IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO

Transcription

1 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 1 of 27 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO NAVAJO HEALTH FOUNDATION - SAGE MEMORIAL HOSPITAL, INC., v. PLAINTIFF, SYLVIA MATHEWS BURWELL, SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES; MARY SMITH, PRINCIPAL DEPUTY DIRECTOR, INDIAN HEALTH SERVICE; DOUGLAS GENE PETER, M.D., ACTING AREA DIRECTOR, NAVAJO AREA INDIAN HEALTH SERVICE; and MARGARET SHIRLEY-DAMON, CONTRACTING OFFICER, NAVAJO AREA INDIAN HEALTH SERVICE, DEFENDANTS. NO. 1:14-cv-958-JB-GBW PLAINTIFF S MOTION FOR PARTIAL SUMMARY JUDGMENT ON THE ISSUE OF ALLOCATION FRYE LAW FIRM, P.C. Paul E. Frye Academy Rd. NE., Suite 310 Albuquerque, NM Tel: ( Fax: ( SONOSKY, CHAMBERS, SACHSE, MILLER & MUNSON, LLP Lloyd B. Miller, NM Federal Bar No W. Fifth Ave., Suite 700 Anchorage, AK Tel: ( Fax: ( Attorneys for Plaintiff Sage

2 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 2 of 27 I. Introduction In this action, Sage seeks, in part, to recover damages from the Indian Health Service (IHS for underpayments of contract support costs (CSC made in fiscal years (FY Sage has calculated the indirect CSC it is owed by reference to the amounts for administrative overhead and other program support costs that it actually incurred for the years at issue. The government reduces the amount of CSC it will recognize by allocating the overhead costs incurred by Sage between the portion of Sage s program activities funded by IHS appropriations, and the portion funded by revenues from third-party payers (primarily Medicare and Medicaid, but also private insurance. The government claims that it is liable only for the CSC associated with (or, in the government s parlance, allocated to the program activities paid for with IHS appropriated funds. In making this allocation, IHS eliminates that portion of Sage s CSC claim that IHS contends was not incurred for activities that support the federal program. Ex. A, from Elizabeth A. Fowler, Deputy Director for Management Operations, Indian Health Service to Sandra Hadley, CPA, Cotton & Company (Mar. 29, 2016 at 2; see also, Ex. B, Report from Def. Expert Sam Hadley (Apr. 1, 2016 at 12 ( Sage claimed all actual costs without applying a funding ratio to prorate the indirect costs between IHS and third-party funding.. This motion addresses a pure question of law based on interpretation of the provisions of the Indian Self-Determination and Education Assistance Act, 25 U.S.C. 450 et seq. (ISDEAA. The government s position on this issue is set forth in letters from 1

3 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 3 of 27 Elizabeth Fowler these letters require an allocation deduction, which Hadley then applied to sharply reduce the amount of Sage s claims. The allocation reduction mandated by Fowler and applied by Hadley is wrong as a matter of law. Sage s CSC claim arises, in its entirety, from activities which are part of the federal program, including federal activities funded by third-party revenue payments, and all are eligible for contract support costs, regardless of the funding source used to support those activities. For this reason, IHS s deep reduction in Sage s CSC claim, based on an allocation between IHS revenue and third-party revenue, is contrary to law. There are no material facts in dispute with regard to this issue. In order to resolve this question of law, Sage moves for an order granting it partial summary judgment that expenditures made with third-party revenues in support of the programs under contract are spent on the federal program and are therefore eligible to be reimbursed as CSC. In accord with D.N.M.LR-Civ. 7.1(a, Sage made a good-faith request of Defendants counsel for their concurrence with this motion, but Defendants represent they oppose the motion. 1 II. Statement of Material Facts as to Which There is No Genuine Issue Pursuant to D.N.M.LR-Civ. 56.1(b, Sage sets out the following statement of material facts as to which no genuine issue exists. 1 Pursuant to D.N.M.LR-Civ. 10.5, Sage obtained Defendants consent to attach 54 pages of exhibits to this motion. 2

4 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 4 of Sage is a Navajo tribal organization for purposes of contracting with the Indian Health Service under the ISDEAA that operates a health care facility in Ganado, Arizona, within the exterior boundaries of the Navajo Reservation. Sec. Am. Compl. with Supplemental Claim, ( Compl., (May 3, 2016, Dkt. 180, 6, 19; Ans. to Sec. Am. Compl. with Supplemental Claim, ( Ans. (May 17, 2016, Dkt. 184, 6, IHS is an agency within the United States Department of Health and Human Services ( HHS and is responsible for providing federal health services to American Indians and Alaska Natives. Indian Health Service, About IHS, /aboutihs/ (last visited Feb 25, Since fiscal year 2005, Sage has contracted with IHS under the ISDEAA to provide health services to a largely Navajo patient population. Compl. 19; Ans. 19; Navajo Area IHS, Report on Navajo Health Foundation Sage Memorial Hospital, Inc., Performance Monitoring Review, (Jan. 1, 2015, Dkt , at Defendant Burwell is the HHS Secretary and has responsibility for carrying out all the functions, authorities, and duties of HHS including contracting on behalf of the United States with Indian tribal organizations under the ISDEAA to provide health care to Native Americans. Compl. 7; Ans Defendant Smith is the Principal Deputy Director of the IHS and has the overall responsibility for carrying out all the functions, authorities, and duties 3

