New Mexico Human Services Department, DAB No. 787 (1986)

GAB Decision 787

September 11, 1986 New Mexico Human Services Department Docket Nos.
85-261-86-32-86-61-86-93 Ballard, Judith A.; Settle, Norval D.  Teitz,
Alexander G.

   (1) The New Mexico Human Services Department (State or HSD) appealed
the decision of the Health Care Financing Administration (HCFA or
Agency) disallowing a total of $2,387,433 in federal financial
participation (FFP) claimed by HSD under Title XIX (Medicaid) of the
Social Security Act (Act).  The amounts disallowed represent the federal
share of State gross receipts taxes reimbursed by HSD as part of the
costs incurred by providers and fiscal intermediaries in furnishing
medical and administrative services.  The disallowances were based on
HCFA's view that payments for the tax were not actual expenditures by
the State within the meaning of applicable federal law because the State
collected the tax from the providers and intermediaries. /1/

This is the third in a series of appeals involving the general issue of
the availability of FFP for state reimbursement of taxes.  Our
conclusions here parallel those in the decisions resolving the other
appeals.  (See Hawaii Department of Social Services and Housing,
Decision No. 779, August 21, 1986, and California Department of Health
Services, Decision No. 786, September 11, 1986).

As in Hawaii and California, we conclude that federal law was ambiguous
concerning whether State income from gross receipts taxes paid by
Medicaid providers and fiscal intermediaries had to be deducted from
HSD's payments to the providers and fiscal intermediaries in determining
the amount of expenditures eligible for FFP.  We also conclude that the
State's interpretation(2) of applicable law was reasonable under the
circumstances of this case where:  (1) the approved State plan in effect
during the disallowance period provided for reimbursement of the gross
receipts tax;  (2) program regulations supported the State's
interpretation;  and (3) HCFA had paid FFP for HSD's full payments
including gross receipts taxes for almost 19 years.  Thus, the Agency
was unreasonable in attempting to apply a different interpretation
retroactively.  Accordingly, we are compelled to overturn the
disallowances.

As in Hawaii and California, nothing in this decision contradicts the
Agency's position that generally expenditures claimed for FFP must be
"net" of any applicable credits.  Furthermore, we emphasize that nothing
in this decision precludes HCFA from promulgating a rule or issuing
formal policy guidance giving notice of HCFA's intent to require states
prospectively and specifically to apply gross receipts taxes received
from providers and intermediaries as credits against Medicaid payments
to them.

This decision is based on the written record (including comments
received in response to a draft decision issued in Hawaii) and a
conference.  We incorporate by reference portions of the analysis in the
Hawaii and California final decisions.

Background

New Mexico has had a gross receipts tax in effect throughout the State's
participation in the Medicaid program (since 1966).  This tax is imposed
on the gross receipts of all for-profit businesses (with a few
exceptions not relevant here) for the privilege of doing business in the
State.  The providers and fiscal agents involved in this case, like all
other business in New Mexico, paid this tax on their gross receipts as
an expense of operating in the State.  New Mexico's State Medicaid plan
did not specifically provide that State taxes, per se, would be
reimbursed.  However, the plan in effect throughout the period in
question did specify that all costs not expressly provided for in the
plan would be reimbursed in accordance with the terms of the Provider
Reimbursement Manual (HIM-15), applicable to Medicare.  (See Appellant's
Brief, p. 5) Under these Medicare principles, it is clear that the State
would reimburse providers and fiscal agents for gross receipts taxes.

The State first calculated a rate using other provider costs and then
added on the amount of the gross receipts tax.  The State gave two
reasons for this.  First, State-owned and non-profit providers were
exempt from paying the tax.  Thus, if the tax were part of the initial
rate calculation these providers would receive reimbursement for an item
that was not a true cost.  The second reason the State calculated the
tax separately was that some providers paid more tax than others.  Thus,
others might be reimbursed for more than their actual costs. This
occurred because(3) the amount of tax varied depending on locality.
While all providers paid the base State tax rate of 3 3/4%, some also
paid additional municipal and county rates.  Under State law,
municipalities and counties could assess their own gross receipts tax if
they so chose.  The municipal and county rates could vary within State
set limits.

