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STATE OF ILL. DEPT. OF PUB. AID v. HECKLER

United States District Court, Northern District of Illinois, E.D


August 23, 1985

STATE OF ILLINOIS BY THE ILLINOIS DEPARTMENT OF PUBLIC AID, PLAINTIFF,
v.
MARGARET HECKLER, SECRETARY OF HEALTH AND HUMAN SERVICES, DEFENDANT.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Invoking federal-question jurisdiction under 28 U.S.C. § 1331, the State of Illinois ("Illinois") seeks judicial review of the disallowance by Secretary Margaret Heckler ("Secretary") of the United States Department of Health and Human Services ("HHS") of reimbursement claimed by Illinois under Title XX of the Social Security Act (the "Act"), 42 U.S.C. § 1397-1397f.*fn1 Each party has moved for summary judgment under Fed.R.Civ.P. ("Rule") 56. For the reasons stated in this memorandum opinion and order, Secretary's motion is granted and Illinois' motion is denied.

Facts*fn2

Illinois has long provided free educational services for handicapped children, consistent with the declaration in Ill. Const. art. X, § 1 that every Illinois child has the right to a "free common school education." See Ill.Rev.Stat. ch. 122, §§ 14-1 to 14-12 (in the form enacted by the School Code of 1961 and hence applicable to the years at issue in this case). In the wake of the federal Education for All Handicapped Children Act of 1975, 20 U.S.C. § 1411-1420 ("EAHCA"), Illinois stepped up its efforts to provide "a free appropriate public educational to all handicapped children" (EAHCA § 1412(3)) and sought to qualify for federal financial assistance (see Illinois Mem.Ex. E).

Local school districts, under the guidance of the Illinois Office of Education, are responsible for identifying children in need of special education (id.). Other state agencies may then participate in the treatment and education of the students, but the Office of Education is charged with overseeing the educational programs offered by the other agencies (Illinois Mem. 9; Ill.Rev. Stat. ch. 122, ¶ 14-8.01, part of the current version of the School Code).

During nearly the entire period relevant to this action, Illinois' Department of Children and Family Services ("DCFS") operated three residential schools for the education of handicapped children:*fn3

    1. the Illinois Braille and Sight Saving School
  (now renamed the Illinois School for the Visually
  Impaired);

2. the Illinois School for the Deaf; and

    3. the Illinois Children's Hospital-School (now
  called the Illinois Children's

  School and Rehabilitation Center) for children
  with orthopedic handicaps.

Students at those schools were drawn from districts all over the state that did not offer comparable programs. Indeed, the lack of classes at the local level was a prerequisite for admission to at least the first two schools (Illinois Mem. 7).

Illinois has applied to HHS for reimbursement of funds expended between October 1, 1975 and March 31, 1980 on various programs covered by Title XX. Its claim included $9,104,702 for operation of the DCFS schools, comprising:

1. $6,311,908 for educational programs and

2. $2,792,804 for room and board expenses.

Initially an HHS regional administrator disallowed all the claimed expenses. On July 29, 1983 that decision became Secretary's when the HHS Grant Appeals Board ("Board") affirmed the disallowance (Illinois Mem.Ex. A).*fn4

Timeliness of This Action

Secretary first argues this action (brought January 15, 1985) is untimely because it was filed nearly 18 months after Board's decision. Although she concedes there is no directly applicable statute of limitations, she argues alternatively:

    1. Illinois' action is barred by the equitable
  doctrine of laches.

    2. This Court should (a) borrow a 60-day
  statute of limitations from other types of
  actions authorized under the Act and (b) apply
  that statute retroactively to bar Illinois'
  Complaint.

Neither alternative is tenable.

