In the
United States Court of Appeals
For the Seventh Circuit

No. 01-2941

INDIANA FAMILY & SOCIAL SERVICES
ADMINISTRATION, and OFFICE OF MEDICAID
POLICY AND PLANNING,

Plaintiffs-Appellants,

and

ELECTRONIC DATA SYSTEMS CORPORATION,

Intervening Plaintiff-Appellant,

v.

TOMMY G. THOMPSON, Secretary of the
United States Department of Health & Human
Services, and NANCY-ANN MIN DEPARLE, Administrator,
Health Care Financing Administration,

Defendants-Appellees.

Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. IP 99-1168-C H/G--David F. Hamilton, Judge.

Argued January 23, 2002--Decided April 12, 2002



 Before BAUER, COFFEY, and EVANS, Circuit
Judges.

  EVANS, Circuit Judge. Indiana, through
its Department of Family & Social
Services (DFSS)/1 and Office of
Medicaid Policy and Planning (OMPP),
adopted a new management information
system for processing Medicaid claims.
The Health Care Financing Administration
(HCFA), now known as the Centers for
Medicare and Medicaid Services (CMMS), of
the United States Department of Health &
Human Services (DHHS) rejected Indiana’s
claim for an enhanced level of federal
funding for the system. Indiana appealed
to the DHHS Departmental Appeals Board
(DAB), which affirmed the disallowance.
After Indiana petitioned for judicial
review, the district judge granted
summary judgment to the Secretary.
Indiana appeals the decision to us.

  Medicaid, as everyone knows, is a
cooperative state-federal program
designed to provide medical assistance to
poor people. Although each state
administers its own program, states with
plans approved by the federal government
are entitled to receive federal matching
funds, referred to in administrative
lingo as Federal Financial Participation
(FFP). Federal money is available to pay
for medical services at a rate based on a
state’s per capita income. It is also
available to share the state’s
administrative expenses, generally at a
50 percent rate. In 1972, to encourage
states to use modern computerized systems
to process Medicaid claims, Congress
passed legislation establishing enhanced
rates of funding. The law provides that
the federal government will pay 90
percent of costs attributable to the
"design, development, or installation of
. . . mechanized claims processing and
information retrieval systems." 42 U.S.C.
sec. 1396b(a)(3)(A)(i). It will also pay
75 percent of costs "attributable to the
operation" of the system. 42 U.S.C. sec.
1396b(a)(3)(B). The system must meet the
requirements for a Medicaid Management
Information System (MMIS), as certified
by DHHS, in order to receive enhanced FFP
funding.

  In 1993 Indiana decided to replace its
existing Medicaid information system. It
contracted with Electronic Data Systems
(EDS) to design and implement the
Advanced Information Management System
(AIM). AIM was designed to process
electronic as well as paper claims and
offered enhanced editing and auditing
features over the old system.

  Some of the claims slated to come
through AIM were Medicare crossover
claims, which are ones that concern
people eligible for both Medicare and
Medicaid (i.e., people who are elderly in
addition to being poor). Such claims are
processed first through Medicare and then
"cross over" to Medicaid for further
coverage (usually of Medicare co-payments
and deductibles). To process a crossover
claim, AIM required both a medical
provider’s Medicare and Medicaid provider
numbers because it cross-referenced the
Medicare number with the Medicaid number
in order to pay the proper Medicaid
provider. In January of 1994, while
preparing to implement AIM, Indiana
mailed Medicaid re-enrollment
applications to medical providers.
According to Indiana, many providers gave
incorrect Medicare provider numbers or
failed to supply a number at all.

  AIM "went live" on February 5, 1995.
Either shortly before or shortly after
this date, Indiana determined that a high
number of crossover claims were being or
would be rejected because of the problem
with the missing provider numbers.
Indiana decided to suspend the claims in
order to track down the missing Medicare
provider numbers in its database. To aid
this process, it routed electronic
crossover claims into "location 41," a
separate electronic file within AIM.