During the period in question here and the prior period not involved in
this disallowance (i.e., 1966 to 1984), the State claimed FFP in the
amount it reimbursed providers and fiscal agents for gross receipts tax.
Until a deferral notice issued on July 9, 1985 (almost 19 years after
the start of the program), HCFA always paid the State's claims for FFP
in the amounts paid providers for medical services and fiscal agents for
administrative costs. /2/

Thereafter, HSD published a notice that it proposed to stop the tax
reimbursements to providers and, on August 21, 1986, HSD issued a final
regulation to that effect.  Two days later, the New Mexico Health Care
Association brought suit in Federal District Court to enjoin both HSD
and the Agency from withholding reimbursement of gross receipts tax. On
September 13, 1985, the Court issued a preliminary injunction barring
HSD from withholding payments for the tax to long-term care providers.
No such relief was ordered against the federal government. /3/

On November 7, 1985, HCFA issued its first disallowance of $1,289,764
for the period January 1, 1984 through March 31, 1985.  This
disallowance covered the State's claims for State gross receipts tax
only, not county or municipal gross receipts tax.  Subsequently, on
January 8, 1986, HCFA disallowed an additional $337,378 for the same
time period.  This disallowance covered the State's claims for
reimbursements of county and municipal gross receipts taxes.
Thereafter, the Agency disallowed an additional $760,291 covering State,
county, and municipal taxes for the following quarters ending September
30, 1985.  The State appealed all the disallowances, totalling
$2,387,433.

I.  Did "federal law" mandate the disallowances here?

As in the Hawaii and California appeals, HCFA based the disallowances on
its view that "federal law" (i.e., section 1903(a) of the Act and Office
of Management and Budget Circular A-87) required the(4) disallowances.
In those cases, we concluded that section 1903(a) and the Circular
simply are not that specific;  while HCFA's interpretation is not
necessarily inconsistent with them (and thus might reasonably be imposed
through a regulation or guideline), it is unreasonable to conclude that
the Act and the Circular themselves required the disallowances so as to
justify retroactive action.

The parties' arguments here are essentially the same as in Hawaii and
California, and we incorporate the applicable discussion and
conclusions.  Below, we calrify how the analysis in those cases applies
here, and discuss arguments raised solely by New Mexico.

   A.  The statute did not mandate the disallowances.

The Agency here cited section 1903(a)(1) as the statutory basis for its
disallowances of State expenditures for gross receipt taxes reimbursed
to providers for medical services.  The Agency also cited the analogous
section, 1903(a)(7), as the basis for its disallowances of gross
receipts taxes reimbursed to fiscal agents for administrative costs.

We concluded in Hawaii that section 1903(a)(1), on its face, did not
compel the disallowances.  (Hawaii, supra, pp. 3-5) We concluded in
California that section 1903(a)(7) did not compel the disallowances
either.  (California, supra, p. 5) We adopt the analyses on pages 3-5 of
Hawaii and page 5 of California and conclude that neither section of the
Act compels the disallowances here.

   B.  OMB Circular A-87 did not mandate the disallowances.

As in Hawaii and California the Agency argued that OMB Circular A-87
compelled the disallowances and the State argued that it did not.  The
arguments presented by the parties here were essentially the same as in
those cases.

In Hawaii and California, we decided that the Circular did not
conclusively establish that taxes paid by providers had to be treated as
"applicable credits" against reimbursements to providers.  (Hawaii,
supra, pp. 5-8 and California, supra, p. 6) HCFA did not argue that
there was any difference between Hawaii's excise tax and New Mexico's
gross receipts tax which should produce an analysis or result different
from that in Hawaii (and we do not see any such difference).  The only
possible difference in the circumstances surrounding the two States'
taxes is that Hawaii's tax was reimbursed indirectly through a rate,
whereas New Mexico's tax may have been reimbursed directly in part.
HCFA did not argue that this should produce a different result, and we
see no reason why it should.  Accordingly, we conclude that the analysis
regarding A-87 at pages 5-8 in Hawaii applies here as well.  The
Circular did not compel the disallowances here, and, indeed, as(5)
discussed in Hawaii, contained language which reasonably could have led
the State to believe the tax was an allowable cost eligible for FFP.
/4/

II.  Was the State's interpretation reasonable under the circumstances
of this case?

As in Hawaii and California, we conclude that, in addition to the
ambiguity and mixed messages in A-87, there are other factors which set
a context in which New Mexico reasonably determined that it did not have
to treat the gross receipts taxes as "applicable credits" offsetting
State payments to the providers and fiscal intermediaries for medical
services and administrative costs.  Below we address similar factors
present in this case.

