THOMAS E. JOHNSTON, District Judge.
On May 10, 2011, Plaintiff West Virginia Department of Health and Human Resources, Bureau of Medical Services ("Plaintiff" or "West Virginia"), filed a complaint in this Court seeking a declaration that the decision of the Department of Health and Human Services Departmental Appeals Board ("DAB" or "Board") disallowing West Virginia's claim for Federal Financial Participation ("FFP") in the amount of $2,298,329 was arbitrary and capricious, an abuse of discretion, and contrary to law. (Docket 1 at 3.) West Virginia also seeks an order setting aside DAB's decision and directing that Defendant United States Department of Health and Human Services ("Defendant" or "the Department") pay West Virginia's disallowed claim. (Id.) On September 23, 2011,
In 1999, West Virginia developed a payment methodology for certain school-based health services ("SBHS") covered by Medicaid and rendered by its school districts to eligible students. The methodology categorized a number of services and calculated an interim reimbursement rate for each service based on the schools' costs of performing the services. There was no historical cost data available from the schools at the time West Virginia developed its methodology, so to obtain cost information from the schools, West Virginia (through a contractor, Pacific Health Group) sent paper surveys to the school districts. Based on the responses it received, which included only employee salaries and fringe benefits,
In 2002, West Virginia retained a second consulting firm, Public Consulting Group ("PCG"). In a report PCG presented to West Virginia on October 1, 2003, PCG stated it had "discovered that certain allowable costs have been omitted from the calculation" of West Virginia's SBHS reimbursement rates since 2000. (Docket 11-1 at 112.) The allowable costs that had been omitted were certain "indirect and operating costs," which include qualifying costs for activities such as data processing and administrative tasks and for costs such as supplies, rents, and maintenance and repair costs. (Id.) To correct the exclusion, PCG extracted indirect and operating cost data from West Virginia's newly-implemented computer database, the West Virginia Education Information System ("WVEIS"), and recommended that West Virginia file a retroactive claim for FFP with the Department based on the higher reimbursement rates, which it posited would be accepted under one of the exceptions to the two-year limitations period. (Id. at 113, 125-26.) In a Medicaid expenditure report for the calendar quarter ending September 30, 2003, West Virginia filed a claim for additional FFP based on the upward rate adjustments suggested by PCG. The additional FFP sought represented West Virginia's SBHS expenditures claimed based on the "salaries and fringes only" rates, and the SBHS expenditures claimed based on the higher, all-inclusive rates. The total amount of additional FFP sought was $4,055,229, which represented $2,298,329 in added indirect and operating costs, and $1,756,900 in additional salary and fringe benefit costs that were greater than originally estimated in the State's initial FFP claim.
At the request of CMS, the Department's Office of Inspector General ("OIG")
On March 19, 2010, West Virginia filed an administrative appeal to DAB challenging CMS's disallowance of the almost $2.3 million in FFP attributable to the initially unreported indirect and operating costs. On March 14, 2011, DAB upheld CMS's disallowance. As DAB's decision constitutes the final decision of the Secretary of Health and Human Services, West Virginia resorted to this Court on May 10, 2011. (Docket 1.) West Virginia's complaint alleges that DAB's decision upholding the disallowance is arbitrary and capricious and contrary to law. (Id. at 3.) West Virginia seeks a declaration that the decision is erroneous and a mandatory injunction directing the Department to pay West Virginia's $2.3 million claim attributable to the indirect and operating cost rate adjustment. (Id.)
The Administrative Procedure Act ("APA") constrains the district court's scope of review in cases appealed from final agency action. Under the APA, a reviewing court shall set aside agency actions, findings of fact, and conclusions of law that are "arbitrary, capricious, an abuse of discretion, or not otherwise in accordance with law." 5 U.S.C. § 706(2)(A). The APA further provides that the district court shall set aside agency actions "in excess of statutory jurisdiction, authority, or limitations, or short of statutory right" along with actions that are "without observance of procedure required by law." § 706(2)(C)-(D). Finally, the district court must set aside any agency findings and conclusions that are "unsupported by substantial evidence ... [appearing] on the record of an agency hearing...." § 706(2)(E).
