Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: FY 1981 Medicaid Quality Control Disallowances
DATE: May 26, 1992
Docket Nos. 90-86 90-87 90-88 90-89
Decision No. 1332
DECISION
Alaska, Rhode Island, Washington, and West Virginia (States)
appealed
Medicaid Quality Control (MQC) disallowances of federal
financial
participation (FFP) by the Health Care Financing Administration
(HCFA).
HCFA determined that these States had exceeded target "error rates"
in
the operation of their Medicaid programs (Title XIX of the
Social
Security Act) during the fiscal year ending September 30, 1981
(FY
1981). Alaska appealed a disallowance of $794,636 FFP, Rhode
Island
$302,919, Washington $888,932, and West Virginia $770,380. A
total of
$2,756,867 FFP is at issue in these appeals.
HCFA relied on estimates of the percentage of each State's
Medicaid
payments that resulted from errors in determining recipient
eligibility.
The error rate estimates were based on statistical samples
required by
the MQC system. The MQC disallowance regulations in effect
for FY 1981
provided for the disallowance of erroneous payment amounts above
a
target rate. These regulations were based on the Michel
Amendment
provisions for target rates set using FY 1978 MQC error rate
estimates
and for fiscal "penalties" for states which exceeded target rates
for FY
1981 and subsequent years.
HCFA asserted that since the FY 1981 MQC error rate estimates were
above
the target rates for these States, a disallowance was mandated by
the
Michel Amendment. The States asserted that the MQC estimates relied
on
were too imprecise to show that the States had exceeded the
target
rates..On the basis of the analysis below, we reverse
these
disallowances. The Michel Amendment and HCFA regulations required
a
statistical sampling system that provided reliable evidence that a
state
had not met target error rates during FY 1981 and that ensured
equal
treatment of all states. The system implemented by HCFA did not
provide
reliable evidence that any of these States had in fact exceeded
their
target error rates and did not ensure that these States had
received
equal treatment.
The point estimates HCFA relied upon in concluding that the States
had
exceeded their target rates were so imprecise that HCFA's reliance
upon
them for making the fine distinctions required by the Michel
Amendment
and MQC regulations was both arbitrary and unreasonable. In
each case
the sampling error for the excess over the target rate was so great
that
the excess figure could not be viewed as being reliable. Indeed in
two
instances where HCFA had determined the excess to be merely a
fraction
of a point, HCFA could conclude with 95 percent confidence only that
the
true value of the excess resided within a range of 10 or 20 points,
so
there remained a substantial probability that each State had in
fact
reduced its error rate below the target level and the reduction may
have
been as large as 5 or 10 points. Moreover, there were numerous
other
factors, including significant problems with the computation of the
base
year rate, that seriously undercut the reliability of the estimates.
HCFA's argument that the States themselves were responsible for
the
unreliability of the estimates is both unpersuasive and
unsubstantiated.
In any event, regardless of who was responsible for the lack
of
precision, HCFA clearly could have taken steps retrospectively
to
improve the reliability of the estimates or to compensate for the
lack
of reliability, but chose not to do so. The record strongly
suggests
that any such steps would have eliminated these disallowances.
There is
simply no support in the record here for HCFA to continue to assert
that
it was compelled to proceed with these disallowances in light of
the
demonstrated and significant imprecision in the supporting estimates.
Our analysis primarily addresses what the Michel Amendment required
and
the adequacy of the supporting statistical data relied on by HCFA
in
determining that these States exceeded their target rates for FY
1981.
These are the only issues we need to reach to resolve these
appeals.
There were additional arguments, .principally presented by the
States,
that we do not address in light of our decision to reverse
these
disallowances for the reasons stated below. 1/
Background
These four appeals are only the latest stage in a process that began
seven
years ago involving 31 Quality Control disallowances in the Aid to
Families
with Dependent Children (AFDC) and Medicaid programs. Board
proceedings
in these cases have involved lengthy discovery, an
evidentiary hearing, the
submission of hundreds of pages of briefing,
hundreds of pages of exhibits
(including many reports on the public
assistance program QC systems and
presentations by expert
statisticians), as well as numerous stays or other
delays to permit
states to seek Congressional intervention or to permit
negotiations
between the parties.
In 1985 the Family Support Administration and HCFA issued 31
Quality
Control (QC) disallowances to 26 states. The Board consolidated
these
disallowances, 22 in the AFDC program and nine in the Medicaid
program,
in order to resolve common issues.
The AFDC disallowances were ultimately permanently waived by statute.
The
Board addressed the nine remaining Medicaid disallowances of
$12,280,908 in
DAB No. 948. 2/ The Board held that HCFA had incorrectly
valued the
excess resource errors identified in the QC samples on which
the
disallowances were based; we remanded the appeals to HCFA for
revaluation and
any consequent recalculation of state error rates and
disallowances..The
excess resource recalculations resulting from DAB No.
948 eliminated the
disallowances completely for five of the nine states.