   A.  The State plan as support for the State's interpretation.

In Hawaii the approved State Medicaid plan applicable during most of the
disallowance period adopted the use of Medicare principles of
reimbursement, and under those principles it was clear that the taxes in
question were allowable costs.  The Board concluded that, in the absence
of any Agency issuance stating clearly that taxes had to be treated as
applicable credits, the State plan supported the State's interpretation.
(Hawaii, supra, pp. 9-10)

As in Hawaii, New Mexico's State Medicaid plan also adopted Medicare
principles of reimbursement.  The parties' arguments were essentially
the same here as in Hawaii.  Accordingly, we adopt the analysis on pages
8-10 of Hawaii here and conclude that New Mexico's State plan supported
the interpretation that gross receipts taxes received by the State did
not have to be netted

   B.  The program income regulations as support for the State's
interpretation.

In this case the parties presented the same arguments as in the Hawaii
and California appeals with regard to the effect of the program income
regulations.  We incorporate by reference the analysis on pages 10-12 of
Hawaii here.  (In California we also adopted that analysis.)

(6) III.  Notice.

   A.  The documents.

In the cover letter to the draft decision issued in Hawaii, sent for
comment to the parties here, the Board noted that if the Board's initial
conclusions were adopted as the final decision, then FFP would be
available to the State until such time as the State had actual notice of
the Agency's present interpretation.  The Board noted that actual notice
was required before a party could be adversely affected by an
unpublished change in Agency policy.  (See Alabama Department of Pension
and Security, Decision No. 128, October 31, 1980;  Oregon Department of
Human Resources, Decision No. 129, October 31, 1980; Utah Department of
Social Services, Decision No. 130, October 31, 1980; New Mexico Human
Services Department, Decision No. 382, January 31, 1983; and see 5
U.S.C. 552(c)(1)(D) and (E)).  The Board asked the parties in New Mexico
to comment on whether certain documents in the Hawaii cases should be
considered notice of a change in Agency policy. The documents included
(1) a letter from the Agency advising the State that its claim for FFP
was being deferred pending further consideration, and (2) the subsequent
disallowance letters.

The parties' arguments in response were essentially the same here as in
Hawaii.  We incorporate the analysis at pages 15-22 of Hawaii and
conclude that neither the deferral nor the disallowance letters can be
considered notice under the circumstances of this case.

   B.  The Administrative Procedure Act.

At the close of the conference in this case, the Board suggested that
the parties brief the effect on this case, if any, of two provisions of
the Administrative Procedure Act (APA) pertaining to notice, sections
552 and 553 of 5 U.S.C.

The two sections pertain to different requirements for notice.  Section
553 deals with notice and comment requirements for rule making; section
552 is the Freedom of Information Act section, and states when there
must be publication in the Federal Register.

The Agency throughout these proceedings relied on a provision in section
553(b).  This section first states that notice of proposed rule making
shall be published in the Federal Register, but then goes on to say:

   Except when notice or hearing is required by statute, this subsection
does not apply - (A) to interpretative rules, general statements of
policy, or rules of agency organization, procedure, or practice;. . . .

(7) The Agency's position was that there was no change in Agency policy
pertaining to taxes since there never was any definite official policy
to pay FFP;  any statement of policy that FFP was not available was
simply an interpretive (or "interpretative") rule, not requiring notice
and comment rule making.  The Agency relied on Cabais v. Egger, 690 F.
2d 234 (D.C. Cir., 1983), which rejected the "substantial impact" test
in considering whether notice and comment was required.

New Mexico differed sharply with the Agency's position on section 553,
insisting that rules which change agency practice must be promulgated
under 553, even if the Agency labels them interpretative or general
policy statements.  New Mexico relied, in addition to 553, on the
requirements for publication in the Federal Register under section 552(
a)(1), which apply to:

   (D) substantive rules of general applicability . . . and statements
of general policy and interpretations of general applicability
formulated and adopted by the agency;. . . .

The subsection provides further that:

   Except to the extent that a person has actual and timely notice of
the terms thereof, a person may not in any manner be . . . adversely
affected by, a matter required to be published. . . .

On their face these provisions seem directly applicable here.  However,
the Agency attempted to distinguish this case, by saying that subsection
(D) is not applicable where a statute is "self-effectuating, and
therefore no interpretation by an agency is required." (Respondent's
supplemental brief, July 30, 1986, p. 6) The Agency continued further
that the Agency has not "formulated and adopted" the policy where "the
statutory provision has a single meaning" and the statute implements
itself and "provides notice of the policy to the public." (Id., p. 7) In
any event, argued the Agency, New Mexico had "actual notice."

