DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: California Department DATE: February 15, 1989 of
Health Services Docket No. 88-175 Audit Report No.
A-09-87-00059 Decision No. 1015
DECISION
The California Department of Health Services (State) appealed a
disallowance by the Health Care Financing Administration (HCFA) of
$7,751,886 in federal financial participation (FFP) claimed for Medicaid
services under Title XIX of the Social Security Act (Act). The
disallowance was for the federal share of amounts, paid to community
hospitals and long-term care facilities during the period October 1,
1973 through September 30, 1985, which were identified in State records
as overpayments.
The State identified two issues in its appeal to the Board. First, the
State argued that HCFA is obligated to wait until the State recovers
overpayments from providers before HCFA demands return of the federal
share. The State conceded that the Board has previously ruled against
California on this issue and chose not to further "reargue" its
position. State's Brief, p. 2. We address this issue briefly below,
affirming our previous decisions.
The second issue, which involves $761,076 of the disallowance, concerns
amounts initially identified by the State as being owed by providers
which were later "reduced" by the State to account for stipulated
settlements between the State and the providers. The auditors, and
HCFA, had requested information concerning the basis for the
settlements. The State did not supply this information, arguing that
some of the information which the auditors sought was protected by the
attorney-client privilege. The State also argued that a past Board
decision implied that HCFA must accept the State's settlement amount as
determining the correct amount of any overpayment unless HCFA has
evidence to show that settlement was really a means of writing off an
amount due from an insolvent provider.
As explained more fully below, we conclude that the mere fact that the
State settled for a lesser amount does not mean that HCFA cannot rely on
the State's initial overpayment determination. Since the State agreed
here, however, to provide to HCFA any admittedly non-privileged
information which might explain the basis for the settlements (and HCFA
agreed to review this information), we do not need to decide here
questions relating to the particular quantum of evidence which the State
must produce to establish the basis for the settlement or to HCFA's
right to examine materials which may be privileged. We thus remand this
part of the disallowance to HCFA to make a further determination.
As is its usual practice, HCFA should also permit the State an
opportunity to show that the other overpayments at issue here have been
recovered (and the federal share returned) or properly adjusted downward
as a result of further State processes.
Background
The California Department of Health Services is the single State agency
responsible for administering California's Medicaid program under Title
XIX of the Act. The Medicaid program, designed to assist low income
persons with their health care costs, is financed jointly by the federal
and state governments. Congress recognized the difficulty in a state's
financing the full costs of the program, even if subsequently reimbursed
by the federal government, and provided for a funding mechanism by which
the Department of Health and Human Services (HHS) advances funds to a
state, on a quarterly basis, equal to the federal share of the estimated
cost of the program. A state will submit to HHS a "quarterly statement
of expenditures" to account for program expenditures for that quarter,
and to provide the basis for HHS to adjust future payments to reflect
any overpayment or underpayment which was made to the state for that or
any prior quarter. See 45 C.F.R. 201.5(a)(3) (1973 - 1985).
Section 1903(d)(2) of the Act states:
The Secretary [of HHS] shall then pay to the State . . . the
amounts so estimated, reduced or increased to the extent of any
overpayment or underpayment which the Secretary determines was made
under this section to such state for any prior quarter and with
respect to which adjustment has not already been made under this
subsection. . . .
The states, in turn, have their own procedures for determining whether
an overpayment of Medicaid funding has been made to a health provider in
the state. These procedures generally include audits of institutional
providers to determine whether they have properly reported costs used to
set per diem reimbursement rates, whether patient days of service have
been correctly claimed, and whether the reimbursement otherwise meets
the state plan and federal requirements. States also provide for
administrative "provider appeals" when a state audit determines that
a
provider has been overpaid.
The federal auditors in this case examined State audits which had
identified overpayments made to community hospitals and long-term care
facilities during the period October 1, 1973 through September 30, 1985.
These overpayments had been recorded on State records as "accounts
receivable" (although some of them were later classified as
"uncollectible.") The auditors found that these overpayments were
not
allowable for FFP under federal regulations and the State plan because
they were in excess of the applicable upper limits for reimbursement.