The remaining four
states, the appellants in this proceeding, had their
disallowances reduced,
but not totally eliminated.
The Michel Amendment
The QC requirements imposed on HCFA and the States by the Michel
Amendment
are at the heart of this controversy. The Michel Amendment
established
a series of target error rates for states to reach in their
AFDC and Medicaid
programs, with ultimately a national standard of four
percent to be met by
September 30, 1982. The Michel Amendment also
provided for "penalties"
should a state fail to make required error rate
reductions for a particular
fiscal year. The regulations at 42 C.F.R.
.431.802 (1981) were based on
the Michel Amendment. 45 Fed. Reg. 6,326
(January 25, 1980).
Section 201 (the Michel Amendment) of H.R. 4389 referenced the
conference
report for H.R. 4289 (the FY 1979 Supplemental Appropriations
Act, Public Law
No. 96-38) and in turn was referenced in Public Law No.
96-123 (the
Continuing Resolution for FY 1980). 3/
The conference report on the 1979 Supplemental Appropriations Act
stated
in pertinent part as follows:
The conferees wish to express their very serious
concern over the
unacceptably high rate of errors
still occurring in the student.
assistance, cash
assistance (AFDC) and Medicaid programs.
. . . the conferees direct the Secretary to issue
regulations
requiring that all States must reduce
their AFDC and Medicaid
erroneous excess payment
rates to 4 percent by September 30, 1982,
in equal
amounts each year beginning in fiscal year 1980. If
the
States fail to make the required reductions,
penalties shall be
applied equal to the amount the
federal share exceeds the dollar
error rate for the
years in question. . . . The conferees
also
direct that the base period to be used in
determining the yearly
reductions for each State
shall be the April-September 1978 review
period for
AFDC and the July-December 1978 sampling period for
Medicaid, and that the Department establish a system of
determining
error rates that insures equal treatment
of all States.
H.R. Conf. Rep. No. 331, 96th Cong., 1st Sess. 34 (1979).
As adopted by the House on August 2, 1979, the Department of Labor,
and
Health, Education, and Welfare and Related Agencies Act (H.R.
4389)
provided as follows:
Sec 201. . . . Provided further, That the
requirements pertaining
to AFDC and Medicaid error
rates, as specified in the conference
report on the
fiscal 1979 Supplemental Appropriations Act (P.L.
96-38), shall be carried out except where the Secretary
determines,
in certain limited cases, that states
are unable to reach the
required reduction in a
given year despite a good faith effort.
125 Cong. Rec. H7108, H7131 (August 2, 1979).
The Continuing Resolution for Fiscal Year 1980 provided in pertinent
part
for appropriations as follows:
Such amounts as may be necessary for projects or
activities
provided for in the Departments of Labor,
and Health, Education,
and Welfare and Related
Agencies Appropriation Act, 1980 (H.R.
4389), at a
rate of operations, and to the extent and in the
manner, provided for in. such Act, as adopted by the
House of
Representatives on August 2, 1979 . . .
.
Pub. L. 96-123, .101(g), 93 Stat. 925 (1979) (emphasis added).
The Medicaid Quality Control System and the Michel Amendment
Disallowance
Regulations
Prior to the establishment of the MQC system at issue here in April
1978,
similar quality control reviews had been operating in both the
AFDC and
Medicaid programs, although no program-wide disallowances based
on quality
control findings had been imposed. 4/
The MQC system implemented in April of 1978 attempted to arrive at
a
measure of Medicaid payments erroneously made on behalf of
individuals
who were ineligible for Medicaid by examining a statistical
sample of
Medicaid cases. Each state was required to have a QC
system. The state
had to select and review a statistically valid sample
group of cases to
determine whether each sampled case met Medicaid
eligibility
requirements in the review month. In subsequent months, the
state QC
staff assembled paid claims for sample cases for services
received
during the review month to determine the amount of dollars
associated
with each sample case. Generally, payments on behalf of
individuals
found to be ineligible were counted as erroneous Medicaid
payments.
HCFA then selected a subsample of each state's sample and reviewed
those
cases. Through the application of a statistical technique
called
regression analysis, the results of the federal subsample reviews
were
used to modify the states' determinations. Estimates of error
rates
were computed by comparing the total dollars paid in error to the
total
dollars paid by Medicaid for a given period.
The MQC system regulation at 42 C.F.R. .431.800(d) (1981) required
the
states to operate MQC systems in accord with the "policies,
sampling
methodology, review procedures, and reporting forms and
requirements
specified" by HCFA in its MQC manuals. The regulations
provided for
statistical samples of cases to identify eligibility errors and
for six
month review periods. (For example, the July-December 1978 base
period
used to set the Michel Amendment target rates was the first
Medicaid
review period for the 1978 MQC system.).The regulations based on
the
Michel Amendment error rate standards required the states to make
equal
incremental reductions reaching the four percent standard by
September
30, 1982. The regulations provided that the then current MQC
system at
42 C.F.R. .431.800 would be used and that disallowances would be
based
on the state payment error rate, i.e., the rate of eligibility
payment
errors detected by the MQC system for an annual or other review
period.
