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Administrative Appeal Board Reverses Medicaid Disallowances Totaling $980 Million

July 15, 2005

WASHINGTON, D.C., July 15, 2005 - Five States, represented by Covington & Burling, have prevailed before the Departmental Appeals Board of the United States Department of Health & Human Services (the "Board") in their appeals of Medicaid disallowances. In a decision issued on June 24, the Board reversed disallowances of federal Medicaid funding totaling over $980 million, which the Centers for Medicare and Medicaid Services ("CMS") had sought to recover from Hawaii, Illinois, Louisiana, Maine, and Tennessee. Medicaid is funded jointly by the federal government and the States. In these disallowances, CMS sought to recover federal funds provided to these States for their Medicaid programs.

In 1992 and 1993, these five States imposed taxes on their nursing homes in order to raise funds for their Medicaid programs. The States also provided financial assistance to certain residents of the nursing homes, in the form of grant payments or tax credits to the residents. In the mid and late 1990s, CMS questioned the permissibility of the taxes and grants or credits under the provider tax provisions of the Medicaid statute that prohibit States from holding taxpayers harmless for the costs of the tax, and the States defended their permissibility. CMS ultimately brought the disallowances at issue here in 2001, and sought to recover the $980 million from the States (approximately $553 million from Tennessee, $314 million from Louisiana, $90 million from Illinois, $18 million from Hawaii, and $8 million from Maine). By 2001, all the States had ended their challenged grants or tax credits to the private pay patients. The States appealed the disallowances to the Board.

The Board reversed the disallowances in their entirety and found that CMS failed to establish that the States' taxes and grants or credits violated the provider tax provisions of the Medicaid statute. Among other things, the Board concluded that CMS failed to follow its own regulations and provided the States with conflicting and insufficient guidance, while it credited the States with acting reasonably in the face of the available information. The Board's decision constitutes the final action of the Secretary of Health and Human Services on this matter, and CMS cannot appeal from it.

The Covington team included Charles Miller, Julie Johnson, and Robert Lundman, all of whom are based in the Washington, D.C. office.

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