5 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 5 of 27 of the IHS within HHS regarding contracting with Indian tribal organizations under the ISDEAA to provide health care to Native Americans. See Compl. 8; Ans. 8 (Defendant Smith was substituted for Defendant McSwain. 6. Defendant Shirley-Damon is the Contracting Officer for the Navajo Area IHS and is responsible for ISDEAA contracts and funding agreements for IHS programs, functions, services, and activities ( PFSAs undertaken by ISDEAA contractors within the Navajo Area IHS, including Sage. Shirley- Damon has the authority to sign ISDEAA contracts and funding agreements with Sage for such IHS programs and to award funds pursuant to those agreements. Compl. 10; Ans. 10 (Defendant Shirley-Damon was substituted for Defendant Dayish. 7. In 2009 Sage contracted with IHS under the ISDEAA. Compl. 19; Ans. 19. Sage and IHS were parties to successive ISDEAA contracts and AFAs for FY 2009 through FY 2013, without interruption. Compl. 21; Ans The 2009 contract included the following PFSAs: Inpatient Services, General Ambulatory and Specialty Care Services, Emergency Department, Emergency Medical Transport, Optometry Clinic, Behavioral Health Services, Radiology, Pharmacy, Laboratory, Physical Therapy, Public Health Nursing, Employee Health Services, Health Education, Transportation Services, School Based Services, Diabetes Program, Traditional Medicine, Dental Clinic, and Podiatry Clinic. Compl. 20; Ans

6 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 6 of The 2009 through 2013 contracts also stated: In addition to general descriptions of services provided above, NHF/Sage [Sage Hospital or Sage] will provide the following services, among other related services, in operating and administering the PFSAs under the ISDEAA Contract and providing health care services for eligible beneficiaries Business Functions: Including, but not limited to, billing and collecting third party reimbursements, conducting utilization review, compliance activities, insurance verification, and collection activities. Ex. C, 2009 AFA, Att. A, at 5; Ex. D, 2010 AFA, Att. A, at 4-5; Ex. E, 2011 AFA, Att. A, at 4-5; Ex. F, 2012 AFA, Att. A, at 4-5; Ex. G, 2013 AFA, Att. A, at Defendants were obligated to pay Sage no less than the full amount of CSC under the 2009 through 2013 Contracts, including indirect costs and direct contract support costs associated with Sage s operation of the PFSAs operated by Sage under those contracts. 25 U.S.C. 450j-1(a, (g; see Salazar v. Ramah Navajo Chapter, 132 S. Ct. 2181, (2012; Arctic Slope Native Ass n v. Sebelius, 501 Fed. Appx. 957, 959 (Fed. Cir The IHS Contracts stated [e]ach provision of the [ISDEAA] and each provision of this Contract shall be liberally construed for the benefit of Sage to transfer certain programs, functions, services, and activities (hereinafter 2 Defendants have admitted the authenticity of these Annual Funding Agreements ( AFAs. See Ex. H, Defs. s Resp. to Pl. s First Set of Requests for Admissions, No. 9 (2009 AFA; id., No. 10 (2010 AFA; id., No. 12 (2011 AFA; id., No. 13 (2012 AFA; id., No. 14 (2013 AFA. 5

7 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 7 of 27 PFSAs, or portions thereof, and associated resources, that are otherwise contractible under section 102(a of the [ISDEAA] (25 U.S.C. 450f(a, including all related administrative functions, from the Secretary to Sage. Ex. I, Contract, Art. 1, 2(B; Ex. J, Contract, Art. 1, 2(B The IHS Contracts provided that [a]ll program income collected by Sage shall be treated as additional supplemental funding to that negotiated in the AFA and Sage may retain all such income pursuant to section 106(m of the [ISDEAA] (25 U.S.C. 450j-1(m to be used to further the general purposes of the Contract. Such program income shall not result in any off-set or reduction in the negotiated amount of the current or successor AFAs. Ex. I, Art. 3, 6; Ex. J, Art. 3, Sage s Annual Funding Agreements (AFAs for each year provided that, [f]or PFSAs provided under this AFA, Sage shall exercise its right pursuant to Section 405 of the Indian Health Care Improvement Act, as amended by P.L , to submit claims directly to and recover directly from Medicare and Medicaid. All funds recovered from Medicare and Medicaid shall be used as allowed by law. Ex. C, 11; Ex. D, 11; Ex. E, 11; Ex. F, 11; Ex. G, 11 (statutory citation updated. 3 Defendants have admitted the authenticity of these contracts. See Ex. H, No. 8 ( Contract; id., No. 11 ( Contract. 6