As provided for by the Michel Amendment, the regulations called
for
waivers of disallowances should the Secretary of Health and
Human
Services determine that a state's failure to meet a required error
rate
target was either beyond the state's control or despite its good
faith
effort. The regulations do not establish the statistical
sampling
techniques for the MQC system, but rather rely on HCFA's QC
Manuals.
The preamble to the final regulations stated that HCFA had
determined to
continue to use the point estimate as "the most accurate
estimate of a
State's true error rate [since] it is the estimate generally
used in
conventional statistical practice." The preamble also discussed
the
expectation that states would complete valid samples based on
HCFA's
directions in QC Manuals. HCFA also stated that the failure to
conduct
a sample in accordance with an approved or approvable plan may result
in
invalid or unreliable estimates. 45 Fed. Reg. 6,326, 6,331 (January
25,
1980). 5/
Under the Michel Amendment regulations, target rates for FY 1981
were
calculated by subtracting from each state's July-December 1978
base
period rate one-third of the.difference between the state's base
period
error rate and four percent. 6/ Disallowances were calculated
using the
number of percentage points by which a state exceeded its 1981
target
rate.
Analysis
The Estimates Used for the Disallowances Were Not Reliable Evidence
that
the States in Fact Exceeded the Target Rates.
HCFA's determinations that the States exceeded their target error
rates
were derived from two separate estimates using statistical
sampling
methodologies authorized by HCFA and implemented by HCFA and the
States.
The determinations required an estimate of each State's error rate
for
the FY 1978 base period and then an estimate of each State's error
rate
for the period at issue, FY 1981. Whenever a state's estimate of
the FY
1978 base period rate was less than 4.00, HCFA gave that state
the
benefit of a base period rate of 4.00. HCFA then subtracted
the
estimates of the FY 1978 rate from the estimates of FY 1981 rate
in
order to determine the "Excess Over Target (EOT)." The estimates
for
each State involved here and the resulting Excess Over Target were
as
follows:
CHART 1: The Disallowance Estimates
Target 1981 EOT rate rate
Alaska
4.00 7.86 3.86
Rhode Island
4.03
4.55 0.52
Washington
4.98 5.86
0.88 West
Virginia
6.54 8.64
2.10
For each of the State's estimates, HCFA used what is called the
"point
estimate." (The Excess Over Target was in fact a composite
"point
estimate.") A "point.estimate" is the single most likely
estimate of
the true value of what is being measured by a particular
statistical
methodology. (The "true" value of what is being measured by
statistical
sampling usually cannot be determined, and most certainly could
not be
determined here.) Although the point estimate is the most
likely
estimate of the true value that can be provided by a
particular
methodology, the reliability and precision of the point estimate
as a
reflection of the true value can vary dramatically depending on
the
methodology used. Indeed, a point estimate derived from a
particular
methodology may be so unreliable and imprecise that it is
worthless as
an estimate of the true value for the purpose being served.
The "confidence interval" surrounding the point estimate provides
an
effective means of measuring (and hence comparing) how reliable
and
precise a point estimate is as a reflection of the true value.
A
confidence interval is a statistician's calculation of the range
of
values (equidistant on either side of the point estimate) within
which
the statistician can say with a specified degree of certainty that
the
true value would occur. For example, a 95 percent confidence
interval
is that range of values that is expected to contain the true value
with
a 95 percent degree of certainty.
In the instant case, HCFA provided the 95 percent confidence intervals
for
the composite point estimate of the Excess Over Target. 7/
The
following chart provides a comparison of the Excess Over Target with
the
width of the confidence intervals for the composite estimate
represented
by the Excess. (The "width" is the difference between the
lower and
upper bounds of the interval.) The next chart compares how
each State
would have performed under a recomputed 1981 rate if HCFA had used
the
lower bound of the confidence interval for the .composite
estimate
rather than the composite point estimate.
CHART 2: The Width of the 95 Percent Confidence Intervals for
the
Composite Estimate of the Excess Over Target
Target 1981 EOT Width rate rate
Alaska
4.00 7.86
3.86 12.44 Rhode
Island
4.03 4.55
0.52 19.56 Washington
4.98 5.86
0.88 10.28
West Virginia 6.54
8.64 2.10 11.84
CHART 3: The States' Performance if HCFA Had Used the Lower Bound
of
the Confidence Interval for the Composite Estimate of the Excess
Over
Target
Target 1981 rate recomputed
Alaska
4.00 1.64 Rhode
Island 4.03
-5.23
Washington
4.98 0.72 West
Virginia 6.54
2.72
The above two charts demonstrate that the confidence intervals for
the
composite estimate of the Excess were so wide that it is impossible
to
conclude with a reasonable certainty that the States failed to
meet
their target rates at all, much less that they failed to meet the
rates
by specific percentages as required by the Michel Amendment.