"Review under this standard is highly deferential, with a presumption in favor of finding the agency action valid." Ohio Valley Envt'l Coalition v. Aracoma Coal Co., 556 F.3d 177, 192 (4th Cir.2009) (citing Natural Res. Def. Council, Inc. v. EPA, 16 F.3d 1395, 1400 (4th Cir.1993)). The district court may not substitute its judgment for that of the agency; the agency action must be affirmed if there exists a rational basis for the decision. See Ethyl Corp. v. EPA, 541 F.2d 1, 34 (D.C.Cir. 1976) (cited with approval by Aracoma Coal, 556 F.3d at 192). In deciding whether the agency action is rational, as opposed to arbitrary and capricious, the district court must confine its review to the explanation "expressed by the agency itself and not supplied by the court." SEC v. Chenery Corp., 332 U.S. 194, 196, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947).
Although the district court's review of the agency decision is extraordinarily narrow in scope, the court must not resign itself to act as merely a "rubber stamp" for the agency action. Aracoma Coal, 556 F.3d at 192; Ethyl Corp., 541 F.2d at 34. Instead, the district court is instructed to conduct "a `searching and careful' inquiry of the record." Aracoma
"When a court reviews an agency's construction of a statute that it administers, [the court] employs the deferential standard of review articulated in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)." EEOC v. Seafarers Int'l Union, 394 F.3d 197, 200 (4th Cir. 2005). Under Chevron, the court must "ask whether the agency's rule is a permissible interpretation of its organic statute." Id. at 205. The Chevron analysis proceeds in two parts. First, the court must ask "whether Congress has directly spoken to the precise question at issue," and "[i]f the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Nat'l Elec. Mfrs. Ass'n v. U.S. Dept. of Energy ("NEMA"), 654 F.3d 496, 504 (4th Cir.2011) (quoting Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778). If, however, "the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." Chevron, 467 U.S. at 843, 104 S.Ct. 2778. In deciding whether to proceed to Chevron's second step, the Supreme Court has instructed that "[f]ew phrases in a complex scheme of regulation are so clear as to be beyond the need for interpretation when applied in a real context." Nat'l R.R. Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407, 418, 112 S.Ct. 1394, 118 L.Ed.2d 52 (1992). The Fourth Circuit has proceeded to Chevron's second step "where the statutory language `neither plainly compel[led] nor clearly preclude[d] [an] interpretation,' because in such circumstances the `precise import' of the language `is ambiguous and certainly not free from doubt.'" NEMA, 654 F.3d at 504 (quoting United Seniors Ass'n v. Social Security Admin., 423 F.3d 397, 403 (4th Cir.2005) (internal quotation marks omitted)). Similarly, our court of appeals has reached Chevron's second step after describing statutory language as "susceptible to more precise definition and open to varying constructions." Md. Dep't of Health & Mental Hygiene v. Ctrs. for Medicare and Medicaid Servs., 542 F.3d 424, 434 (4th Cir.2008) (internal quotation marks omitted).
If a court determines that the statute is ambiguous on the precise question at issue, and therefore proceeds to Chevron step two, it must defer to the agency's interpretation "so long as the construction is a reasonable policy choice for the agency to make." Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 986, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005) (internal quotation marks omitted). The court must "afford `controlling weight' to an agency's reasonable interpretation even where we would have, if writing on a clean slate, adopted a different interpretation." NEMA, 654 F.3d at 504 (citing Regions Hosp. v. Shalala, 522 U.S. 448, 457, 118 S.Ct. 909, 139 L.Ed.2d 895 (1998)). The Fourth Circuit has added that "[t]he Medicaid statute is a prototypical `complex and highly technical regulatory program' benefitting from expert administration, which makes deference
Moreover, the agency's interpretations of its own regulations are also entitled to substantial deference:
Dist. Mem'l Hosp. of Sw. N.C., Inc. v. Thompson, 364 F.3d 513, 517-18 (4th Cir. 2004) (citation styles modified).
In sum, then, if the statute at issue is ambiguous, then the agency regulation is entitled to substantial deference based on Chevron and the unique and complex nature of the Medicaid statute. In addition, provided the agency's interpretation of its own regulation (for example, as provided in guidance manuals) is a reasonable one, it must be afforded controlling weight. Thomas Jefferson Univ. v. Shalala, 512 U.S. at 512, 114 S.Ct. 2381.
In its decision, DAB aptly provided general background on the federal Medicaid statute as follows:
(Docket 11 at 2) (citations altered).
