In the subject disallowance, CMS determined based on the Guide’s "free care principle" that the school districts were not entitled to Medicaid funds for EPSDT services provided to Medicaid-eligible students because the school districts provided the services to Medicaid-ineligible students without seeking third-party reimbursement. CMS argued initially before the Board that the Guide’s free care principle is a reasonable interpretation of section 1902(a)(17)(B) of the Act¹ that merely clarifies the longstanding policy in CMS’s State Medicaid Manual, and that this interpretation is entitled to deference since the Secretary had broad discretion to interpret section 1902(a)(17)(B).

In its reconsideration request, CMS reiterated its argument that the free care principle in the Guide is an interpretation of section 1902(a)(17)(B). CMS also argued that the Guide’s free care principle was issued pursuant to the authority delegated to the Secretary by that section to set standards for available resources for determining the extent of medical assistance.²

This reconsideration ruling is based on the record for DAB No. 1924 as well as the parties’ submissions in the reconsideration proceeding.³

CMS argues in its request for reconsideration, as it did in the original proceedings in this case, that the Guide’s free care principle is a reasonable interpretation of section 1902(a)(17)(B) of the Act. An interpretative rule clarifies the meaning of an already existing statutory (or regulatory) requirement and does not impose new requirements.⁴ In the original proceedings, CMS did not identify the specific language in section 1902(a)(17)(B) of which, in its view, the free care principle is an interpretation. CMS now takes the position, however, that the free care principle interprets the terms "extent of medical assistance" and "resources." CMS contends in particular that the free care principle is an "interpretation that services ‘available without charge’ are a resource sufficient to reduce the amount of medical assistance." CMS submission dated 11/1/04, at 5. CMS also contends that the free care principle interprets "the definition of ‘medical assistance’ insofar as it is ambiguous about whether a cost is charged to recipients or incurred by others. . . ." CMS submission dated 7/23/04, at 10.

"express . . . directive to the Secretary in section 1902(a)(17)(B) to set resource standards applicable . . . to the ‘extent of medical assistance.’" CMS submission dated 11/1/04, at 1. Section 1902(a)(17)(B) requires states to have standards in their Medicaid State plans for determining Medicaid eligibility and the extent of medical assistance that take into account only income and resources determined, "in standards prescribed by the Secretary," to be available to the applicant or recipient. This clearly gives the Secretary authority to prescribe standards for what constitutes available "resources" for the purpose of determining the extent of an individual’s medical assistance under title XIX.⁵

• The Guide is not accompanied by a transmittal from the Secretary or any official in CMS (then the Health Care Financing Administration (HCFA)) relying on a delegation from the Secretary to issue standards under section 1902(a)(17)(B). Instead, the cover page of the Guide merely indicates that it was authored by the Center for Medicaid and State Operations.

• The Guide was not published following the notice and comment procedures in the Administrative Procedure Act (APA), 5 U.S.C. § 553.⁶ These procedures must be followed when a legislative rule (referred to in the APA as a substantive rule) is issued.⁷ Standards issued under the Secretary’s delegated authority in section 1902(a)(17)(B) are legislative rules. See, e.g., Herweg v. Ray, 455 U.S. 265, 274 (1982) (standards issued under section 1902(a)(17))(B) are entitled to "legislative effect").⁸ If the Secretary had intended the Guide as a legislative rule, we presume he would have issued it pursuant to the notice and comment procedures.⁹

CMS contends that the Board erred in holding in DAB No. 1924 that CMS should have waived the Guide’s free care principle here. CMS argues specifically that the only waiver authority is in section 1115(a)(2) of the Act, that CMS is not obligated to grant a waiver pursuant to this provision, and that there is no evidence that CMS acted arbitrarily by granting a waiver for some states and not others. CMS submission dated 7/23/04, at 11; CMS submission dated 8/16/04, at 13-14.¹⁰ CMS’s arguments misapprehend the nature of the Board’s holding, however. In essence, the Board held that even if CMS’s free care principle is an interpretation of the Act, it is not reasonable as applied to the type of services in question under the particular circumstances of this case. CMS does not address any of the bases for this holding in DAB No. 1924, including the undisputed fact that efforts to obtain third-party reimbursement for the cost of EPSDT services provided in this case to non-Medicaid eligibles would have cost more than they could produce in reimbursement. In any event, this holding is not dispositive in view of our conclusion that the Guide’s free care principle is not an interpretative rule.