For
example, HCFA determined, based on estimates of Rhode
Island's
performance for base year FY 1978 and for the audited year FY 1981,
that
Rhode Island had failed to meet the target rate of 4.03 in the
audited
year by only 0.52. The composite 95 percent confidence interval
for the
two estimates on which the excess determination of 0.52 was based
was
19.56! This means that HCFA had determined with 95 percent
certainty
that the true value was somewhere on a scale between -5.23 and
14.33.
Indeed, even the 90 percent confidence interval for the
separate
estimate of Rhode Island's FY 1981 performance was 10.65. See
States
Opening Brief -- Part II at 72. Such wide confidence intervals
for such
a small excess mean that the statistical data in question for
Rhode
Island is completely unreliable for making the fine
distinctions
required by the Michel Amendment. The confidence intervals
indicate
that there is almost as great a chance that Rhode Island met the
target
rate as that it did not. Indeed, based on these
confidence.intervals,
HCFA cannot even rule out the possibility that the
State's program was
error free! 8/
Moreover, almost identical conclusions can be reached
concerning
Washington's performance, where HCFA had determined that
Washington
exceeded its target rate by only 0.88 and had a composite 95
percent
confidence interval for the Excess Over Target of 10.28.
Even for the two remaining states that had somewhat larger Excesses,
West
Virginia with an Excess of 2.10 and Alaska with an Excess of 3.86,
the
composite confidence intervals of 11.84 for West Virginia and 12.44
for
Alaska were such that there was a substantial probability for each
State that
it met its target rate and indeed that it had a FY 1981
performance that was
well below its target rate. Although HCFA had
determined that Alaska
had exceeded its target rate by 3.86, the width
of the 95 percent confidence
interval for the composite point estimate
of the Excess was 12.44 points, and
the possibility consequently existed
at the lower bound of the confidence
interval that Alaska's performance
actually was 1.64, which was 2.36 points
below its target. Likewise,
although West Virginia exceeded its target
rate by 2.10, the width of
the 95 percent confidence interval for the
composite point estimate of
the Excess was 11.84 and the possibility still
existed at the lower
bound of the confidence interval that West Virginia's
performance was
2.72, which was 3.82 points below the target of 6.54.
Moreover, there were substantial other factors that would suggest that
the
statistical data here were completely unreliable.
o The FY 1978 base period estimates were unreliable and understated
the
true error rates. The underlying data was so replete with errors
that
the United States General Accounting Office (GAO) recommended in
several
interrelated reports that disallowances not be based on the 1978
base
period data; GAO found that there was gross understatement of errors
by
the 1978 MQC process as well as significant deficiencies in the AFDC
QC
data used by.the MQC system. 9/ States Exhibits (Exs.) 52, 53 and
54.
Moreover, HCFA's attempt to correct the base period rates was
not
adequate. HCFA provided a "strictly optional" reexamination of the
base
period data for the federal subsample cases only. There is no
reason to
conclude that this limited reexamination would have produced valid
base
period rates since AFDC cases previously found eligible and state
sample
cases other than those in the federal subsample were not
reevaluated.
HCFA provided an extremely short time frame for reopening, which
indeed
had already passed before the states knew what the FY 1981 error
rates
were. Contrary to HCFA's assertions, the States are not bound to
accept
the target rates as binding simply because there had been this
very
limited opportunity to reopen and correct the FY 1978 rates. 10/
There
is no reason to conclude that this opportunity would have
fully
corrected for either the extent to which the 1978 rates
understated
errors or the fact that the MQC systems in 1978 and 1981 were
not
comparable (as the GAO reports noted, HCFA continued to improve
and
streamline administration of the system so that the 1981 system was
far
more effective at error identification). In any event, the
opportunity
to correct is of no legal significance here since the question
presented
is whether there is overall an adequate factual predicate for
a
disallowance, an inquiry which also involves MQC statistical data
other
than the FY 1978 rate..o The FY 1981 error rates suffered
from
substantial imprecision. As with the confidence interval for
the
composite estimate of the Excess, the confidence intervals for the
FY
1981 rates show that the range of possible true values for the FY
1981
rates was so broad that it is not possible to conclude that the
point
estimate was a reliable indicator of the true error rates for
these
States. See States Opening Brief -- Part II at 80-83; States Ex.
122
(HCFA letter of June 11, 1991 listing standard errors for original
and
revised 1981 rates). Moreover, the States presented persuasive
expert
opinion and testimony on the effect of certain statistical phenomena
on
the 1981 rates which provided further evidence of the inadequacy
of
these rates as a basis for a disallowance, which HCFA was not able
to
rebut. States Exs. 55 and 86 and Transcript of 1987 Hearing.
The error
rate estimates were skewed upward for FY 1981 by outlier cases
(cases of
higher value than the norm) in the sample. See States Ex. 70.
11/ This
lends credence to the States' assertion that when estimates
are
imprecise, as these were, the presence of outlier cases in the
sample
required the use of statistical techniques to test and correct
the
imprecise rates. HCFA also failed to take into account the effect
on
these rates of penalty bias and extreme value bias in the MQC
system.