42 U.S.C. § 1320b-2, which applies to Medicaid and various other programs in the Social Security Act, provides:
§ 1320b-2(a) (emphasis added). Subsection 1320b-2(a) thus establishes a general two-year limitations period for all claims filed by states for FFP dollars related to the administration of Medicaid programs. The two-year period begins to run "on the first day of the calendar quarter immediately following" the calendar quarter in which a given Medicaid expenditure was made. The purpose of the two-year claims requirement is to "ensure that states submit final reimbursement requests in a timely fashion so that [the Department] can plan its budget." Connecticut v. Schweiker, 684 F.2d 979, 984 (D.C.Cir. 1982). There are several exceptions to the two-year limitations period in subsection 1320b-2(a). In light of the timely claims requirement's purpose, however, "the exceptions... are intended to cover only `extreme situations,'" and they are intended to "take care of those cases where it would be patently unfair to a state to outlaw its claim merely because of the passage of time." Md. Dep't of Health & Mental Hygiene, DAB Decision No.1909, 2004 WL 714960, at *4 (Feb. 10, 2004).
Most relevant to this case is the exception for "adjustments to prior year costs." The Department's regulations make clear that:
45 C.F.R. § 95.19. The regulations further state that:
Id. § 95.4. Finally, the preamble to the regulation setting forth the definition of "adjustment to prior year costs" states:
Time Limits for States To File Claims, 46 Fed.Reg. 3527, 3528 (Jan. 15, 1981). Nowhere in the statute or regulations is the phrase "cost item" defined.
West Virginia argues that DAB's decision was arbitrary and capricious for essentially two reasons: (1) DAB disregarded relevant precedent and relied on inapposite precedent in reaching its decision; and (2) DAB made several factual findings that are not supported by substantial evidence. (Docket 16 at 18-32.)
Regarding its first assignment of error, West Virginia argues that DAB "took the position that operating and indirect costs were separate `cost components' that should have been claimed within two years, despite the State's evidence showing that these costs were unknown at the time the interim rates were set." (Id. at 25.) West Virginia goes on to argue that such a conclusion is not only unsupported by DAB precedent, it is contrary to DAB precedent. (Id. at 25-32.) First, it must be noted that DAB never concluded "cost item," as it is used in 45 C.F.R. § 95.4, means "cost component." CMS adopted that definition of "cost item" prior to the agency appeal, and it is urged by the Department in the present case; however, as set forth in more detail below, DAB never passed on the precise definition of "cost item."
Turning to substance, it is West Virginia's position that the term "cost item" as it appears in the regulations
In contrast, the Department argues that the term "cost item" means "cost component," such that only alterations to previously-claimed costs (as opposed to services) are permissible beyond the two-year limitations period. (Docket 18 at 16.) As applied to the facts of this case, the Department argues that West Virginia submitted a claim for SBHS that was based on an interim rate derived from several cost components, including teacher salaries and fringe benefits. Then, after the two-year limitations period expired, Plaintiff attempted to add costs that were never included in its initial interim rate, such as indirect and operating expenses (which include expenses such as rent and facility maintenance). The Department maintains that the regulation's use of the phrase "cost item" means, in this case, that West Virginia may adjust only the salary and fringe benefit costs beyond the two-year limitations period; it may not add all new "cost components" to the claimed reimbursement rate. CMS adopted this view in affirming the disallowance of West Virginia's supplemental claim. (Docket 11-1 at 54-56.) However, DAB declined to resolve the issue of what "cost item" means, instead resting its decision on another aspect of the regulations and its precedent.
DAB's resolution of this case turned on its decisions in Kansas Department of Social and Rehabilitation Services, DAB Decision No.2014, 2006 WL 517665 (Feb. 23, 2006), and South Carolina State Health and Human Services Finance Commission, DAB Decision No. 943, 1988 WL 486082 (Mar. 29, 1988),
Time Limits for States To File Claims, 46 Fed.Reg. 3527, 3528 (Jan. 15, 1981) (emphasis added). DAB concluded that, like Kansas, West Virginia "sought to belatedly adjust its interim rates to account for categories of costs that it was aware of but chose not to include in the interim rate calculations ...." (Docket 11 at 7.) In other words, DAB concluded that West
In a related argument, West Virginia states that reversal is warranted because "[t]he Board failed to address the question of whether the operating and indirect costs at issue constituted new `cost items' within the meaning of the ... exception." (Docket 16 at 18.) Both West Virginia and the Department made arguments to DAB and to this Court based on the regulation codified in the Code of Federal Regulations:
In this subpart [pertaining to time limits for states to file claims] —
45 C.F.R. § 95.4. In the parties' view, apparently, if a subsequent adjustment is deemed to be an alteration to "a particular cost item that was previously claimed," then the exception applies. DAB, however, has consistently employed an additional requirement or guiding principle — that the subsequent adjustment be "unforeseen and unavoidable" — which is derived from the regulation's preamble, located in the Federal Register and discussed above.
