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January 29, 1993


The opinion of the court was delivered by: KENNETH CONBOY


 Plaintiff, the New York State Department of Social Services ("New York"), brings this action against the United States Department of Health and Human Services ("HHS"), HHS Secretary Louis W. Sullivan, the Health Care Finance Administration ("HCFA"), and HCFA Administrator Gail R. Wilensky (collectively "the Secretary"), claiming that the Secretary refused to subsidize at the statutorily required level New York's operation of the New York City Welfare Management System ("WMS/NYC"). The WMS/NYC, which is an extension of a system New York installed in all of New York State except New York City ("upstate WMS"), is an enhancement of New York State's Medicaid Management Information System ("MMIS"). MMIS is a Mechanized Claims Processing and Information Retrieval System ("MCPIRS") used by New York to, inter alia, process Medicaid claims. New York and the Secretary now move for summary judgment. *fn1" For the reasons that follow, the Secretary's motion is granted and New York's motion is denied.

 I. Background

 A. Statutory and Regulatory Background

 The Medicaid Act, Title XIX of the Social Security Act ("the act"), 42 U.S.C. § 1396, et seq. (1992), establishes a state-administered, federally-subsidized program for providing medical assistance to needy individuals. A state seeking to participate in the program must submit to the Secretary a comprehensive plan for reimbursing health care providers for services they provide to low income and disabled patients. The federal government partially reimburses states, whose plans have been approved by the Secretary, for the costs of providing medical assistance and administering the program. 42 U.S.C. § 1396b.

 The act provides that among the administrative costs for which a state participating in the Medicaid program may obtain reimbursement are the costs attributable to the development and operation of an MCPIRS. 42 U.S.C. § 1396b(a)(3)(A)(i). An MCPIRS is "a system of software and hardware used to process Medicaid claims, and to retrieve and produce utilization and management information about services that is required by the Medicaid agency or Federal Government for administrative and audit purposes." 42 C.F.R. § 433.111(b) (1991). The act also provides that states shall receive 90% Federal Financial Participation ("FFP"), i.e. federal funding, for "the design, development, or installation of such [MCPIRS's] as the Secretary determines are likely to provide more efficient, economical, and effective administration of the [State's Medicaid] plan." 42 U.S.C. § 1396b(a)(3)(A)(i). The act indicates that the states shall receive 75% federal funding for "the operation of systems (whether such systems are operated directly by the State or another person under a contract with the State) of the type described in subparagraph (A)(i) (whether or not designed, developed, or installed with assistance under such subparagraph) which are approved by the Secretary. . . ." 42 U.S.C. § 1396b(a)(3)(B). Besides discussing federal subsidies which are not relevant to the case at bar, the act indicates that States shall receive 50% federal funding for costs the Secretary finds necessary "for the proper and efficient administration of the State plan." 42 U.S.C. § 1396b(a)(7). The act says nothing about funding enhancements to MCPIRS's.

 The regulations contained in the Code of Federal Regulations mirror the three-tiered statutory framework of the Act. The regulations first require a state to describe its proposed mechanized claims processing and information retrieval system in an advance planning document "(APD"). If the proposed system satisfies certain conditions, HFCA will approve it, and Federal Financial Participation will be available to the state at a 90% rate. See 42 C.F.R. § 433.112(b) (1991). After the state installs the entire system and HFCA approves the system's operation, 75% FFP is available to the state for the system's operating costs. 42 C.F.R. § 433.116 (1991). Miscellaneous administrative costs necessary for the proper administration of the state program are reimbursed at a 50% FFP rate. See 42 C.F.R. § 433.15(b)(7) (1991). Moreover, the regulations provides that "FFP is available at 90 percent in expenditures for . . . enhancement of an [MCPIRS]."

  Chapter 11 of the State Medicaid Manual ("SMM"), which is made part of the regulatory scheme by 42 C.F.R. § 433.110(a)(1) (1991), discusses the funding scheme in more detail. *fn2" The SMM contemplates the installation of an MCPIRS in the following manner. First, the state will develop, install, and test components of the MCPIRS's known as subsystems, see Exhibit C to Defendant's Statement Pursuant to Rule 3(g) [hereinafter "SMM"] § 1255, and the Secretary will fund the development, installation, and testing of these subsystems at a 90% FFP rate. See id. These subsystems may become operational before the MCPIRS becomes operational, and the subsystems may by themselves perform useful functions. See id. Nevertheless, after the state develops, installs, and tests the a subsystem, the Secretary will only provide the state with 50% FFP for the subsystem's operating costs prior to the complete MCPIRS's operation. The policy of funding these subsystem operations at 50% FFP is known as the transition funding policy. Once the MCPIRS is operating and HCFA approves the MCPIRS's operation, the State is entitled to 75% FFP. Should the Secretary determine that date upon which the system satisfied HFCA's criteria for operational approval was prior to the date upon which the HFCA actually approved of the system's operation, the Secretary will make available to the state 75% FFP from the former date rather than from the latter. See id.