8 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 8 of The AFAs also stated that [a]ny funds recovered by Sage through filing, litigating, or settling a claim against a third party to pay for services previously provided to IHS-eligible beneficiaries by Sage, or for such services previously provided by the IHS through PFSA now operated by Sage, shall be considered program income to be utilized by Sage in support of the PFSAs contracted herein. Ex. C, 12; Ex. D, 12; Ex. E, 12; Ex. F, 12; Ex. G, The funding tables in each AFA noted third party resources as part of the Area Office direct operations budget. Ex. C, Att. C; Ex. D, Att. C; Ex. E, Att. C; Ex. F, Att. C; Ex. G, Att. C. 16. By letter dated August 25, 2014 to then-contracting Officer Dayish, Sage submitted to IHS a CSC claim for FY 2009 through 2013 for a total of $62,569,681. Compl. 68; Ans. 68; CSC Claim Letter, (Jan. 26, 2015, Dkt at By letter dated July 16, 2015, IHS asserted a counterclaim against Plaintiff for FY 2009 through 2013 in the amount of $4,218,357. Letter from Contracting Officer Dayish, (July 17, 2015, Dkt ( Dayish letter. This counterclaim was based on IHS s assertions that Plaintiff did not expend the indirect CSC funding on activities that the parties agreed were eligible for indirect CSC funding (i.e., reasonable, necessary, non-duplicative costs incurred for activities carried on to operate the Federal program. Ans. to Sec. Am. Compl. (July 17, 2015, Dkt. 84 at 15, 23; see also Dayish Letter, at 1,

9 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 9 of 27 This counterclaim was later dismissed. Stipulation of Dismissal of Defs. Countercl., (Mar. 7, 2016 Dkt Despite the fact that Defendants dismissed their counterclaim, their expert continues to reduce her calculations of Sage s damages because Sage claimed all actual costs without applying a funding ratio to prorate the indirect costs between IHS and third-party funding. Ex. B at IHS asserts that Ex. A at 1. CSC... is only generated by the Secretarial amount, not additional amounts a tribal contractor may choose to contribute to its ISDEAA programs from other sources.... [T]he purpose of CSC funding is to ensure that tribal contractors are not required to reduce the program, as operated by the Secretary, to cover their additional costs necessary for contract compliance when the program is transferred from federal to tribal operation. 20. IHS also maintains that CSC funding is authorized only for support of the federal program, and not for expanded programs funded with other resources. See 25 U.S.C. 450j-l(a(2-(3. Accordingly, the determination of CSC funding must ensure that it is limited only to those activities that support the federal program. IHS accomplishes this through application of a ratio, based on either revenues or expenditures that demonstrates which costs are related to the federal program as compared to expanded programs, etc. In years when there were shortfalls due to Congressionally-capped appropriations for CSC (up to and including fiscal year 2013, IHS divides the contract amount, plus an amount that recognizes a potential shortfall, by the actual revenues/ expenditures.... The use of the ratio ensures that CSC funding is not being awarded for non-federal programs. 8

10 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 10 of 27 Ex. A at Defendants expert asserts that Ex. B at 5. Sage based its claim for indirect CSC for FYs 2009 through 2013 on actual, historical cost data; however, it:... b. Is requesting that IHS pay 100 percent of Sage s claimed indirect CSC, rather than the reasonable estimate of IHS s prorated share of the eligible indirect CSC that Sage calculated during the original contract negotiation. 22. As part of her analysis, Defendants expert subtracted costs in Sage s claim that IHS considered to be duplicative, explaining: Ex. B at 9. IHS determined that some claimed amounts or activities are duplicative of activities funded in the Secretarial amount.... Those activities that are already funded in the Secretarial amount cannot also be funded as CSC. For example, Sage is claiming costs associated with linens and cleaning supplies as indirect costs. Linens and hospital housekeeping would be part of direct hospital operations (i.e., direct program funds and would be funded in the Secretarial amount. Other examples of specific cost areas that appear duplicative include activities related to Dietary, Wellness, Med Rec, Utilities, and Grounds, as these are direct functions of hospital operations that were funded within the core Secretarial funding. 23. As part of her analysis, Defendants expert made an adjustment to because Sage had not allocate[ed] indirect costs to the significant amount of thirdparty revenue received annually and used to fund hospital operations[.] Ex. B at 13. According to Defendants expert: 9

