Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_17-cv-04462/USCOURTS-azd-2_17-cv-04462-0/pdf.json

Nature of Suit Code: 899
Nature of Suit: Other Statutes - Administrative Procedure Act/Review or Appeal of Agency Decision
Cause of Action: 28:1331 Fed. Question: Review Agency Decision

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Arizona Health Care Cost Containment 

System,

Plaintiff,

v. 

Centers For Medicare and Medicaid 

Services, et al.,

Defendants.

No. CV-17-04462-PHX-DJH

ORDER 

This matter is before the Court on an appeal by Plaintiff, Arizona Health Care Cost 

Containment System (“AHCCCS”), against Defendants, the United States Department of 

Health and Human Services, by and through its Centers for Medicare and Medicaid 

Services, and the Secretary of the United States Department of Health and Human Services, 

in his official capacity (collectively “HHS”). AHCCCS is appealing from a decision by 

the Health and Human Services Departmental Appeals Board disallowing $11,716,850 in 

federal financial participation for claimed school-based administrative costs. (Doc. 1).

AHCCCS filed an Opening Brief (Doc. 30), HHS submitted an Answering Brief 

(Doc. 34), and AHCCCS filed a Reply Brief (Doc. 35).

I. Background

Under the Social Security Act, states are eligible to receive federal reimbursement, 

referred to as “federal financial participation,” for school-based administrative activities 

that support Medicaid-eligible school children under the Individuals with Disabilities 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 1 of 18
- 2 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Education Act. (Doc. 17-3 at 1-3). For the period between January 2004 and September

2008, AHCCCS claimed $30,584,822 as federal financial participation for school-based 

administrative activities (Doc. 17-3 at 4); this amount was originally fully paid to AHCCCS

(Doc. 30 at 8). 

In October 2008, the Health and Human Services Office of the Inspector General

informed AHCCCS that it was conducting an audit of Arizona’s contingency fee payment 

arrangements with consultants for claiming school-based administrative costs; in March

2011, the objective of the audit was “revised” to focus on AHCCCS’s actual claims for 

school-based administrative costs. (Doc. 17-5 at 109-110; Doc. 17-5 at 143-144). 

Following these audits, the Office of the Inspector General disallowed $11,716,850 in 

federal funding for claimed school-based administrative costs. (Doc. 17-5 at 152). It 

disallowed $6,295,139 of this amount based upon AHCCCS’s data-collection method for 

school-based administrative costs. (Doc. 17-5 at 152, 163-166). It disallowed the

remaining $5,421,711 because it found that AHCCCS failed to maintain all needed claim 

substantiation documentsfor the first quarter of 2004 and the second quarter of 2005. (Doc.

17-5 at 152, 161-163). AHCCCS appealed this decision to the Department of Health and 

Human Services Departmental Appeals Board (the “Appeals Board”), which affirmed. 

(Doc. 17-3 at 1-26).

This Order will first discuss relevant context, including the applicable terms of the 

2003 Claiming Guide, which provided guidance to states regarding submitting claims for 

federal financial participation of school-based administrative costs; AHCCCS’s approach 

to documenting the amounts requested for federal financial participation of school-based 

administrative costs; the audits of AHCCCS’s claims; and the administrative review 

process in this matter. This Order will next address whether the Appeals Board properly 

disallowed $6,295,139 based upon AHCCCS’s data-collection methodology. Finally, this 

Order will address whether the Appeals Board properly disallowed $5,421,711 for 

AHCCCS’s failure to fully substantiate its claims during the 2011 audit.

...

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 2 of 18
- 3 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

A. The Claiming Guide

In a May 2003 publication, the Centers for Medicare and Medicaid Services

(“CMS”) issued a Medicaid School-Based Administrative Claiming Guide (the “Claiming 

Guide”) (Doc. 17-5 at 1-61). The Claiming Guide outlines acceptable methods for 

accurately assessing time spent on administrative activities. (Doc. 17-5 at 44). It noted 

that “one of the most commonly used sampling methodologies for time studies is random 

moment sampling” (“RMS”) and that the “RMS method represents an acceptable method 

for accurately assessing the time spent on administrative activities.” (Doc. 17-5 at 44). 

The Claiming Guide acknowledged that there was some flexibility in the sampling 

methodology, but stated that the methodology must remain statistically valid and that the 

methodology must be acceptable to CMS:

Flexibility is afforded within the bounds of statistical validity. However, the 

validity and reliability of the sampling methodology must be acceptable to 

CMS. That is, the state must include details of how its time study 

methodology will be validated.

(Doc. 17-5 at 45). 