12/ Here, the imprecision in the rates exacerbates any .penalty
bias
and increases the likelihood that over time a state will be
sanctioned
when its true error rate was within the applicable
tolerance. The rates
for the States may also have been affected by a
statistical phenomenon
called extreme value bias. In essence, in this
type of system where
there is a set of values stated for the 50 states, the
values for those
states at the high or low end of the set of statistical
values will tend
to be over and under estimates, respectively, of the actual
value they
measure. Accordingly, it is of some significance here that
these States
were among the higher range of values for FY 1981 so that
statistically
these estimates are likely to be overstatements of the true
error rates.
Compared to all other states in the nation, Alaska had the
second lowest
error rate estimate in the base period and the second highest
error rate
estimate in FY 1981. (Alaska's base error rate was
determined to be 0.7
percent!) The States' unrebutted evidence
indicates that both estimates
are suspect because they are by comparison so
unstable and because they
are so extreme in relation to all other
states. Also, beyond the
imprecision inherent in the small federal
subsample size, the States
pointed to the effects of measurement error on the
accuracy of the
rates. It was undisputed that particularly at this
point in the QC
process some error findings resulted either from the lack of
an
objective definition of error (i.e., the absence of a clearcut policy
or
requirement) or from different information available to the federal
and
state reviewers.
HCFA's Argument that the States Themselves Were Responsible for
the
Unreliability of the Estimates Is Both Unpersuasive and
Unsubstantiated.
HCFA consistently argued that the States themselves were responsible
for
the high level of imprecision in the estimates. HCFA
particularly
relied on two factors in support of this argument. HCFA
asserted that
the States had discretion in determining the size of their
samples and
could have increased the precision of their estimates by
increasing the
size of their samples. HCFA also argued that the
imprecision was the
result of the poor quality of the state reviews of case
errors which in
turn resulted in low correlations between state and federal
QC findings
and thereby required greater reliance for the error rate estimate
on the
small federal subsample..We conclude that HCFA's arguments are
without
any merit for the following reasons:
o The record demonstrates that, more than any other factor, the size
of
the federal subsample determined the level of imprecision in
the
estimates. In fact, Dr. Morris Hansen of Westat, Inc., the
chief
architect of the QC program, stated: "The size of the Federal
subsample
is the principal factor in determining their [the error rate
estimates']
precision." 13/ Thus, HCFA, which was in complete control
of the
subsampling process and which had considerable discretion concerning
the
size of the subsample, has to accept primary responsibility for
the
ultimate lack of precision of the error rate estimates at issue.
o It was HCFA's correlation measure that determined whether the
error
rate estimate would rely principally on the smaller federal subsample
or
the larger state sample. Where the correlation between state
and
federal error findings was low, the state's ultimate error rate
estimate
would be based to a greater degree on the smaller federal subsample
and
the attendant precision of the resulting error rate estimate would
be
diminished. Yet the findings of low correlation that actually
occurred
here, which in fact diminished the precision of the error
rate
estimates, did not necessarily reflect any failings or carelessness
in
the State reviews, as HCFA argued. The low correlation resulted
only
because the small federal subsamples contained a very small number
of
error cases and the effect of any disagreement from among this
very
small number could easily result in a finding of low correlation.
In
fact, when all cases in the subsample, not just the error cases,
were
compared with the state samples, all four of the States here had
overall
agreement rates ranging from 95.5 percent to 98.3 percent.
States
Opening Brief -- Part II at 102.
o Even the disagreement on a very small number of error cases
which
occurred here cannot be said to reflect on the quality of either
the
state or the federal review until those disagreements have
been
resolved. In fact, some of the original disagreements were
resolved in
favor of the States in our earlier decision. 14/
The
remaining.disagreements have yet to be resolved and therefore cannot
be
said to reflect negatively on the quality of the States'
reviews.
(Among other issues, the disagreements still include an aspect of
the
excess resource issue, which as noted above, we do need not to
resolve
here.) Furthermore, the States alleged, and HCFA did not
effectively
refute, that the disagreements often involved cases where there
may not
have been clear and unequivocal answers, cases that raised issues
of
evolving federal policy. See States Opening Brief -- Part II
at
102-104. This very possibility in the AFDC context was addressed
by
Congress in the QC reform legislation for AFDC.
o The States persuasively argued that, since the imprecision of
their
estimates rested so heavily on the results of the federal
subsample
review, they lacked any substantial opportunity to make
improvements in
the precision of the estimates, and indeed, were unaware of
the wide
confidence intervals associated with the estimates until
those
statistics were obtained in the discovery proceedings in the first
phase
of this case. States Opening Brief -- Part II at 104.
The Michel Amendment Does Not Compel These Disallowances in the Absence
of
Evidence Adequate to Show That the States Exceeded Their Error Rate
Targets
for FY 1981.