1. Laches

Lingenfelter v. Keystone Consolidated Industries, Inc., 691 F.2d 339, 340 (7th Cir. 1982) reaffirmed that a laches defense cannot succeed without a showing of both plaintiff's lack of diligence and prejudice to defendant:

  Laches is principally a question of the inequity
  of permitting a claim to be enforced. It is
  unlike limitation, which is based merely on time.
  Rather, laches is based upon changes of
  conditions or relationships involved with the
  claim.

Only last week our Court of Appeals again confirmed that twofold aspect of a laches defense (Jeffries v. CTA, 770 F.2d 676, 679 (7th Cir. 1985)):

  Laches will bar this claim only if [plaintiff]
  had inexcusably delayed in asserting it and
  [defendant] has been materially prejudiced by the
  delay.

Secretary has simply failed to show any "changes of conditions" or other prejudice (material or otherwise) in this case. Instead her Mem. 23-28 conjures up the specter of the administrative havoc and uncertainty that could result if many other litigants delayed as long as Illinois has in seeking review of disallowances. Thus Secretary urges this Court to bar Illinois' claim strictly as a matter of policy and as a speculative means of deterring other litigants from following Illinois' example.

But an appeal to equitable relief must focus on the circumstances of this case, not another and purely hypothetical one. Effectively Secretary asks this Court, in the exercise of its equitable powers, to establish a rigid rule of law under which any petition for review of a disallowance, if filed 17 or more months after Board's decision, would be barred regardless of the individual circumstances of the case.

Such rigidity is antithetic to the very concept of equity. As Black's Law Dictionary 484 (5th ed. 1979) reflects (mirroring the origins of courts of equity), equity itself involves the rejection of rigid rules to accomplish what is fair and just in a particular situation. Absent a showing of material prejudice to Secretary (and none has been made), the equitable doctrine of laches is inapplicable to the circumstances of this case.

2. Retroactive Application of a Borrowed Statute

Secretary then argues at great length this Court should borrow and apply the 60-day statute of limitations applicable to many other Social Security Act claims, just as the Supreme Court has applied "borrowed" limitations periods in Wilson v. Garcia, ___ U.S. ___, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985) and DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983). She asserts courts are the appropriate governmental arm to establish a limitations period for disallowance reviews, because jurisdiction to entertain such reviews in the first place has been implied by courts rather than expressly conferred by Congress. State of Illinois, Department of Public Aid v. Schweiker, 707 F.2d 273, 275, 277 (7th Cir. 1983).

But even if it were assumed proper to apply a "borrowed" limitations period, and even if Secretary's proposal of a 60-day period were deemed appropriate to that end, that period should not be applied retroactively to bar Illinois' claim. Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 355-56, 30 L.Ed.2d 296 (1971) teaches a decision may not be applied retroactively if each of two conditions obtains:

    1. That new decision resolves "an issue of
  first impression whose resolution was not clearly
  foreshadowed."

    2. Retroactive application would be inequitable
  under the circumstances of the case.

Those rules could not fit the current circumstances more precisely. Secretary concedes no court has ever applied any statute of limitations to claims seeking review of disallowance decisions, even though states have waited up to a year to file them. In fact Secretary R.Mem. 4 admits no court has even looked at the issue.

It is thus an understatement to say there has been no "foreshadowing" of a short limitations period. In the words of Chevron, 404 U.S. at 108, 92 S.Ct. at 356 (citation omitted):

  It would also produce the most "substantial
  inequitable results" . . . to hold that the
  respondent "slept on his rights" at a time when
  he could not have known the time limitation that
  the law imposed upon him.

Because a new limitations period could not properly be applied to Illinois' claim, and in light of this opinion's disposition on the merits, the issue whether any limitations period should be borrowed — and if so which period — need not be discussed further.*fn5

Disallowance of Educational Costs

Both parties agree the educational expenses claimed for DCFS schools would normally be reimbursed under Act § 1397a(a)(1), which during the relevant period authorized Title XX funding for a variety of services including:

  services designed to meet the special needs of
  children . . ., the blind, . . . [and] the
  physically handicapped.