The Claiming Guide next addressed the use of over-sampling and non-responses in 

the time study methodology. (Doc. 17-5 at 45). Although it recognized that oversampled 

responses are sometimes substituted for responses that were not received, it cautioned 

against substituting oversampled responses for completed responses when there were few 

reported Medicaid activities:

To ensure an adequate number of responses, many schools oversample 

and/or factor in a non-response rate in their time study methodology. Under 

this methodology, oversampled responses are sometimes substituted for 

responses not received. However, oversampled responses should not be 

substituted for completed responses in which there are no or few reported 

Medicaid activities in order to increase the Medicaid reimbursable portion of 

the claim. No completed responses should be deleted or ignored. 

(Doc. 17-5 at 45). 

Finally, with respect to claiming methodology, the Claiming Guide indicated that it 

is potentially problematic for employees who do not perform many Medicaid activities to 

fail to complete the time-study; in order to avoid such problems, non-responses must be 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 3 of 18
- 4 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

coded to non-Medicaid time study codes: 

Another potential problem is employees who are instructed to not complete 

the time study if they typically do not perform many Medicaid activities. To 

avoid this, all non-responses should be coded to non-Medicaid time study 

codes. 

(Doc. 17-5 at 45 (emphasis added)). 

B. Arizona’s Approach

In a January 2004 document entitled, “Medicaid Administrative Claiming Program 

Guide; DRAFT – Pending CMS Approval,” AHCCCS described its proposed methodology 

for collecting the sampling to establish the amount of time spent on administrative 

activities. (Doc. 17-5 at 63-73). The proposed methodology stated that forms would be 

marked invalid if they contained missing or inaccurate information or if the form was not 

approved; invalid forms would then be removed from the sample pool of observation 

forms:

Forms that cannot be validated, due to missing or inaccurate information, or 

failure [to] return the updated form will be marked invalid. Once all invalid 

forms have been extracted from the sample pool of observation forms, all 

valid forms are included in the tabulation. 

(Doc. 30 at 12; Doc. 17-5 at 72-73). 

On March 23, 2004, via e-mail, AHCCCS submitted its proposed claiming plan for 

the Medicaid School-Based Program for CMS’s review and approval. (Doc. 17-5 at 100). 

The transmittal e-mail stated that “[t]he guide has been prepared in accordance with the 

CMS May 2003 Guide and in response to AHCCCS’[s] change of contractor.” (Doc. 17-

5 at 100). Apparently not hearing back from CMS regarding the proposed plan, AHCCCS

e-mailed CMS in November 2004; AHCCCS asked whether there was “any information 

regarding the status of the AHCCCS claiming guide review/approval process.” (Doc. 17-

5 at 99). In response, Kenneth Adams of CMS indicated possible, but not official, approval 

of the plan, based upon AHCCCS’s representation that the plan was consistent with the 

Claiming Guide:

I forwarded Arizona’s School-Based Admin claiming plan to CO1right after 

I received it from you on March 23, 2004. I have not heard from CO and 

1 The record is unclear regarding the identity of “CO.”

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 4 of 18
- 5 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

confess I also have not had an opportunity to review it closely – but other 

staff indicated it looks good, but they have a few questions; 

Until such time as we formally approve AHCCCS’[s] plan we are relying on 

your statement in the transmittal e-mail that says AHCCCS’s program was 

prepared in accordance with the May 2003 CMS guide.

(Doc. 17-5 at 99). CMS never approved or disallowed AHCCCS’s 2004 proposed plan, 

which remained in place until AHCCCS modified the plan in May 2008. (Doc. 17-5 at 

107). 

AHCCCS made the May 2008 modification in response to an April 22, 2008, 

recommendation by its contractor, Maximus. In its recommendation, Maximus noted that, 

although the Claiming Guide was “arguably . . . contrary” to “other federal guidance” 

regarding non-responses, “AHCCCS treats ‘non-responses’ differently than the CMS 

Guide requires.’” (Doc. 17-5 at 103, 107). 

C. AHCCCS Claims Audits–Sampling Errors and Unretained Documents

On October 20, 2008, the Health and Human Services Office of the Inspector 

General (the “OIG”) notified AHCCCS that it intended to audit AHCCCS’s contingency 

fee agreements with consultants for claiming school-based administrative costs (the “2008 

audit”). (Doc. 17-5 at 109-110). The specific stated objectives were to:

determine the (1) extent to which the Arizona Health Care Cost Containment 

System (AHCCCS) has contracted with consultants through contingency fee 

payment arrangements and (2) impact of these arrangements on the 

submission of improper claims to the Federal Government.

(Doc. 17-5 at 109). The audit period was from January 1, 2004, through June 30, 2008. 

