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Seminole Tribe of Florida v. Azar

United States District Court, District of Columbia

March 26, 2019

ALEX M. AZAR, II, et al., Defendants.



         Denying Plaintiff's Motion for Summary Judgment; Denying Defendants' Cross-Motion for Summary Judgment


         The Indian Self-Determination and Education Assistance Act (“ISDEAA”), 25 U.S.C. §§ 5301-5423, authorizes the federal government and Indian tribes to enter into contracts that permit the tribes to provide to their members federally funded services that the government would have otherwise provided itself. Pursuant to the ISDEAA, Plaintiff in this case, the Seminole Tribe of Florida, has for years contracted with the Secretary of Health and Human Services (“HHS”) so that the Tribe may operate its own health program with federal dollars. For fiscal year 2018, the Tribe and the Secretary were able to reach an agreement on the vast majority of federal funding that would be transferred to the Tribe in support of this health program. But the parties were not able to agree on one category of funds. The Tribe therefore brought this lawsuit, asking the Court to compel the Secretary to accept the Tribe's final offer. Presently before the Court are the parties' cross-motions for summary judgment. As explained below, the Court denies both of these motions, because there remain significant factual issues that the parties have not yet addressed.


         A. Statutory and Regulatory Background

         Congress passed the ISDEAA in 1975 in recognition of the right of Indian tribes to self-govern. Pub. L. No. 93-638, § 3, 88 Stat. 2203, 2203-04 (1975); see also 25 U.S.C. § 5302(a). The Act gives tribes the option of entering into “self-determination contracts” with the Secretary of HHS and the Secretary of Interior, under which the tribes become authorized to provide services to their members that otherwise would have been provided by the federal government- like education, law enforcement, or healthcare. See 25 U.S.C. § 5321(a)(1). Consistent with its broader purpose, the ISDEAA limits the government's discretion to deny tribes the ability to enter into a self-determination contract. After a willing tribe submits “a proposal” for such a contract, the relevant Secretary must approve the proposal within ninety days, unless he “provides written notification to the applicant” of “a specific finding that clearly demonstrates that” at least one of five enumerated grounds for rejection applies. Id. § 5321(a)(2).

         Among those grounds for rejection is the Secretary's conclusion that “the amount of funds proposed under the” tribe's submission “is in excess of the applicable funding level for the contract.” Id. § 5321(a)(2)(D). The “applicable funding level, ” the ISDEAA explains, is made up of two general categories of money. The first category is what is often referred to as “the Secretarial amount, ” meaning the amount that “the appropriate Secretary would have otherwise provided for the operation of the programs . . . for the period covered by the contract.” Id. § 5325(a)(1). By requiring that the federal government provide no less than this amount, the ISDEAA ensures that the tribes receive funding equal to what the government would have spent if it provided the services at issue itself. Id.

         On top of this base amount, however, the Secretary must also provide a second category of funds: “contract support costs” (“CSCs”). Id. § 5325(a)(2). These are “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, but which . . . normally are not carried on by the respective Secretary in his direct operation of the program . . . or . . . are provided by the Secretary in support of the contracted program from resources other than those under contract.” Id.

         CSCs in turn comprise two sub-categories of funds. One is direct CSCs, which are, unsurprisingly, the “direct program expenses for the operation of the Federal program that is the subject of the contract, ” id. § 5325(a)(3)(A)(i), like unemployment taxes or workers compensation payments. The other category is indirect CSCs, which are “any additional administrative or other expense[s] related to the overhead incurred by the tribal contractor in connection with the operation of the Federal program, ” id. § 5325(a)(3)(A)(ii). Indirect CSCs generally make up the majority of CSCs; they can include expenses for facilities, equipment, auditing, and other financial management services. See Cherokee Nation of Okla. v. Leavitt, 543 U.S. 631, 635 (2005).

         The ISDEAA provides no specific procedure for determining the amount of indirect CSCs a tribal contractor will incur related to a particular program in a given year. The Act merely states, as noted above, that the costs must be “reasonable . . . to ensure compliance with the terms of the contract and prudent management, ” 25 U.S.C. § 5325(a)(2), and that they cannot duplicate any funding already included in the Secretarial amount, id. § 5325(3)(A). Normally, however, the CSC amount attributed to a particular program is calculated by applying an “indirect cost rate” to a base amount of funds already owed to the tribe. See 2 C.F.R. pt. 200, app. VII, § C; Cherokee Nation, 543 U.S. at 635. The same indirect cost rate is generally used across all of the tribal contractor's federal programs for two to four years, see 2 C.F.R. pt. 200, app. VII, §§ B.9, C.2.a, and it is determined through negotiations with the Interior Business Center (“IBC”), located within the Department of Interior.

