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October 6, 1992

STATE OF NEW YORK, THE NEW YORK STATE DEPARTMENT OF SOCIAL SERVICES, and CESAR A. PERALES, Commissioner of the New York State Department of Social Services, Plaintiffs,
LOUIS W. SULLIVAN, M.D., United States Secretary of Health and Human Services, and the U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendants.


The opinion of the court was delivered by: HOWARD G. MUNSON



 Presently before the court are cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56. The court heard oral argument on November 28, 1991 in Albany, New York. For the reasons stated below, the court grants defendants' cross-motion for summary judgment and denies plaintiffs' motion.


 This action is premised on defendants' refusal to reimburse plaintiffs for certain expenditures incurred in administering Title XIX of the Social Security Act, 42 U.S.C. §§ 1396, et seq., ("Title XIX" or "Medicaid"). The complaint asserts the existence of a federal question as the basis for jurisdiction. 28 U.S.C. §§ 1331, 1361.

 Pursuant to Title XIX, New York State is entitled to submit claims for reimbursement to the federal government to defray certain expenditures in administering the Medicaid program within its borders. A two-year statute of limitations for the presentation of such claims is imposed by 42 U.S.C. § 1320b-2, with certain exceptions, which include the "audit exception." On December 5, 1986, the New York State Department of Social Services submitted claims that were over two years old, arguing, nonetheless, that their payment was justified under the "audit exception." The United States Department of Health and Human Services ("HHS") rejected these claims as untimely.

 The subject claims were submitted to the Health Care Financing Administration ("HCFA"), a branch of HHS, as part of the New York State auditing process known as the Shares Reclassification System ("SRS"). SRS consists of a method of comparing state and federal computer-generated files for purposes of ascertaining state Medicaid expenditures which were initially mischaracterized as ineligible for federal funding. The audit in question determined that there should have been a reduction in the dollar value of all of the claims analyzed, but that the overall reduction should have been offset by a limited upward adjustment of $ 873,607, consisting of Medicaid expenditures incurred between July 1, 1983 and December 31, 1983. While the downward adjustment was accepted by the HCFA, the limited upward adjustment was disallowed. This decision was then appealed to HHS's Departmental Appeals Board ("DAB"). *fn1" The DAB affirmed the HCFA's decision on September 1, 1988, finding:

 1. The state audit was a true audit.

 2. An audit which serves as the subject matter of the "audit exception" may be either a federal or state audit. Accordingly, New York's audit qualified for consideration under the "audit exception."

 3. In order for the "audit exception" to be activated, it is necessary that the Federal Government accept the late claims. In support of this conclusion, the DAB noted the wording of 45 C.F.R. 95.4 which defines "audit exception" as "a proposed adjustment by the responsible Federal agency to any expenditure claimed by a State by virtue of an audit."

 4. There were no actions taken by defendants which demonstrated their acceptance of the disputed claims. HCFA's acceptance of the downward adjustments did not, on that basis alone, compel the Board to accept any untimely upward adjustments.

 Exhibit ("Exh.") 1 attached to Document ("Doc.") 3, at 2-10.

 By summons and complaint filed in this court on June 27, 1989, the State alleges that the decisions of the HCFA and the DAB violate the Social Security Act. The State served interrogatories and requests for production of documents, and defendants responded with a motion to preclude discovery. In anticipation of bringing the instant motions, plaintiffs agreed to withdraw their discovery demands, without prejudice. Defendants thereafter withdrew their motion to preclude discovery, without prejudice. The parties have now cross-moved for summary judgment. In the alternative, plaintiffs seek an order compelling defendants to provide affidavits explaining why the HCFA denied audit exception treatment for the subject upward adjustment.

 Both parties agree that the only issue before the court regarding the cross-motions for summary judgment is whether the DAB's determination that the proposed upward adjustment of $ 873,607 did not fall under the "audit exception" of 42 U.S.C. § 1320b-2(a), *fn2" complies with the meaning and intent of the statute. See Plaintiffs' Memorandum of Law, Doc. 11, at 7-8; Defendants' Memorandum of Law, Doc. 13, at 3. Both parties also agree that the scope of judicial review of the DAB's action is governed by the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2).

 Plaintiffs argue that the decision of the DAB should be overturned because it violates three separate subsections of the APA. Specifically, it violates subsection (2)(A) by virtue of being arbitrary, capricious, and otherwise not in accordance with law; it violates subsection (2)(C) by virtue of being in excess of statutory jurisdiction, authority, or limitations; and it violates ...

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