But Secretary disallowed the expenses under the then-applicable Act § 1397a(a)(10):

  No payment may be made under this section with
  respect to any expenditure for the provision of
  any educational service which the State makes
  generally available to its residents without cost
  and without regard to their income.

Secretary's corresponding regulation during the years at issue provided (45 C.F.R. § 228.43*fn6):

  FFP [Federal Financial Participation] is not
  available for any educational service made
  generally available through any State or local
  educational agency to residents of the state
  without cost and without regard to their income.
  To the extent a fee is imposed on any resident,
  FFP is available only for such fee.

Where the litigants part company is over the meaning of "generally available." Board's and Secretary's contention is that free educational services were "generally available" to handicapped Illinois children without regard to income, because those services were provided to every such student through the combined network of local school district programs and DCFS schools. Stripped to its essentials,*fn7 Illinois' position is that programs were not "generally available" for purposes of Act § 1397a(a)(10) unless they were provided:

    1. both by and within local school districts
  and

    2. by educational agencies meeting those "by
  and within" criteria.

Under Illinois' reading, then, the services in dispute were not generally available in the state because many school districts referred their handicapped students out to the centrally-located and social-service-agency-operated DCFS schools. Illinois claims to support that notion with a number of opinions and guidelines published by HHS, but all of them actually confirm Secretary's contention (Administrative Record ["R."] 100-15).

Any analysis must of course begin with — and focus on — the language of Act § 1397a(a)(10) itself. "[A]ny educational service which the State makes generally available to its residents" is a sweeping phrase, one that by its literal terms includes services provided by any state agency anywhere in the state. Nothing in the statutory language even hints at the narrow reading Illinois advocates.

That means Illinois cannot force the statutory language into Illinois' own unnaturally narrow mold without (at a minimum*fn8) convincing evidence from the legislative history and purpose or from Secretary's regulations. Illinois identifies no such evidence.

1. Legislative Purpose

When Congress passed Title XX it clearly intended to supplement, rather than to replace, state funding of social services. Act § 1397b required states receiving Title XX funds to continue funding social services at prior levels. Title XX was structured to allow states to extend their services further than before, and Act § 1397a reads like a congressional judgment that its supplemental resources were better spent on services in nonexistent or limited state supply than on services already generally available.

Illinois' skewed reading of Act § 1397a wholly ignores Congress' unwillingness to take over state funding of existing programs. According to Illinois, Congress would have been prepared to assume the bulk of the expenses of Illinois' programs even if Illinois were already providing, entirely at its own cost, comprehensive and free educational services to every single handicapped child in the state.

For that reason alone Illinois' proposed interpretation is highly suspect. But the most fundamental problem with Illinois' position is that it attributes to Congress a totally arbitrary and rather absurd distinction — based purely on form — among state programs. If Illinois were right, Congress' concern was not whether states provided services at all, but rather whether the services were provided within local school districts by educational agencies. In those terms Illinois might qualify for extensive federal funding, while a second state that provided exactly the same type and extent of services to handicapped children might not qualify for a single penny — and that would be so merely because its services were provided by and within local school districts.

Illinois offers no suggestion why Congress might have been so preoccupied with such formalities, nor has it produced a shred of evidence of such preoccupation from either the statute or its legislative history. Surely Congress would not have decided multi-million dollar block grants should hinge on such considerations without making some reference to them.*fn9 Total congressional silence on that score shouts down Illinois' attempted appeal to legislative history.*fn10

2. Regulations and Opinions Promulgated by Secretary

At the outset a fundamental principle of administrative law must be recognized: Secretary cannot effectively "amend" a statute in such a basic respect by means of regulations. Glossing over (or more accurately, wholly ignoring) that proposition, Illinois cites:

    1. language in Reg. § 228.43 prohibiting federal
  funding for services "generally available through
  any State or local educational agency" (emphasis
  added); and

    2. the test, as stated in HHS' October 1, 1975
  Title XX Program Regulation Guide ("PRG") (R.
  100), for determining whether a service is
  "generally available."

