The opinion of the court was delivered by: GREEN
This is an action brought by thirteen states, one county and one intervening state
against F. David Mathews, successor Secretary of Health, Education and Welfare (HEW) and the administrator, Social and Rehabilitation Service in HEW. Plaintiffs, all participants in the Aid to Families with Dependent Children (AFDC) program, seek to have the HEW regulation contained in 45 C.F.R. § 205.41 published at 40 Fed. Reg. 32954 on August 5, 1975, declared invalid.
Plaintiffs assert that they do not question HEW's right to set quality controls. What is contested is HEW's authority to establish a percentage of financial disallowance by regulation and the reasonableness of the specific percentages imposed. The challenged regulation provides for the withholding of federal financial participation under the AFDC program when erroneous payments to AFDC recipients exceed prescribed tolerance levels of 3% of payments to ineligibles and 5% of overpayments. The case is presently before the Court on the defendants' motion to dismiss or in the alternative for summary judgment, and the plaintiffs' cross-motion for summary judgment.
For a more complete understanding of the issues raised by the parties, a brief background of the program is necessary.
The AFDC program, one of several income maintenance programs under the original Social Security Act of 1935, provides federal matching funds in specified amounts to states to support payments to plan recipients and to cover a percentage of administrative expenses. 42 U.S.C. §§ 603(a), 1301(a)(8). To participate, a state must submit a plan which meets criteria established by federal statute and the plan must be approved by the Secretary of HEW. 42 U.S.C. § 602.
The regulations at issue are the department's efforts to effectuate quality control and to facilitate corrective action. Under the regulations the states are required to implement a system by which a prescribed number of sample AFDC cases are selected during a six-month period. An investigation is then made to determine whether each case was correctly paid. The figures regarding the number of overpayments, underpayments
and payments to ineligibles are projected to the universe of all AFDC grants within each state during the period. The difference between each state's percentage of payments to ineligibles and as overpayments which exceed the tolerance levels of 3% for ineligibles and 5% for overpayments set by the challenged regulation will be converted into a dollar figure and constitute the federal financial participation (FFP) withholding.
The purported basis offered by the defendants for the selection of the respective percentage sanctions is a study made by Westat where intensive in-depth investigations were made of a sample of recipients under AFDC.
The Westat report
states, however, "It was mutually agreed that Westat's evaluation was to be of the systems without regard to the potential use of QC as a sanctioning tool . . .".
Further, in discussing the percentage tolerances for overpayments, the report states,
"5b. The current 5% level for overpayments does not seem to be achievable under present circumstances. Westat recommends that this level be changed to 9% as a temporary national tolerance. This level is also rigorous under present conditions . . .".
These comments were made despite a March 20, 1973 memorandum from HEW's Director of Division of Program Evaluation to the Acting Commissioner of the Assistance Payments Administration (APA) in HEW, which states as follows:
"In view of the fiscal disallowance policy requiring zero tolerance, DeGeorge and Cohen were apprehensive that the Westat report might include statements to the effect that this goal was unreasonable. As a result Joel Cohen, Tom Scarlett, Harris and I had a number of meetings with Westat to ensure that they limited their observations to the terms of the contract and did not offer opinions on the 'proposed' use of QC for fiscal disallowances. They agreed to do this.
The importance of this approach is that Mr. Cohen did not want our legal case weakened by one of our own consultants stating that QC should not be used in this manner or zero tolerance is an impossibility."
For an understanding of what is involved in each application filed in each state under AFDC, the following is quoted from the affidavit of Bill B. Benton, Jr.
Mr. Benton is an expert in the field of social and economic policies in ...