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State of Illinois Dep't of Healthcare and Family Services v. U.S. Dep't of Health & Human Services

March 28, 2008


The opinion of the court was delivered by: Judge Virginia M. Kendall


Plaintiff, the State of Illinois Department of Healthcare and Family Services ("IDHFS" or "Illinois") seeks judicial review of two rulings by the Departmental Appeals Board ("DAB" or "the Board") of the U.S. Department of Health and Human Services ("HHS" or "Defendant"), which sustained the Centers for Medicare & Medicaid Services' ("CMS") disallowances of school-based administrative costs under the Medicaid program.*fn1 Defendant, Michael Leavitt ("Leavitt" or "the Secretary") is the Secretary of HHS and is responsible for the overall administration of HHS. The parties filed cross motions for summary judgment. For the reasons stated herein, Plaintiff's Motion for Summary Judgment is denied and Defendants' Motion for Summary Judgment is granted.

I. Statutory and Regulatory Framework

In 1965 Congress authorized the Medicaid program by adding Title XIX to the Social Security Act, 79 Stat. 343. The program is "a cooperative endeavor in which the Federal Government provides financial assistance to participating States to aid them in furnishing health care to needy persons." Harris v. McRae, 448 U.S. 297, 308 (1980). Subject to the federal standards incorporated in the statute and the Secretary's regulations, each participating State must develop its own program describing conditions of eligibility and covered services. The program is administered by State Medicaid agencies with oversight provided by CMS. As part of the Medicaid program, the federal government contributes a percentage of the costs that states incur in providing medical services to their Medicaid-eligible populations. 42 U.S.C. § 1396b(a). School-aged children are a part of the Medicaid-eligible population, and thus, the statute envisions providing financial assistance to participating states to aid them in furnishing health care to needy school-aged children. A state may seek reimbursement for medical and administrative services to Medicaid-eligible school-aged children under Medicaid. 42 U.S.C. § 1396n(g)(2).

Two examples of approved Medicaid administrative functions that States provide to school-aged children are Medicaid outreach and services performed by skilled professional medical personnel ("SPMP") and their staff. Schools and other Local Education Agencies ("LEAs") that seek reimbursement from the federal government for the costs of Medicaid Outreach and SPMP services submit administrative claims based upon time studies in which participating school personnel document all of their time during a particular period using activity codes that distinguish between Medicaid-claimable administrative activities and non-claimable activities. An LEA's time study results are then used in conjunction with the LEA's cost data to generate an administrative claim.

After an administrative claim is generated, a State may seek reimbursement, or federal financial participation ("FFP"), from the federal government. States may only receive FFP for administrative activities that the Secretary finds "necessary" for "the proper and efficient administration of the State plan." 42 U.S.C. § 1396b(a)(2),(7). CMS has the authority to determine whether a cost is necessary, and "whether all components of that necessary cost are 'allowable'" New York v. Shalala, 959 F. Supp. 614, 616 (S.D. N.Y. 1997), aff'd 143 F.3d 119 (2d Cir. 1998); New York Dep't of Soc. Servs. v. Shalala, 811 F. Supp. 964, 970-72 (S.D.N.Y. 1993) (deferring to Secretary and sustaining denial of enhanced 75 percent reimbursement rate).

"Reasonable" and "necessary" are related, but discrete concepts. "'Necessary costs of administration are those that make the program run efficiently in accomplishing what it was intended to accomplish. They need not be indispensable or the only possible way to reach the objectives, but costs that are tangential or unrelated to the specific goals of the program are not 'necessary.'" New York State Dep't of Soc. Servs., DAB No. 1636, 1997 WL 733948 at *7-8 (Nov. 18, 1997). A cost is "reasonable," in turn, if "in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost." OMB Circ. A-87, Att. A, ¶C.2a. CMS may consider various factors, such as whether the type of cost is generally recognized as necessary for the performance of the grant and the benefit received by the program. Id.; see also New York State Dep't of Soc. Servs., DAB No. 1636, 1997 WL 733948 at *8.

