket Number: No. 734,D,734
• Parties: , Medicare&Medicaid Guide P 42,182 STATE OF NEW YORK DEPARTMENT OF SOCIAL SERVICES, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary, U.S. Department of Health and Human Services, 200 Independence Avenue, S.W., Washington, D.C. 20201, Gail R. Wilensky, Ph.D., Administrator, Health Care Financing Administration, 200 Independence Avenue, S.W., Washington, D.C. 20201, Defendants-Appellees. ocket 93-6158.
• Court: U.S. Court of Appeals — Second Circuit

Page 485

21 F.3d 485

44 Soc.Sec.Rep.Ser. 223, Medicare&Medicaid Guide P 42,182

STATE OF NEW YORK DEPARTMENT OF SOCIAL SERVICES, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary, U.S. Department of Health and Human Services, 200 Independence Avenue, S.W., Washington D.C. 20201, Gail R. Wilensky, Ph.D., Administrator, Health Care Financing Administration, 200 Independence Avenue S.W., Washington, D.C. 20201, Defendants-Appellees.

No. 734, Docket 93-6158.

United States Court of Appeals Second Circuit.

Argued Dec. 2, 1993.

Decided April 4, 1994.

Arvid E. Roach II, Covington & Burling, Washington, DC (Kurt A. Wimmer, Covington & Burling, Washington, DC, of counsel), for plaintiff-appellant.

Christine H. Chung, Asst. U.S. Atty., New York City (Mary Jo White, U.S. Atty. for the S.D.N.Y., Gabriel W. Gorenstein, Asst. U.S. Atty. of counsel), for defendants-appellees.

Before: LUMBARD, KEARSE, and JACOBS, Circuit Judges.

JACOBS, Circuit Judge:

Beginning in January 1985, the State of New York Department of Social Services ("New York") developed a computer system for use in New York City that would improve New York's ability to perform eligibility determinations for Medicaid and other social services programs, and installed the system serially at 92 locations in New York City. The Health Care Financing Administration ("HCFA") has paid a portion of the development and operating costs of the system, but New York and the federal government disagree as to the extent of HCFA's obligation to pay operating costs incurred at individual sites as they became operational prior to the date in 1989 as of which the entire system was certified complete. New York contends that the Medicaid Act and principles of administrative procedure require a 75% contribution from HCFA, and HCFA contends that the Medicaid Act and administrative regulations adopted pursuant thereto require no more than the 50% contribution that HCFA has already paid. New York brought an administrative appeal before the Departmental Appeals Board ("DAB"), challenging HCFA's disallowance. After DAB upheld We affirm.

HCFA's decision, New York challenged that ruling in the United States District Court for the Southern District of New York (Conboy, J.), which granted summary judgment in favor of Defendants-Appellees Donna E. Shalala, Secretary of the U.S. Department of Health and Human Services (the "Secretary", "HHS"); HHS; Gail R. Wilensky, Administrator of HCFA; and HCFA.

BACKGROUND

A. Statutory and Regulatory Framework

Under the Medicaid Act, 42 U.S.C. Sec. 1396 et seq. (1988 & Supp. III 1991) (the "Act"), the federal government reimburses a portion of state expenditures for medical assistance to low income or disabled people. The level of federal funding available to a state, called the Federal Financial Participation ("FFP"), varies according to the service provided. See id. Sec. 1396b(a). Unless otherwise specified in Sec. 1396b, states are reimbursed for 50% of expenditures that are "found necessary by the Secretary for the proper and efficient administration of the State plan." Id. Sec. 1396b(a)(7). Enhanced funding is available in specific instances. See id. Sec. 1396b(a). Among the expenses that may be reimbursed at an enhanced level of FFP are those associated with the development and operation of computerized claims processing programs. In 1972, Congress determined that computerized systems for claims processing and information retrieval would reduce Medicaid costs. See H.R.Rep. No. 231, 92d Cong., 2d Sess. 8 (1972), reprinted in 1972 U.S.C.C.A.N. 4989, 5089. In order to encourage states to develop these systems, Congress amended the Act to provide 90% FFP for costs "attributable to the design, development, or installation of such mechanized claims processing and information retrieval systems," id. Sec. 1396b(a)(3)(A)(i), and 75% FFP for costs "attributable to the operation of [such] systems," id. Sec. 1396b(a)(3)(B).

The statutory language relevant to this appeal is as follows:

Sec. 1396b. Payment to States

(a) Computation of amount

From the sums appropriated therefor, the Secretary ... shall pay to each State [quarterly] ...