  AIM weekly status reports for May 1995
showed a growing backlog of electronic
crossover claims. As of the week ending
May 12, Indiana had loaded all crossover
tapes onto AIM,/2 but there were still
164,000 claims to be processed for the
first time; by May 19 that number was
167,000; by May 26 it was 184,000; by
June 2 it was 211,418; by June 9 it was
230,000; by June 16 it was 250,000. This
backlog was processed in full the week
ending June 23.

  After an on-site certification review of
AIM in August 1996 and some back and
forth with Indiana, HCFA reached a final
decision in December of 1997 that AIM’s
certification date would be November 21,
1995, not February 5, 1995. The
difference in dates represented
$5,880,230 in decreased funding. Indiana
appealed the disallowance to the
Departmental Appeals Board. While the
appeal was pending, Indiana and HCFA
discussed the reasons why AIM was not
certified as of February 5. In May of
1998, HCFA revised its decision, holding
that June 23 was the proper certification
date because as of that date AIM was
processing electronic Medicare crossover
claims on "a normal flow basis."

  The DAB upheld HCFA’s rejection of a
February 5 certification date but moved
the certification date up a week from
June 23 to June 17, or from the end to
the beginning of the week when the
backlog was processed./3 The DAB first
noted that "a decision to withhold the
processing" of electronic crossover
claims "because of problems in securing
Medicare provider numbers . . . is not
grounds for certifying Indiana’s system
as of February 5, 1995." AIM could not be
"fully functional" without this "critical
information." The DAB also wrote that
"the AIM system had more problems than
just the missing provider numbers." But
"[r]egardless of the cause," the evidence
established that AIM was not
"continuously processing electronic
crossover claims" until it started
processing the backlog on June 17. The
fact that AIM may have processed some
electronic Medicare crossover claims in
February and possibly in March 1995 was
insufficient to show that AIM was
"operating continuously" in light of the
backlog.

  Indiana filed a petition for judicial
review in the district court. EDS was
allowed to intervene as Indiana indicated
that it might look to it to recover
damages. The parties moved for summary
judgment and the district judge ruled in
the Secretary’s favor, noting that "the
cause of the problem does not matter"
because the DAB had not tried "to resolve
those issues definitively." Rather, the
DAB had evaluated "actual performance" in
interpreting the "operating continuously"
standard. The DAB did not act arbitrarily
or capriciously in finding "that
processing a small fraction of a
particular type of claims, and then
suspending all processing of such claims
for several months, did not satisfy the
requirement of ’operating continuously,
processing all claims types.’"

  We recall that the relevant statute
provides that the federal government will
pay 75 percent (remember the normal
administrative rate is 50 percent) of
expenses attributable to the "operation"
of an approved information system. 42
U.S.C. sec. 1396b(a)(3)(B). The relevant
regulation requires that the system has
been "operating continuously during the
period for which" enhanced funding is
claimed. 42 C.F.R. sec. 433.116(d).
Another regulation, 42 C.F.R. sec.
433.110(a)(1), directs the reader to
HCFA’s State Medicaid Manual (SMM) for
additional guidelines. The manual
requires that the "complete system with
all its component subsystems . . . has
been operating continuously, processing
all claims types, during all periods for
which 75 percent FFP is claimed." SMM
sec. 11210.
  We have had some skirmishing about the
relevant standards of review. Although we
review a district court’s ruling on a
motion for summary judgment de novo, Mt.
Sinai Hosp. Med. Ctr. v. Shalala, 196
F.3d 703, 707 (7th Cir. 1999), judicial
review of the DAB’s determination is made
under 5 U.S.C. sec. 706, which requires
that we uphold the Secretary’s
determination unless he made "an
arbitrary or capricious decision, abused
[his] discretion, acted contrary to law
or regulation, or lacked the support of
substantial evidence." Mt. Sinai, 196
F.3d at 708 (citations omitted).

