Pennsylvania, Department of Public Welfare v. U.S. Department of Health & Human Services

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

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No. 10-2409

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COMMONWEALTH OF PENNSYLVANIA,

DEPARTMENT OF PUBLIC WELFARE,

Appellant.

v.

U.S. DEPARTMENT OF HEALTH AND HUMAN

SERVICES;

SECRETARY OF THE U.S. DEPARTMENT OF HEALTH

AND

HUMAN SERVICES, in his official capacity.

___________

On Appeal from the United States District Court

for the Middle District of Pennsylvania

(D.C. Civil Action No. 1:08-cv-00791)

District Judge: Honorable Yvette Kane

___________

Submitted Under Third Circuit LAR 34.1(a)

January 13, 2011

Before: SCIRICA, BARRY and VANASKIE, Circuit

Judges.

(Filed June 13, 2011)

Jason W. Manne, Esq.

Office of General Counsel

Department of Public Welfare

300 Liberty Avenue

303 State Office Building

Pittsburgh, PA 15222-0000

Counsel for Appellant

Tony West, Assistant Attorney General

(Did not enter an appearance)

William Kanter, Esq.

Peter R. Maier, Esq.

United States Department of Justice

Civil Division

950 Pennsylvania Avenue, N.W.

Washington, DC 20530-0000

Counsel for Appellee

___________

OPINION OF THE COURT

___________

VANASKIE, Circuit Judge.

The Pennsylvania Department of Public Welfare

(“Pennsylvania”) challenges a decision disallowing federal

reimbursement of occupancy costs incurred in operating

2

community residential facilities for the developmentally

disabled. The District Court, on cross-motions for summary

judgment, affirmed the Secretary of Health and Human

Services‟ (“HHS”) determination that reimbursement of

occupancy expenses is precluded by the statutory exclusion of

room and board set forth in 42 U.S.C. § 1396n(c)(1).

Discerning no error in the District Court‟s well-reasoned

decision, we will affirm.

I.

Pennsylvania, like every other state, participates in the

Medicaid Program, which was established in 1965 under Title

XIX of the Social Security Act, 42 U.S.C. § 1396 et seq.

Medicaid is “a cooperative, jointly funded, federal-state

program to financially assist low income persons in securing

medical care.” Klein v. Califano, 586 F.2d 250, 253 (3d Cir.

1978). Under Medicaid, the federal government reimburses

between 50% and 83% of state costs for patient care on behalf

of eligible low-income individuals. Medicaid is administered

by HHS through its Centers for Medicare and Medicaid

Services (“CMS”).

As part of Medicaid, states are eligible to receive

federal financial participation to assist with medical

assistance expenditures for eligible individuals in hospitals,

nursing facilities, and intermediate care facilities for the

mentally retarded. Federal financial participation was

extended in 1981 to cover developmentally disabled

individuals receiving care in home- and community-based

settings. See 42 U.S.C. § 1396n(c). Pursuant to 42 U.S.C. §

1396n(c)(1), states can opt-in to this coverage program by

obtaining a “waiver” of other provisions of the Medicaid

Statute. Section 1396n(c)(1), in pertinent part, provides:

3

The Secretary may by waiver provide that a

State plan approved under this subchapter may

include as “medical assistance” under such plan

payment for part or all of the cost of home or

community-based services (other than room

and board) approved by the Secretary which are

provided pursuant to a written plan of care to

individuals with respect to whom there has been

a determination that but for the provision of

such services the individuals would require the

level of care provided in a hospital or a nursing

facility or intermediate care facility for the

mentally retarded the cost of which could be

reimbursed under the State plan.

42 U.S.C. § 1396n(c)(1) (emphasis added).

HHS has issued regulations implementing the

exclusion of expenditures of federal funds for “room and

board.” 1 See 42 C.F.R. § 441.310(a)(2). The State Medicaid

Manual, which serves as the official HHS interpretation of the

law and regulations, contains the following explanatory

statement:

Except for respite care furnished in a State

approved facility that is not [a] private

residence (see item 4), [federal financial

participation] is not available for room and

board of the recipient as part of a home and

community-based service. Board means three

1

There are exceptions to this rule with regard to

personal caregivers and respite costs that are not relevant

here.