         These negotiations are generally guided by uniform cost principles issued by the Office of Management and Budget (“OMB”) that are applicable to all federal awards to non-federal entities-not just to Indian tribes. See generally 2 C.F.R. pt. 200; see also 2 C.F.R. § 200.100. Those principles instruct that the process begins by taking the tribe's total costs associated with all federal programs for a fiscal year and classifying them as either direct or indirect. See 2 C.F.R. pt. 200, app. VII, §§ B.9, E.2. The indirect costs are then divided by a “distribution base, ” which is usually either the total direct costs of all federal programs contracted to the tribe, or the total salaries and wages associated with all federal programs. See 2 C.F.R. pt. 200, app. VII, § C.2.a, c. The product of that division equation is the indirect cost rate-“the percentage which the total amount of allowable indirect costs bears to the base selected.” Id. § C.2.a.

         Once the IBC and the tribal contractor agree on an indirect cost rate, they execute an “Indirect Cost Negotiation Agreement.” Pl.'s Mot. for Summ. J., Ex. C, ECF No. 9-3. It is then presumed that the agreed-upon rate will be used to allocate indirect costs to all of the tribal organization's individual federal contracts-by multiplying the rate by the base amount attributable to the individual contract at issue. Id.; 2 C.F.R. pt. 200, app. VII, § E.1. Thus, if, for example, the rate was determined using a distribution base of total direct costs for all federal programs, the indirect CSCs for a particular program would be calculated by applying the rate to the total direct costs for that particular program. See 2 C.F.R. pt. 200, app VII, §§ B.1, C.2.a. Because total direct costs are certain to be a larger amount than salaries and wages (which are themselves a portion of total direct costs), indirect cost rates pegged to total direct costs are likely to be lower percentages than those pegged to salaries and wages. But everything should roughly even out when the rate is multiplied by the corresponding base amount: For total direct cost rates, a relatively low rate would be applied to a relatively high base amount. For salary and wage rates, a somewhat higher rate would be applied to a somewhat lower base amount.

         A hypothetical example may make this easier to understand. Take a fictional tribe with multiple federal contracts, which together represent $10 million in total direct costs, of which $8 million is spent on salaries and wages. On top of these costs, the tribe also estimates $2 million in indirect costs associated with all of its federal programs. To calculate the tribe's indirect cost rate, it would first choose the distribution base: either the total direct costs of $10 million or the salaries and wages amount of $8 million. It would then divide the $2 million indirect costs number by the chosen distribution base. So if the base was total direct costs, the resulting indirect cost rate would be 2 million divided by 10 million-.2, or 20 percent. And if the base was salaries and wages, the rate would be 2 million divided by 8 million-.25, or 25 percent.

         Once one of these rates has been calculated, it is then used to allocate the indirect costs across the fictional tribe's federal awards. Assume that the tribe's federal health program has total direct costs of $5 million, of which $4 million are salaries and wages. If the rate had been determined using total direct costs, the 20 percent number calculated above would be applied to $5 million, producing an indirect cost award for the health program of $1 million. If, on the other hand, the rate had been determined using salaries and wages, the 25 percent number from above would be applied to $4 million, producing the same indirect cost award: $1 million.

         Admittedly, this example involves round numbers and evenly distributed costs. In practice, the methodology would rarely be this clean, and the ultimate indirect cost award could vary slightly depending on whether the rate was pegged to total direct costs or salaries and wages. But, as the Court said earlier, the purpose of the methodology is to allocate indirect costs across awards in a roughly even manner-so that “each Federal award bear[s] a fair share of the indirect costs in reasonable relation to the benefits received from the costs.” 2 C.F.R. pt. 200, app VII, § B.1 (emphasis added).

         B. Factual Background

         This case arises out of a dispute over the amount of recoverable indirect CSCs related to a self-determination contract for healthcare services. Such contracts for health care services, as one might expect, fall within the purview of the Secretary of HHS and are overseen by the Indian Health Services (“IHS”), one of HHS's operating divisions. Plaintiff, the Seminole Tribe of Florida, has for years contracted with HHS and IHS to operate its own health program. For fiscal year 2018, the parties were able to agree on the Secretarial ...

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