11 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 11 of 27 Ex. B at 13. Due to its obligation not to fund CSC related to third-party funding, IHS has consistently negotiated with tribes and tribal organizations by allocating the program s indirect costs to their various funding sources. The manner in which IHS allocates CSC can vary depending on the documentation available. With Sage, IHS calculated revenues related to the IHS-funded portion of the program as a percentage of Sage s overall revenues. 24. IHS and Tribal programs use third-party collections to fund the health care services they provide. These collections from Medicare, Medicaid, and Private Insurance were included in IHS s Budget Justifications for FY 2009 through FY See, e.g., INDIAN HEALTH SERV., DEP T OF HEALTH & HUMAN SERVS., JUSTIFICATION OF ESTIMATES FOR APPROPRIATIONS COMMITTEES CJ-137 (2012, available at themes/newihstheme/documents/fy2012budgetjustification.pdf ( Public and private collections are a significant part of the IHS and Tribal budgets, and provide increased access to quality health care services for American Indian and Alaska Natives (AI/AN. Third party revenue represents up to 50 percent of operating budgets at many facilities. ; id. at CJ-11 CJ-12, CJ-49, CJ-62 CJ-63, CJ 137 CJ-139 (other references to inclusion of Medicare, Medicaid, and private insurance collections in IHS program funding. See also INDIAN HEALTH SERV., DEP T OF HEALTH & HUMAN SERVS., JUSTIFICATION OF ESTIMATES FOR APPROPRIATIONS COMMITTEES CJ-158 (2009; INDIAN HEALTH SERV., DEP T OF HEALTH & HUMAN SERVS., JUSTIFICATION OF 10

12 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 12 of 27 ESTIMATES FOR APPROPRIATIONS COMMITTEES CJ-169 (2010; INDIAN HEALTH SERV., DEP T OF HEALTH & HUMAN SERVS., JUSTIFICATION OF ESTIMATES FOR APPROPRIATIONS COMMITTEES CJ-155 (2011; INDIAN HEALTH SERV., DEP T OF HEALTH & HUMAN SERVS., JUSTIFICATION OF ESTIMATES FOR APPROPRIATIONS COMMITTEES CJ-141 (2013; Ex. K, Pfanner Dep. 48:19-49:5 (when IHS runs a service unit, it bills for third-party revenues and uses those funds to maintain accreditation and provide additional services. III. Standard of Review Summary judgment is warranted where there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a; accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986; J.H. ex rel. J.P. v. Bernalillo County, 61 F. Supp. 3d 1085, 1134 (D.N.M (Browning, J.. This motion presents no dispute of material fact, but rather seeks resolution of a matter of statutory interpretation. The only issue presented is whether Sage is entitled to judgment as a matter of law. See Thomas v. Metropolitan Life Ins. Co., 631 F.3d 1153, 1160 (10th Cir ( Statutory interpretation is a matter of law appropriate for resolution on summary judgment. (internal citation omitted. As the Tenth Circuit has instructed, [t]he starting point in any case involving statutory construction is the language of the statute itself. Ramah Navajo Chapter v. Lujan, 112 F.3d 1455, 1460 (10th Cir (citing United States v. Thompson, 941 F.2d 1074, 1077 (10th Cir. 1991, cert. denied, 503 U.S. 984 (1992; see also Chickasaw 11

13 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 13 of 27 Nation v. United States, 208 F.3d 871, 876 (10th Cir. 2000, aff d, Chickasaw Nation v. United States, 534 U.S. 84 (2001. Moreover, [w]hen the terms of the statute are clear and unambiguous, that language is controlling absent rare and exceptional circumstances. Ramah Navajo Chapter, 112 F.3d. at 1460 (quoting Thompson, 941 F.2d at 1077; accord Chickasaw Nation, 208 F.3d at 876; Ramah Navajo Chapter v. Salazar, 644 F.3d 1054, 1062 (10th Cir. 2011, aff d 132 S. Ct (2012. When a statutory provision is ambiguous, the court look[s] to traditional canons of statutory construction to inform our interpretation. Ramah Navajo Chapter v. Salazar, 644 F.3d at 1062 (quoting Conrad v. Phone Directories Co., 585 F.3d 1376, 1381 (10th Cir One such canon is that the Court must consider the statute as a whole to determine the meaning of a particular phrase. The court take[s] into account the broader context of the statute as a whole when ascertaining the meaning of a particular provision. Ramah Navajo Chapter v. Salazar, 644 F.3d at 1062 (quoting Conrad, 585 F.3d at The court should not confine itself to examining a particular statutory provision in isolation. The meaning or ambiguity of certain words or phrases may only become evident when placed in context. FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, (2000 (citing Brown v. Gardner, 513 U.S. 115, 118 (1994 ( Ambiguity is a creature not of definitional possibilities but of statutory context.. In other words, the statute must be read as a whole since the meaning of statutory language, plain or not, depends on context. King v. St. Vincent s Hosp., 502 U.S. 215, 221 (1991 (internal 12