There are different levels of FFP to reimburse states for a portion of the costs of administrative activities related to the Medicaid program. Costs of most administrative activities are reimbursed at a rate of 50 percent. 42 U.S.C. §1396b(a)(7); 42 C.F.R. §433.15(a)(7). In other words, states and the federal government share equally in the cost of most Medicaid administration.

42 U.S.C. § 1396b(a)(7); 42 C.F.R. § 431.15 (2007). The costs of some administrative activities, however, are reimbursed at an enhanced rate of 75 percent.

Illinois created its own activity codes to capture LEA and SPMP time spent performing school-based Medicaid outreach and SPMP administrative activities-- Codes C1 and C2 for Medicaid outreach activities and Codes E2 and F2 for administrative activities of SPMP. Illinois submitted administrative claims to CMS seeking reimbursement for the activities of LEAs and SPMP under Codes C1, C2, E2, and F2. This dispute concerns CMS disallowances of Illinois's reimbursement claims under those codes and for the activities captured by them. Illinois appealed to the DAB who ultimately sustained CHS's disallowances of Illinois's claims for costs under C1, C2, E2, and F2.

A. Medicaid Outreach versus Child Find

Illinois and HHS seek judicial review of the DAB's approval of CMS's disallowance of administrative costs associated with Medicaid outreach under activity codes C1 and C2. Outreach activities have long been a subject of disagreement between CMS and Illinois. The source of their disagreement concerns the difference between administrative activities under Medicaid outreach and administrative activities under the Individuals with Disabilities Education Act ("IDEA"). In short, administrative activities associated with Medicaid outreach are Medicaid-claimable whereas administrative activities associated with "child find" under the IDEA are not. See SSA §1903(a); 42 U.S.C. §1396(a); 20 U.S.C. §1400(d); 20 U.S.C §1401(9).

Understanding the difference between activities under Medicaid outreach and the IDEA is necessary in order to resolving the parties' motions. Medicaid outreach is commonly understood as "seeking out persons or groups who may be eligible for Medicaid to inform them of that possibility in order that they may come in for eligibility determination or may be made aware of Medicaid services available to them." New York State Dep't of Soc. Servs., No. 1636, at 6 (1997); 6412 AR 769, id. at 735-36 (Model Code 1.b). The federal government funds a portion of state expenses for administrative costs associated with Medicaid outreach. See SSA §1903(a); 42 U.S.C. §1396(a). On the other hand, the IDEA authorizes federal funding to ensure that all children with disabilities may receive a "free appropriate public education" that emphasizes "special education and related services designed to meet their unique needs." 20 U.S.C. §1400(d); see 20 U.S.C §1401(9). The IDEA begins with the statutorily mandated "child find" process, wherein:

"All children with disabilities residing in the State,...regardless of the severity of their disabilities, and who are in need of special education and related services, are identified, located, and evaluated, and a practical method is developed and implemented to determine which children with disabilities are currently receiving needed special education and related services."

20 U.S.C. §1412(a)(3)(A); 34 C.F.R. §300.125(1)(1). Each student who is defined as potentially disabled must undergo an "initial evaluation" by a team of qualified professionals to determine whether the student is in fact a "child with a disability" with the meaning of the IDEA. 20 U.S.C. §1414(1)(1),(b)(2),(4),(c)(1); 34 C.F.R. §300.301. During this evaluation, the child "is assessed in all areas related to the suspected disability." 34 C.F.R.§300.304(c)(40). If the child is disabled, the team will prepare an "individualized education program" ("IEP") which describes the effects of the disability on the child's education performance, the goals for improvement, and the special education and related services" that will be provided. 20 U.S.C. §1414(d)(1)(A); 34 C.F.R. §300.320. Each child must be re-evaluated at least once very three years, and IEPs must be reviewed no less than annually. 20 U.S.C. §1414.(a)(2),(d)(4); 34 C.F.R. §§300.321; 300.343(c).

In summary, Medicaid outreach involves informing potential Medicaid-eligibles of the availability of Medicaid or assisting them in enrollment whereas the IDEA's "child find" provision requires the state to identify, locate, and evaluate all children with potential disabilities who are in need of special education or any related services. See New York State Dep't of Soc. Servs., No. 1636, at 6 (1997); 6412 AR 769, id. at 735-36 (Model Code 1.b); 20 U.S.C. §1412(a)(3). In this case, the DAB sustained CMS's disallowances of Illinois' request for administrative costs for Medicaid outreach using activity codes C1 and C2 because the Board believed that the activity codes actually captured activities incurred for "child find."

