In the

United States Court of Appeals

For the Seventh Circuit

No. 01-2941

INDIANA FAMILY & SOCIAL SERVICES

ADMINISTRATION, and OFFICE OF MEDICAID

POLICY AND PLANNING,

Plaintiffs-Appellants,

and

ELECTRONIC DATA SYSTEMS CORPORATION,

Intervening Plaintiff-Appellant,

v.

TOMMY G. THOMPSON, Secretary of the

United States Department of Health & Human

Services, and NANCY-ANN MIN DEPARLE, Administrator,

Health Care Financing Administration,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. IP 99-1168-C H/G--David F. Hamilton, Judge.

Argued January 23, 2002--Decided April 12, 2002

 

 Before BAUER, COFFEY, and EVANS, Circuit

Judges.

 EVANS, Circuit Judge. Indiana, through

its Department of Family & Social

Services (DFSS)/1 and Office of

Medicaid Policy and Planning (OMPP),

adopted a new management information

system for processing Medicaid claims.

The Health Care Financing Administration

(HCFA), now known as the Centers for

Medicare and Medicaid Services (CMMS), of

the United States Department of Health &

Human Services (DHHS) rejected Indiana’s

claim for an enhanced level of federal

funding for the system. Indiana appealed

to the DHHS Departmental Appeals Board

(DAB), which affirmed the disallowance.

After Indiana petitioned for judicial

review, the district judge granted

summary judgment to the Secretary.

Indiana appeals the decision to us.

 Medicaid, as everyone knows, is a
cooperative state-federal program

designed to provide medical assistance to

poor people. Although each state

administers its own program, states with

plans approved by the federal government

are entitled to receive federal matching

funds, referred to in administrative

lingo as Federal Financial Participation

(FFP). Federal money is available to pay

for medical services at a rate based on a

state’s per capita income. It is also

available to share the state’s

administrative expenses, generally at a

50 percent rate. In 1972, to encourage

states to use modern computerized systems

to process Medicaid claims, Congress

passed legislation establishing enhanced

rates of funding. The law provides that

the federal government will pay 90

percent of costs attributable to the

"design, development, or installation of

. . . mechanized claims processing and

information retrieval systems." 42 U.S.C.

sec. 1396b(a)(3)(A)(i). It will also pay

75 percent of costs "attributable to the

operation" of the system. 42 U.S.C. sec.

1396b(a)(3)(B). The system must meet the

requirements for a Medicaid Management

Information System (MMIS), as certified

by DHHS, in order to receive enhanced FFP

funding.

 In 1993 Indiana decided to replace its

existing Medicaid information system. It

contracted with Electronic Data Systems

(EDS) to design and implement the

Advanced Information Management System

(AIM). AIM was designed to process

electronic as well as paper claims and

offered enhanced editing and auditing

features over the old system.

 Some of the claims slated to come

through AIM were Medicare crossover

claims, which are ones that concern

people eligible for both Medicare and

Medicaid (i.e., people who are elderly in

addition to being poor). Such claims are

processed first through Medicare and then

"cross over" to Medicaid for further

coverage (usually of Medicare co-payments

and deductibles). To process a crossover

claim, AIM required both a medical

provider’s Medicare and Medicaid provider

numbers because it cross-referenced the

Medicare number with the Medicaid number

in order to pay the proper Medicaid

provider. In January of 1994, while

preparing to implement AIM, Indiana

mailed Medicaid re-enrollment
applications to medical providers.

According to Indiana, many providers gave

incorrect Medicare provider numbers or

failed to supply a number at all.

 AIM "went live" on February 5, 1995.

Either shortly before or shortly after

this date, Indiana determined that a high

number of crossover claims were being or

would be rejected because of the problem

with the missing provider numbers.

Indiana decided to suspend the claims in

order to track down the missing Medicare

provider numbers in its database. To aid

this process, it routed electronic

crossover claims into "location 41," a

separate electronic file within AIM.