  Also at issue is the deference accorded
the Secretary’s interpretation of the SMM
in the wake of United States v. Mead
Corp., 121 S. Ct. 2164 (2001). Mead,
which was decided 2 months after the
district judge’s ruling in this case,
makes clear that not all agency
interpretations of its own laws are
entitled to full Chevron deference. Only
those subject to notice-and-comment or
comparable formalities qualify. Id. at
2172-73; United States Freightways Corp.
v. Commissioner, 270 F.3d 1137, 1141 (7th
Cir. 2001). Less formal agency
interpretations, including those in
agency manuals, receive "more flexible
respect," Freightways, 270 F.3d at 1141,
depending on the agency’s care,
consistency, formality, relative
expertness, and the position’s overall
persuasiveness. Mead, 121 S. Ct. at 2171,
2175.

  Indiana finds nothing objectionable in
the manual itself but instead challenges
what it calls the "Secretary’s ad hoc
interpretation" of the manual. Indiana
asserts that it made a deliberate
decision to "suspend" electronic
crossover claims (by routing them into
location 41) so it could obtain or
reconcile Medicare provider numbers./4
By denying its claim for funding, the
Secretary improperly interpreted
"processing" not to include the
suspension of claims for information
verification and error correction. The
Secretary instead interpreted
"processing" as synonymous with "paying."
Indiana asks us not to defer to this
interpretation because it is nonsensical
and conflicts with a manual provision
requiring that a "claims processing
subsystem" must "[a]utomatically suspend
all transactions in error until
corrections are made." SMM sec. 11325.

  Indiana doesn’t have the facts to pull
off this argument. AIM was never in the
business of identifying erroneous
crossover claims and sending them to
location 41 in order to allow Indiana to
obtain missing provider numbers for those
claims. Shortly after the "live" date,
AIM began rejecting electronic crossover
claims that lacked provider numbers.
After edits were made, all electronic
crossover claims were sent to location
41, regardless of whether they were
missing information or not. As Judge
Hamilton in the district court aptly put
it, "[E]ven those providers who had
correctly provided all necessary
information had their claims for payment
put on ice until the week beginning June
17, 1995."/5 Thus, the issue for us is
not whether the Secretary was wrong to
find that processing does not include
claim suspension for error correction.
The DAB made no such determination. The
relevant issue is whether we should upset
the Secretary’s conclusion that AIM’s
segregation of all electronic crossover
claims, whether they contained errors or
not, meant that AIM was not "processing"
the claims.

  Although neither the manual nor the
governing regulation defines
"processing," we think the Secretary did
not err by concluding that "processing"
does not entail segregating an entire
class of claims without regard to whether
individual claims within the class were
valid or not./6 Indeed, we need look no
further than Indiana’s own brief to find
support for this interpretation. It
states:

[W]hat the phrase must mean is that a
system that receives claims for payment
must either process the claim for
payment, deny the claim because it does
not meet certain requirements, or suspend
the payment of the claim to obtain
additional information in order to ensure
that the claim is properly adjudicated.

Later it adds:

The Medicaid Manual can only be
interpreted as saying that the system
must have the capability for having all
types of claims processed, including
identifying the claim when received,
assigning a control number, paying the
claim when it is warranted, suspending
the claim when further development is
necessary, and then either paying or
denying the claim for payment (both
italics added).

These definitions presume that the act of
processing requires a system "to separate
non-compliant claims for further review"
(more of Indiana’s words). Indiana
hasacknowledged the obvious--that
warehousing all claims of a particular
type, regardless of whether some are
valid, means that the system is not
performing an essential part of
processing by sorting the good from the
bad, correcting the bad, and allowing the
good to go forward.