HCFA consistently asserted that the Michel Amendment compelled
these
disallowances notwithstanding any deficiencies in the underlying
MQC
error rate estimates. We disagree. Rather, we conclude that
the Michel
Amendment and the MQC regulations at 42 C.F.R. .431.802 authorized
HCFA
to impose a disallowance only where there was valid and
reliable
statistical data supporting the conclusion that a state exceeded
its
error rate targets. Moreover, nothing in the language of the
various
statutory or legislative materials which comprise the Michel
Amendment
sanction provisions or in the MQC regulations supports HCFA's
assertion
here that we must reject the States' challenge to HCFA's use of
this
data as a challenge to the MQC system itself.
HCFA acknowledged that the error rate data was imprecise and that
accepted
statistical techniques might permit the development of more
precise rates for
FY 1981. Transcript of 1987 Hearing, Day 2 at 95-98.
Nevertheless, HCFA
asserted in these appeals that disallowances were
mandated since the Michel
Amendment adopted the existing MQC system and
that system had produced these
rates. This argument is not persuasive.
The actual language .used in
the conference report manifests an intent
to exact fiscal "penalties" only
for states that fail to improve their
program administration to meet the
error rate targets.
While the MQC system was a sampling system and thus necessarily
involved
an estimation process, Congress cannot reasonably be said to
have
intended that the results of the sampling be adopted regardless of
its
statistical validity. 15/ To the contrary, Congress can be presumed
to
have intended that sound techniques would be employed.
Congress
specifically cautioned that the system for determining rates must
ensure
equal treatment of the states. 16/ For us to accept HCFA's
assertion
that it is obliged to pursue these disallowances notwithstanding
the
significant imprecision in the supporting estimates would
substantially
undercut the object of the MQC disallowance process of
providing some
fiscal incentive to reduce erroneous payments. The
result HCFA espouses
would undercut the statutory scheme because
disallowances would be based
not on a state's failure to meet the target but
on the vagaries of
imprecise data.
We see no basis in the MQC system regulation and HCFA pointed to no
part
of the MQC manuals that would prevent HCFA from developing more
precise
error rate estimates for these States using accepted
statistical
techniques. In this regard, we do not read the Michel
Amendment
language as establishing a mandate to disallow Medicaid
monies
notwithstanding the adequacy of the supporting .estimates.
Congress
established the Michel Amendment targets for reductions by the
states in
the levels of erroneous expenditures as part of the overall efforts
to
improve program administration and reduce erroneous expenditures.
While
the system required by the conferees in 1979 specified use of the
FY
1978 base period data to set the target rates, the conferees
acted
before GAO or HHS had analyzed the 1978 data and learned that there
were
deficiencies in that data. By providing that funds would be
disallowed
to the extent the error rates for FY 1981 and subsequent years
exceeded
the target rates based on the FY 1978 rates, the Michel Amendment
was an
obvious incentive for the states to reduce errors, but not an end
in
itself. The Michel Amendment and the QC disallowance regulations do
not
provide for a lesser standard of proof for a MQC
system-based
disallowance than would apply to disallowance actions
generally. HCFA
was not authorized or directed to disallow Medicaid
monies without
reasonable factual support. The object of imposing
disallowances was
not to generate revenue or blindly apply the results of the
QC sampling
process notwithstanding the lack of reliability of any particular
rate.
Thus, implicit in the requirements of the Michel Amendment and the
QC
regulations is a determination with an adequate factual basis
for
concluding that the FY 1981 target error rates were exceeded.
Moreover, HCFA's characterization of this case as dealing only with
how
much misspent money states would be permitted to retain ignores
the
history and purpose behind the MQC system and disallowances based
on
that system. Accordingly, we are not persuaded by HCFA's assertion
that
despite "the less than ideal statistical precision" of the MQC
error
rate estimates these disallowances must be upheld since HCFA would
have
had the authority to disallow all erroneous payments if the
Michel
Amendment had not specifically provided for FFP up to the amount of
each
year's target rate. HCFA cited Maryland v. Mathews, 415 F.Supp.
1206
(D.D.C. 1976), for the proposition that the states were not entitled
to
FFP for erroneous payments.
We conclude, however, that HCFA misread Maryland v. Mathews.
As
relevant here, that case stands for the proposition that the
Secretary
had the authority by regulation to establish an
empirically-based
tolerance level providing for FFP in certain erroneous
payments in
recognition of the impossibility of operating completely
error-free
programs. Here, the Secretary exercised that authority in
regulations
and established such a .tolerance. Thus, the question
presented is
whether the evidence is sufficient to establish that the
tolerance was
exceeded.
In this regard, we note that the history of quality control efforts
in
Medicaid and the other public assistance programs reveals a
tension
between competing purposes of improving administration, and
thus
reducing erroneous payments, and recovering erroneous payments.
This
particular dispute arose in the context of a tolerance level whereby
FFP
was permitted in a specified level of erroneous payments. Assuming
that
the Michel Amendment is a legislative enactment, as HCFA argued it
was,
it was then the culmination of previous efforts in both AFDC
and
Medicaid (and Food Stamps) to reduce errors. By setting the
tolerance
level and the interim targets, Congress implicitly recognized
the
principle that FFP was available in some level of erroneous
payments.