Neither of those affords Illinois any comfort. In fact, those and other sources cited by Illinois rather confirm Secretary has consistently construed Act § 1397a in the same way she now urges.

(a) Which Agency May Provide the Educational Service

Illinois interprets Reg. § 228.43 as restricting "general availability" analysis to educational agencies. But Secretary's comments when that regulation was promulgated make it plain the term "educational" was inserted not to modify (in the limiting sense) "state agency," but rather to embrace local school districts within the agencies included in "general availability" analysis. Thus "educational" was intended to serve an expansive purpose, not a restrictive one as Illinois urges (40 Fed.Reg. 27352, 27353 (1975)):

  Writers [to Secretary about the proposed
  regulation, among other expressions of views]
  recommended deletion of "local educational
  agency." Since many States provide education
  through and at the discretion of local agencies,
  inclusion of such agencies is necessary to carry
  out the intent of the law.

That regulatory construction, under which services rendered by any state agency were taken into account in determining general availability, is confirmed by the May 11, 1976 opinion memorandum of HEW*fn11 Regional Commissioner Virginia Smyth (appended to Illinois' Memorandum in the Board proceeding, R. 107). Ms. Smyth there stated Secretary's position a service was generally available under Reg. § 228.43 even if provided by a noneducational agency, provided the service conformed to the state Board of Education's requirements for education of the handicapped. And on that score Illinois Mem. 9-10 asserts the Illinois Office of Education's role with respect to the DCFS and other state agencies is that of:

  insuring that all programs and services provided
  to handicapped children operated by other state
  agencies are operated in accordance with
  appropriate procedural safeguards and standards
  jointly developed and agreed to by the Illinois
  Office of Education and the other state agency.

Finally, the PRG on which Illinois relies also states without qualification (R. 100) (emphasis added):

  Federal financial participation is available for
  educational services only if (1) the service is
  included in the services plan and (2) residents
  of the State may not usually receive the service
  free from a public agency.

  (b) Whether the Service Must Be Provided Within Each School
      District

Illinois' claim as to the meaning of the PRG regarding the location in which services must be provided also clutches at straws. PRG at 2439 (R. 101) provides:

  The three methods which a State may utilize in
  determining if a service is "generally available
  without cost and without regard to income" are as
  follows:

  1.  Total Population Test — an
      educational service is generally available if
      it is provided in school districts or other
      designated areas that have populations which
      total 75% or more of the total population of
      the area being tested (geographic area or
      entire State).

  2.  Target Population Test — an
      educational service is generally available if
      it is provided in school districts or other
      designated areas to 75% or more of the target
      population for whom the service is intended
      in the area being tested (geographic area or
      entire State).

  3.  School District Test Without Regard to
      Population — an educational service is
      generally available if it is provided in 75% or
      more of the school districts in the area being
      tested (geographic area or entire State).

Illinois seeks to interpret the phrase "in school districts" as a requirement that services be provided within the boundaries of each district. But that reading utterly ignores the import of the adjacent phrases:

1. "or other designated areas"; and

2. "(geographic area or entire state)."

It is clear "school districts" are referred to merely as convenient geographical boundaries for defining the populations whose access to services is to be the measure of general availability. By its own terms the PRG test can be applied equally well to populations of larger or smaller geographical areas bearing no relation to school districts. In fact the parenthetical phrase "or entire State" suggests the test may be applied to the state as a whole without regard to smaller boundaries. Thus the PRG actually produces inferences contrary to Illinois' position.

In sum, every legitimate approach to the meaning of language points to the same conclusion. Board (and hence Secretary) correctly determined Illinois was not eligible for reimbursement of educational costs at DCFS schools.*fn12

Room and Board Costs

During the relevant period Act § 1397a(a)(7)(E) barred the use of federal funds to reimburse states:

  for the provision of room or board . . . other
  than room or board provided for a period of not
  more than six consecutive months as an integral
  but subordinate part of a service described in
  paragraph (1) of this section.

