Alaska Department of Health and Social Services, DAB No. 1452 (1993)
Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Alaska
Department
DATE: December 17, 1993
of Health and Social
Services Docket Nos.
A-93-150 and A-93-151 Decision No.
1452
DECISION
The State of Alaska Department of Health and Social Services
(Alaska)
appealed a determination by the Health Care Financing
Administration
(HCFA) disallowing $1,255,147 in federal financial
participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security
Act (Act). 1/
HCFA disallowed the federal share of payments to hospitals and
long term
care (LTC) facilities found by Alaska audits to exceed the rates
allowed
by Alaska's Medicaid State Plan. The payments were for facility
fiscal
years ending June 30, 1985 to June 30, 1989. 2/
After the appeals were filed, HCFA reduced the disallowance in Docket
No.
A-93-150 by $31,609 to $979,253, to account for provider payments
for which
Alaska had not claimed federal financial participation. HCFA
Attachment
(Att.) 9. Thus, the amount at issue is now $1,223,538.
Alaska appealed the disallowance on the ground that these excess
payments
were not "properly treated as `overpayments'" under State court
and
administrative decisions holding that Alaska had no statutory
authority to
recoup these amounts from the providers. Alaska argued
that there had
been no overpayments to the providers since its
rate-setting system did not
provide for audit-based retrospective
adjustments so that the providers had
not been paid amounts in excess of
what they were entitled to receive under
the approved State plan.
Alternatively, Alaska claimed that section
1903(d)(2)(D) of the Act
relieves it of any obligation to return the federal
share of these
excess payments because they have been rendered uncollectable
by the
State court's decision. Additionally, Alaska claimed that it
was
entitled to a greater reduction of the disallowance than HCFA
allowed
based on its failure to claim the full amount of FFP in some
payments
made to LTC providers ("voluntary disallowance").
As discussed in detail below, we uphold the disallowance as reduced
by
HCFA. While we recognize that Alaska is presented with a
difficult
circumstance since State court and administrative decisions
have
interpreted State law against it, the federal requirements are clear
and
do not provide HCFA with legal authority to pay FFP in the
excess
payments.
There is no dispute here that Alaska determined through its facility
audit
process that proper calculation of the payment rates would have
resulted in
lower rates on a prospective basis. Federal law limits the
availability
of FFP to payments made in accordance with the methods and
standards
established by the Medicaid State plan. Thus, FFP is not
available in
the payments initially made to these facilities which were
found to exceed
the payments that would have been made based on
corrected rates. It is
Alaska's option under the Medicaid program how
it chooses to develop and
implement procedures for recouping
overpayments from providers.
Alaska's apparent inability to recoup
excess payments under its procedures
does not preclude a finding by HCFA
that unallowable expenditures were
claimed for FFP. The amounts at
issue here would not have been paid to
providers had Alaska's initial
rate calculations been based upon accurate
provider data. As Alaska did
not demonstrate that it revised its audit
findings, so as to determine
that the amounts originally identified as
overpayments were actually
proper payments made in accordance with the
methods and standards in its
State plan for determining provider payment
rates, HCFA is entitled to
rely on those audit findings. Furthermore,
Alaska's apparent inability
to collect overpayments from providers under
State law does not entitle
it to the exception in section 1903(d)(2)(D) of
the Act for overpayments
to bankrupt or out-of-business providers.
Accordingly, we uphold the
disallowance in the amount calculated by HCFA
subject to further
reduction should Alaska substantiate a larger reduction
than HCFA has
allowed. If HCFA rejects Alaska's claim for a further
reduction, Alaska
may request Board review with respect to that limited issue
within
thirty days from receipt of HCFA's written determination.
Relevant Authority
Title XIX of the Act provides for federal grants to aid in financing
state
medical assistance programs. Section 1903(a)(1) of the Act
provides
that FFP is available in the total amount expended each quarter
as medical
assistance under the approved state plan. The plan must
fulfill certain
statutory and regulatory requirements and be approved by
the Secretary of
Health and Human Services (HHS). Section
1902(a)(13)(A) of the Act
requires that a state plan must provide for
payment for hospital and LTC
services "through the use of rates
(determined in accordance with methods and
standards developed by the
State . . .) which the State finds, and makes
assurances satisfactory to
the Secretary, are reasonable and adequate to meet
the costs that must
be incurred by efficiently and economically operated
facilities[.]"
