DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State Dept. of DATE: January 26, 1989 Social
Services Docket Nos. 88-82 88-111 88-187 Decision No. 1012
DECISION
The New York State Dept. of Social Services (State) appealed
determinations by the Health Care Financing Administration (HCFA,
Agency) disallowing federal financial participation (FFP) claimed under
title XIX of the Social Security Act (Medicaid) for the period July 1,
1985 through June 30, 1986. The costs claimed represented amounts
originally paid under the State-funded medical assistance program which
the State later claimed as payments for individuals eligible for
Medicaid on the basis of disability. The State identified the amounts
claimed in Docket Nos. 88-82 and 88-111 by drawing a stratified random
sample of 150 cases from a universe consisting of 236,508 recipients of
State-funded medical assistance from July 1 through December 31, 1985
who had expenditures between $250 and $15,000. Documentation underlying
each of the 150 sample cases was then reviewed by disability review
teams. Following the procedure in 42 C.F.R. 435.541 for making
disability determinations, the teams found 39 of the 150 individuals to
be disabled. In Docket No. 88-82, the State extrapolated these results
to estimate the amount paid to individuals in the universe who were
disabled and thus eligible for Medicaid. In Docket No. 88-111, the same
results were applied to a subsequent quarter to estimate the amount paid
to disabled Medicaid eligibles. The State did not provide details
regarding the sample on which the claim in Docket No. 88-187 was based
other than to state that, like the sample in Docket No. 88-82, it came
from the time period of expenditures for which the claim was filed and
that each of the sampled cases was fully documented. The State
indicated that it did not plan to make disability determinations for the
cases outside the sample in any of the three appeals before us.
HCFA disallowed the costs on the ground that HCFA's "State Medicaid
Manual" prohibited claims based on projections from a statistical
sample. HCFA cited both Transmittal No. 30 to the State Medicaid
Manual, dated December 1984, and Transmittal No. 52, dated September
1987. Transmittal No. 30 provides that "[c]laims developed through the
use of sampling, projections, or other estimating techniques are
considered estimates and are not allowable." The Agency stated that
Transmittal No. 52 constituted a "more explicit statement of this same
policy. . . ." Agency's brief dated July 29, 1988, p. 9. A secondary
basis for the disallowance was that the claims were not properly
documented.
For the reasons discussed below, we conclude that the State was not
authorized to use statistical sampling as a basis for claiming Medicaid
funds in these cases. We reach this conclusion not because we find that
sampling per se was an unacceptable means of establishing a claim;
rather, we find that sampling was impermissible here because it was used
in lieu of making the disability determinations which the regulations,
reasonably interpreted, require in each case for which payment is made.
Accordingly, we uphold the disallowances of that part of the claims
which was based on extrapolation from a statistical sample of cases
eligible for Medicaid on the basis of disability. Since disability
determinations were made for the cases in the sample, FFP claimed for
those cases is allowable provided the individuals in question were
properly determined to be disabled; we thus remand this portion of the
appeals to the Agency for review of these cases.
For purposes of this decision, the parties agreed to assume that (1) the
State made correct disability determinations in the sampled cases using
the proper procedures, (2) all expenditures in the universe sampled were
made for services which would constitute covered services under Medicaid
and (3) the statistical sampling techniques used by the State in Docket
Nos. 88-82 and 88-187 were valid. The effect of these assumptions
(which the record suggests are substantial and contested assumptions) is
to present us with a hypothetical "best case" for the State: that
the
State has made a statistically valid estimate of the amount paid to
individuals who could have been properly classified as eligible for
Medicaid on the basis of disability. Thus, the issue in these appeals
is not whether an accurate claim could be made based on a statistical
projection. Instead, we are dealing with a threshold issue of whether
the State may claim Medicaid funds for several hundred thousand cases
for which the documentation that might establish the individual's
eligibility for Medicaid on the basis of disability has never been
examined. We conclude that the Agency reasonably interpreted the
Medicaid regulations as requiring a disability determination in each
case for which FFP is claimed.
HCFA took the position in this proceeding that "individual eligibility
determinations are a core requirement of the Medicaid program. . . ."