4

meals a day or any other full nutritional

regimen. Room means hotel or shelter type

expenses including all property related costs

such as rental or purchase of real estate and

furnishings, maintenance, utilities, and related

administrative services.

(A. 112a.)

Pennsylvania obtained a home and community based

service (“HCBS”) waiver in 2001. The waiver, which was

renewed in 2006, authorized reimbursement of state expenses

for “habilitation services” for developmentally disabled

individuals in home- and community-based treatment

settings. 2

Habilitation services are defined by statute as “services

designed to assist individuals in acquiring, retaining, and

improving the self-help, socialization, and adaptive skills

necessary to reside successfully in home and community

based settings.” 42 U.S.C. § 1396n(c)(5)(A). The waiver

granted to Pennsylvania defined these community habilitation

services as follows:

2

Pennsylvania provides habilitation services to

developmentally disabled individuals in four living

arrangements: intermediate care facilities for the mentally

retarded (“ICF/MRs”), community homes (also called

“community residential facilities”), family living homes, and

supported independent living arrangements. Of these,

funding to the nearly 2,200 non-profit or county-owned

community residential facilities across the state is at issue

here.

5

Community Habilitation means services

designed to assist individuals in acquiring,

retaining, and improving the self-help,

socialization, and adaptive skills necessary to

reside successfully in home and community-

based settings. Habilitation may be provided up

to 24 hours a day based on the needs of the

individual receiving services. Included are

provider training costs, supervisory costs,

purchased personnel costs, and costs of

necessary supplies, equipment and adaptive

appliances. Services may be provided by a

qualified family member or relative,

independent contractor, or services agency.

(A. 62a.)

Pennsylvania provides habilitation services in nearly

2,200 non-profit or county-owned community residential

facilities. From 2001 through part of 2006, Pennsylvania did

not seek federal reimbursement for occupancy costs for

Medicaid recipients living in such facilities. Instead,

Pennsylvania paid for residents‟ room and board in these

facilities using a combination of state funds and the residents‟

Supplemental Security Income.

On March 1, 2006, Pennsylvania began claiming a

portion of occupancy costs as reimbursable “habilitation

services.”3 Specifically, Pennsylvania claimed that 54.1667%

3

Beginning in late 2005, Pennsylvania employed the

consulting firm MAXIMUS to maximize the Medicaid

funding it was receiving from the federal government. The

6

of its occupancy costs, including rent, utilities, interest,

depreciation, building insurance, housekeeping, building

repairs, maintenance and renovation, and furnishings and

equipment were not, in fact, “room” costs, but were

“habilitation costs.” This claim was based on the fact that

residents were engaged in “waiver services” on the premises

for 13 hours in a typical 24-hour day, and, consequently,

room costs for this period actually supported habilitation.

CMS denied the request for inclusion of occupancy

costs by a letter dated July 5, 2006, determining that the costs

constituted “room and board” expenses and were therefore

non-reimbursable under the statute and the State Medicaid

Manual. The letter expressly disapproved Pennsylvania‟s

approach, noting that “[Section 4442.3.B.8 of the State

Medicaid Manual] requires the clear differentiation between

the services covered by the HCBS waiver that are provided in

the residence and the cost of room and board, which by law

cannot be covered.” (A. 80a.) CMS issued a letter dated

August 17, 2006, stating that the State could not include the

$50,939,457 in occupancy costs in its HCBS Medicaid

claims. An additional $9,997,220 was subsequently

disallowed. On June 21, 2007, CMS formally disallowed all

of Pennsylvania‟s claims for occupancy costs.

Pennsylvania appealed the disallowance to the HHS

Departmental Appeals Board (“DAB”), which upheld the

disallowance on February 6, 2008. The DAB explained:

[T]he costs that Pennsylvania is calling

“occupancy” (or “facility”) costs today are the

claim for occupancy costs appears to have been developed

from MAXIMUS‟ analysis and advice.