That section also requires assurances from states that each
facility
will file uniform cost reports and that the state will perform
periodic
audits of these reports. The Secretary has also required by
regulation
that states must "provide for periodic audits of the financial
and
statistical records of participating providers." 42 C.F.R.
.
447.253(e). Further, states must pay providers "using rates
determined
in accordance with methods and standards specified in an approved
State
plan." 42 C.F.R. . 447.253(g).
The current provisions of section 1902(a)(13)(A) (referred to as the
Boren
Amendment) were enacted in 1980 and 1981 to replace the
requirement that
reimbursement for hospital and LTC facility services be
on a "reasonable cost
basis" or "reasonable cost-related basis,"
respectively. Omnibus Budget
Reconciliation Act of 1980, Pub. L. No.
96-499, . 962 (1980) (the Boren
Amendment, applicable to LTC
facilities), and Omnibus Budget Reconciliation
Act of 1981, Pub. L. No.
97-35, . 2173 (1981) (applying the Boren Amendment's
language to
inpatient hospitals). This change was intended to provide
greater
flexibility in rate setting to the states. The assurances
required from
the states were to ensure proper payments to facilities even
though
there would be no detailed federal oversight of the rate-setting
and
audit process.
Congress had recognized the difficulty in a state's financing the
full
costs of a Medicaid program, even if subsequently reimbursed by
the
federal government, and provided for a funding mechanism by which
HHS
advances funds to a state, on a quarterly basis, equal to the
federal
share of the estimated cost of the program. A state must submit
to HHS
a quarterly statement of expenditures, based on which HHS can
adjust
future payments to reflect any overpayment or underpayment which
was
made to the state for that quarter. See generally California Dept.
of
Health Services, DAB No. 1015 (1989); Michigan Dept. of Social
Services,
DAB No. 971 (1988) (summarizing Board's overpayment analysis).
Specifically, section 1903(d)(2)(A) of the Act provides that amounts
paid
to a state shall be "reduced . . . to the extent of any overpayment
. . .
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."
In numerous cases involving excess or improper payments by states
to
Medicaid providers, this Board has held that, under section
1903(d)(2),
HCFA may require adjustment of the grant award for the federal
share of
firmly established overpayments, even if a state has not yet
recovered
these amounts from the providers. The Board reasoned that
excess or
improper payments are not "medical assistance" within the meaning
of
sections 1903(a)(1) and 1905(a) of the Act. See, e.g., California
Dept.
of Health Services, DAB No. 1254 (1991); DAB No. 971 (and
decisions
cited therein).
The Board's prior holdings on these overpayment issues have been upheld
in
three decisions by United States Courts of Appeals: 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).
Congress created an exception to the adjustment requirements
for
overpayments to bankrupt or insolvent providers identified for
quarters
beginning on or after October 1, 1985. Consolidated Omnibus
Budget
Reconciliation Act of 1985, Pub. L. No. 99-272, section
9512(a)(3)
212-13 (1986), adding section 1903(d)(2)(D) of the Act.
Section
1903(d)(2)(D) provides that the federal share need not be refunded
where
the state is unable to recover a debt from a provider "on account
of
such debt having been discharged in bankruptcy or otherwise
being
uncollectable." See 42 C.F.R. . 433.318 (1992).
Case Background
Alaska instituted a prospective payment system for hospitals and
LTC
facilities in 1983. The State plan provisions for the rate years
in
question incorporated the Alaska statutes and regulations governing
rate
setting. Alaska Exs. 29-39. Generally, these plans provided
for
prospective rates to be set by the Medicaid Rate Commission (MRC)
in
advance of each fiscal year based on financial data submitted by
the
facilities. The various plan provisions specify the types of
costs
allowable for rate-setting purposes. There were different State
plans
for each rate year; the parties have not indicated that variations
among
the plans as to allowable costs or methods and standards applied in
rate
setting are relevant to this dispute so we do not describe
these
provisions in detail.