 AIM weekly status reports for May 1995

showed a growing backlog of electronic

crossover claims. As of the week ending

May 12, Indiana had loaded all crossover

tapes onto AIM,/2 but there were still

164,000 claims to be processed for the

first time; by May 19 that number was

167,000; by May 26 it was 184,000; by

June 2 it was 211,418; by June 9 it was

230,000; by June 16 it was 250,000. This

backlog was processed in full the week

ending June 23.

 After an on-site certification review of

AIM in August 1996 and some back and

forth with Indiana, HCFA reached a final

decision in December of 1997 that AIM’s

certification date would be November 21,

1995, not February 5, 1995. The

difference in dates represented

$5,880,230 in decreased funding. Indiana

appealed the disallowance to the

Departmental Appeals Board. While the

appeal was pending, Indiana and HCFA

discussed the reasons why AIM was not

certified as of February 5. In May of

1998, HCFA revised its decision, holding

that June 23 was the proper certification

date because as of that date AIM was

processing electronic Medicare crossover

claims on "a normal flow basis."

 The DAB upheld HCFA’s rejection of a

February 5 certification date but moved

the certification date up a week from

June 23 to June 17, or from the end to

the beginning of the week when the

backlog was processed./3 The DAB first

noted that "a decision to withhold the

processing" of electronic crossover

claims "because of problems in securing

Medicare provider numbers . . . is not
grounds for certifying Indiana’s system

as of February 5, 1995." AIM could not be

"fully functional" without this "critical

information." The DAB also wrote that

"the AIM system had more problems than

just the missing provider numbers." But

"[r]egardless of the cause," the evidence

established that AIM was not

"continuously processing electronic

crossover claims" until it started

processing the backlog on June 17. The

fact that AIM may have processed some

electronic Medicare crossover claims in

February and possibly in March 1995 was

insufficient to show that AIM was

"operating continuously" in light of the

backlog.

 Indiana filed a petition for judicial

review in the district court. EDS was

allowed to intervene as Indiana indicated

that it might look to it to recover

damages. The parties moved for summary

judgment and the district judge ruled in

the Secretary’s favor, noting that "the

cause of the problem does not matter"

because the DAB had not tried "to resolve

those issues definitively." Rather, the

DAB had evaluated "actual performance" in

interpreting the "operating continuously"

standard. The DAB did not act arbitrarily

or capriciously in finding "that

processing a small fraction of a

particular type of claims, and then

suspending all processing of such claims

for several months, did not satisfy the

requirement of ’operating continuously,

processing all claims types.’"

 We recall that the relevant statute

provides that the federal government will

pay 75 percent (remember the normal

administrative rate is 50 percent) of

expenses attributable to the "operation"

of an approved information system. 42

U.S.C. sec. 1396b(a)(3)(B). The relevant

regulation requires that the system has

been "operating continuously during the

period for which" enhanced funding is

claimed. 42 C.F.R. sec. 433.116(d).

Another regulation, 42 C.F.R. sec.

433.110(a)(1), directs the reader to

HCFA’s State Medicaid Manual (SMM) for

additional guidelines. The manual

requires that the "complete system with

all its component subsystems . . . has

been operating continuously, processing

all claims types, during all periods for

which 75 percent FFP is claimed." SMM

sec. 11210.
 We have had some skirmishing about the

relevant standards of review. Although we

review a district court’s ruling on a

motion for summary judgment de novo, Mt.

Sinai Hosp. Med. Ctr. v. Shalala, 196

F.3d 703, 707 (7th Cir. 1999), judicial

review of the DAB’s determination is made

under 5 U.S.C. sec. 706, which requires

that we uphold the Secretary’s

determination unless he made "an

arbitrary or capricious decision, abused

[his] discretion, acted contrary to law

or regulation, or lacked the support of

substantial evidence." Mt. Sinai, 196

F.3d at 708 (citations omitted).