7

same as the costs that Pennsylvania previously

has treated as room costs. They have the same

component parts: rent, utilities, interest,

depreciation, building insurance, housekeeping,

building repairs and maintenance, building

renovations, furnishings and equipment, and

repairs of furnishings and equipment. For all

intents and purposes, Pennsylvania‟s occupancy

costs in community residential facilities are

room costs; they are the costs of providing

housing to the Medicaid recipients who live

there.

(A. 37a-38a.)

Pennsylvania next brought suit in the U.S. District

Court for the Middle District of Pennsylvania, alleging that

the DAB‟s decision violated the Administrative Procedure

Act as an action that was arbitrary, capricious, an abuse of

discretion, or otherwise unlawful. The District Court

awarded summary judgment to HHS on March 31, 2010. The

court initially concluded that “[room and board]

unambiguously means the provision of living space and

meals.” (A. 14a.) The court further found that, even if the

term “room” was ambiguous, under the deferential Chevron

standard of review, the DAB‟s construction of the statutory

term “room and board” was reasonable, supported by the

language of the State Medicaid Manual, and entitled to

deference.

8

II.

In this appeal from the decision of an administrative

4

board, “we apply de novo review to the district court's ruling,

and in turn apply the applicable standard of review to the

underlying agency decision.” Cyberworld Enter. Techs., Inc.,

v. Napolitano, 602 F.3d 189, 195-96 (3d Cir. 2010). Under

the Administrative Procedure Act, we must determine

whether the Board‟s action was “arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law.”

5 U.S.C. § 706(2)(A).

Our review of whether an administrative board

committed an abuse of discretion is governed by Chevron,

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,

842-43 (1984). Under Chevron, we follow a two-step

analysis. First, we determine “whether Congress has directly

spoken to the precise question at issue.” Id. at 842. If it has,

we must effectuate the intent of Congress. If not, we must

determine whether the agency‟s construction of the statute is

“permissible.” Id. at 843. Notably, we “need not conclude

that the agency construction was the only one it permissibly

could have adopted to uphold the construction, or even the

reading the court would have reached if the question initially

had arisen in a judicial proceeding.” Id. at 843 n.11.

Our first inquiry is whether Congress has directly

spoken to the issue of whether the “room and board”

exclusion encompasses the “occupancy costs” which

Pennsylvania seeks to claim. “We determine whether

Congress has unambiguously expressed [its] intent by looking

4

The District Court had jurisdiction under 28 U.S.C. §

1331. We have jurisdiction under 28 U.S.C. § 1291.

9

at the plain and literal language of the statute.” United States

v. Geiser, 527 F.3d 288, 294 (3d Cir. 2008) (internal

quotation marks and citations omitted). “When determining a

statute's plain meaning, our starting point is the ordinary

meaning of the words used. We refer to standard reference

works such as legal and general dictionaries in order to

ascertain the ordinary meaning of words.” Id. (internal

quotation marks and citations omitted).

Webster‟s defines “room and board” as “lodging and

food usu[ally] specifically earned or furnished.” Webster‟s

Third New International Dictionary 1972 (1993). The

applicable definition of “room” is given as “lodging

consisting of a room usu[ally] specifically earned or

furnished,” id. at 1972, and the applicable definition of

“board” is given as “food in the form of daily meals often

provided as payment for services,” id. at 243. The Oxford

English Dictionary, which dates the term back at least to the

year 1795, defines “room and board” as “accommodation and

meals,” and compares it to the phrase “bed and board,”

meaning “entertainment with lodging and food,” which has

been in existence since at least circa 1403. See Room, n. and

Bed, n., Oxford English Dictionary (2d ed. 1989), online

version available at http://www.oed.com/.5

The plain meaning of “room and board,” therefore,

encompasses not mere “living space,” but “lodging” that has

been especially furnished together with food. Lodging is

defined as “a place to live” and “a room or rooms in the house

of another used as a place of residence.” Webster‟s Third

5

Black‟s Law Dictionary does not define the term.

