Opinion ID: 8312872
Heading Depth: 2
Heading Rank: 1

Heading: The ISDEAA's Limit on Indirect CSC Funding

Text: To evaluate the merits of both of the Tribe's claims, the Court begins by reviewing what the ISDEAA says about indirect CSCs-and then also what the Act does not say. The Act defines CSCs as the reasonable costs for activities which must be carried on by a tribal organization as a contractor to ensure compliance with the terms of the contract and prudent management. 25 U.S.C. § 5325 (a)(2). It then defines indirect CSCs specifically as the reasonable and allowable costs ... related to the overhead incurred by the tribal contractor in connection with the operation of the Federal program, function, service, or activity pursuant to the contract. Id. § 5325(a)(3)(A)(ii). These definitions are limited, however, by a separate section of the ISDEAA, which provides that funds available to the Indian Health Service under the Act may be expended only for costs ... attributable to contracts, grants and compacts pursuant to the [ISDEAA] and that no funds appropriated by this or any other Act shall be available for any contract support costs or indirect costs associated with any contract, grant, cooperative agreement, self-governance compact, or funding agreement entered into between an Indian tribe or tribal organization and any entity other than the Indian Health Service. Id. § 5326. Reading these provisions together, the ISDEAA is clear about at least one thing: as another court in this circuit has already held, the Act explicitly prohibits IHS from funding ... indirect costs 'associated with' non-IHS entities. Tunica-Biloxi Tribe of La. v. United States , 577 F.Supp.2d 382 , 418 (D.D.C. 2008) (quoting 25 U.S.C. § 5325 ). It, in other words, limit[s] the amount of indirect  cost funding required of the ... Secretary to those costs attributable to the Secretary's self-determination contract with the tribal contractor. Id. at 423 . Thus, although the Act may cabin IHS's discretion, it does not eliminate the agency's role entirely; IHS has an obligation to ensure that a Tribe's request for indirect CSCs constitutes the reasonable costs resulting from the Tribe's federal health program. Otherwise, the Tribe's proposal is in excess of the applicable funding level for the contract, and it must be rejected. 25 U.S.C. § 5321 (a)(2)(D). The ISDEAA provides little instruction, though, on how IHS should go about fulfilling its obligation. The Act is silent on what reasonable means in this context, and it does not say how indirect CSCs should be estimated. Instead, as the Court said earlier, those calculations are guided by OMB-issued uniform cost principles that are codified in the Code of Federal Regulations. See generally 2 C.F.R. pt. 200. Those principles state that indirect CSCs may be calculated using an indirect cost rate that is determined by taking an estimate of total indirect costs associated with all of a tribal organization's federal awards together and dividing that estimate by a distribution base made up of costs resulting from those federal awards. See 2 C.F.R. pt. 200, app. VII, §§ B.9, E.2. That distribution base is usually either the total direct costs of all of those federal programs, or the portion of those costs made up by salaries and wages. Id. § C.2.a, c. The product of the division equation is an indirect cost rate, which is then used to allocate indirect costs to individual contracts by multiplying the rate by the base amount attributable to the individual contract at issue. Id. § C.2.a. Here, the Tribe has agreed on an indirect cost rate with the IBC that is pegged to salaries, wages, and fringe benefits. And the Tribe's proposal for indirect CSCs is based on application of that rate to the salaries, wages, and benefits that it contends are attributable to its federally funded health program. In its motion for summary judgment, the Tribe seems to suggest that IHS must accept the results of this methodology in all instances. See, e.g. , Pl.'s Mot. for Summ. J. at 7 (IHS accepts the Tribe's rate, as it must.); Pl.'s Reply in Support of Mot. for Summ. J. (Pl.'s Reply) at 7, ECF No. 15 (IHS's 80% ... cap lacks any grounding in the statute.). Essentially, the Tribe says that, by rejecting the methodology here, IHS violated the ISDEAA. The Court disagrees with this as a general contention, however. Nothing in the OMB principles come close to indicating that the prescribed methodology will produce the statutorily correct result every time. To the contrary, in fact, the principles say that [o]nce a rate has been agreed upon, it will be accepted and used by all Federal agencies unless prohibited or limited by statute.  