While the Board has upheld HCFA's general authority to
disallow
erroneous expenditures, it does not follow from this authority
that
where there is an established tolerance level HCFA may determine
that
the tolerance was not met using significantly imprecise or
unreliable
data. Without reliable factual evidence that the States
failed to meet
the error targets, no disallowance was warranted.
HCFA Could Have Taken Steps to Improve the Reliability of the Estimates
or
to Compensate for the Lack of Reliability But Chose Not to Do So.
Perhaps the most troubling aspect of these appeals was that HCFA did
not
set any minimum standards of precision despite the problems with the
FY
1978 base period and FY 1981 estimates. It appears that there was
no
point at which HCFA would have required some form of re-sampling or
some
alternative methodology or auditing technique to compensate for
the
extreme imprecision of the MQC estimates. Obviously those states
that
had less precise estimates, as the ones here, were placed at
a
considerable disadvantage when compared to states with more
precise
estimates. The states with less precise estimates were just as
much at
jeopardy for a QC disallowance even though their error rate
estimates
would be much less likely to be a reflection of their true
performance
in administering the Medicaid program.
One of the mandates of the Michel Amendment is that DHHS "establish
a
system for determining error rates that insures equal treatment for
all
States." The four States.here were all among the top ten states
having
imprecise point estimates. The lack of a required minimum level
of
precision together with the wide disparities in the precision of
the
point estimates for all the states appears to be inconsistent with
the
mandate of equal treatment in the Michel Amendment. The goal was
to
induce the States to improve their performance, not to subject them
to
haphazard disallowances based on imprecise estimates that are
not
adequate evidence of their actual performance.
Throughout the lengthy proceedings that have surrounded
these
disallowances since originally issued, the States have identified
a
variety of ways by which HCFA could have improved the precision of
the
estimates or could have compensated for the lack of precision.
The
suggested techniques, some of which are widely used
throughout
government and even within this Department, include:
stratified
sampling, reliance on the lower bound of the confidence interval
rather
than the point estimate, anti-penalty bias modifications, elimination
of
"outlier" cases, using a "process control band" with the point
estimate,
"empirical Bayes estimates," and use of the States' samples
modified by
federal sub-sample findings without the use of the regression
formula.
While we recognize that some of these techniques may be more
compatible
with the overall QC system HCFA has adopted, we do not need here
to
assess the merits of any particular technique. The record
strongly
suggests that the application of at least some of these techniques
would
have eliminated the disallowances. When HCFA was specifically
asked
during the hearing held for the earlier appeals whether it was
legally
precluded from improving the precision or compensating for the lack
of
precision, HCFA did not so argue. Transcript of 1987 Hearing, Day 2
at
95-96. We find that the availability of these techniques and the
lack
of a legal barrier to their application here is a further
indication
that the use of highly imprecise estimates is arbitrary
and
unreasonable.
Conclusion
Based on the foregoing analysis, we reverse the FY 1981 MQC
disallowances
for Alaska, Rhode Island, Washington, and West Virginia
based on our
conclusion that the statistical MQC data upon which HCFA
relied was so
.imprecise that it was inadequate proof that these States
in fact failed to
meet MQC targets for error reduction for FY 1981.
_______________________________ Donald F. Garrett
_______________________________ Norval D. (John) Settle
_______________________________ Cecilia Sparks Ford
Presiding
Board Member
1. Among these other matters is the States' assertion that an
excess
resource error should be counted as an error in the review month only
if
in prior months an individual had not incurred sufficient
medical
expenses to offset the excess resource amount. While the
States
presented a substantial question concerning whether it was necessary
to
eliminate the multiple counting effect to properly value excess
resource
errors (a different issue than we resolved in FY 1981 Medicaid
Quality
Control Disallowances, DAB No. 948 (1988)), we did not need to
reach
that question here.
2. Both parties agreed that the record from DAB No. 948 should
be
incorporated into the record for these appeals.
3. The States argued that the Michel Amendment was never enacted
by
Congress and that the FY 1981 regulations were therefore invalid. At
an
early stage in the proceedings of the prior appeal, the Board ruled
that
it did not have jurisdiction to address the validity of the
regulations,
since the Board is "bound by all applicable laws and
regulations." 45
C.F.R. .16.14. The States appealed this issue to
court, but the United
States District Court for the District of Columbia
granted the
Department's Motion to Dismiss on grounds of ripeness.
Alabama v.
Bowen, Civ. Act. No. 86-0841 (November 26, 1986). The States
continue
to maintain that the disallowances are unlawful because the
Michel
Amendment regulations lack statutory authority, but did not
further
pursue this issue before the Board because of the earlier
jurisdictional
ruling. States Opening Brief -- Part II at 6.
4. For a discussion of the developments in quality control reviews,
see
DAB No. 948, at 3-6.