(Doc. 17-5 at 109). An attachment to the notification letter detailed the documents 

requested. (Doc. 17-5 at 111-112). Examples of the requested documents include 

AHCCCS policies regarding school-based administrative claims and copies of contracts 

between AHCCCS and Maximus. (Doc. 17-5 at 111-112). The 2008 audit also requested 

“Quarterly amount claimed by AHCCCS for Federal financial participation for Medicaid 

school-based administrative expenditures (in an Excel file).” (Doc. 17-5 at 112). The 2008 

audit notification letter further stated that, “we will also need access to additional 

documents and records”; the letter did not specify which additional documents and records 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 5 of 18
- 6 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

would be needed. (Doc. 17-5 at 109).

The OIG issued a second intent to audit notification letter to AHCCCS on March 

11, 2011 (the “2011 audit”). (Doc. 17-5 at 143-144). The “purpose” of that letter was to 

notify AHCCCS of the OIG’s “intention to conduct an audit of Medicaid school-based 

administrative costs claimed by the State of Arizona.” (Doc. 17-5 at 143). The stated 

objective was to “determine whether [AHCCCS] claimed Medicaid administrative costs 

for the school-based program in accordance with Federal regulations and guidance.” (Doc. 

17-5 at 143). The letter then linked the school-based administrative costs audit to the 

October 2008 audit of AHCCCS’s contingency fee agreements with consultants for 

claiming school-based administrative costs:

We initially started this review as part of a nationwide survey of Medicaid 

contingency fee payment arrangements. . . . After discussion with Centers 

for Medicare & Medicaid Services officials and OIG management, we have 

revised our objective to focus on AHCCCS’[s] claiming of Medicaid 

administrative costs for the school-based programs.

(Doc. 17-5 at 143). 

In a January 2013 Report, the OIG disallowed $11,716,850 from the $30,545,822 

that AHCCCS claimed as the Federal share of school-based administrative costs. (Doc. 

17-5 at 152). The OIG found that $6,295,139 of this amount was unallowable based upon 

AHCCCS’s Random Moment Time Sampling method. (Doc. 17-5 at 152). The OIG 

determined that AHCCCS “inappropriately discarded sample items when calculating the 

statewide Medicaid percentages.” (Doc. 17-5 at 152). The OIG reasoned that AHCCCS 

reduced the sample size when it discarded items; the reduced sample size resulted in higher 

Medicaid percentages, which therefore increased the amount of Federal reimbursement. 

(Doc. 17-5 at 164).

The OIG disallowed the remaining $5,421,711 because, for two out of the nineteen 

quarters considered—the first quarter of 2004 and the second quarter of 2005—AHCCCS

did not maintain documentation to support “(1) the universes of total available moments in 

time and RMTS participants and/or (2) the sample of random moments for selected 

participants.” (Doc. 17-5 at 152). In reaching this conclusion, the OIG stated that 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 6 of 18
- 7 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

AHCCCS provided copies of completed observation forms,2 but “did not provide data files 

to support the sample universe determination and the sample selection.” (Doc. 17-5 at 

162). The OIG stated that, without the files, it could not determine whether the provided 

observation forms were for the sample items selected for those two quarters. (Doc. 17-5 

at 163). As a result, the OIG disallowed all claimed reimbursement for the first quarter of 

2004 and the second quarter of 2005. (Doc. 17-5 at 161-163). 

D. The Administrative Review Process

On March 4, 2013, AHCCCS responded to the OIG report, disagreeing with the 

recommendation that AHCCCS refund $11,716,850 in federal reimbursement for schoolbased administrative costs. (Doc. 17-5 at 179-180). By letter dated October 20, 2016, 

HHS formally disallowed the $11,716,850 in claimed federal financial participation for 

school-based administrative costs. (Doc. 17-5 at 182-187). AHCCCS submitted a Request 

for Reconsideration to the Secretary of the Department of Health and Human Services on 

December 14, 2016. (Doc. 17-5 at 189-201). In its Request for Reconsideration, 

AHCCCS: (1) argued that the disallowance for purported methodological issues was 

“unfounded and unfair” because it was based upon AHCCCS’s lack of explicit 

methodology (Doc. 17-5 at 194), and (2) acknowledged that Maximus “was unable to 

provide the supporting documentation” for the two quarters at issue, but argued that 

disallowing the entire amount claimed was “unreasonable and unduly punitive” (Doc. 17-

5 at 193). On February 14, 2017, CMS issued its decision on AHCCCS’s request for 

reconsideration. (Doc. 17-5 at 204-205). CMS affirmed the disallowance. (Id.). 

AHCCCS filed a Notice of Appeal with the Department of Health and Human 

Services on April 3, 2017. (Doc. 17-5 at 207-208). On October 2, 2017, the Appeals Board 

issued its decision. (Doc. 17-3 at 1 – 26). The Board upheld the $11,716,850 disallowance. 