CMS’s assertions of additional errors in DAB No. 1924 reflect a misunderstanding of that decision. CMS argued that the Board erred in holding that the free care principle "cannot supersede the regulatory definition of ‘resources’." See CMS submission dated 11/1/04, at 7, citing DAB No. 1924, at 15. CMS argued that "[m]erely because ‘services available without charge to the community’ are not included as a resource for eligibility purposes has no bearing on whether such services should or should not be excluded under section 1902(a)(17)(B) in determining the extent of medical assistance." Id. We disagree. The point the Board was making in DAB No. 1924, which we reaffirm here, was that the Secretary has already chosen to exercise his discretion under section 1902(a)(17)(B) by promulgating regulations which do not address the "free care" CMS seeks to treat as a resource here. Those regulations contain no indication that CMS had the authority to specify any resources for purposes of determining the extent of medical assistance at some later date in an informal issuance like the Guide.¹¹

CMS also alleges that the Board made an error of fact in DAB No. 1924 "insofar as it misconstrued the free care policy as imposing conditions on States or providers concerning non-Medicaid users of a service." CMS submission dated 8/16/04, at 2. According to CMS, the Guide merely "suggests" that schools establish procedures, such as establishing a fee schedule and ascertaining third-party resources for non-Medicaid eligibles, "which would assure that the services would not be regarded as ‘free,’ thus assuring the availability of FFP." Id. at 9. CMS is correct that the Guide does not literally require that, "in order to receive funding for EPSDT services provided to students who are Medicaid eligible, the state must also seek reimbursement for services provided to the remaining, Medicaid-ineligible students, either from any third-party insurers or directly from these students or their families," as the Board stated in DAB No. 1924 (e.g., at 1).¹² However, the Guide clearly requires that a state or other provider establish that services provided to Medicaid-ineligible students were not free of charge as a condition of obtaining reimbursement for providing the same services to Medicaid-eligible students. Moreover, CMS did not identify any other way in which the Oklahoma school districts could have established that the services were not free of charge other than seeking third-party reimbursement for the cost of the services to the Medicaid-ineligible students. Thus, the Guide’s free care principle is not merely a suggestion, but instead functions to deprive providers of funding for mandated services based on the failure to follow a condition on that funding which was not imposed by Congress or by the Secretary pursuant to authority delegated by Congress. Cf. Pennhurst State School and Hospital v. Halderman, 451 U.S. 1, at 17 (1981) (holding that "if Congress intends to impose a condition on the grant of federal moneys, it must do so unambiguously") (cited at DAB No. 1924, at 19, n.23).

CMS also asserts that the Guide’s free care principle "gives effect to the language in section 1902(a)(17)(B) consistent with the overall objective of preserving Medicaid as the payor of last resort." CMS submission dated 11/1/04, at 6. This argument does not provide any basis for reconsidering our decision, however. If the free care principle were an interpretation of section 1902(a)(17)(B) (or some other statutory or regulatory provision), then it would be appropriate to consider whether the interpretation is consistent with other statutory and regulatory provisions as one factor in determining whether the interpretation is a reasonable one. Since we have concluded that the free care principle is not an interpretative rule, however, there is no reason to consider this matter here. In any event, as we noted in DAB No. 1924, the concept of the payor of last resort originates from the third-party liability requirements in section 1902(a)(25) of the Act, which apply only to services provided to Medicaid-eligible individuals.¹³ DAB No. 1924, at 18-19. Thus, in requiring, as a condition of obtaining Medicaid FFP for services to Medicaid-eligible students not covered by a third-party payment, that providers pursue liable third parties in the case of non-Medicaid eligibles to whom the same services were provided, CMS is applying the concept of payor of last resort in a manner not contemplated by section 1902(a)(25).

In transmitting a copy of the CMS Administrator’s decision on Maryland’s State plan amendment (identified in note 3 above) to the Board, CMS stated that "[t]he adjudication constitutes the Secretary’s position on the issues decided" and that "[t]he Secretary’s position on the free care policy supercedes CMS’ brief [in the reconsideration] to the extent that CMS’ brief is inconsistent with the Administrator’s decision." CMS submission dated 9/23/04, at 1. CMS nevertheless specifically stated in a later submission that it was no longer relying on section 1905(a) of the Act as authority for the Guide’s free care principle, although this section is the primary authority for this principle cited by the Administrator’s decision. It is not clear in what other respects CMS’s arguments on reconsideration are inconsistent with the Administrator’s decision, nor is it clear to what extent CMS continues to rely on the Administrator’s decision to support its motion for reconsideration.¹⁴ In any event, none of what CMS claims are the "major points" in the Administrator’s decision are indicative of an error in our decision.

CMS submission dated 9/23/04, at 2, quoting Administrator’s decision at 24. It is not clear in what sense the Administrator believed the free care principle advances a federal interest apart from the principle itself that Medicaid should not pay for services to Medicaid-eligible students that Medicaid-ineligible students receive without charge. While CMS argues that it has an interest in "preserving Medicaid funds" that is advanced by the Guide’s free care principle (CMS submission dated 11/1/04, at 2), this interest appears to be fully protected by the statutory requirement for seeking reimbursement from liable third parties for payments for Medicaid-eligible individuals.¹⁵ In any event, even if the Guide’s free care principle advances a federal interest, this would only be a factor in determining the reasonableness of the free care principle if it were an interpretative rule; it does not provide any legal authority for the free care principle.