We have decided above, as we did in Hawaii and California, that neither
the statute itself, nor the statute read together with A-87, clearly and
unambiguously precluded FFP for taxes;  the states were not on
constructive notice that FFP was unavailable.  Thus, subsection (D) of
section 552(a)(1) applies because the statute simply was not
"self-effectuating."

We have also dealt in Hawaii and California with the Agency's argument
that there was no change in policy since the Agency never had a formal
written policy on the issue.  The Agency argued that FFP for
expenditures for taxes was paid inadvertently or erroneously, and that
its present position on taxes was an(8) initial interpretation of the
Act.  The fact that the Agency provided FFP for taxes for 18 years in
the Hawaii cases and here, and some six years in the California cases,
seriously undermines the argument, however.  (See also, fn. 2 above)
Even if we agreed with the Agency, however, we would conclude that
subsection (D) of section 552(a)(1) applies, since application of that
subsection does not depend on whether the interpretation was an initial
one or a changed one.

We need not decide the further issue of whether the requirements for
notice and comment rule making of section 553 of the APA apply here,
because we have determined that the publishing or actual notice
requirements of section 552 do apply, which is dispositive.  Actual
notice was required before the State could be adversely affected. /5/

We have found above, as we did in Hawaii and California, that neither
the deferral letters nor the disallowance letters constituted "actual
notice." Since actual notice was required, and New Mexico did not
receive it, the disallowances must be reversed.

We need not reach the issue of what would constitute actual notice,
since that is not necessary for our decision.  We indicated in Hawaii,
and we repeat here, that an action transmittal might well be sufficient
but we have also stressed that the making of policy and the method of
promulgating it is for the Agency.

(9) Conclusion

Based on the foregoing, we sustain the State's appeal.  /1/ We use
        "HSD," "New Mexico," and "State" interchangeably when referring
to the appellant in this decision.  Nevertheless, it is useful in
picturing what happened in this case to note that, while HSD paid the
providers for medical services, the providers did not pay gross receipts
taxes back to HSD.  Rather, the providers paid gross receipts taxes to
the New Mexico Taxation and Revenue Department;  the money went into the
"tax administration suspense fund" for transfer later either to the
State general treasury or the local jurisdiction in which the taxable
transaction occurred, as provided by State statute.  /2/ For several
        years prior to this, Agency representatives had expressed
concerns about the State's reimbursement of gross receipts tax but had
taken no steps to terminate FFP for the reimbursements.  (Appellant's
Ex. 18)         /3/ The Court issued a final order on March 7, 1986,
continuing injunctive relief against HSD.  The order granted injunctive
relief against HCFA only if its basis for denying FFP was that payment
of the gross receipts tax was not an allowable cost to the providers.
Further action was stayed, at the suggestion of the parties, pending
Board decision.         /4/ The parties appeared to agree that, even for
institutional Medicaid providers, the tax was treated as an "add-on" and
was not reimbursed as part of a per diem rate.  (Transcript of
Conference, pp. 63-64) The matter is not entirely clear, however, since
under Medicare principles (which the State plan used), reimbursements to
institutional providers must be based on a per diem rate calculated
using the underlying provider costs, including taxes.  Thus, it may have
been that the parties simply meant that an overall per diem rate was
calculated using other provider costs and then the increment of the rate
attributable to taxes was calculated separately since it could vary from
locality to locality.         /5/ We referred in Hawaii to the internal
memorandum of February 1983 from an attorney in the Office of the
General Counsel, which gave an opinion that FFP was not available for a
Georgia state sales tax on pharmaceuticals for Medicaid patients (the
State was exempt by state statute), and which indicated that FFP might
not be available for sales taxes generally.  (Respondent's Tab 30, Ex.1)
The memorandum went on to say that arguably the "new policy" of not
allowing FFP for sale taxes constituted an interpretative rule, not
subject to the notice and comment provisions of section 553.  But the
memorandum also went on to say that, given the uncertain state of the
law notice and comment was the appropriate action.  HCFA was advised to
give actual notice to all jurisdictions that participated in the
Medicaid program, and to "proceed along both avenues, addressing the
problem in the short term by actual notice, and in the long run, by
publication." Id., p. 5.  394 APRIL 25, 1987