(Doc. 17-3 at 1).

AHCCCS now asks this Court to reverse the Departmental Appeals Board decision 

2 For the first quarter of 2004, AHCCCS provided copies of 3,559 filled-out observation 

forms and, for the second quarter of 2005, AHCCCS provided copies of 3,730 filled-out 

observation forms. (Doc. 17-5 at 162-163). 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 7 of 18
- 8 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

and set aside the disallowances that were upheld by that decision. (Doc. 1). Based upon 

the parties’ Stipulation (Doc. 10), this Court ordered that, as an administrative appeal, this 

case is excluded from the Mandatory Initial Discovery Pilot and that no discovery would 

be conducted. (Doc. 11). AHCCCS filed an Opening Brief (Doc. 30), HHS filed an 

Answering Brief (Doc. 34), and AHCCCS filed a Reply Brief (Doc. 35)

II. Discussion

A. Standard of Review 

This Court reviews the HHS Departmental Appeals Board decision under the 

Administrative Procedure Act (the “APA”), 5 U.S.C. § 551 et seq. Under the APA, the 

reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions 

found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance 

with law.” 5 U.S.C. § 706(2)(A). The agency’s decision is “presumptively valid; the 

plaintiff bears the burden of showing otherwise.” Texas Tech Physicians Assocs. v. United 

States Dep’t of Health and Human Services, 917 F.3d 837, 844 (5th Cir. 2019). 

The Court must defer to agency regulations that present a reasonable interpretation 

of an ambiguous statute. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 

467 U.S. 837, 842-44 (1984). An agency’s interpretation of its own regulation is similarly 

entitled to deference. Auer v. Robbins, 519 U.S. 452, 461 (1997). However, agency 

interpretations that “lack the force of law,” such as those in opinion letters, policy 

statements, agency manuals, and enforcement guidelines, “do not warrant Chevron-style 

deference.” Christensen v. Harris County, 529 U.S. 576, 587 (2000). Such interpretations 

are “‘entitled to respect’ . . ., but only to the extent that those interpretations have the ‘power 

to persuade.’” Id. (internal citations omitted).

B. Disallowance Based Upon Reporting Method

The Appeals Board upheld the $6,295,139 sampling methodology disallowance 

because “CMS did not unreasonably interpret the [Claiming Guide] after the fact” and 

because “Arizona discarded responses when the [Claiming Guide] then in effect did not 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 8 of 18
- 9 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

specifically permit such action and without CMS approval.”3 (Doc. 17-3 at 16). AHCCCS

argues that this Court should reverse this disallowance because the disallowance rationale 

was based on an unannounced and subjective standard that CMS has not always applied; 

because CMS failed to provide a reasoned basis for the disallowance; and because 

AHCCCS should have been permitted to rely on its proposed methodology in light of 

CMS’s failure to notify AHCCCS that the methodology was not acceptable. (Doc. 30 at 

12-25). In response, HHS states that this Court should uphold the disallowance because 

the Claiming Guide required AHCCCS to include non-responses in its sample and because 

CMS never approved the sampling methodology. (Doc. 34 at 8-12). As explained below, 

the Court affirms this disallowance because, based upon the administrative record, the 

Appeals Board decision was not arbitrary, capricious, an abuse of discretion, or otherwise 

not in accordance with the law. 

The Claiming Guide was provided to state agencies and schools to explain the 

acceptable process and methodology for claiming federal reimbursement for school-based 

administrative costs. Specifically, the Claiming Guide stated that its purpose was to 

“inform schools, state Medicaid agencies, and other interested parties on the appropriate 

methods for claiming federal reimbursement for the costs of Medicaid administrative 

activities performed in the school setting.” (Doc. 17-5 at 5). The Claiming Guide further 

noted that “[s]tate Medicaid Agencies are responsible for ensuring . . . that claims are 

submitted to CMS in conformance with such requirements.” (Doc. 17-5 at 6). Finally, the 

Claiming Guide stated that it “does not supersede any statutory or regulatory 

requirements.” (Doc. 17-5 at 6). Instead, “it clarifies and consolidates CMS’[s] guidance 

on how to meet these statutory and regulatory requirements and explains the application of 

such requirements in the context of current practices.” (Doc. 17-5 at 6). 

Regarding capturing the time for administrative Medicaid costs, the Claiming Guide 

required states to “develop an allocation methodology that is approved” by HHS. (Doc. 

3 The Appeals Board also affirmed the $6,295,139 sampling methodology disallowance 

because it found that Arizona failed to demonstrate that it actually interpreted the Claiming 

Guide language to mean that it could exclude non-responses without obtaining approval 

from CMS (Doc. 17-3 at 12-15). 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 9 of 18
- 10 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

17-5 at 12). Different methodologies could be used, including random moment sampling, 

contemporaneous time sheets, or other “quantifiable measures of employee effort.” (Doc. 