West Virginia also urges the Court to recognize a distinction between adjusting an interim rate to encompass new services and adjusting an interim rate based on the addition of new costs for rendering the same services. (Docket 16 at 24-32.) This argument appears to be an attempt to distinguish unfavorable DAB precedent, namely Kansas and South Carolina, and to align the present case to the circumstances of a favorable DAB decision, Pennsylvania Department of Public Welfare, DAB Decision No. 703, 1985 WL 259400 (Nov. 19, 1985). The Court will consider these cases in chronological order, since the decisions and their rationales build upon one another.
In Pennsylvania, the State timely submitted claims to the Secretary for services provided to patients in publicly-owned facilities during 1979 through 1981. The years in question were final cost-settled. 1985 WL 259400, at *2. Pennsylvania later discovered that additional provider costs were incurred during the years in question — namely rent paid to the responsible public agency and bond charges for capital projects — which could be included in the State's claim for federal Medicaid assistance. Id. The State claimed the omission of the rent and bond costs occurred due to a lack of communication between the Pennsylvania General State Authority, which was responsible for all construction at State facilities, and the health department. Id. When Pennsylvania discovered that the rent and bond costs had not been included in the cost settlements or submitted in its claims for federal money, the State attempted to adjust its previously-submitted claims and argued for application of the "adjustment to prior year costs" exception. Id. The Health Care Financing Administration ("HCFA") (the precursor agency to CMS) disallowed the additional claim made by Pennsylvania, but DAB reversed, stating:
Id. DAB found that the "cost item" in an interim rate system is the rate itself, not a particular item of cost:
Id.
In South Carolina, decided three years after Pennsylvania, the State submitted supplemental claims in 1987 for "ancillary services" rendered in a state-run psychiatric hospital during fiscal years 1979 through 1984. 1988 WL 486082, at *1-2/ Such costs were not made a part of the State's interim rates to the hospital, and the years were final cost-settled and closed prior to the supplemental claims. Id., at *2. South Carolina was seeking the additional federal money for ancillary services because a consulting firm reviewed the State's reimbursement procedures and advised that ancillary services should be reimbursed under the Medicaid statute and the state plan and, in turn, claimed from the federal government. Id. Both HCFA and DAB disallowed the claims as untimely filed. Id., at *1.
South Carolina argued that the "adjustment to prior year costs" exception permitted its supplemental claim, relying on DAB's Pennsylvania and Ohio decisions, "where certain items of costs not included in an interim rate were considered in finding an adjustment to prior year costs, even though cost reports for those years had apparently been closed." Id., at *3. However, in South Carolina, DAB specifically limited Pennsylvania and Ohio to "their particular facts," and stated that the exception would apply only when "a state later realize[s] that it ha[s] mistakenly not included costs of particular items in computing the final rate." Id., at *4. DAB found that South Carolina did not fit this narrower view of the exception:
Id. DAB also commented that the exception for adjustments to prior year costs is intended to give a state a reasonable opportunity to adjust its interim rate, provided the adjustment is made in the course of the "state's interim and final cost settlement process." Id. (citing Tenn. Dep't of Health and Env't, DAB Decision No. 921, 1987 WL 343317 (Dec. 2, 1987)).
The South Carolina decision was appealed to federal district court in South Carolina and ultimately was appealed to and affirmed by the Fourth Circuit. See S.C. Health & Human Servs. Finance Comm'n v. Sullivan, 915 F.2d 129 (4th Cir.1990). The court of appeals agreed with DAB that the phrase "cost item" as used in 45 C.F.R. § 95.4 "refers to the per diem rate and not the individual costs of particular services and [DAB] has in the past permitted state agencies to obtain reimbursement for particular cost items not included in the calculation of the interim billing rate." Id. at 131 (citing DAB's decisions in Pennsylvania, 1985 WL 259400, and Ohio, 1985 WL 259288).