 As far as funding for MCPIRS enhancements is concerned, SMM § 11255 provides that 90% FFP is available for "improvement of each subsystem in an approved complete system." SMM § 11255 indicates that FFP at the "90-percent level for any subsystem terminates on the date the . . . improvement to a subsystem is fully tested and subsequently accepted by the State." SMM § 11255. SMM § 11255 also provides that 50% FFP "is available for the operation of any subsystem from the point that 90-percent FFP ceases until the complete system is fully operational. . . ." Once the entire MCPIRS is operating, and the Secretary approves the MCPIRS's operation, the state is entitled to 75% FFP for the operation of the MCPIRS.

 B. Factual Background

 The MMIS, which New York installed in 1977 and which is in operation throughout the State, is the general system design approved by HCFA for the mechanized processing of claims and information retrieval. See Complaint Attached as Exhibit A to Defendants' Statement Pursuant to Civil Rule 3(g) [hereinafter "Compl."] §§ 7, 18. The primary function of the MMIS is to process claims submitted by health care providers to New York for Medicaid funds. Administrative Record [hereinafter "R."] 1414. Upstate WMS determines recipient eligibility of New Yorkers who do not live in New York City for all major welfare programs supervised by New York. R. 1411-18. Upstate WMS and WMS/NYC are not part of New York's existing MMIS. R. 1414. Rather, Upstate WMS and WMS/NYC interface with New York's MMIS to provide data on individuals eligible for Medicaid in New York State. R. 1414, 1423.

 HCFA approved the Upstate WMS's APD in May 1977. The APD proposed initial installation of WMS in upstate New York and subsequent extension to New York City. Affidavit of Bow Eng. P 7 at R. 753. New York installed the WMS incrementally by region in upstate New York, and the last regions became operational in March 1982. Id. at P 8; R. 956. Following HCFA's approval of the operation of Upstate WMS, the Secretary funded and continues to fund the operation of upstate WMS at a 75% FFP rate. Affidavit of Bow Eng P 9 at R. 753.

 HFCA has disallowed all the claims New York has made for 75% FFP to pay for the operational costs of the WMS/NYC, and has only provided FFP to New York at the 50% rate generally available for MCPIRS administrative costs. HCFA disallowed these claims because New York had submitted claims for the 75% FFP prior to HCFA's having approved of the operation of the entire WMS/NYC system citywide. Thus, New York had not met the prerequisites for enhanced funding set forth in 42 C.F.R. § 433.116(a) (1991).

 New York appealed HCFA's disallowances to the HHS Departmental Appeals Board ("DAB"). New York principally challenged HCFA's authority to require approval of the operation of the WMS/NYC as a condition to receiving 75% FFP for operational costs. New York argued that because WMS/NYC is not a mechanized claims processing and information retrieval system, it is not subject to the requirements in the HFCA regulations. New York also claimed that HCFA had arbitrarily used a different process for reviewing the WMS/NYC than the Secretary had used for reviewing the upstate WMS. The State contended that because HCFA had approved the upstate WMS incrementally by region, it was bound to review the WMS/NYC incrementally by site.

 Following a hearing, DAB upheld the disallowances. DAB found that the WMS/NYC is not an MCPIRS, R. 5, and that therefore the only basis upon which New York could properly have claimed 90% FFP during the developmental phase of the WMS/NYC was if HCFA had considered the WMS/NYC an "enhancement" to MMIS. R. 8; see 42 C.F.R. § 433.112(a) (1991). DAB then found that as an "enhancement" to the MMIS, the WMS/NYC was subject to HFCA's approval prior to the payment of 75% FFP for operational costs. R. 9. DAB concluded that it was reasonable to condition the approval of New York's request for enhanced FFP on HCFA's approval of the operation of the totally installed WMS/NYC. *fn3"

 DAB also rejected New York's argument that the approval regulations did not apply to the WMS/NYC. DAB made the factual finding that, during negotiations between New York and HCFA over the funding of the WMS/NYC, HFCA gave New York "ample notice and [New York] understood that these provisions [42 C.F.R. § 433.116 and the provisions of the SMM] would apply to WMS/NYC." R. 8. DAB noted that New York's minutes of a November 8, 1984 meeting with HCFA officials indicated a discussion regarding "transitional funding of a system at 50% for operational costs until the system is fully implemented and approved by HCFA as operational." Id. DAB also referred to an October 18, 1984 letter in which the Secretary explicitly notified New York that 75% would not be available until after New York implemented the WMS/NYC citywide and HCFA approved of the operation of the system.

 Finally, DAB rejected New York's argument that HCFA unreasonably treated differently the approval of the upstate WMS from the approval of the WMS/NYC. DAB found that HCFA's actions with respect to WMS/NYC "were in full accord with applicable regulation and policy," R. 18, and that "nothing in the applicable regulations and policy committed HCFA to incremental review." Id. DAB noted that the difference in the approval process for the upstate WMS and the WMS/NYC could be justified by the differences in the systems, attributable in part to the "uniqueness of the City's size, caseload, structure and labor unions." ...

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