17-5 at 12). Regardless of the time study method used, the study had to reflect “all of the 

time and activities (whether allowable or unallowable under Medicaid) performed by 

employees participating in the Medicaid administrative claiming program.” (Doc. 17-5 at 

12 (emphasis in original)). 

Although the Claiming Guide provided for some “flexibility” in terms of claiming 

methodology, there were express limitations on that flexibility: first, the sampling 

methodology had to be “within the bounds of statistical validity”; second, “the validity and 

reliability of the sampling methodology must be acceptable to CMS.” (Doc. 17-5 at 45). 

Other limitations included that “[n]o completed responses should be deleted or ignored” 

and that “all non-responses should be coded to non-Medicaid time study codes.” (Doc. 17-

5 at 45).

AHCCCS takes issue with this final limitation requiring all non-responses to be 

coded to non-Medicaid time study codes. It argues that it rightfully believed that it was 

acceptable to exclude non-responses based upon the language of the Claiming Guide, as 

well as past practices, and that its belief was justifiable because it timely communicated its 

plan to CMS, which never suggested that the plan was unacceptable. (Doc. 30 at 21). The 

Appeals Board rejected this argument, reasoning that AHCCCS’s proposed plan did not 

conform to the Claiming Guide because its proposal excluded “certain types of responses 

considered invalid” and “essentially sought approval to deviate from the general rule of 

including all responses.” (Doc. 17-3 at 17). The Appeals Board further found that the 

Claiming Guide could be interpreted to permit the exclusion of non-responses, but only 

“with an approved protocol to support it.” (Doc. 17-3 at 16 (emphasis added)). Because 

CMS never approved the plan and because the plan excluded certain non-responses, the 

Appeals Board concluded that the claims were “properly disallowed for improperly 

excluding non-responses or incomplete or inaccurate responses.” (Doc. 17-3 at 19). This 

Court agrees. 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 10 of 18
- 11 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

First, when looking at the language of the Claiming Guide, AHCCCS’s program 

was not prepared in accordance with the Guide. Under the Claiming Guide, the default for 

incomplete forms was to include the form as non-Medicaid: “Another potential problem is 

employees who are instructed to not complete the time study if they typically do not 

perform many Medicaid activities. To avoid this, all non-responses should be coded to 

non-Medicaid time study codes.” (Doc. 17-5 at 45 (emphasis added)). Under AHCCCS’s 

plan, however, if there was a problem with a form, the default was to exclude the form 

from consideration. The plan stated that forms would be marked invalid if there was 

missing information, inaccurate information, or a failure to return the form; these “invalid 

forms” would then be “extracted from the sample pool of observation forms.” (Doc. 17-5 

at 72-73). In other words, if a form was not returned, was missing information, or contained 

inaccurate information, that form would be excluded from the tabulation. After those 

invalid forms were excluded, the remaining valid forms would be used for the tabulation. 

(Doc. 17-5 at 72-73). Therefore, AHCCCS’s methodology of excluding invalid forms 

contradicts the Claiming Guide’s express language. 

Second, CMS did not approve AHCCCS’s proposed plan. AHCCCS correctly 

states that it followed appropriate procedures by presenting CMS with the proposed plan. 

AHCCCS similarly correctly states that CMS never disapproved the plan based on the way 

the plan handled non-responses; lack of disapproval, however, is not approval. In the 

communication from Kenneth Adams of CMS to AHCCCS, Mr. Adams acknowledged 

that he had forwarded the claiming plan once he received it, that he had “not heard” back 

about the plan, and that he has “not had an opportunity to review it closely.” (Doc. 17-5 at 

99). While he did say that “other staff indicated it looks good,” he tempered this statement 

with the caveat that “they have a few questions.” (Doc. 17-5 at 99). Notably, he indicated 

that, until CMS formally approves the plan, CMS is “relying on your statement in the 

transmittal e-mail that says AHCCCS’s program was prepared in accordance with the May 

2003 CMS guide.” (Doc. 17-5 at 99). As discussed above, however, AHCCCS’s plan 

directly contradicted the express language of the Claiming Guide; therefore, contrary to 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 11 of 18
- 12 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

AHCCCS’s representation in its transmittal email to Mr. Adams, the plan could not have 

been “prepared in accordance” with the Claiming Guide.

Further, while the reasons for CMS’s delay in either approving or disapproving the 

proposed plan are unclear,4 CMS’s silence cannot be considered a concession that the plan 

was acceptable because the Claiming Guide stated that CMS approval was required: 

“Flexibility is afforded within the bounds of statistical validity. However, the validity and 

reliability of the sampling methodology must be acceptable to CMS.” (Doc. 17-5 at 45). 