Id.
Finally, in Kansas, the State submitted a claim for federal Medicaid dollars in August 2002 for educational services rendered by psychiatric hospitals in the years 1994 to 1999. 2006 WL 517665, at *1. Kansas knew of the costs of providing the educational services all along, but a 1992 change in Medicaid law rendered states eligible for federal assistance on educational services. Id., at *1-2. Kansas experienced some difficulty implementing the change in the law, and the State sought guidance and clarification from federal authorities on the scope of its eligibility for federal money. Kansas also waited and developed an "allocation methodology" for reporting the educational costs, which took nearly four years. Id., at *2. As a result, no claim was filed for educational services rendered by psychiatric hospitals until 2002 (although other services rendered at those hospitals had been timely claimed). Id.
CMS disallowed the supplemental claim as untimely. DAB affirmed the decision to disallow because "[t]he exception for adjustments to prior year costs is intended to cover unforeseen and unavoidable adjustments to account for differences between a final rate determined using actual allowable costs incurred in providing services and the interim rates estimated based on [historical data trended forward]." Id., at *1. Rather than finding Kansas' omission "unforeseen and unavoidable," DAB stated that "Kansas consciously excluded the educational costs when calculating both the interim rates ... and when it first issued cost settlements for those years which it labeled `final.'" Id. DAB cited the Fourth Circuit's decision in South Carolina v. Sullivan, explaining that "the exception for adjustments to prior year costs was designed to accommodate costs that were unknown to the agency at the time it calculated the rate." Id., at *6. From DAB's explanation in Kansas, by "unknown costs," it means costs of which the agency is wholly unaware, not simply costs of which the agency is aware but for which it is unable to accurately predict an amount:
Id. Kansas also argued that DAB's decisions in Pennsylvania and Ohio applied to its situation, and consequently, the adjustment
Id., at *7 (quoting South Carolina, 1988 WL 486082, at *4) (emphases added).
In the present case, West Virginia, like Kansas, states it intended to submit a claim for indirect and operating costs all along, but it consciously excluded a claim for those costs pending development of a centralized and more efficient method of gathering historical cost information. In its briefing to the Court, West Virginia represented that it considered estimating the indirect and operating costs at the time of its initial claim but rejected that alternative because it feared over-estimating, which would lead to financial difficulties for its schools. (Docket 16 at 15.) West Virginia concedes that there was no "mistaken omission" of the added costs in this case, even though DAB's decisions in South Carolina and Kansas expressly limit the adjustment to prior year costs exception to cases of mistaken omission in circumstances such as these. Contrary to West Virginia's contentions, then, it appears that Kansas is most like this case, and the Court, like DAB, is unable to find a reason for departing from Kansas' holding.
West Virginia attempts to distinguish South Carolina and Kansas by arguing that those decisions "involved situations where States retroactively sought to redefine the scope of the service provided to capture additional costs." (Docket 16 at 28.) In contrast, West Virginia argues that it (like the State in Pennsylvania) simply added costs associated with rendering the same services initially claimed. (Id. at 29-31.) In a roundabout way, then, West Virginia argues that the disallowances in South Carolina and Kansas were actually based on DAB's findings that the
West Virginia urges the Court to reverse DAB's decision and to apply the Pennsylvania decision "exactly as written." (Docket 16 at 26.) It is West Virginia's position that Pennsylvania in no way turned on the fact that the state "mistakenly omitted" certain costs. Instead, West Virginia apparently argues that Pennsylvania stands for the proposition that any cost associated with a timely-claimed service may be submitted at the State's leisure. However, as the Department rightly responds, whatever Pennsylvania said at the time it was issued,
As a final point, West Virginia argues that it had good reason to refrain from including indirect and operating costs in its initial rates: the State did not have historical data on which to estimate the relevant costs. (Docket 16 at 35-37.) Again, West Virginia attempts to distinguish unfavorable DAB precedent, this time by pointing out that the State in South Carolina knew the amounts of the costs it omitted rather than simply that it was omitting a category of covered costs. Although certainly appealing to one's sense of reasonableness, the legal significance of this argument is difficult to grasp. DAB's decision in South Carolina did not turn on the fact that the State omitted costs for which it had fairly accurate cost estimates, and the facts in Kansas indicate that the delay in submitting additional costs was due to the State waiting for more precise cost documentation to become available. Much like this case, the State in Kansas "knew the costs existed and that it could claim them under Medicaid but chose not to do so pending development of an allocation methodology," which was described as "a methodology for extracting, reporting
West Virginia also argues that DAB "relied on several [factual] conclusions about the claims and West Virginia's claiming procedures ... [that] were largely based on speculation and are inconsistent with the evidence in the administrative record." (Docket 16 at 32.) First, West Virginia alleges that DAB's "assumption that West Virginia could have obtained the necessary cost information within two years is inconsistent with the evidence before the Board." (Id. at 33.) Although not abundantly clear, this argument appears to challenge DAB's overall conclusion that West Virginia's sought adjustment for indirect and operating costs was not "unforeseen and unavoidable," specifically by arguing that the prolonged delay in submitting those costs was indeed unavoidable because West Virginia had no accurate historical data due to its incomplete computerized cost-reporting system (WVEIS). In other words, West Virginia argues that it had no choice but to submit untimely adjustments, and it challenges DAB's finding to the contrary. In its decision, DAB considered West Virginia's argument and stated the following:
(Docket 11 at 7-8) (some citations omitted).