  This meaning is consistent with the
manual and the regulation. We’ll start
with the requirement that a system
"suspend all transactions in error until
corrections are made." SMM sec. 11325.
Even assuming that all of the crossover
claims lacked the requisite information,
Indiana did not suspend each transaction
because of this error. Rather, it
sequestered the entire group of
electronic crossover claims to address
the problems bedeviling what it suspected
would be the majority of the claims.
Moreover, AIM may well have suspended
claims that were not in error by
withholding payment on claims that may
have contained correct information. It is
a consistent reading of the "suspension"
guideline to infer that claims not in
error be allowed to proceed to payment.
After all, the objectives of the MMIS are
"[m]ore accurate and timely claims
processing" and "[r]educed time to pay
providers." SMM sec. 11115. Another
guideline requires the claims processing
subsystem to "[e]nsure that
reimbursements to providers are rendered
promptly and correctly." SMM sec. 11325.
Moreover, the governing regulation
requires "continuous" operations. 42
C.F.R. sec. 433.116(d). We doubt that a
physician who submitted a valid
electronic crossover claim, but had to
wait months for payment because of
problems with claims submitted by other
providers, would think that AIM was busy
"processing" crossover claims. The
Secretary acted consistently with his
statutory authority by adopting an
interpretation of processing that
encourages states to pay valid crossover
claims efficiently, thereby encouraging
physicians to provide medical services to
the elderly and poor, which is, putting
all this administrative mumbo jumbo to
the side, the whole point of Medicare and
Medicaid./7

  The Secretary filled this gap with
sufficient care and formality to warrant
deference. HCFA performed its initial
certification review in August of 1996.
Even after it disallowed enhanced
funding, it negotiated with Indiana at
length before revising its original
decision. The DAB weighed the evidence
submitted in this case and, in a thorough
opinion, upheld HCFA’s decision. The
Secretary has a familiarity, expertise,
and institutional memory concerning the
intricacies of Medicaid processing
systems and funding standards that we
cannot rival. The Secretary did not reach
the conclusion in this case, as Indiana
contends, in an "ad hoc" fashion.

  And there is another ground for
upholding the Secretary. Even assuming
that AIM identified and withheld only
those claims lacking provider numbers,
the resulting backlog was substantial.
The DAB found that the provider numbers
were "critical information" for AIM’s
functioning and "[t]he responsibility to
procure this information in a timely
manner to ensure the full and continuous
operation of the AIM system rested with
Indiana."

  Indiana has not challenged this finding,
which we think is also entitled to
deference. Indeed, it is not only
consistent with but appears to be
compelled by the manual. The manual
provides that "the federally required
MMIS" has six "core subsystems," one of
which is "claims processing." SMM sec.
11310. The manual specifies that the
claims processing subsystem must
"[v]erify that all providers submitting
input are properly enrolled." SMM sec.
11325. There is also a "provider"
subsystem. SMM sec. 11310. The provider
subsystem must "[p]rocess provider
applications and changes in a timely
manner and maintain control over all data
pertaining to provider enrollment" and
"[b]uild and maintain a computerized file
of provider data for claims processing."
SMM sec. 11320. It is not inconsistent to
read this requirement as encompassing
Medicare provider numbers since the MMIS
seeks "[c]ompatibility with Medicare
claim processing and information
retrieval systems for the processing of
Medicare claims." SMM sec. 11115. And the
Manual makes clear that the "complete
system with all its component subsystems"
must be "operating continuously, process
ing all claims types, during all periods
for which 75 percent FFP is claimed"
(italics added). SMM sec. 11210.

  This interpretation is also persuasive.
Common sense alone dictates that in order
for an information system to operate, it
must be technically functional and also
have access to the input required to
perform its tasks. Otherwise the goal of
using the system to process claims
effectively will not be achieved, as in
this case where a backlog of a quarter of
a million crossover claims developed.
Interpreting the manual to require a
state to ascertain necessary information
does not discourage states from
developing mechanized systems to process
Medicaid claims. The federal government
still provides 90 percent of the costs
attributable to the "design, development,
or installation" of these systems.
Because the 75 percent level applies to a
system’s "operation," the Secretary can
justifiably expect that a system will not
only be technically operational but also
possess the requisite information to
enable the system to hum.