Secretary originally implemented that provision in a regulation allowing payment for room and board only (Reg. § 228.41(a) (1976)):

  when provided to an individual who is receiving a
  service of which room or board is an integral but
  subordinate part and then only for a period of
  not more than six consecutive months in any
  12-month period and for not more than one 6-month
  period for any one episode or placement.

Later the same regulation was amended to allow payment only (id. (1978)):

  as an integral but subordinate part of another
  service and then only for a period of not more
  than six consecutive months for any one
  placement.

Finally, Reg. § 228.41(d) (1978) in turn defined placement as:

  an uninterrupted period of time during which an
  individual takes up, or is placed in, residence
  in a facility other than his usual place of
  residence, for the purpose of undergoing a
  specific regimen of services or treatment
  according to a prescribed plan.

DCFS schools had a high ratio of returning students. For example, 81% of the students enrolled during the 1977-78 school year returned in 1978-79. That factor leads the litigants to dramatically different results on the room-and-board issue.

Illinois treated each school year as a separate "placement," claiming room and board expenses for each student each year. Conversely, Secretary disallowed $2,792,804 of the claimed expenses on the ground that a child's year-after-year enrollment was a single "placement," entitling Illinois to reimbursement for only one six-month period per child, no matter how many years the child was enrolled (except in the unusual case where there were two wholly separated enrollments). Secretary viewed the summer months as a vacation rather than a break in the placement.

Illinois bases its view of each year as a separate placement on the individualized nature of treatment at the schools. As Board found, a very detailed individualized education program ("IEP") is prepared for each student (R. 289). That IEP contains a comprehensive list of goals the child is expected to achieve during a semester, and (id.):

  [E]ach facility utilizes a variety of tools to
  supplement the child's I.E.P. The Illinois School
  for the Deaf (ISD) employees [use] aptitude
  testing to identify individual needs and
  achievements. Children are grouped on the class
  list according to individual ability. A child may
  change classes, or programs, one or more times
  during a school year if it is determined that a
  change would improve learning and emotional
  development. Children are also rated on
  psychological factors including social adequacy
  and communication skills. Parent involvement is
  sought on a regular basis. Report cards and
  progress reports are sent to all parents at the
  end of each nine week term. Parents receive an
  end-of-year report which aids in determining
  whether another placement is needed. Parent
  conferences are scheduled throughout the year to
  obtain input regarding placement, goals,
  objectives, and curriculum (Tab 11). A
  recommendation on each child is submitted to the
  superintendent at the end of the school year when
  the treatment plan is concluded.

Based on those carefully plotted treatment programs, Illinois says each separate year of schooling is a "specific regimen of services or treatment according to a prescribed plan" (Reg. § 228.41(d)). Because each year's plan is different, it assertedly amounts to a new course of treatment. And Illinois stresses the parents and the State never determine in advance how many years a child will remain in a special school. Instead such decisions are made on a year-by-year basis, only after a child's
progress has been analyzed and discussed among parents and school officials.

Board gave careful consideration to Illinois' extensive evidence. It then rejected the State's factual argument, finding a significant continuity in treatment from year to year (R. 289):

  We find that the foregoing, and the documents,
  evidence much of a continuing, cyclical, arguably
  even routine, nature. The process appears to be a
  laudable one, but it nevertheless is much more
  akin to an on-going evaluation/training process
  than to anything like the time-constrained
  exceptional effort for which section
  2002(a)(7)(E) allows collateral payment. IDPA
  cannot change this merely by such superficial
  things as labeling IEPs "treatment plans." The
  IEPs bear a strong resemblence (sic) to periodic
  education plans one may observe in use in any
  typical public education program. Furthermore,
  the IEPs themselves contain a number of
  statements strongly implying that there is an
  on-going continuity of process; the Agency quoted
  these provisions at length in its brief
  (see pp. 15-16) and we will not repeat them here.
  IDPA did not explain these provisions in its reply.