HCFA brief dated October 18, 1988, p. 6. As we discuss later, it is not
clear that this generalization compels rejecting the use of statistical
sampling methodology in all Medicaid claims. We nevertheless agree
that, with respect to individuals whose eligibility is based on
disability, the regulations can reasonably be read to require that
claims for FFP in Medicaid payments be supported by individual
disability determinations. Section 435.913(b) of 42 C.F.R. provides
that the state Medicaid agency "must dispose of each application by a
finding of eligibility or ineligibility. . . ." In addition, 42 C.F.R.
431.17(b) requires that the state agency maintain "[i]ndividual records
on each applicant and recipient that contain information on . . . (1)
Date of application; (ii) Date of and basis for disposition; (iii) Facts
essential to determination of initial and continuing eligibility. . . ."
With respect to individuals whose application for Medicaid is based on
disability, 42 C.F.R. 435.541 (1979) requires that:
(a) . . . [T]he [Medicaid] agency must obtain a medical report
and a social history for individuals applying for Medicaid on the
basis of disability. The medical report must include a diagnosis
based on medical evidence. The social history must contain enough
information to enable the agency to determine disability.
(b) A physician and a social worker, qualified by professional
training and experience, must review the medical report and social
history and determine on behalf of the agency whether the individual
meets the definition of disability.
On their face, these regulations require that the state agency have a
positive disability determination in the case file for every individual
covered by a claim for payments for individuals eligible for Medicaid on
the basis of disability. It necessarily follows from this reading of
the regulations that statistical sampling cannot be used to determine
Medicaid eligibility on the basis of disability since disability
determinations would be made only in the sampled cases. HCFA clearly
adopted this reading of the regulations when it stated in Transmittal
No. 30 of the State Medicaid Manual that claims developed through the
use of sampling were unallowable as estimates. The State made a number
of arguments, discussed below, all of which proceeded from the view that
the Agency's literal interpretation of the regulations in Transmittal
No. 30 was not warranted. While the State may be correct that there are
other reasonable interpretations of the regulations, states are bound by
a reasonable Agency interpretation of which they have actual notice.
See Social Service Board of North Dakota, DAB No. 166 (1981); New York
State Dept. of Social Services, DAB No. 788 (1986); and Indiana Dept. of
Public Welfare, DAB No. 970 (1988). The State did not dispute that it
had notice of Transmittal No. 30 at the time the payments in question
here were made. Thus, the question before us is whether the Agency's
interpretation of the regulations in Transmittal No. 30 is reasonable.
A threshold issue, however, is whether Transmittal No. 30 was a
substantive rule, which was required to be published pursuant to notice
and comment rulemaking under section 553 of the Administrative Procedure
Act (APA), or an interpretative rule, which is excepted from this
requirement. The State asserted that under W.C. v. Bowen, 807 F.2d 1502
(9th Cir. 1987), an Agency statement is considered a substantive rule
unless it neither increases nor decreases congressionally vested rights
and argued that Transmittal No. 52 (and thus Transmittal No. 30)
"affects such rights" and was invalid since it was not properly
published. State's supplemental reply brief, p. 13. We disagree.
Transmittal No. 30's prohibition on statistical sampling, as applied to
the cases before us, was implicit in 42 C.F.R. 435.541. Transmittal No.
30 clarified but did not change the State's obligations with respect to
documenting Medicaid claims. Accordingly, publication of Transmittal
No. 30 in accordance with section 553 of the APA was not required. (To
the extent that the Agency sought to bar statistical sampling as a means
of determining payments made to individuals eligible for Medicaid on a
basis other than disability, however, the State's argument may be valid.
This matter is more properly addressed in a separate proceeding relating
solely to such payments, if any.)
Another threshold issue is whether Executive Order No. 12291, which
states that "[r]egulatory action shall not be undertaken unless the
potential benefits . . . outweigh the potential costs. . . ," applied
here, as the State argued. The State asserted that its annual
administrative costs would increase by a minimum of $52,858,143 (to be
shared equally by the State and HCFA) if individual disability
determinations were required, and that since this outweighed any
benefits involved, the regulation was not justified. State's
supplemental reply brief, p. 5. However, since section 435.541, on
which Transmittal No. 30 was based, was promulgated in 1978, the 1981
Executive Order does not apply.