2 C.F.R. pt. 200, app VII § E.1 (emphasis added); see also id. § C.4.b. (Where Federal statutes restrict the reimbursement of certain indirect costs, it may be necessary to develop a special rate for the affected Federal award.). The Tribe's Indirect Cost Negotiation Agreement with the Interior Business Center similarly states that [u]se of the rate(s) contained in th[e] agreement is subject to any applicable statutory limitations. Pl.'s Mot. for Summ. J., Ex. C at 2. The ISDEAA contains such a limitation, as the Court just finished explaining. The Act permits IHS to fund only the indirect CSCs that constitute the reasonable costs resulting from the Tribe's self-determination contract for health services. See Tunica-Biloxi , 577 F.Supp.2d at 418-23 . Thus, if IHS believes that the OMB-provided methodology runs astray of this requirement  under the facts of a particular case, nothing prevents the agency from speaking up and proposing a modification; the agency is in fact statutorily required to do so. Having said all of this, IHS's published Indian Health Manual -its guidance document on self-determination contracts and CSC awards-indicates that OMB's uniform principles are generally accepted, while also maintaining that costs must be analyzed to ensure they meet the definition of CSC[s] in the ISDEAA. See Defs.' Cross-Mot. for Summ. J. (Defs.' Cross-Mot.), Ex. 1 at 19, ECF No. 14-2. In weighing the parties' specific arguments here, then, the Court starts with the premise that application of OMB's uniform principles will result in indirect CSC awards that are reasonable and consistent with the ISDEAA, absent abnormal circumstances. IHS contends that abnormal circumstances are present here because the Tribe has allocated an unusually large portion of its IHS funds to salaries, wages, and fringe benefits. IHS does not dispute that the Tribe has the statutory authority to redirect its federal money in this manner, see 25 U.S.C. § 5386 , but the agency argues that it has the effect of distorting the application of OMB's methodology by creating a mismatch between the indirect cost rate and the base amount to which that rate is applied. To understand this supposed mismatch, recall what an indirect cost rate is supposed to signify: it is the percentage which the total amount of allowable indirect costs for all federal contracts bears to the [distribution] base selected. See 2 C.F.R. pt. 200, app. VII, § C.2.a. When the selected distribution base is all total direct costs, the rate is likely to be relatively low. The rate is likely to be higher, on the other hand, when the selected base is a merely a portion of total direct costs-like salaries, wages, and benefits, which according to IHS, typically make up roughly 70 percent of the total direct costs of a federal tribal health program. See Defs.' Cross-Mot., Ex. 3, Decl. of Ashley Metcalf ¶ 18, ECF No. 14-4. Here, the Tribe has chosen to redirect its IHS funds so that 98.93 percent of its Secretarial amount is spent on salaries, wages, and benefits. See Pl.'s Mot. for Summ J., Ex. B at 8-9. Thus, the Tribe's base amount for its indirect CSC calculation more closely resembles the total direct costs of the entire program than the amount one would expect to be expended on salaries, wages, and benefits. Yet that base amount was still subject to an indirect cost rate that had been pegged to salaries, wages, and benefits-a kind of rate that, again, is generally higher than a rate based on total direct costs. According to IHS, therein lies the mismatch: a high indirect cost rate applied to a high base amount produces an artificially increased indirect CSC estimate. Defs.' Cross-Mot. at 12, ECF No. 14. This line of reasoning alone would maybe be sufficient for IHS if this were an APA case. Under the ISDEAA, however, it is IHS's burden to show by clear and convincing evidence that this claimed mismatch amounts to a statutory violation. See 25 U.S.C. § 5387 (d). At this point in the proceedings, the agency has not yet met that burden. It has provided ample evidence that the Tribe's base amount has been inflated, but it has given the Court virtually no information about the specific inputs that would determine the Tribe's indirect cost rate under the OMB methodology. And, at the risk of stating the obvious, in order to show that a mismatch  between the base amount and the rate exists, evidence concerning both the base amount and the rate is necessary. Without specific evidence about the Tribe's rate, it remains possible that the rate somehow offsets the fact that the Tribe spends an unusually high amount of money in support of salaries, wages, and benefits in relation to its federal health program. IHS's key piece of evidence illustrates the problem quite well. With its cross-motion for summary judgment, the agency submitted financial documents from 2015 that purportedly supported the Tribe's indirect cost proposal to the IBC in support of its indirect cost rate negotiations. See Defs.' Cross-Mot., Ex. 2, ECF No. 14-3. Those documents, IHS claims, show that the Tribe operates a very large health program, and that the Secretarial amount funds only a small fraction of that program-about 10 percent. See Defs.' Cross-Mot. at 16, 19. According to IHS, the 2015 documents also show that IHS money funds approximately 50 percent of the salaries, wages, and benefits for the Tribe's entire expanded health program. Id. at 19 . In IHS's view, that figure clearly show[s] that allowing [the Tribe] to distort the ... cost base as it has done results in IHS paying much more than its pro rata share of indirect costs. Id. Yet as the Court just said, to show distortion, IHS needs evidence concerning the Tribe's rate as well. It is possible that the 2015 documents that IHS has submitted include information to this effect, but if they do, the information is redacted. The distribution base, for example, that was used to determine the Tribe's indirect cost rate should have comprised costs associated with all of the Tribe's federal programs. The submitted documents appear to include financial information regarding such other