14 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 14 of 27 citations omitted. Indeed, [i]t is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme. Brown & Williamson, 529 U.S. at 133 (quoting Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 809 (1989. The Court must also consider the unique canon of statutory interpretation that applies to cases involving Native Americans. Although courts usually defer to the administering agency when interpreting ambiguous statutes, see Chevron U.S.A., Inc. v. Nat. Res. Defense Council, 467 U.S. 837, 843 (1984, that rule does not apply here. Instead, when it comes to statutes impacting Indian tribes, statutes are to be construed liberally in favor of the Indians, with ambiguous provisions interpreted to their benefit. Montana v. Blackfeet Tribe, 471 U.S. 759, 766 (1985; Ramah Navajo Chapter v. Lujan, 112 F.3d at 1461 ( In cases involving Native Americans,... we have taken a different approach to statutory interpretation, holding that normal rules of construction do not apply when Indian treaty rights, or even non-treaty matters involving Indians, are at issue. (quoting E.E.O.C. v. Cherokee Nation, 871 F.2d 937, 939 (10th Cir This canon is rooted in the unique trust relationship between the United States and the Indians. Oneida County v. Oneida Indian Nation, 470 U.S. 226, 247 (1985. This means that if the [Act] can reasonably be construed as the Tribe would have it construed, it must be construed that way. Ramah Navajo Chapter v. Salazar, 644 F.3d at 1062 (alteration in original (quoting Ramah Navajo Chapter v. Lujan, 112 F.3d at

15 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 15 of 27 This canon of statutory interpretation is doubly applicable when it comes to the ISDEAA, because it is repeated both in the ISDEAA itself and in Sage s contracts. The Supreme Court has recognized that [c]ontracts made under [the] ISDA specify that [e]ach provision of the [ISDA] and each provision of this Contract shall be liberally construed for the benefit of the Contractor.... Salazar v. Ramah Navajo Chapter, 132 S. Ct. 2181, 2191 (2012 (quoting 25 U.S.C. 450l(c (Model Agreement, 1(a(2; Ex. C, 2(B (stating, Each provision of the ISDA and each provision of this Contract shall be liberally construed for the benefit of Sage.... ; Ex. D, 2(B (stating same. The Supreme Court has interpreted this language to mean that the Government must demonstrate that its reading [of the ISDEAA] is clearly required by the statutory language. Ramah, 132 S. Ct. at As this Court has already recognized, the Tenth Circuit has said that Indian deference trumps Chevron deference at least when it comes to interpreting the ISDEA[A] s ambiguous provisions. Amended Mem. Op. and Order, Dkt. 109, at 62 (citing Ramah Navajo Chapter v. Lujan, 112 F.3d at 1462; see also Ramah Navajo Sch. Bd., Inc. v. Babbitt, 87 F.3d 1338, 1344 (D.C. Cir (no deference due agency positions on CSC issues because Congress withheld from the agency all authority to regulate CSC issues. IV. Background on the ISDEAA s CSC Provisions The ISDEAA was enacted to give Indian communities more control over the federal services they receive so that these services would be more responsive to the 14

16 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 16 of 27 needs and desires of those communities. 25 U.S.C. 450a(a. The Act achieves this purpose through the establishment of a meaningful Indian self-determination policy, which encourages the transition from federal control of programs serving Indian Tribes to tribal operation of these programs. 25 U.S.C. 450a(b. Accordingly, Congress provided that, upon the request of any Indian tribe by tribal resolution, to enter into a self-determination contract, the Secretary must by law contract with the Tribe or tribal organization to plan, conduct and administer the federal programs that otherwise would be administered by the Secretary. 25 U.S.C. 450f(a(1. The ISDEAA further mandates that Tribes are to be paid two types of funding to operate the contracted programs. First, tribal contractors are entitled to be paid the Secretary s program funds: the amount the Secretary would have expended had the government itself [continued to] run the program. Arctic Slope Native Ass n, v. Sebelius, 629 F.3d 1296, (Fed. Cir. 2010, vacated on other grounds, 133 S. Ct. 22 (2012, on remand, 501 Fed. Appx. 957 (Fed. Cir See also 25 U.S.C. 450j- 1(a(1. This is called the Secretarial amount. Arctic Slope Native Ass n, 629 F.3d at Second, beginning in 1988, Congress also required the agency to add to the Secretarial amount a second type of funding called contract support costs ( CSC. Pub. L. No , title II, 205, 102 Stat. 2285, (Oct. 5, Congress added this funding because it realized that the Secretarial amount alone did not provide sufficient money to allow Tribes to provide the same level of services the Secretary 15