10

New International Dictionary 1329 (1993). The original

phrase, “bed and board,” encompassed the furnishing of

entertainment as part of one‟s lodging. Indeed, as HHS

points out, “the rent paid by the lodger at the boarding house

of yesteryear entitled him to his seat at the dinner table and a

chair in the parlor after dinner, not just the room where he

slept.” (Appellee‟s Br. at 26.) The plain meaning of the term

has never been limited to the actual hours occupied by

sleeping and eating, but extends to the activities or

entertainments incidental to the provision of lodging.6

Because the plain meaning of the statute leaves no

doubt that the costs at issue here were meant to be excluded

from reimbursement, we find that the District Court did not

err.

Even if the definition of “room and board” were

deemed ambiguous, however, we would still find that the

DAB did not abuse its discretion. Under the second prong of

Chevron, if the agency‟s construction of the term “room and

board” is permissible, we must allow it to stand. A

“„reasonable interpretation‟” of the statute is permissible.

Pareja v. Attorney General, 615 F.3d 180, 193 (3d Cir. 2010)

(quoting Chevron, 467 U.S. at 844). Indeed, in this Circuit,

6

Even Pennsylvania‟s own Administrative Code

defines “room” as “[t]he client‟s share of lodging costs, utility

costs – for example, electricity, heating, water and sewage –

and annual upkeep costs of the community residential mental

retardation facility – for example, trash collection, general

maintenance including necessary repairs and renovation

costs.” 55 Pa. Code § 6200.3. It defines “board” as “[t]he

client‟s share of his food and food preparation costs.” Id.

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statutory construction has been deemed permissible when it

“is based on an accepted dictionary definition of the term . . .

and does not impermissibly strain the plain language of the

regulation.” Secretary of Labor v. Beverly Healthcare-

Hillview, 541 F.3d 193, 200 (3d Cir. 2008).

Here, the DAB construed the word “room” to include

what Pennsylvania called “occupancy costs” because “[t]hey

have the same component parts: rent, utilities, interest,

depreciation, building insurance, housekeeping, building

repairs and maintenance, building renovations, furnishings

and equipment, and repairs of furnishings and equipment.”

(A. 37a.) The DAB added that these costs “are the costs of

providing housing to the Medicaid recipients who live there.”

(Id. at 38a.) The DAB further distinguished “room” costs

from reimbursable “habilitation services” costs, such as

“provider training costs, supervisory costs, purchased

personnel costs, and costs of necessary supplies.” (Id.)

The interpretation given to the phrase “room and

board” is plainly reasonable. It is consistent with the

dictionary definitions mentioned above. It is also consistent

with the congressional determination to limit reimbursement

to habilitation “services” exclusive of room and board.

Accordingly, the District Court did not err in according

deference to the HHS interpretation.7

7

Pennsylvania argues that the State Medicaid Manual

authorizes it to “allocate” its room costs between

reimbursable and non-reimbursable expenses. According to

Pennsylvania, the State Medicaid Manual, which contains

“[i]nstructions [which] are official interpretations of the law

and regulations, and, as such, are binding on Medicaid State

12

Pennsylvania argues, however, that it is inappropriate

to analyze this matter under the second step of Chevron

because this issue concerns a federal grant to the states, which

essentially involves a contract between Congress and the

states. Pennsylvania argues that “[t]he legitimacy of

Congress‟ power to legislate under the Spending Clause rests

upon whether States voluntarily and knowingly accept the

terms of the contract,” that “[s]tates cannot accept terms of

which they are unaware or unable to ascertain,” and that

“obligations under Federal grants generally should be judged

by reference to the law in effect when the grants were made.”

(Appellant‟s Br. at 15-16 (internal citations and quotation

marks omitted).) Accordingly, Pennsylvania claims that

agencies,” State Medicaid Manual, Foreword, quoted in Sai

Kwan Wong v. Doar, 571 F.3d 247, 253 n.6 (2d Cir. 2009),

states that “[t]here must also be a detailed cost allocation

strategy provided as part of the waiver request to explain how

the cost of waiver services in the residential setting will be

determined and segregated from ineligible waiver costs.”