We thus reach the question whether Transmittal No. 30 was a reasonable
interpretation of 42 C.F.R. 435.541. One major argument advanced by the
State was that the requirement for individual disability determinations
was unreasonable where, as here, a state ran its own state-funded
medical assistance program in addition to the Medicaid program. The
State argued that the underlying purpose of section 435.541 was to
assure that all eligible individuals received the benefits to which they
were entitled. Here, the State noted, even absent a disability
determination, an individual who met all other Medicaid eligibility
requirements would have received medical assistance payments equal in
amount to Medicaid payments which the individual would otherwise have
received. Thus, the State asserted, the only purpose served by the
disability determination would be to determine whether the State was
entitled to FFP in those payments, a purpose which can be achieved by
extrapolating from a sample of cases in which disability determinations
are made. The State acknowledged, however, that individual disability
determinations are necessary in a state which has no separate medical
assistance program. State's reply brief dated August 25, 1988, p. 19.
With no source of funding other than Medicaid, a state would not
generally make a payment to an individual without first determining
whether that individual was eligible for Medicaid. If disability was
the only likely basis for Medicaid eligibility, a disability
determination would have to be made.
The State's argument effectively admits that the Agency's interpretation
of section 435.541 is the only reasonable one as applied to states which
have no separate medical assistance program. Thus, the State is in
effect arguing for an exception to the regulation based on its
particular circumstances. Section 16.14 of 45 C.F.R. provides that the
Board is bound by applicable law and regulation, however, and we have no
authority to grant exceptions to valid regulations on a case-by-case
basis. Moreover, the courts have embraced the principle that--
Administrative agencies and officers . . . cannot be required to
refine their rules to assure tailor-made equity for each of the
complexities that may arise. If they issue and interpret
regulations which are rational and supportable in their general
application, they cannot necessarily be charged with
unreasonableness because in particular the regulations and
general interpretations may grind with a rough edge.
Gulf Oil Corp. v. Hickel, 435 F.2d 440, 447 (D.C. Cir. 1970). See also
Kenny v. Hampton, 475 F.2d 1323 (D.C. Cir. 1973). This principle is
applicable here, where the Agency's interpretation is clearly reasonable
in the simple situation where a state does not supplement the Medicaid
program with its own medical assistance program. Another argument
advanced by the State was that the requirement for a disability
determination in section 435.541 was a program eligibility requirement
and not a recordkeeping requirement. The State asserted that failure to
comply with this section was not a basis for disallowing a claim as long
as the claim covered payments to individuals who were in fact Medicaid
eligible. According to the State, a disallowance based on section
435.541 was properly taken only pursuant to the quality control review
process, which examined the actual eligibility of recipients in a sample
and provided for a disallowance (projected to the universe of
recipients) if a national target error rate was exceeded. The State
also observed that "mere maintenance of records does not assure that the
records reflect accurate information about individual recipients," and
characterized the Agency's interpretation of the regulation as
"burdensome" and "overly technical." State's reply brief,
p. 26;
State's supplemental reply brief, p. 16, n. 10.
We agree with the State that section 435.541 as interpreted by the
Agency is a recordkeeping, or documentation, requirement and that errors
can be made in determining whether an individual is disabled even if the
prescribed procedure is followed. We are not persuaded, however, that
this provision lacks any program purpose. Even if some disability
determinations are erroneous, the determinations still provide, for most
states, a necessary basis for making Medicaid payments. Moreover, it
appears that states would be unable to comply with existing quality
control requirements if they lacked individual disability determinations
since a claim based on extrapolation from a sample does not identify the
particular individuals covered by the claim. Furthermore, the State
contended that its disability determinations in the 150 sample cases in
Docket Nos. 88-82 and 88-111 were based on records which it had
maintained in accordance with section 435.541. This indicates that the
State saw a program purpose in maintaining the underlying documentation
required by this provision.
The State also contended that the requirement for individual disability
determinations was unreasonable because individuals who were not
initially eligible for Medicaid but were receiving State medical
assistance had no reason to timely notify the State of a change in their
circumstances which might result in their eligibility for Medicaid.
Thus, according to the State, often the only way for the State to
receive Medicaid funding for eligible individuals is to identify those
individuals on a retroactive basis. Since states have only two years
from the end of the quarter in which the expenditure was incurred to
file a claim for FFP (under section 1132 of the Act), making retroactive
individual disability determinations in the large number of cases
involved here was not in the State's view feasible. This is not a basis
for finding the requirement for individual disability determinations
unreasonable, however. The State's real quarrel is with the two-year
filing deadline, not with this requirement. Having requested and been
denied a waiver of this deadline by the Agency (see State's reply brief
dated August 25, 1988, at p. 11), the State now feigns compliance with
the deadline by ignoring section 435.541. The Board has recognized in
prior decisions the hardship which may be caused by the two-year
deadline. However, it is not a justification for departing from the
applicable requirements for documenting a claim. See New York State
Dept. of Social Services, DAB No. 537 (1984), at p. 11.