17 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 17 of 27 would have provided if the Secretary had continued to operate the program directly, instead of contracting the operation of the program to the tribal organization. See S. REP. NO at 9 (1987. CSC cover costs for services that IHS receives from other federal agencies when it directly operates a program, from payroll to legal expenses to procurement activities (among others. Since a contracting Tribe would not have access to those additional federal services, the tribal contractor necessarily would have to provide them with funding that was not transferred in the Secretarial amount. CSC were also intended to cover additional requirements, such as annual audits and insurance, that apply to Tribes but not to the federal government. S. REP. NO at 8-9 (1987. The costs of those additional requirements would also not be transferred in the Secretarial amount because IHS does not have to pay them. For both reasons, Congress required the agencies to supplement the Secretarial amount by paying contract support costs to Tribes in an amount necessary to fund the reasonable costs for activities which must be carried on by a tribal organization as a contractor to ensure compliance with the terms of the contract and prudent management U.S.C. 450j-1(a(2. In 1994, Congress expanded the costs eligible for CSC, making clear that CSC include both indirect administrative costs, such as special auditing or other financial management costs that are part of a contractor s general overhead, and also certain direct costs, such as workers compensation insurance that are attributable directly to the personnel and facilities associated with a particular program. Cherokee Nation v. 16

18 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 18 of 27 Leavitt, 543 U.S. 631, 635 (2005 (citing 25 U.S.C. 450j-1(a(3(A(i, (ii; S. REP. NO , at 9 (1994; 140 Cong. Rec. 28,631 (1994 (same. The ISDEAA mandates that upon award of each year s contract, contract support costs shall be added to the Secretarial amount. 25 U.S.C. 450j-1(a(2 (emphasis added. The total funding amount shall not be less than the applicable amount determined pursuant to section [450j-1](a of the [ISDA], 25 U.S.C. 450l(c(b(4 (emphasis added, i.e., the full Secretarial amount and the full contract support cost amount to which the tribal contractor is entitled. V. Sage is Entitled to Judgment as a Matter of Law that Third-Party Revenues Spent on the Federal Program Under the ISDEAA Are Eligible for Contract Support Costs Under the ISDEAA, IHS must provide CSC funding for administrative or other expense related to the overhead incurred by the tribal contractor in connection with the operation of the Federal program, function, service or activity pursuant to the contract. See 25 U.S.C. 450j-1(a(3(A(ii (emphasis added. IHS claims that CSC is to be paid only on that portion of the contracted program that is funded with appropriated dollars, not with third-party revenues. The legal issue presented by IHS s allocation argument is whether programs, functions, services, and activities (PFSAs funded in part by thirdparty revenues are part of the federal program that is eligible for CSC under the statute and the contract between IHS and Sage. Sage contends that it is entitled to CSC funding to support the administration of all Federal health care programs provided under Sage s contract with IHS, whether those 17

19 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 19 of 27 services are funded by appropriated dollars or by third-party revenues received by Sage (i.e., revenues received from Medicare, Medicaid and private insurance. A. IHS allocates CSC only to the portion of Sage s program that it estimates is supported by appropriated funds. IHS has rejected a significant portion of Sage s CSC claim because IHS asserts it is responsible for the payment of CSC only on that portion of Sage s PFSAs funded by appropriated dollars (what Defendants expert calls ISDEAA funding. E.g., Ex. B at 14. As stated in the Fowler Letter, IHS asserts: CSC funding is authorized only for support of the federal program, and not for expanded programs funded with other resources.... Accordingly, the determination of CSC funding must ensure that it is limited only to those activities that support the federal program. Ex. A at 2 (emphasis added. IHS considers PFSAs funded in part by third-party revenues to be expanded programs and not part of the federal program. IHS argues that programs funded in part with third-party revenues represent a program expansion because such program activities, it alleges, go beyond the level of services that the Secretary would have provided if the Secretary was still operating these programs put another way, IHS argues that these third-party revenues go beyond the amount the Secretary would have otherwise provided. 25 U.S.C. 450j-1(a(1. This is why IHS states that CSC is only generated by the Secretarial amount, not additional amounts a tribal contractor may choose to contribute to its ISDEAA programs from other sources. Ex. A at 1. 18

20 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 20 of 27 IHS leaves the impression that if the Secretary operated these programs, IHS would not itself generate and use third-party revenues in addition to its appropriated funds in order to provide services. But that impression is decidedly false, for IHS heavily supports its ongoing federal program with hundreds of millions of dollars in third-party revenues. See supra at 10-11, infra at 22. To apply its rule against CSC on the portion of any program supported with thirdparty revenues, IHS purports to divide programs into two categories federal and nonfederal (or expanded. It does this through application of a ratio, based on either revenues or expenditures that demonstrates which costs are related to the federal program as compared to expanded programs, etc.... The use of the ratio ensures that CSC funding is not being awarded for non-federal programs. Ex. A at 2. The government s expert notes that Sage claimed all actual costs without applying a funding ratio to prorate the indirect costs between IHS and third-party funding. Ex. B at 12. She also insists that, As noted in the [Fowler] Technical Letter..., IHS is not legally responsible for the CSC applicable to an expanded program. Ex. B at 13. So Defendants expert calculated historical percentages to estimate the portion of indirect costs allocable to IHS activities, id. at 14, by devising a ratio of the funding Sage received from appropriated dollars over total revenues for each of FY 2009 through She then uses this ratio to make an adjustment to allocate total indirect costs to IHS ISDEAA funding for each year. See Ex. B at 8 (allowing 52.66% of eligible indirect CSC for FY 2009; id. at 15 (allowing 75.46% of eligible indirect CSC for FY 2010; id. at 17 19