Thus, DAB made two factual findings to support its conclusion that West Virginia acted in a manner inconsistent with the timeliness exception for unforeseen and unavoidable adjustments: (1) West Virginia could have timely gathered the relevant information by means other than its computer system; and (2) West Virginia could have submitted timely claims based on the information in its computer system, which was fully functional in "late 2002." West Virginia argues that its "school systems were not generating [cost] reports for operating and indirect costs at the time [West Virginia] calculated the interim rates," and it was therefore unable to include those costs in its interim rates. (Docket 16 at 33.) The State adds that "at the time West Virginia filed its initial claim for SBHS costs ... [it] had only the results of a limited paper survey [which covered teacher salary and fringe benefit costs] conducted in 1999 at the direction of the State Department of Education." (Id.) Finally, West Virginia argues that DAB's assertion that relevant data could have been extracted from the WVEIS system after its complete implementation in "late 2002" and used to submit timely claims is "pure speculation." (Id. at 34.)
Although the Court is unlikely to have made these findings itself, DAB's findings are supported by the record. In its briefing before this Court, West Virginia admits that it "conservatively relied on ... informal information (which covered salary and fringe benefit costs) in developing the interim rates because, at that time, it lacked better information...." (Id. at 33-34.) The "informal information" to which West Virginia refers is data collected from a paper survey administered at the direction of the State Department of Education in 1999. (See Docket 11 at 187-88.) DAB found that West Virginia could have sought indirect and operating cost data by means other than WVEIS, as it had salary and fringe benefit cost data. This finding is one a reasonable mind might accept based on the record, and it is not weakened by West Virginia's contention that schools did not have that cost data available to them. West Virginia never explained why schools were able to provide the relevant indirect and operating cost data in WVEIS but would not have been able to furnish the same information through another medium.
West Virginia's second contention regarding DAB's findings of fact relates to the Board's conclusion that the subsequent inclusion of indirect and operating costs was not part of West Virginia's normal cost settlement process. On this point, DAB found that West Virginia hired a consulting firm, PCG, "not ... to review reported costs to identify errors or inconsistencies or to audit the records of the school districts to determine whether they correctly reported their annual costs," as would be the case if PCG was hired merely as an independent contractor to perform final cost settlements on the State's behalf. (Docket 11 at 9.) Instead, DAB found that West Virginia hired PCG to "`identify existing federal [revenue] sources which the [State] is either underutilizing or not maximizing all available federal funds' and to assist the State in recovering additional funds." (Id. (citation omitted).) DAB concluded that "the disallowed adjustments were not made for the purpose of reconciling estimated and actual costs — as would have been typical under a retrospective payment system." (Id.) The Court concludes that a reasonable mind would accept
Although reluctant to do so,
The Court
Overall, this case presents a difficult question that is not squarely answered by the statute, the regulations, or prior decisions. The parameters of the "adjustments to prior year costs" exception are less than clear, and the agency (as well as States required to navigate the timeliness guidelines) would be well-served by regulations that are more precise and straightforward, and grounded in sound policy. West Virginia's argument that it would have been eligible for the exception had the State been entirely oblivious to the schools' indirect and operating costs is not lost on the Court, and it should not be lost on the agency, either.