The State also noted that both the courts and the Board had accepted
statistical sampling as a technique for auditing states' Medicaid
claims, and argued that it was unfair to preclude the states from
establishing their claims in a comparable manner. The State pointed
out, moreover, that in an audit of claims related to recipients
reclassified by the State as Medicaid-eligible, HCFA itself used a
statistical sample to review the claims. HCFA Final Audit Report No.
88-NYS-05, State's Exhibit 12. However, the purpose of an audit is to
search for errors in claims ostensibly submitted in accordance with
requirements of law and regulation. Thus, in the HCFA audit just
mentioned, HCFA was auditing claims which were supported by individual
disability determinations made by the State retroactively; the question
there was whether the disability determinations were correct. The
decisions cited by the State involve audits of Medicaid overpayments
where there was no question about the eligibility of individual
recipients. See State of Georgia v. Califano, 446 F. Supp. 404 (N.D.
Georgia 1977); Illinois Physicians Union v. Miller, 675 F.2d 151 (7th
Cir. 1982); and Tennessee Dept. of Health and Environment, DAB No. 898
(1987). Thus, the use of sampling as an audit technique does not excuse
the State from developing the evidence required to show that its claims
covered payments to Medicaid eligibles. The State noted in addition that
the Board ruled in Ohio Dept. of Human Services, DAB No. 900 (1987),
that statistical sampling could be used by a state to determine the
amount of costs allocable to the title IV-E program, and argued that
this was precedent for the use of sampling to establish a claim. The
Ohio decision is distinguishable from this case, however, because it did
not involve, as does this case, a situation where sampling was used as a
substitute for individual eligibility determinations. Statistical
sampling was inappropriate in this case as a means of establishing the
State's Medicaid claims because it was used in lieu of making individual
disability determinations. Whether Transmittal No. 30 validly prohibits
the use of sampling to establish a claim under other circumstances is
simply not a question which we need address here.
The State further noted that in State of Florida v. Mathews, 422 F.
Supp. 1231 (D.D.C. 1976), the court found invalid the Agency's
prohibition on the use of statistical sampling to determine eligibility
for services under title IV-A on the ground that the Agency failed to
comply with the rulemaking requirements of the Administrative Procedure
Act. The State asserted that Congress was aware of the Department's
policy of allowing statistical claiming in title IV-A, and that
Congress, by failing to comment on the matter when it transferred the
medical assistance program from title IV-A to title XIX, evidenced an
intent to continue that policy.
The State's reliance on Mathews is misplaced. In that case, the court
found that nothing in the Handbook of Public Assistance Administration
(the Agency handbook on title IV-A), the published regulations or any
other official source prohibited the use of sampling for determining
eligibility for title IV-A services. Here, however, the prohibition on
sampling was contained in the State Medicaid Manual, an official Agency
issuance, and flowed directly from a published regulation (section
435.541) which on its face required individual disability
determinations. Thus, the court's rationale for upholding the use of
sampling in title IV-A is not applicable here. Moreover, the State
provided no support for its sweeping conclusion that Congress approved
the use of statistical sampling in title XIX merely because the medical
assistance program was formerly a part of title IV-A. Since title XIX
substantially expanded the title IV-A medical assistance program, one
might just as well conclude that Congress did not intend title XIX to be
administered in the same way as the title IV-A program. The State also
argued that the Agency's prohibition on statistical sampling "runs
contrary to the general policies of DHHS and its other operating
components," citing regulations promulgated by the Family Support
Administration (to implement the Immigration Reform and Control Act)
which allow the states to use statistically valid sampling to determine
costs incurred by state and local governments in providing public
assistance, public health assistance and educational services to
legalized aliens. State's supplemental reply brief, p. 13. The fact
that FSA deemed it necessary to promulgate regulations allowing sampling
indicates to us, however, that FSA did not regard sampling as a
generally allowable method of developing a claim. Moreover, the
preamble to the FSA regulations justifies the use of sampling based in
part on the "difficulty of tracking expenditures to a specific
individual and the possible deterrent effect such tracking might have on
those seeking services." 53 Fed. Reg. 7832, 7845 (March 10, 1988).