21 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 21 of 27 (allowing 68.99% of eligible indirect CSC for FY 2011; id. at 19 (allowing 60.43% of eligible indirect CSC for FY 2012; id. at 21 (allowing 52.01% of eligible indirect CSC for FY B. The ISDEAA requires CSC to be paid on all federal program activities, including activities funded in part with third-party revenues. IHS s interpretation of the Act s CSC provisions conflicts with 25 U.S.C. 450 j- 1(m. By applying a funding ratio to determine what constitutes the federal program, and by denying CSC to the excluded amount, IHS forces contracted programs funded in part with third-party revenues to bear their own overhead expenses, thus reducing the amount of services that the Tribe can provide with those programs. But this methodology directly contradicts 450j-1(m, which provides: The program income earned by a tribal organization in the course of carrying out a self-determination contract (1 shall be used by the tribal organization to further the general purposes of the contract; and (2 shall not be a basis for reducing the amount of funds otherwise obligated to the contract. By allocating CSC only to portions of Sage s program funded by appropriations and not to the portions of the program funded by third-party revenues i.e., the portions funded by program income earned by the tribal organization in the course of carrying out a self-determination contract IHS seeks to reduc[e] the amount of funds otherwise obligated to the contract and thereby accomplish precisely that which the statute explicitly prohibits. It is undisputed that Sage is using the third-party revenues to 20

22 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 22 of 27 further the general purposes of the contract, as the statute and the contract with IHS require. Yet IHS is using that program income as a basis for reducing the amount of funds obligated to the contract by decreasing the amount of CSC that will be paid. IHS s approach is expressly barred by 450j-1(m. IHS s legal position on allocation is also inconsistent with other provisions of the ISDEAA. The statute does not make a distinction between the portions of programs funded by appropriated dollars and those funded by third-party revenue dollars. The Act defines the Secretarial amount without regard to funding source as the amount:... the appropriate Secretary would have otherwise provided for the operation of the programs or portions thereof for the period covered by the contract, without regard to any organizational level within the Department of the Interior or the Department of Health and Human Services, as appropriate, at which the program, function, service, or activity or portion thereof, including supportive administrative functions that are otherwise contractable, is operated. 25 U.S.C. 450j-1(a(1. Nowhere in this definition is the Secretarial amount limited to the amount of IHS appropriations, as opposed to amounts the Secretary or a Tribe receives from third-party payers to fund the program. Similarly, the statute states that CSC shall be added to this Secretarial amount, 25 U.S.C. 450j-1(a(2, not to the Secretarial amount of programs funded with appropriated IHS funds. IHS s interpretation is therefore contrary to the statute s plain language, which defines the Secretarial amount broadly as the amount IHS would have otherwise provided for the program an amount that necessarily includes both appropriated funds and third-party revenues. 21

23 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 23 of 27 IHS s position also ignores reality. IHS almost universally supplements its own appropriated funds with third-party revenues to carry out its federal health care programs. The program services that IHS provides with those additional third-party funds are supported by the same administrative structure that supports the services it funds with appropriated dollars. See INDIAN HEALTH SERV., DEP T OF HEALTH & HUMAN SERVS. JUSTIFICATION OF ESTIMATES FOR APPROPRIATIONS COMMITTEES, According to IHS, [t]hird party revenue represents up to 50 percent of operating budgets at many facilities. INDIAN HEALTH SERV., DEP T OF HEALTH & HUMAN SERVS., JUSTIFICATION OF ESTIMATES FOR APPROPRIATIONS COMMITTEES CJ-137 (2012, available at documents/fy2012budgetjustification.pdf; Ex. K, Pfanner Dep. At 48:19-49:5. Recognizing this considerable source of non-appropriated funding, the Indian Health Care Improvement Act (IHCIA directs IHS to spend third-party funds on improving facilities or providing additional services. 25 U.S.C. 1641(c(1(B; see also 1621f (extending restrictions to private reimbursements. The IHCIA requires that third-party revenues be returned to the local service unit that generates the funds and bars IHS from transferring those revenues elsewhere. 1641(c(1(A. Indeed, a significant portion of the IHS funding for PFSAs operated by Sage came from third-party revenues. See Att. C to Ex. C, Ex. D, Ex. E, Ex. F, Ex. G (noting a line item for third party resources available as an Area Office tribal share. And, if IHS were to retrocede, or take back, the programs that Sage is operating, IHS would receive not only the appropriated funds, but 22