 Also at issue is the deference accorded

the Secretary’s interpretation of the SMM

in the wake of United States v. Mead

Corp., 121 S. Ct. 2164 (2001). Mead,

which was decided 2 months after the

district judge’s ruling in this case,

makes clear that not all agency

interpretations of its own laws are

entitled to full Chevron deference. Only

those subject to notice-and-comment or

comparable formalities qualify. Id. at

2172-73; United States Freightways Corp.

v. Commissioner, 270 F.3d 1137, 1141 (7th

Cir. 2001). Less formal agency

interpretations, including those in

agency manuals, receive "more flexible

respect," Freightways, 270 F.3d at 1141,

depending on the agency’s care,

consistency, formality, relative

expertness, and the position’s overall

persuasiveness. Mead, 121 S. Ct. at 2171,

2175.

 Indiana finds nothing objectionable in

the manual itself but instead challenges

what it calls the "Secretary’s ad hoc

interpretation" of the manual. Indiana

asserts that it made a deliberate

decision to "suspend" electronic

crossover claims (by routing them into

location 41) so it could obtain or

reconcile Medicare provider numbers./4

By denying its claim for funding, the

Secretary improperly interpreted

"processing" not to include the

suspension of claims for information

verification and error correction. The

Secretary instead interpreted

"processing" as synonymous with "paying."

Indiana asks us not to defer to this

interpretation because it is nonsensical

and conflicts with a manual provision

requiring that a "claims processing
subsystem" must "[a]utomatically suspend

all transactions in error until

corrections are made." SMM sec. 11325.

 Indiana doesn’t have the facts to pull

off this argument. AIM was never in the

business of identifying erroneous

crossover claims and sending them to

location 41 in order to allow Indiana to

obtain missing provider numbers for those

claims. Shortly after the "live" date,

AIM began rejecting electronic crossover

claims that lacked provider numbers.

After edits were made, all electronic

crossover claims were sent to location

41, regardless of whether they were

missing information or not. As Judge

Hamilton in the district court aptly put

it, "[E]ven those providers who had

correctly provided all necessary

information had their claims for payment

put on ice until the week beginning June

17, 1995."/5 Thus, the issue for us is

not whether the Secretary was wrong to

find that processing does not include

claim suspension for error correction.

The DAB made no such determination. The

relevant issue is whether we should upset

the Secretary’s conclusion that AIM’s

segregation of all electronic crossover

claims, whether they contained errors or

not, meant that AIM was not "processing"

the claims.

 Although neither the manual nor the

governing regulation defines

"processing," we think the Secretary did

not err by concluding that "processing"

does not entail segregating an entire

class of claims without regard to whether

individual claims within the class were

valid or not./6 Indeed, we need look no

further than Indiana’s own brief to find

support for this interpretation. It

states:

[W]hat the phrase must mean is that a

system that receives claims for payment

must either process the claim for

payment, deny the claim because it does

not meet certain requirements, or suspend

the payment of the claim to obtain

additional information in order to ensure

that the claim is properly adjudicated.

Later it adds:

The Medicaid Manual can only be

interpreted as saying that the system

must have the capability for having all
types of claims processed, including

identifying the claim when received,

assigning a control number, paying the

claim when it is warranted, suspending

the claim when further development is

necessary, and then either paying or

denying the claim for payment (both

italics added).

These definitions presume that the act of

processing requires a system "to separate

non-compliant claims for further review"

(more of Indiana’s words). Indiana

hasacknowledged the obvious--that

warehousing all claims of a particular

type, regardless of whether some are

valid, means that the system is not

performing an essential part of

processing by sorting the good from the

bad, correcting the bad, and allowing the

good to go forward.

 This meaning is consistent with the

manual and the regulation. We’ll start

with the requirement that a system

"suspend all transactions in error until

corrections are made." SMM sec. 11325.