B) Administrative Costs in Support of Skilled Professional Medical Personnel and their directly supporting staff

Illinois and HHS also disagree regarding the DAB's decision to affirm CMS's disallowances of administrative costs incurred by SPMP and their staff under activity codes E2 and F2. Administrative activities of SPMP and their directly supporting staff are among the activities that receive a higher level of FFP. The Medicaid statute provides that States shall receive FFP at a rate of 75 percent for sums "as are attributable to compensation or training of SPMP and staff directly supporting such personnel" so long as the functions are found necessary by the Secretary for the proper and efficient administration of the State plan. 42 U.S.C. §1396b(a)(2)(A); see also 42 C.F.R. §433.15(b)(5)(2007). SPMP are defined as "physicians, dentists, nurses, and other specialized personnel who have professional education and training in the field or medical care or appropriate medical practice." 42 C.F.R. §432.2 (2007). The regulation further defines "staff of other public agencies" to cover SPMP and directly support staff who are "employed in State or local agencies other than the Medicaid agency who perform duties that directly relate to the administration of the Medicaid program." Id.

SPMP must be also in "positions that have duties and responsibilities that require those professional medical knowledge and skills." 42 C.F.R. § 432.50(d)(iii). According to the regulatory preamble, the function must require the SPMP's "[l]evel of medical expertise in order to be performed effectively." 50 Fed. Reg. at 46,656.*fn2 CMS provided interpretative guidelines for SPMP related costs in the Title XIX Financial Management Review Guide #1: Skilled Professional Medical Personnel (Feb. 2002). 6402 AR 653-84. In regard to permissible SPMP functions, CMS listed such activities as reviewing complex physician billing and participating in case management, including medical review or utilization review. Id. at 663. For the 75 percent enhanced rate to apply to the activities of supporting staff, they must be "secretarial, stenographic, and copying personnel and files and records clerks who provide clerical services that are directly necessary for the completion of the professional medical responsibilities and functions of the skilled professional medical staff." 42 C.F.R. §432.50(d)(1)(v) (2007). SPMP "must directly supervise the supporting staff and the performance of the supporting staff's work." Id.

Finally, states may receive enhanced FFP for SPMP administrative activities but not medical services. CMS discovered that states were confusing activities that were administrative versus medical in nature, and therefore, CMS furnished guidance to assist states in properly claiming FFP to avoid double billing. CMS's guide, Medicaid and School Health: A Technical Assistance Guide (Aug. 2007) (the "TA Guide") distinguished between administrative services and medical services as follows:

Expenses cannot be claimed as administration if they are an integral part or extension of a direct medical or remedial service, such as patient assessment, patient education, counseling, development of the medical portion of an IEP or IFSP, or another physician extender activities. Such services are properly paid for as part of the payment made for the medical or remedial services....[Provides may not claim an additional cost as administrative costs under the state plan.

One example of a medical service performed by a SPMP on school-aged children that is not reimbursed at the enhanced rate is Early and Periodic Screening, Diagnostic and Treatment ("EPSDT").*fn3 Medicaid-eligibles under the age of 21 must undergo EPSDT which is a comprehensive and preventive children's health program that emphasizes early assessment and treatment. 42 U.S.C. §1396d(r). EPSDT requires periodic dental, vision, and hearing examinations and assessments, as well as periodic "screening services" that furnish comprehensive assessments of physical and mental health, physical examinations, immunizations, and laboratory tests. Id. Mandatory EPSDT benefits also include:

Such other necessary health care, diagnostic services, treatment and other measures described in [Section 1396d(a)] to correct or ameliorate defects and physical and mental illnesses and conditions discovered by the screening services, whether or not such services are covered under the State plan.

42 U.S.C. §1396(r)(5).

The DAB's position is that Illinois's Codes E2 and F2 were pervasively flawed and covered activities beyond those traditionally recognized as SPMP administrative functions. Additionally, the DAD found that Illinois's reimbursement ...

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