Based on this language, the Appeals Board correctly found that AHCCCS was not entitled 

to interpret CMS’s silence as approval of its proposed plan. 

Finally, AHCCCS suggests that it nonetheless properly used its claiming 

methodology because some approved state methodologies, including AHCCCS’s 2010 

plan, allow non-responses to be discarded. (Doc. 30 at 14-16). As recognized by the 

Appeals Board, the problem with this argument is that “the parallel goals of statistical 

validity and claim integrity” only allow exclusion of non-responses when there is “an 

approved protocol.” (Doc. 17-3 at 16). Arizona’s revised, approved protocol is much more 

detailed regarding non-responses than the proposed 2004 plan and therefore, as found by 

the Appeals Board, “differs materially from the draft 2004 plan, to ensure a valid sample 

size.” 5 (Doc. 17-3 at 18). Accordingly, because AHCCCS’s proposed plan treated nonresponses differently from the Claiming Guide instructions, because CMS approval was 

required to ensure statistical validity, and because AHCCCS implemented the plan without 

obtaining CMS approval, this Court affirms the Appeals Board’s decision disallowing

$6,295,139 based upon Arizona’s Random Moment Time Sampling method.

4 The Appeals Board suggests that “[s]ince CMS never approved Arizona’s 2004 plan, as 

drafted, it is reasonable to infer that CMS had concerns or reservations” about the 2004 

plan. (Doc. 17-3 at 18 (emphasis in original)). Further, the Appeals Board found that, 

CMS’s approval of Arizona’s modified plan “strongly suggests that CMS had concerns 

about a matter relevant to statistical validity that the 2004 plan did not adequately or 

specifically address.” (Doc. 17-3 at 18). 

5 The 2010 plan states “[Arizona] will require an 85% return rate. Non-responsive 

moments, moments not returned or not accurately completed and subsequently resubmitted 

. . . will not be included in the results unless the return rate for valid moments is less than 

85%. If the return rate of valid moments is less than 85%, then, non-returned moments 

will be included and coded as a non-allowable.” (Doc. 17-3 at 18). 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 12 of 18
- 13 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

C. Disallowance Based Upon Failure to Retain Documentation

The Appeals Board also upheld a $5,421,711 disallowance based upon AHCCCS’s 

failure to retain supporting claim documentation from the first quarter of 2004 and the 

second quarter of 2005. It reasoned that AHCCCS improperly failed to maintain 

documentation to support its claims for those quarters and that, without the documentation, 

AHCCCS could not substantiate any of its claims for those quarters. (Doc. 17-3 at 23-25). 

AHCCCS asserts this Court should reverse that decision because, although underlying 

documents were admittedly missing at the time of the 2011 audit, AHCCCS was not 

required to retain those documents until the 2011 audit; therefore, according to AHCCCS, 

the Appeals Board decision is arbitrary and capricious and should be reversed. (Doc. 30 

at 27-29). HHS argues that the disallowance was rational because AHCCCS was obligated 

to substantiate its claims regardless of any document retention guidelines and because, in 

any event, AHCCCS had sufficient notice that its claims were being challenged and 

therefore should have retained the records. (Doc. 34 at 12-14). As explained below, the 

Court affirms this disallowance because, based upon the administrative record, AHCCCS 

should have retained the needed supporting documentation until all audits were resolved; 

because AHCCCS failed to retain the documents and could not substantiate its claims for 

those two quarters, the Appeals Board decision was not arbitrary, capricious, an abuse of 

discretion, or otherwise not in accordance with the law. 

In general, claim documents must be retained for a minimum of three years; if there 

is an audit of a claim, this period is extended until the audit is resolved. 42 C.F.R. § 433.32; 

45 C.F.R. § 75.361. The Code of Federal Regulations, regarding State Fiscal 

Administration and Federal Matching and General Administration Provisions, provides 

that state Medicaid agencies, as well as local agencies administering the plan, must 

“[r]etain records for 3 years from date of submission of a final expenditure report.” 42 

C.F.R. § 433.32(b). Likewise, regarding Post Federal Award Requirements, the Code of 

Federal Regulations states that “[f]inancial records, supporting documents, statistical 

records, and all other non-Federal entity records pertinent to a Federal award must be 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 13 of 18
- 14 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

retained for a period of three years from the date of submission of the final expenditure 

report or, for Federal awards that are renewed quarterly or annually, from the date of the 

submission of the quarterly or annual financial report.” 45 C.F.R. § 75.361. However, if 

an “audit is started before the expiration of the 3-year period, the records must be retained 

until all litigation, claims, or audit findings involving the records have been resolved and 

final action taken.” 45 C.F.R. § 75.361(a); see also 42 C.F.R. § 433.32(c) (stating that 

agencies must “[r]etain records beyond the 3-year period if audit findings have not been 

resolved”).