This problem was unique to the program in question there and does not
justify the use of statistical sampling in the cases before us.
The State also asserted that if the Agency had believed that the State
was not complying with section 435.541, it would have requested that the
State amend its State plan pursuant to 45 C.F.R. Part 201, presumably to
provide for individual disability determinations. We note that if the
Agency believed that the State in administering its plan failed to
comply substantially with a federal requirement, it could have gone a
step further and withheld future payments to the State. 45 C.F.R.
201.6. However, the State provided no basis for concluding that,
because the Agency failed to take these actions, it was precluded from
disallowing the claims in question here. As the Board has previously
stated, where a compliance action is not warranted, there may
nevertheless be grounds for a disallowance. See California Dept. of
Health Services, DAB No. 734 (1986), p. 9. Thus, the Agency's failure
to take any action pursuant to Part 201 has no bearing on the question
whether the disallowance here was proper.
The State asserted further that the use of a sample to document a claim
was allowable under New York State Dept. of Social Services, DAB No. 854
(1987). We disagree. In DAB No. 854, which also involved State-funded
payments which the State later determined were made to individuals
eligible for Medicaid on the basis of disability, part of the State's
claim was based on a projection from a sample of cases in which
individual disability determinations were made. The disability
determinations for the sampled cases were not submitted until the
two-year filing deadline applicable to the claim to which they related
had passed. Moreover, the medical reports and social histories on which
the disability determinations were required to be based were not
assembled until the two-year deadline had passed. The Board found that
since it was not clear at the time the claim was filed that the
supporting documentation even existed, the claim was properly
disallowed. The State distinguished DAB No. 854 from the instant
appeals on the ground that here the disability determinations for the
sample cases were made before the filing deadline passed, implying that,
absent this distinction, the Board would have allowed the claim in DAB
No. 854. The fact remains, however, that the Board did not reach the
issue of whether individual disability determinations were required in
that decision. This issue would have been raised, however, in the
absence of the distinction noted by the State. Therefore, nothing in
DAB No. 854 supports the State's position in the appeals now before us.
The State also argued that HCFA's position here was inconsistent with
its treatment of another state, pointing out, as it had in DAB No. 854,
that HCFA had paid claims by the State of California which were based on
a sample of cases and a projection of the results of the sample to a
universe of expenditures. That action is not inconsistent with the
disallowances before us here, however, since the Board concluded in DGAB
No. 854 that California was paid for expenditures which were supported
by disability determinations. Here, in contrast, the sampling was
undertaken to obviate the need to make disability
determinations. Accordingly, we conclude that the Agency reasonably
interpreted the Medicaid regulations to require individual disability
determinations and thus to prohibit statistical sampling to establish
Medicaid eligibility on the basis of disability. We are not prepared to
find here, as HCFA argued, that the regulations required individual
eligibility determinations even in those cases where Medicaid
eligibility was not based on disability. Since all the individuals in
question had been determined eligible for the State's medical assistance
program, the State complied with the requirements at 42 C.F.R.
435.913(b) and 431.17(b) for an eligibility determination and for
supporting documentation even if the State did not identify these
individuals as Medicaid-eligible. Moreover, while eligibility based on
disability clearly cannot be established absent a disability
determination, HCFA did not show that the State lacked sufficient
documentation to establish eligibility in other types of cases. Indeed,
the State was unable to specify how many cases, if any, involved other
bases for Medicaid eligibility and what bases were in fact involved.
Accordingly, we determine that separate proceedings are appropriate with
respect to other types of cases, if any. Conclusion
For the reasons stated above, we uphold the disallowance in each of the
three appeals to the extent that it represents disability-based claims
calculated by extrapolation from a statistical sample since the State
did not make individual disability determinations for the cases
involved. We remand to the Agency that part of the disallowance in each
appeal which pertains to the cases in the sample to determine whether
the disability determination in each case was properly made so that FFP
is allowable. The State may appeal the Agency's determination in these
cases pursuant to 45 C.F.R. Part 16. The State may also initiate a new
appeal with respect to any cases in which there was some other basis
for Medicaid eligibility within 30 days of its receipt of this decision.
________________________________
Donald F. Garrett
________________________________
Alexander G. Teitz
________________________________ Norval
D. (John) Settle Presiding Board