programs, but the information is redacted. Thus, as things currently stand, the Court does not know what other federal programs the Tribe operates, and the Court certainly does not know how costly those programs are, or what percentage of those costs are for salaries, wages, and benefits. If salaries, wages, and benefits made up a similarly high percentage of the budgets of those other federal programs, it is theoretically possible that the resulting indirect cost rate would have no distortive effect. To be sure, IHS may not have submitted any of this evidence because it does not have it. The Tribe negotiated its indirect cost rate with the IBC; IHS played no role. The redactions on the 2015 documents also may be the Tribe's responsibility and not the agency's. At the same time, though, the ISDEAA places a heavy burden on IHS, and the agency has not even provided more generalized information, such as evidence that shows what typical indirect cost rates pegged to salaries might look like compared to those pegged to total direct costs. By not providing any information whatsoever, IHS's motion for summary judgment depends on the Court accepting a critical assumption: that the Tribe's indirect cost rate does not somehow account for the unusually high amount of salaries, wages, and benefits being expended in relation to the Tribe's federal health program. That assumption might be a reasonable one; the Court has no cause to believe that the rate does offset the effect of the inflated base amount. However, reliance on an assumption does not constitute clear and convincing evidence that the Tribe's proposal exceeded the applicable funding level for the contract. 25 U.S.C. §§ 5321 (a)(2)(D), 5387(d). With specific evidence about the Tribe's indirect cost rate lacking, summary judgment in IHS's favor is inappropriate at this time, as an issue of material fact remains unresolved.  That said, if IHS is correct in its assumption that the Tribe's indirect cost rate is incompatible with the base amount to which it is applied, the Court agrees that this presents a potential problem under the ISDEAA. It raises the possibility that the Tribe's estimate is based on costs that are not actually attributable to or associated with the Tribe's self-determination contract. 25 U.S.C. § 5326 . The Court therefore finds that summary judgment in favor of the Tribe is unwarranted at this stage as well. As IHS explained in its rejection letter, the Tribe's reallocation left less than $ 90,000 in the remaining budget funded by the Secretarial amount. Pl.'s Mot. for Summ J., Ex. B at 9. Clearly, IHS said, it would be impossible for the Tribe to operate a health care program with these remaining funds unless it was relying on its own separate revenue, so it is obvious that the Tribe's proposed indirect CSC amount is being calculated based, at least in part, on additional resources the Tribe is choosing to use and is not solely based on specific activities that are necessary to support the federal program. Id. The Tribe, for its part, does not dispute that this is true; it concedes that it is able to use its own funds to cover the remaining costs of the federal program. According to the Tribe, it is permissible to factor those other funds into the indirect CSC calculation because [a]t least one court has held that such third-party revenues used by a tribe to provide services under its ISDEAA agreement are part of the Secretarial amount and generate CSC just like IHS-appropriated funds. Pl.'s Mot. for Summ. J. at 15. But even if that other decision was correctly decided, the Tribe has not shown that it is applicable here. The case on which the Tribe relies, Navajo Health Foundation-Sage Memorial Hospital, Inc. v. Burwell , 263 F.Supp.3d 1083 (D.N.M. 2016), does not say that tribes may recover CSCs generated based on all outside, supplemental funds spent in relation to a federal health program. Rather, Sage Memorial presented the narrower question of whether third-party revenue from Medicaid, Medicare, and private insurance companies must be included in the CSC calculation. Id. at 1114 . The court held that such revenue had to be included. As the court explained, the ISDEAA specifically notes that the 'program income earned by a tribal organization in the course of carrying out a self-determination contract ... shall not be a basis for reducing the amount of funds otherwise obligated [to] the contract.'  Id. at 1166-67 (quoting 25 U.S.C. § 5325 (m) ). A second provision of the Act similarly states that [a]ll Medicare, Medicaid, or other program income ... shall not result in any offset or reduction in the amount of funds the Indian tribe is authorized to receive under its funding agreement in the year the program income is received or for any subsequent fiscal year. 25 U.S.C. § 5388 (j). Thus, the source of the supplemental funding was critical in Sage Memorial ; because the money had been earned in the course of carrying out the self-determination contract, it could not be excluded from the CSC calculation. 