* * * * * *

(3) an amount equal to--

(A)(i) 90 per centum of so much of the sums expended during such quarter as are attributable to the design, development, or installation of such mechanized claims processing and information retrieval systems as the Secretary determines are likely to provide more efficient, economical, and effective administration of the plan ... and

* * * * * *

(B) 75 per centum of so much of the sums expended during such quarter as are attributable to the operation of systems ... of the type described in subparagraph (A)(i) (whether or not designed, developed, or installed with assistance under such subparagraph) which are approved by the Secretary ...

* * * * * *

plus

* * * * * *

(7) ... an amount equal to 50 per centum of the remainder of the amounts expended during such quarter as found necessary by the Secretary for the proper and efficient administration of the State plan.

42 U.S.C. Sec. 1396b(a) (emphasis added).

In 1974, the Secretary promulgated regulations to implement Sec. 1396b(a)(3). Before a state may become eligible to receive federal reimbursement for developing or operating a computerized claims system, these regulations require a state to submit to the Secretary an Advance Planning Document describing the proposed system. See 42 C.F.R. Sec. 433.112(a). If the proposal meets the conditions outlined in the regulations, the Secretary will approve the system, see id. Sec. 433.112(b), and federal funds will become available at the 90% FFP rate for the system's "design, development, installation or improvement," id. Sec. 433.112(a). After the system is installed, "FFP is available at 75 percent of expenditures for operation of a The regulations indicate that "[a]dditional HHS regulations and HCFA procedures for implementing these regulations" are set forth in Part 11 of the State Medicaid Manual ("SMM"). 42 C.F.R. Sec. 433.110(a)(1). Section 11255 of the SMM, known as the "transition funding policy," provides that:

                mechanized claims processing and information retrieval system approved by HCFA, from the first day of the calendar quarter after the date the system met the conditions of initial approval, as established by HCFA (including a retroactive adjustment of FFP if necessary to provide the 75 percent rate beginning on the first day of that calendar quarter)."   Id. Sec. 433.116(a).  The regulations provide that HCFA will approve the system operation if, inter alia, "[t]he system [has] been operating continuously during the period for which FFP is claimed."   Id. Sec. 433.116(d)
                

Projects for designing, developing, installing, or improving an automated claims processing and information retrieval system will be funded during the transition between 90% FFP and 75% FFP as follows:

. FFP at the 90% level is available for design, development, installation, or improvement of each subsystem in an approved complete system meeting the requirements of Sec. 11205.

. FFP at the 90% level for any subsystem terminates on the date the subsystem or improvement to a subsystem is fully tested and subsequently accepted by the State.

. FFP at the 50% level is available for operation of any subsystem from that point that 90% FFP ceases until the complete system is fully operational and meets the requirements of Sec. 11210.

. FFP at the 75% level is available prospectively from the date the system is approved and retroactively to the date that the complete approved system is determined to be fully operational and meets all requirements as defined in Sec. 11210.

(Emphasis added.) SMM Sec. 11205 contains the conditions a state's system must meet before 90% FFP is available; SMM Sec. 11210 contains the conditions that must be met before 75% FFP is available. Federal payments have been made in accordance with the letter of these SMM procedures.

B. New York's Computerized Systems

In 1977, New York instituted its Medicaid Management Information System (the "MMIS"), a mechanized claims processing and information retrieval system used primarily for processing claims for services rendered to Medicaid beneficiaries. In order to expand the volume of information regarding Medicaid eligibility that would be accessible to the MMIS, New York developed the Welfare Management System (the "WMS"), which determines recipient eligibility for all New York welfare programs, including Medicaid. While the WMS is not actually a component of the MMIS and may operate independently of it, an interface allows the MMIS to use the WMS's computerized data to facilitate and improve determinations regarding an individual's eligibility for Medicaid. The parties agree that, technically, the WMS is regarded as an "enhancement" of the MMIS under HHS regulations, rather than a "subsystem" or an "improvement" of the MMIS. An "enhancement" in this context is a modification of the functions of the MMIS that expands the MMIS beyond its original purposes. See 45 C.F.R. Sec. 95.605. The parties disagree as to whether the Secretary may reasonably apply the transition funding policy to an "enhancement."

New York's legislature authorized implementation of the WMS in two phases: first, in all areas of New York State outside the five boroughs of New York City (the "Upstate/WMS"); and second, in New York City (the "NYC/WMS"). The Advance Planning Document for the Upstate/WMS was approved by HCFA in 1977 (the same year New York instituted its MMIS), and New York installed the Upstate/WMS region-by-region in seven multi-county regions. Because the Upstate/WMS was being installed concurrently with New York's MMIS, and the parties had already agreed to a phased implementation of the MMIS, HCFA agreed with New York to review and approve the Upstate/WMS on the same basis, shifting from 90% FFP to 75% FFP for each region when all sites in the region...