(See the regulatory citations in State's Ex. 3.) The federal auditors
examined the State audit reports and workpapers, determining that the
audits were performed in accordance with generally accepted government
accounting standards and were adequately supported. State's Ex. 1, pp.
3-4.
HCFA's ability to recover federal share of overpayments prior to State
recovery from providers
In a series of decisions, the Board has addressed whether HCFA may
demand payment from a state for the federal share of Medicaid
overpayments to providers before the state itself has been able to
recover the funds. The states have based their argument that HCFA could
not adjust the federal share of overpayments prior to a state's recovery
on section 1903(d)(3) of the Act. That section provides: The pro rata
share to which the United States is equitably entitled . . . of the
net amount recovered during any quarter by the State . . . with
respect to medical assistance furnished under the State plan shall
be considered an overpayment to be adjusted under this subsection.
. . .
The Board has held that, under section 1903(d)(2) of the Act, HCFA may
require repayment of the federal share before a state has recovered
overpayment amounts, when those amounts have been firmly established as
excess or improper payments. The Board's analysis rested on the
wording, intent, and longstanding administrative interpretation of the
statutory provisions and, specifically, on the conclusion that excess or
improper payments by a state are not "medical assistance furnished under
the state plan" within the meaning of section 1903(d)(3). See, e.g.,
California Dept. of Health Services, DAB No. 977 (1988); California
Dept. of Health Services, DAB No. 334 (1982). The Board has been upheld
by three U.S. Courts of Appeals on this issue: Massachusetts v.
Secretary, 749 F.2d 89 (1st Cir. 1984), cert. denied, 472 U.S. 1017
(1985); Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985); and Missouri
Department of Social Services v. Bowen, 804 F.2d 1035 (8th Cir. 1986).
In this appeal, California restated its position that "for provider
overpayments occurring prior to October 1, 1985," the federal statute
requires the return of the federal share of the overpayments "only as
the state recovers such overpayments. . . ." State's brief, p. 2. The
State, however, acknowledged the Board's rejection of this position in
prior decisions and determined to "therefore refrain from rearguing
matters on which the Board has consistently applied the same rule." Id.
Since California declined to challenge the Board's previous holdings on
this question, or to argue that the instant appeal differs in any
significant respect from those considered in the earlier decisions, we
reach the same conclusion here. We incorporate by reference here the
analysis stated in previous Board decisions and also rely on the Courts
of Appeals decisions cited above.
The State's reduction of the disallowance based on settlement agreements
The State sought to reduce the disallowance amount by $761,076 FFP to
account for stipulated settlements between the State and providers.
State's Ex. 1 (audit report), p. 5. The record does not indicate the
particular disputes that gave rise to the settlement agreements. The
audit report described a stipulated settlement as "an agreement between
the State and the provider but the basis for the settlement is not
disclosed." State's Ex. 1, p. 5. The State would not disclose any
information to the auditors to explain the basis for the settlements,
because the documentation sought was "a review of the confidential legal
file maintained by the attorney who represented the [State] in the
overpayment appeal [by the providers in question]." The State in its
brief to the Board argued that certain of the information concerning the
settlements was confidential and protected by the attorney-client
privilege. State's brief, pp. 2-5.
As HCFA noted, however, the State did not dispute that some information
which the State admits is not confidential could be disclosed. The
State offered that it now "is willing to provide such information as it
can without waiving attorney-client privilege." State's brief, p. 4.
The reason for HCFA's requesting information regarding the basis of the
settlement was apparently to determine whether the reason for the
settlement was related to the "merits" of what the proper amount of
Medicaid reimbursement should be for the provider, or whether the reason
for the settlement related instead to practical concerns by the State in
choosing not to litigate the dispute with the provider. HCFA in its
brief emphasized the State's "indisputable burden of justifying the
settlement actions" (HCFA's brief, p. 6), i.e., that the State has the
obligation to show that the basis for the settlement concerned the
actual amount owed to the State. See also California Dept. of Health
Services, DAB No. 889 (1987), p. 5 (stating this HCFA position in the
context of another appeal).