In order to determine the ending date of the three-year documentation retention 

period for the first quarter of 2004 and the second quarter of 2005, and to therefore 

determine whether AHCCCS was obligated to maintain the missing documentation at the 

time of the 2011 audit, the Court must first determine the starting dates of those three-year 

periods. Based on the record, it is unclear exactly when AHCCCS filed its claims for the 

first quarter of 2004 and the second quarter of 2005. Pursuant to 42 U.S.C. § 1320b-2(a), 

states must file claims “within the two-year period which begins on the first day of the 

calendar quarter immediately following such calendar quarter.” 42 U.S.C. § 1320b-2(a). 

Therefore, claims for the first quarter of 2004 must have been submitted by April 1, 2006, 

and claims for the second quarter of 2005 must have been submitted by July 1, 2007.6

Based upon the three-year document retention period from those dates, AHCCCS must 

have retained the documents from the first quarter of 2004 until April 1, 2009, and must 

have retained documents from the second quarter of 2005 until July 1, 2010.7

If an audit is started before the end of the three-year document retention period, the 

records must be retained until the audit is resolved and final action has been taken. 45 

6Because AHCCCS did not submit evidence of the exact claim submission dates, the Court 

will analyze this issue using the latest dates on which AHCCCS could have supported the 

claims.

 

7 CMS asserts that a five-year, not three-year, document retention policy applies based 

upon AHCCCS’s own 2004 plan, which required Maximus to retain the time study records 

for no less than five years. (Doc. 34 at 13). Based on this Court’s decision, it is unnecessary 

to address whether the federal three-year document retention requirement applies or 

whether the claimed internal five-year document retention policy applies. 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 14 of 18
- 15 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

C.F.R. § 75.361(a) (“the records must be retained until all litigation, claims, or audit 

findings involving the records have been resolved and final action taken”); see also 42 

C.F.R. § 433.32(c) (agencies must “[r]etain records beyond the 3-year period if audit 

findings have not been resolved”). In the present case, the 2008 audit was initiated on 

October 20, 2008, which was before the end of the three-year document retention period 

for both the first quarter of 2004 and the second quarter of 2005. Therefore, AHCCCS was 

required to retain all documents related to the 2008 audit until that audit was resolved. In 

contrast, the 2011 audit was initiated after expiration of the three-year document retention 

period. Therefore, unless the 2008 audit was broad enough to encompass the missing 

documents that were required for the 2011 audit, AHCCCS was not obligated to maintain 

those documents beyond the three-year period. Accordingly, resolution of this issue turns 

upon whether the 2008 audit was sufficiently broad enough to encompass the 2011 audit. 

The Court agrees with the Appeals Board, which found that the 2008 audit notice 

“plainly” announced that it would examine “whether federal funds were properly claimed”

and therefore found that the 2008 audit notice put AHCCCS on notice that it would need 

to retain substantiating claim documentation. (Doc. 17-3 at 21-22). The stated purpose of 

the 2008 audit was to “determine the (1) extent to which [AHCCCS] has contracted with 

consultants through contingency fee payment arrangements and (2) impact of these 

arrangements on the submission of improper claims to the Federal Government.” (Doc. 

17-5 at 109 (emphasis added)). This essentially means, with respect to AHCCCS, that the 

audit was intended to examine the contingency fee payment arrangements between 

AHCCCS and its contractor Maximus and was intended to determine if the contingency 

fee arrangement impacted the submission of improper claims. Attached to the audit notice 

was a list of documentation requested in connection with the audit; those documents 

included “Quarterly amounts claimed by AHCCCS for Federal financial participation for 

Medicaid school-based administrative expenditures (in an Excel file).” (Doc. 17-5 at 112). 

 On March 11, 2011, the OIG presented a second audit letter to AHCCCS, this time 

indicating that it was specifically examining the school-based administrative costs claimed 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 15 of 18
- 16 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

by the State of Arizona. (Doc. 17-5 at 143). In doing so, it stated that it had “revised” its 

prior audit to focus on the claimed administrative costs, rather than the contingency fee 

payments. (Id.).