State Medicaid Manual § 4442.3(B)(8) (reproduced in A.

111a-12a). Pennsylvania concludes that it is permitted to

allocate “occupancy costs” between the permitted objective of

habilitation services and the unpermitted objective of room

and board, and this triggers the application of Office of

Management and Budget Circular No. A-87 (“OMB A-87”),

which governs the allocation process. OMB-87, however,

speaks only to “allowable costs.” See Office of Mgmt. &

Budget, Executive Office of the President, OMB Cir. No. A-

87, Revised (2004). Because room costs are, by statute, not

allowable, OMB-87 does not apply here. The State Medicaid

Manual does not generally enable ineligible costs to be

bifurcated, as Pennsylvania now proposes.

13

because the definition of “room” did not definitely exclude

what it now calls “occupancy costs,” to so find now would

force Pennsylvania to accept a term which was not

ascertainable at the time of agreement. To support its

argument, Pennsylvania cites Bennett v. New Jersey, 470 U.S.

632 (1985), and Bennett v. Kentucky Department of

Education, 470 U.S. 656 (1985).

These cases are inapposite. Bennett v. New Jersey

dealt with whether states were obligated to repay grants

issued under Title I of the Elementary and Secondary

Education Act. In that case, New Jersey was the recipient of

Title I grant monies which it distributed to numerous school

districts. New Jersey argued that substantive statutory

changes made by Congress should retroactively govern the

court‟s determination of whether New Jersey‟s distribution

was in violation of Title I. The Supreme Court disagreed,

finding that “changes in substantive requirements for federal

grants should not be presumed to operate retroactively.

Moreover, practical considerations related to the

administration of federal grant programs imply that

obligations generally should be determined by reference to

the law in effect when the grants were made.” New Jersey,

470 U.S. at 638.

Bennett v. Kentucky Department of Education, a

companion case to Bennett v. New Jersey, also addressed a

potential misuse of Title I funds. The Court determined that

Kentucky had used Title I funds to supplant, rather than

supplement, existing educational funding. Kentucky, 470

U.S. at 660-61. The Court expressed concern about a

requirement that the funds be repaid, however, noting that “a

demand for repayment is more in the nature of an effort to

14

collect upon a debt than a penal sanction.” Id. at 662-63.

While the Court agreed that “Congress must express clearly

its intent to impose conditions on the grant of federal funds so

that the States can knowingly decide whether or not to accept

those funds,” id. at 665-66 (internal quotation marks

omitted), it found that “[t]here was no ambiguity with respect

to [the] condition” imposed, id. at 666. The Court further

observed that “[u]nlike normal contractual undertakings,

federal grant programs originate in and remain governed by

statutory provisions expressing the judgment of Congress

concerning desirable public policy.” Id. at 669.

Here, we do not deal at all with the retroactivity of

statutory amendments or the issue of retroactive punitive

sanctions. On the contrary, the case before us involves a

consistent interpretation of a statutory provision that has been

applied throughout Pennsylvania‟s participation in the waiver

program. Indeed, prior to March 1, 2006, Pennsylvania‟s

reimbursement applications excluded the very occupancy

costs to which it now claims entitlement. Thus, this case is

unlike Bennett v. New Jersey, in which the Court recognized

the concern that arises when a party had “a right that had

matured or become unconditional.” 470 U.S. at 639 (internal

quotation marks omitted). Moreover, the interpretation of the

room and board exclusion is by no means as uncertain as that

of the provisions of Title I at issue in the Bennett decisions,

which were the focus of considerable debate before Title I

was updated and clarified. See Bennett v. Ky. Dep’t of Educ.,

470 U.S. at 667-69 (reviewing history of Title I from its 1965

enactment, noting “uncertainty” compounded by selective

enforcement and 1978 statutory amendments based upon

extensive study of inconsistent administration of statute).

15

Thus, Pennsylvania‟s argument that we should not apply

Chevron here is unavailing.

III.

For the foregoing reasons, we will affirm the judgment

of the District Court.

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