California said that in DAB No. 977 the Board had "suggested that HCFA
did not have the right to look behind settlements unless it has evidence
to show that the 'settlement' is really a means of writing off an amount
due from an insolvent provider." State's brief, pp. 4-5. California
asked that the Board "squarely address" the issue in this case and
"hold
that HCFA does not have the authority to require the State to make its
legal files on settlements public under penalty of disallowance of the
pre-settlement disputed amount." State's brief, p. 5. The State also
argued that it might have legitimate legal or policy strategy
considerations which cause it to settle a dispute with a provider and
that such decisions are appropriate and beneficial to the federal
government as well as to the State.
Contrary to what California argued, DAB No. 977 cannot be read as
placing a burden on HCFA to affirmatively find (prior to disallowing the
federal share of the overpayment amount identified in the State audit)
that a settlement is merely a means of writing off a debt from an
insolvent provider. In DAB No. 977, the Board rejected California's
assertion that any amount the State had reduced by agreement with the
provider should not be considered an overpayment. The Board pointed out
that the federal auditors had specifically found there that amounts
which the State claimed had been settled had simply been written off
because the providers were bankrupt or insolvent. More generally,
however, the Board reiterated its holdings from prior cases that HCFA
could reasonably rely on State audit findings in the absence of any
showing that those findings were unreliable. DAB No. 977, pp. 7-8.
The mere fact that a dispute between a state and a provider has settled
is not sufficient to call into question the state's initial
determination, based on properly performed audits, as to the amount of
reimbursement the provider has received in excess of what is permitted
under the state plan and federal requirements. The State acknowledged
in effect that it may have reasons for settling a dispute with a
provider other than a reevaluation of the merits of the audit findings.
See also New Jersey Dept. of Human Services, DAB No. 683 (1985), pp.
11-15. While there might be some benefit to the federal government from
the State exercising its judgment not to pursue its audit findings in
every instance, this does not justify a rule requiring HCFA to always
accept the settlement unless it makes an affirmative finding that the
settlement is in fact simply a way of writing off a bad debt.
Since the State offered to supply HCFA with information which it admits
is not privileged, we do not at this stage reach questions concerning
the State's justification of the basis for the particular settlements at
issue here. Such questions will become ripe for review only if HCFA
finds the State's explanation of the basis for the settlement
insufficient after reviewing the non-privileged information.
Without ourselves considering the nature and type of evidence that
exists concerning the basis for the settlement agreements, we cannot
address questions concerning the particular quantum of evidence the
State must produce in order to render unreasonable HCFA's reliance on
the original audit findings. The State should have the opportunity to
present to HCFA the non-privileged material, before HCFA determines
whether it accepts a reduction in the disallowance.
We also do not reach the issue here of whether HCFA may require the
State to produce privileged material. We note, however, that, even if
the Board found that the State properly withheld such material, at most
this would mean that the Board might not draw a negative inference from
the State's failure to produce the material. Assertion of the privilege
could not by itself provide a basis for reversing the disallowance.
Conclusion
Based on the foregoing, we uphold HCFA's disallowance of $6,990,810
($7,751,886 - $761,076), subject to reduction to the extent the State
shows the overpayments have been collected (and the federal share
adjusted) or the State's determinations reversed on appeal after the
time of the audit report. (See note 1, above.) If the State disagrees
with HCFA's recalculation of the disallowance amount, it may return to
the Board on this calculation issue, within 30 days of receiving HCFA's
recalculation.
We also remand the appeal for the disallowance of $761,076 FFP relating
to the State's attempt to reduce the disallowance to reflect settlement
agreements. Within 30 days of receipt of this decision (or such longer
time as HCFA permits), the State should provide to HCFA all of the
admittedly non-privileged information which may explain the basis for
the settlement agreements in question, or other evidence supporting
reduction of the disallowance for these overpayments to the federal
share of the settlement amount. (See note 5, above.) HCFA should
examine this material within 30 days after receiving it (or such other
reasonable time HCFA may need), by which time it should issue a new
written determination if it does not accept the reduction in the
disallowance by $761,076. If dissatisfied with that decision, the State
may return to the Board within 30 days of receiving HCFA's
determination.
________________________________ Donald
F. Garrett
________________________________
Alexander G. Teitz
________________________________ Judith
A. Ballard Presiding Board