25 U.S.C. § 5325 (m). By contrast, here, the Tribe has not established that any of its supplemental funds constitute program income earned in the course of carrying out its federal health program. In fact, the Tribe has hinted that most of the money is unrelated to the federal health program. See Pl.'s Mot. for Summ. J. at 8 ([T]he Tribe is willing and able to cover these additional expenses with its own funds and, to a lesser extent , third-party revenues. (emphasis added) ). Nonetheless, the Tribe argues that this case presents an easier question than ... Sage Memorial  because it has merely proposed to recover  CSC in support of IHS-appropriated funding, not tribal or third-party funding. Id. at 15 . The argument seems to be that the Tribe's proposed base amount for purposes of calculating indirect CSCs is made up entirely of IHS money. But this argument fails for reasons that were already provided above: if the base has been inflated-even with IHS funds-and the indirect cost rate does not account for or offset that inflation, the effect is that the indirect CSC amount is being calculated based in part on the Tribe's own resources. And unless those other resources turn out to be program income within the meaning of the ISDEAA, there is a problem, as the Tribe's estimate would be based on costs that are not actually attributable to or associated with the Tribe's self-determination contract. 25 U.S.C. § 5326 . Although the Tribe may have suggested that most of the supplemental funding it is using here does not constitute program income, the reality is that the Court currently has no information concerning the source of the money. If the Tribe can show that its other money is program income, Sage Memorial may ultimately govern. But for now, there are at least two categories of material factual issues that remain unresolved: (1) the source of the Tribe's supplemental funds; and (2) the specific circumstances surrounding the determination of the Tribe's indirect cost rate. With these issues outstanding, the Court is unable to conclude that either party is entitled to judgment as a matter of law. Having concluded that material factual issues remain unresolved and that summary judgment is inappropriate, the Court's final task is to determine where the factual questions should be addressed in the first instance. IHS has suggested it is open to further negotiation, and it argues that the proper course is remand. See Defs.' Reply at 7, ECF No. 17. The Court agrees that this is the preferable approach under these circumstances. Although the ISDEAA permits the Court to retain jurisdiction over the parties' dispute, see 25 U.S.C. §§ 5321 (b)(3), 5331(a), it is a well-established principle of administrative law that reviewing courts have discretion to remand to the agency upon the agency's request, see Sierra Club v. Van Antwerp , 560 F.Supp.2d 21 , 23 (D.D.C. 2008) (citing Citizens Against Pellissippi Parkway Extension, Inc. v. Mineta , 375 F.3d 412 , 417 (6th Cir. 2004) ). Indeed, at least in the APA context, as long as the agency's reasons for seeking a remand are substantial and legitimate, a remand is usually appropriate, particularly when such a course would potentially save both the parties and the court time and resources. Id. cf. Ethyl Corp. v. Browner , 989 F.2d 522 , 524 (D.C. Cir. 1993) (Courts commonly grant agency requests for remand, preferring to allow agencies to cure their own mistakes rather than wasting the courts' and the parties' resources reviewing a record that both sides acknowledge to be incorrect or incomplete.). IHS's desire for remand here appears legitimate: it says that it is willing to negotiate in line with the Court's holding, and it says that it remains flexible in offering an appropriate figure that represents [the Tribe's] CSC according to the requirements of the ISDEAA. Defs.' Reply at 7. As the Court has no reason to question these assertions, it thinks that the parties should be afforded another opportunity to reach an agreement before time and resources are expended on further judicial proceedings. The Tribe also does not argue that the Court lacks the authority to remand; it contends only that remand is inappropriate because IHS's denial was contrary to the ISDEAA as a matter of law. See Pl.'s Reply at 11-12. Of course, the Court has now rejected that position and concluded that it is unable to rule in  the Tribe's favor based on the current record. In circumstances like these, the Tribe itself seems to acknowledge that remand can be beneficial. See id. at 12 (Remand is appropriate when a court requires more information to make a decision....). The Court therefore exercises its discretion to remand to IHS for further consideration, and the Court stays this case in the interim. If the parties ultimately do reach an agreement, they should file a stipulation of dismissal with the Court. In the meantime, they must file a joint status report every 60 days that updates the Court on the progress of negotiations and proposes a schedule for further proceedings. For the foregoing reasons, the Tribe's motion for summary judgment and Defendants' cross-motion for summary judgment are both DENIED . An order consistent with this Memorandum Opinion is separately and contemporaneously issued. The observant mathematicians will notice that 28.32% of $ 6,655,712 is in fact roughly $ 1,884,897. As far as the Court can tell, IHS's number of $ 1,740,786 was the product of subtracting a credit for indirect-cost funding that is contained within the Secretarial amount. The use of such a credit is not an issue in this case. See Compl. ¶ 32 n.5, ECF No. 1. Indeed, the Tribe's proposed amount similarly involved the subtraction of a credit that was contained within the Secretarial amount. Id. ¶ 32.