  In sum, although Indiana complains that
it confronted a "no win" situation in
that it had to choose between submitting
electronic crossover claims that would be
rejected (which would have caused HCFA to
deny funding) or suspending the claims
(which led HCFA to deny funding), Indiana
continues to ignore the critical decision
it made earlier to "go live" with AIM
before its provider database was
complete. As Dorothy Collins, HCFA’s
regional administrator, wrote to Kathleen
Gifford (with Indiana):

The problems which caused the delay in
processing these claims should have been
anticipated and addressed before the
system "went live." Federal Financial
Participation (FFP) would have been
available at the 90 percent rate for the
additional costs involved in anticipating
and addressing crossover processing
problems as well as all the other
problems which arose when the AIM system
was turned on.

Whether Indiana would have been entitled
to the 90 percent rate for fixing its
database issue is not clear. What is
clear is that instead of postponing AIM’s
debut, Indiana jumped the gun. We find
nothing wrong with the Secretary’s
decision to hold Indiana to the
consequences of that choice. The judgment
of the district court is AFFIRMED.

FOOTNOTES

/1 Acronyms are a staple of court decisions, espe-
cially in cases like this one involving bureau-
cratic behemoths. So we won’t go light on the
acronyms, as we’ll first use "DFSS" for the
Department of Family & Social Services. Later
we’ll introduce "OMPP", "HCFA", "CMMS", "DHHS",
"DAB", "FFP", "EDS", "AIM", and "SMM".

/2 The mechanics of how electronic crossover claims
were loaded into the system are a mystery to us.
Indiana apparently received tapes that contained
crossover claims. As near as we can determine,
AIM was able to load the tapes into the system
but could not process the claims contained on
them.

/3 The DAB reminded HCFA that it had not reduced the
$5,880,230 figure after the first revision, so
the amount at issue was unclear. At oral argu-
ment, counsel told us that slightly over $2
million still hangs in the balance.

/4 We will assume for purposes of this appeal that
AIM’s problems were attributable solely to miss-
ing Medicare provider numbers. The parties stren-
uously debated, however, the exact cause of AIM’s
problems before the DAB, which specifically found
that AIM had systemic problems.

/5 It is hard to tell whether Indiana contests this
fact. Although Indiana’s submissions at various
levels of this dispute have at times suggested
that Indiana suspended only erroneous claims, the
record evidence indicates otherwise. See Mary
Simpson aff. para. 8 ("Indiana . . . made a
conscious decision to withhold the processing of
Medicare crossover claims for up to six (6)
months."); Pat Nolting aff. para. 7 ("In February
1995, a conscious decision was made . . . to
withhold processing of Medicare crossover claims.
. . . [H]ad all Medicare crossover claims been
processed in February 1995, there would have been
a large number of rejected claims which would
have required resubmittal by providers."). Indi-
ana claims that it processed electronic crossover
claims in March of 1995. The DAB properly found
that there was no evidence to support that asser-
tion.

/6 Indiana invokes definitions for "data processing"
and "automatic data processing" that appear in
federal regulations. These definitions are so
generic that we think they fail to illuminate the
narrower issues raised in this case.

/7 Indiana has made much of the fact that it ulti-
mately processed the backlogged claims within the
6-month time frame for crossover claims allowed
by 42 C.F.R. sec. 447.45(d)(4)(ii). But the
governing regulation for enhanced funding (which
Indiana does not challenge) requires "continuous"
operation. 42 C.F.R. sec. 433.116(d). A substan-
tial backlog of electronic crossover claims
developed in the spring of 1995. So the fact that
Indiana may have been able to adjudicate the
crossover claims under the most generous wire
does not show that it was doing so continuously
in light of the fact that it sidetracked the
claims for some time.