Even assuming that all of the crossover

claims lacked the requisite information,

Indiana did not suspend each transaction

because of this error. Rather, it

sequestered the entire group of

electronic crossover claims to address

the problems bedeviling what it suspected

would be the majority of the claims.

Moreover, AIM may well have suspended

claims that were not in error by

withholding payment on claims that may

have contained correct information. It is

a consistent reading of the "suspension"

guideline to infer that claims not in

error be allowed to proceed to payment.

After all, the objectives of the MMIS are

"[m]ore accurate and timely claims

processing" and "[r]educed time to pay

providers." SMM sec. 11115. Another

guideline requires the claims processing

subsystem to "[e]nsure that

reimbursements to providers are rendered

promptly and correctly." SMM sec. 11325.

Moreover, the governing regulation

requires "continuous" operations. 42

C.F.R. sec. 433.116(d). We doubt that a

physician who submitted a valid

electronic crossover claim, but had to

wait months for payment because of

problems with claims submitted by other

providers, would think that AIM was busy

"processing" crossover claims. The

Secretary acted consistently with his
statutory authority by adopting an

interpretation of processing that

encourages states to pay valid crossover

claims efficiently, thereby encouraging

physicians to provide medical services to

the elderly and poor, which is, putting

all this administrative mumbo jumbo to

the side, the whole point of Medicare and

Medicaid./7

 The Secretary filled this gap with

sufficient care and formality to warrant

deference. HCFA performed its initial

certification review in August of 1996.

Even after it disallowed enhanced

funding, it negotiated with Indiana at

length before revising its original

decision. The DAB weighed the evidence

submitted in this case and, in a thorough

opinion, upheld HCFA’s decision. The

Secretary has a familiarity, expertise,

and institutional memory concerning the

intricacies of Medicaid processing

systems and funding standards that we

cannot rival. The Secretary did not reach

the conclusion in this case, as Indiana

contends, in an "ad hoc" fashion.

 And there is another ground for

upholding the Secretary. Even assuming

that AIM identified and withheld only

those claims lacking provider numbers,

the resulting backlog was substantial.

The DAB found that the provider numbers

were "critical information" for AIM’s

functioning and "[t]he responsibility to

procure this information in a timely

manner to ensure the full and continuous

operation of the AIM system rested with

Indiana."

 Indiana has not challenged this finding,

which we think is also entitled to

deference. Indeed, it is not only

consistent with but appears to be

compelled by the manual. The manual

provides that "the federally required

MMIS" has six "core subsystems," one of

which is "claims processing." SMM sec.

11310. The manual specifies that the

claims processing subsystem must

"[v]erify that all providers submitting

input are properly enrolled." SMM sec.

11325. There is also a "provider"

subsystem. SMM sec. 11310. The provider

subsystem must "[p]rocess provider

applications and changes in a timely

manner and maintain control over all data

pertaining to provider enrollment" and

"[b]uild and maintain a computerized file
of provider data for claims processing."

SMM sec. 11320. It is not inconsistent to

read this requirement as encompassing

Medicare provider numbers since the MMIS

seeks "[c]ompatibility with Medicare

claim processing and information

retrieval systems for the processing of

Medicare claims." SMM sec. 11115. And the

Manual makes clear that the "complete

system with all its component subsystems"

must be "operating continuously, process

ing all claims types, during all periods

for which 75 percent FFP is claimed"

(italics added). SMM sec. 11210.

 This interpretation is also persuasive.

Common sense alone dictates that in order

for an information system to operate, it

must be technically functional and also

have access to the input required to

perform its tasks. Otherwise the goal of

using the system to process claims

effectively will not be achieved, as in

this case where a backlog of a quarter of

a million crossover claims developed.

Interpreting the manual to require a

state to ascertain necessary information

does not discourage states from

developing mechanized systems to process

Medicaid claims. The federal government

still provides 90 percent of the costs

attributable to the "design, development,

or installation" of these systems.

