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Indiana Family & Social Services Administration v. Thompson

April 12, 2002


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.

Before Bauer, Coffey, and Evans, Circuit Judges.

The opinion of the court was delivered by: Evans, Circuit Judge.

Argued January 23, 2002

Indiana, through its Department of Family & Social Services (DFSS)*fn1 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,*fn2 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.*fn3 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 ...

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