24 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 24 of 27 also all the third-party revenues generated by those programs. If third-party revenues support an integral part of the federal program under contract, those revenues are entitled to CSC support as much as the portions of the program supported with appropriated dollars. IHS s effort to put Sage s program activities funded with third-party revenues offlimits for CSC funding also conflicts with the ISDEAA s mandate that all agency programs are subject to the Act s contracting mandate. The Act does not limit contractable programs to those funded with appropriated dollars. Instead, it broadly reaches all programs that are: (C provided by the Secretary of Health and Human Services...[and] (E for the benefit of Indians because of their status as Indians without regard to the agency or office of the Department of Health and Human Services... within which it is performed. 25 U.S.C. 450f(a(1. The program services that Sage is providing in part with thirdparty revenues meet this definition, and are all services listed as PFSAs in Sage s contracts and Annual Funding Agreements i.e., they are the services that are contractable under the Act. In fact, Sage s Funding Agreements acknowledge that Sage will collect third-party revenues in operating and administering the PFSAs under the ISDEAA Contract, and the Scope of Work in those Agreements lists Business Functions: [i]ncluding, but not limited to, billing and collecting third-party reimbursements.... E.g., Ex. G at 4-5. If IHS agreed that the federal program includes billing and collecting third-party revenues, it makes no sense for IHS to claim 23

25 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 25 of 27 that spending those funds on health programs as both IHS and Sage are required to do is somehow a separate non-federal program. Instead, the statute makes sense only if the federal program includes services supported in part by third-party revenues. IHS s contention to the contrary that only programs supported solely by appropriated funds are contractable is not supported by either the statutory language or by IHS s own practice. Further, the courts have considered and squarely rejected IHS s position concerning whether the reach of ISDEAA extends to programs supported in part by thirdparty revenues. In Pyramid Lake Paiute Tribe v. Burwell, 70 F. Supp. 3d 534 (D.D.C. 2014, the district court recognized that programs funded by third-party revenues are part of the federal program, and held on that basis that a program was contractable under the Act even though it was funded mostly with third-party revenues. In Pyramid Lake, IHS had been directly operating an emergency medical services program with approximately $502,611 in operating costs. Id. at 538. When the Tribe submitted a proposal to contract that program, IHS declined the proposal because (among other reasons IHS had only budgeted $38,746 in appropriated funds to operate the program and was using third-party revenues to fund the rest. Id. at 544. IHS maintained that the third-party revenues were not available for contracting. Id. at 539. The Court rejected IHS s position, explaining: [T]here is nothing in the ISDEAA that requires the funding for selfdetermination programs to themselves be a program, function, service, or activity available for contracting.... [T]he applicable funding level for a 24

26 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 26 of 27 contract proposal under sections 450f(a(2(D and 450j1(a(1 is determined based on what the Secretary otherwise would have spent, not on the source of the funds the Secretary uses. If the Secretary chooses to augment its spending on a program with other funds available to her, nothing in the Act permits her to deduct those amounts from the tribe s funding under an otherwise acceptable ISDEAA contract. Id. at 544. Thus, contrary to IHS s assertions, the court concluded that PFSAs funded in part by third-party revenues are contractable as federal programs funded by the Secretarial amount. The result makes perfect sense. When IHS funds programs supported in part by third-party revenues, as it did in Pyramid Lake, IHS does not create a separate administrative structure for those third-party revenue-funded programs. Instead, these programs are supported by the same IHS finance, human resources and procurement personnel that support programs funded by appropriated dollars. The same is true for Sage. Since the third-party revenue-funded portion of Sage s program is part of the federal program, Sage is entitled to be reimbursed for the CSC required to administer the portion of Sage s programs that are funded by those revenues. IHS may not reduce the funding to which Sage is entitled because Sage s federal program is funded in part by third-party revenues. VI. Conclusion For the foregoing reasons, Sage is entitled to judgment as a matter of law holding that the portion of Sage s programs funded in part by third-party revenues is part of Sage s federal program that is eligible for CSC funding and third-party revenues may 25

27 Case 1:14-cv JB-GBW Document 199 Filed 08/01/16 Page 27 of 27 not be used as a basis for reducing the amount of funds otherwise obligated to the ISDEAA contract. Respectfully submitted, FRYE LAW FIRM, P.C. By: s/ Lloyd B. Miller Paul E. Frye Thomas E. Albright Academy Rd. NE., Suite 310 Albuquerque, NM Tel: ( Fax: ( SONOSKY, CHAMBERS, SACHSE, MILLER & MUNSON, LLP Lloyd B. Miller, NM Federal Bar No W. Fifth Ave., Suite 700 Anchorage, AK Tel: ( Fax: ( Attorneys for Plaintiff Sage CERTIFICATE OF SERVICE I hereby certify that on August 1, 2016 I filed the foregoing with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to the parties of record in this matter. s/ Lloyd B. Miller 26