5. State plan requirements for the MQC system were established by
42
C.F.R. .431.800 (1979). 43 Fed. Reg. 45,188 (September 29, 1978)
as
amended by 44 Fed. Reg. 17,935 (March 23, 1979). Rules and
procedures
for the disallowance of FFP in erroneous Medicaid payments
detected
through the MQC system were established by 42 C.F.R. .431.801.
44 Fed.
Reg. 12,591 (March 7, 1979). Effective only for FYs 1981 and
1982,
these initial disallowance regulations were replaced by the
regulations
based on the Michel Amendment that are at issue here, 42 C.F.R.
.431.802
(1981). 45 Fed. Reg. 6,326 (January 25, 1980). These
Michel Amendment
disallowance provisions are now at 42 C.F.R. .431.862
(1991). 55 Fed.
Reg. 22,142 (May 31, 1990). The current Medicaid
Eligibility Quality
Control system regulations implementing section 1903(u)
of the Act are
at 42 C.F.R. ..431.800 -- 431.836 (1991). 55 Fed. Reg.
22,142 (May 31,
1990). Other regulatory changes over the last decade
are not relevant
here and thus are not described.
6. HCFA furnished the following examples: If a state's 1978 error
rate
were seven percent, its FY 1981 target error rate would have been
six
percent (seven percent minus one-third the difference between
seven
percent and four percent). Similarly, if the state's 1978 error
rate
were 10 percent, its FY 1981 target rate would be eight percent
(10
percent minus one-third the difference between 10 percent and
four
percent). HCFA Brief on Common Issues -- Part II at 9, n. 12.
7. We note that the composite 95 percent confidence intervals for
the
Excess Over Target were calculated during prior Board proceedings
based
on the unrevised 1981 error rate estimates. The parties here
agreed to
continue to use the earlier data as an indicia of the precision of
the
Excess amounts now before us based on the revised 1981 estimates.
See
States Opening Brief --Part II at 67-74. In fact, the 95
percent
confidence intervals surrounding solely the revised 1981 estimates
were
also very wide, and thus suggest that continued reliance on
the
composite intervals by the parties was reasonable.
8. We do not here address the rather esoteric issue of the
possibility
contemplated by the confidence interval that the State's
"real"
performance was better than perfect.
9. The GAO 1981 Report to Congress "Medicaid's Quality Control
System
Is Not Realizing Its Full Potential" stated at page 16 --
Regarding the accuracy of the base period data, HHS agreed
that
there were problems. . . . HCFA believes that the accuracy
of
MQC data has substantially and steadily improved . . . .
While
we trust that the accuracy has improved from that of the
base
period and will improve further when our recommendations
are
implemented, the current formula for Medicaid MQC
disallowances
still measures progress in reducing error rates from the
base
period. To the extent that the base period data
are
inaccurate--and . . . we found significant
inaccuracies--any
disallowances made under the formula would be
inaccurate . . . .
and disallowances calculated using the current
formula would not
be fully supported.
10. The seven states which elected to reopen their rates had their
base
period rates increased. West Virginia and Rhode Island were among
those
seven.
11. It was likely that the outlier cases substantially increased
the
error rate estimates; HCFA did nothing to correct the estimates
to
account for this effect. For example, for Rhode Island, there was
an
outlier case with a dollar value of $2,873 in the sample for
the
April-September 1981 sample period. Without this outlier case the
error
rate for this sample period would have been .16% not 6.83% and the
FY
1981 rate would be 2.06% not 5.51%. States Opening Brief -- Part II
at
75; States Ex. 55 at 18-19. While this data is for the Rhode
Island
rate prior to its recalculation based on the valuation of
excess
resource errors to account for DAB No. 948, no adjustment was made
to
correct for the effect of such outlier cases. Therefore, we
conclude
that the distorting effect of such cases which this data illustrates
was
still a factor for the recalculated rates directly at issue here.
12. Penalty bias exists because over time states can only be
sanctioned
and never credited. Consequently, to the extent the rates
are over or
under estimates this will not balance out.
13. Letter dated February 8, 1988 from Dr. Morris Hansen, States
Ex.
130 at 1.
14. The States demonstrated that the resolution of just a small
number
of error cases had a tremendous impact on the error rate
estimates.
15. We note that it is well established that acceptable evidence can
be
produced by valid statistical sampling techniques. See Rosado v.
Wyman,
322 F.Supp. 1173, 1180-1 (1977). We have specifically stated
that valid
statistical sampling produces a result which has a high degree
of
probability of being at least as accurate as a case-by-case
review.
Tennessee Dept. of Health and Environment, DAB No. 898 (1987).
This
decision in no way affects existing authority upholding the use
of
statistical sampling techniques.
16. While HCFA asserted that by using a federal subsampling process
the
MQC system assured equal treatment among the states, this
one
characteristic of the MQC sampling process does not preclude HCFA
from
taking other reasonable steps to assure that no state is
unfairly
determined to have exceeded its target rate for a
particular