Although the 2008 audit did not specifically focus on the validity of the schoolbased administrative claims, the language of the notice letter was broad enough to put 

AHCCCS on notice that it needed to retain the administrative claim supporting documents 

until the 2008 audit was resolved. First, the 2008 audit encompassed Arizona’s 

contingency fee agreements with consultants for claiming “school-based administrative 

costs.” (Doc. 17-5 at 109). The claims at issue are for these school-based administrative 

costs. Second, the 2008 audit notice stated that one of its purposes was to examine the 

impact of contingency fee arrangements “on the submission of improper claims to the 

Federal Government.” (Doc. 17-5 at 109). When considering this language together, the 

audit notice indicated that the audit would include school-based administrative costs and

would necessarily need to encompass whether claims were improperly submitted for those

costs. Thus, as recognized by the Appeals Board (Doc. 17-3 at 21-22), once AHCCCS

received the notice, it was required to retain all documents related to the audit until the 

audit was resolved. See 45 C.F.R. § 75.361; 42 C.F.R. § 433.32(c). 

AHCCCS suggests that it did not need to retain the documents underlying the claims 

submissions because those documents were not included in the list of documents attached 

to the 2008 audit notice. Instead, the notice merely asked for a spreadsheet of quarterly 

amounts claimed by AHCCCS during the period from 2004 to 2008. (Doc. 30 at 27). 

Although the list of items did request such a spreadsheet, the audit further stated that “we 

will also need access to additional documents and records.” (Doc. 17-5 at 109, 112). This 

language demonstrates that the provided list was not an exclusive list. Therefore, the 2008 

audit letter placed AHCCCS on notice that all documents related to the audit needed to be 

retained until that audit was resolved. Because that audit was never resolved, but was 

instead modified into the 2011 audit, AHCCCS should have continued to maintain the 

documents through resolution of the 2011 audit. 

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 16 of 18
- 17 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Finally, AHCCCS argues that, even if it had been required to maintain the missing 

documents, it is “unreasonable and punitive” for CMS to disallow all amounts claimed for 

the first quarter of 2004 and the second quarter of 2005. (Doc. 30 at 29-32). AHCCCS 

asks this Court to instead only permit disallowance of an amount proportionate to the 

percentage of claims disallowed during the 17 quarters for which AHCCCS provided the 

necessary supporting documentation. (Id.). It reasons that, because only a small 

percentage was disallowed from the remaining quarters, it is disproportionately punitive to 

disallow 100% of the claims from the two quarters in question. (Id.). The Appeals Board 

rejected this argument, finding that the “disallowance of [federal financial participation]

for failure to substantiate the claims is not intended to punish the state agency.” (Doc. 17-

3 at 24). Instead, the “issue is whether federal funds have been properly paid to a claimant 

in accordance with applicable requirements.” (Doc. 17-3 at 24). Therefore, the 

disallowance was based on CMS’s finding that AHCCCS could not substantiate any of its 

claims for those two quarters because it admittedly failed to retain and to produce the 

underlying random moment time sampling records for those quarters. (Doc. 17-3 at 25). 

Accordingly, the Appeals Board concluded that “Arizona has not carried its burden to show 

that the audit findings were not substantiated.” (Doc. 17-3 at 25). Finally, the Appeals

Board stated that, to the extent that Arizona’s request for a reduced disallowance may be 

considered a request for equitable relief, it could not provide such relief because it is not 

authorized to issue equitable relief. (Doc. 17-3 at 25). 

This Court finds that, based on the record provided, the Appeals Board decision was 

not arbitrary, capricious, an abuse of discretion, or otherwise contrary to law. As stated by 

the OIG, and as recognized by the Appeals Board, the disallowance was based upon the 

OIG’s inability to determine the proper amount for reimbursement because AHCCCS 

failed to substantiate its claims for those two quarters during the audit:

Without these files, we could not determine whether the observation forms 

that the State agency provided were for the sample items selected for those 

two quarters. Because the State agency was unable to provide required 

documentation of the sample universe determination and/or sample 

selection, the Federal reimbursement for school-based administrative costs 

for those quarters was unallowable.

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 17 of 18
- 18 -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

(Doc. 17-5 at 163; see also Doc. 17-5 at 183-184). Therefore, because AHCCCS was 

obligated to maintain all required supporting documents once it had notice of the audit and 

because the OIG could not determine the proper claim amount without all supporting 

documents, the Court affirms the Appeals Board decision finding that that the $5,421,711 

was properly disallowed.

III. Conclusion

The Court finds that the Departmental Appeals Board’s decision was neither 

arbitrary and capricious nor an abuse of discretion. Accordingly, 

IT IS ORDERED affirming the October 2, 2017, Decision of the Department of 

Health and Human Services Departmental Appeals Board.

IT IS FURTHER ORDERED dismissing the administrative appeal and directing 

the Clerk to enter judgment accordingly. 

Dated this 14th day of February, 2020.

Honorable Diane J. Humetewa

United States District Judge

Case 2:17-cv-04462-DJH Document 37 Filed 02/18/20 Page 18 of 18