Because the 75 percent level applies to a

system’s "operation," the Secretary can

justifiably expect that a system will not

only be technically operational but also

possess the requisite information to

enable the system to hum.

 In sum, although Indiana complains that

it confronted a "no win" situation in

that it had to choose between submitting

electronic crossover claims that would be

rejected (which would have caused HCFA to

deny funding) or suspending the claims

(which led HCFA to deny funding), Indiana

continues to ignore the critical decision

it made earlier to "go live" with AIM

before its provider database was

complete. As Dorothy Collins, HCFA’s

regional administrator, wrote to Kathleen

Gifford (with Indiana):

The problems which caused the delay in

processing these claims should have been

anticipated and addressed before the

system "went live." Federal Financial

Participation (FFP) would have been

available at the 90 percent rate for the
additional costs involved in anticipating

and addressing crossover processing

problems as well as all the other

problems which arose when the AIM system

was turned on.

Whether Indiana would have been entitled

to the 90 percent rate for fixing its

database issue is not clear. What is

clear is that instead of postponing AIM’s

debut, Indiana jumped the gun. We find

nothing wrong with the Secretary’s

decision to hold Indiana to the

consequences of that choice. The judgment

of the district court is AFFIRMED.

FOOTNOTES

/1 Acronyms are a staple of court decisions, especially in cases like this one involving bureaucratic behemoths. So we won’t go light on the

acronyms, as we’ll first use "DFSS" for the

Department of Family & Social Services. Later

we’ll introduce "OMPP", "HCFA", "CMMS", "DHHS",

"DAB", "FFP", "EDS", "AIM", and "SMM".

/2 The mechanics of how electronic crossover claims

were loaded into the system are a mystery to us.

Indiana apparently received tapes that contained

crossover claims. As near as we can determine,

AIM was able to load the tapes into the system

but could not process the claims contained on

them.

/3 The DAB reminded HCFA that it had not reduced the

$5,880,230 figure after the first revision, so

the amount at issue was unclear. At oral argument, counsel told us that slightly over $2

million still hangs in the balance.

/4 We will assume for purposes of this appeal that

AIM’s problems were attributable solely to missing Medicare provider numbers. The parties strenuously debated, however, the exact cause of AIM’s

problems before the DAB, which specifically found

that AIM had systemic problems.

/5 It is hard to tell whether Indiana contests this

fact. Although Indiana’s submissions at various

levels of this dispute have at times suggested

that Indiana suspended only erroneous claims, the

record evidence indicates otherwise. See Mary

Simpson aff. para. 8 ("Indiana . . . made a

conscious decision to withhold the processing of

Medicare crossover claims for up to six (6)

months."); Pat Nolting aff. para. 7 ("In February

1995, a conscious decision was made . . . to

withhold processing of Medicare crossover claims.

. . . [H]ad all Medicare crossover claims been

processed in February 1995, there would have been
a large number of rejected claims which would

have required resubmittal by providers."). Indiana claims that it processed electronic crossover

claims in March of 1995. The DAB properly found

that there was no evidence to support that assertion.

/6 Indiana invokes definitions for "data processing"

and "automatic data processing" that appear in

federal regulations. These definitions are so

generic that we think they fail to illuminate the

narrower issues raised in this case.

/7 Indiana has made much of the fact that it ultimately processed the backlogged claims within the

6-month time frame for crossover claims allowed

by 42 C.F.R. sec. 447.45(d)(4)(ii). But the

governing regulation for enhanced funding (which

Indiana does not challenge) requires "continuous"

operation. 42 C.F.R. sec. 433.116(d). A substantial backlog of electronic crossover claims

developed in the spring of 1995. So the fact that

Indiana may have been able to adjudicate the

crossover claims under the most generous wire

does not show that it was doing so continuously

in light of the fact that it sidetracked the

claims for some time.