Board's interpretation of "placement" began with the premise that because room and board expenses are not generally reimbursed under Title XX, the exception in Act § 1397a(a)(7)(E) (and the regulations promulgated thereunder) should be narrowly construed (R. 286). Board found further support for a narrow construction in HHS's 1980 Guide to Federal Financial Participation Under Title XX of the Social Security Act (the "Guide") 3.D.13 (Illinois Ex. J):
*fn13

  If one placement ends and another placement
  begins for the same service or the same type of
  service, FFP is available for the cost of room or
  board during a second placement only if the
  individual was discharged from the prior
  placement because further treatment was not
  needed, not feasible, or not available and not
  for purposes of reentering the facility in order
  to begin another 6-month period of room or board.
  A new placement would begin, for example, if a
  person successfully completes a course of
  treatment, is discharged, or manages well in the
  community for a period of time until he or she
  has a relapse which necessitates a second
  placement.

It is clear the DCFS students did not meet the criteria of the Guide.*fn14 It distorts the Guide's language to say of students home for summer vacation that "further treatment was not needed, not feasible, or not available." Those same students returned to school in the fall, not because of relapses, but rather because parents, guardians, and school officials had determined at the end of the school year further treatment was necessary.

As the Guide makes plain, a break in service of a few months does not necessarily bring a placement to a close. And the hallmarks set forth in the Guide for the end of a placement correspond more to a graduation than to the mere completion of a particular grade (Guide 3.D.9 and 3.D.10):

  A placement that is ending is typically marked by
  indications that the recipient has successfully
  completed the prescribed course of treatment or
  services, or that an evaluation of the individual
  shows that he or she is now able to function
  outside the facility, or that the person is
  discharged without the intention of reentering
  the service facility (or a similar type of
  service facility) for further treatment.

Promulgated in 1980, the Guide interprets the language of the 1978 regulation as to "placements." Illinois contended before Board (though it did not repeat the argument here) the reference in the 1976 regulation to "placement or episode" is more expansive and accommodates Illinois' position. But Board found no basis in the regulation itself to construe it differently from the newer regulation (R. 290), and Illinois apparently did not submit a pre-1978 Guide to flesh out the earlier regulation. In that respect it is worth noting the 1975 Guide would have supported Board's interpretation had Illinois attempted to rely on it (see Secretary Mem.App. 1, at 2418).

Bedford Medical Center v. Heckler, 766 F.2d 321, 323 (7th Cir. 1985) commands a deferential standard of review of the Board's decision, particularly in interpreting regulations (citations omitted):

  Our standard of review of this reimbursement
  decision has been established by the
  Administrative Procedure Act. 5 U.S.C. § 706
  (1982). When reviewing administrative decisions,
  federal courts are authorized to set aside agency
  decisions only when they: are arbitrary,
  capricious, an abuse of discretion, or otherwise
  not in accordance with the law; are contrary to
  constitutional right, power, privilege, or
  immunity; exceed statutory jurisdiction or fall
  short of statutory right; are reached in violation
  of established procedure; or are unsupported by
  substantial evidence. . . . We note also that the
  interpretations of regulations issued pursuant to a
  statute, especially a statute as complex as the
  Medicare Act, are entitled to considerable
  deference.

Board's decision as to the room and board expenses was thorough, well-reasoned and well supported by the evidence. Bedford and the reasonableness of Board's decision compel this Court to affirm Board.

Conclusion

There is no genuine issue of fact, and Secretary is entitled to a judgment as a matter of law. Because that conclusion compels the granting of Secretary's motion for summary judgment (and of course the denial of Illinois' motion), this action is dismissed with prejudice.


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