MRC began performing audits of prospective rates in 1986, and found
that
Alaska had overpaid its hospital and LTC facility providers in
36
facility fiscal years. Alaska Br. at 7. Alaska described the
results
as follows --
the audits showed that . . . the costs reported on
providers'
budget or cost report submittals and rate requests
were
overstated because costs were misallocated between cost
or
revenue centers, or because costs were included that
we
determined were not allowable or because of similar errors.
Affidavit of Michael Sanders, Audit Manager of Alaska's Audit Unit,
Alaska
Ex. 3. State auditors (Alaska used both in-house and
independent
contract auditors) calculated the difference between the rates
developed
using the reported data from the facilities (i.e., the amounts
initially
paid to these facilities) and the rates as recalculated based on
the
audit findings, and identified this difference as overpayments to
the
facilities. Alaska Exs. 8 and 12. Beginning in 1987, Alaska
sought to
recover these funds from the providers. Alaska Br. at 8.
Alaska's efforts to recover the overpayments were unsuccessful,
because,
upon appeals by providers, State administrative and judicial
proceedings
found no recoupment authority in Alaska's statutes or
regulations
governing audit and rate setting. City of Cordova vs.
Medicaid Rate
Commission, 789 P.2d 346, 350-51 (Alaska 1990); In the Matter
of Our
Lady of Compassion Care Center, Case No. 90-MRC-2 (Alaska Ex. 17)
3/.
In Cordova, the Alaska Supreme Court held that State law did not
authorize
"retroactive recoupment" or "consider[ing] audit results in .
. .
determination of prospective payment rates for the current
fiscal
year[.]" The court described Alaska's prospective rate-setting
system
as "provid[ing] an incentive for facilities to minimize their
costs
because a facility providing a service at a cost less than
the
pre-determined rate is permitted to keep the difference (`earns
a
profit')." Cordova at 348-50. Discussing the State statute
providing
for audits of facility financial records as a condition of payment,
the
court stated that "[i]t is clear that the text of the statute does
not
state or imply that the amount of the payment will be affected by
any
audit." In Cordova, Alaska sought to recover overpayments for the
July
1, 1984 to June 30, 1985 rate year.
Our Lady of Compassion pertained to Alaska's action to recover
audit-based
overpayments for the 1986 and 1987 rate years (July 1, 1985
to June 30,
1987). That decision relied on the conclusions reached by
the court in
Cordova and held that, with the exception of overpayments
based on false
information, the MRC lacked the legal authority to recoup
audit-based
overpayments even under later State regulations not at issue
in
Cordova. The later regulations were described in the
administrative
decision as providing only for notice by the MRC to Alaska of
"amounts
due from or to the facility" and were found not to empower recovery
of
such amounts. Our Lady of Compassion at 23.
In light of the Cordova decision, Alaska initiated an attempt to
recover
excess payments under a common law recoupment theory. Alaska
Br. at 10
and 11, Alaska Ex. 14.; Alaska Ex. 4 (showing status of
pending
administrative action). Alaska indicated that it "remains
unclear
whether there is a basis for common law recoupment[.]" Alaska
Br. at
11. Alaska also indicated that it had not taken any further
action to
finalize some audits for the fiscal years ending June 30, 1987
through
December 31, 1988. 4/ Alaska Br. at 13.
HCFA accepted Alaska's audit reports identifying overpayments
to
providers, and made corresponding disallowances of the federal
share.
Alaska Exs. 6 and 10. On appeal, Alaska argued principally that
since
Cordova held that it had no statutory authority to recoup, HCFA has
no
basis for requiring a refund of the federal share of disputed
provider
payments. Below, we first address this argument, and then
proceed to
consider additional arguments made by Alaska.
Analysis
I. Amounts paid to providers which exceed the
rates properly paid
in accordance with the methods and standards for rate
determination in
the approved state plan are overpayments for which FFP is
not available
pursuant to section 1903(a)(1) of the Act.
Alaska argued that the payments at issue are not properly characterized
as
overpayments because State law did not provide for retrospective
adjustment
of prospective facility rates based on audit findings.
Alaska maintained
that, because it had no authority to recoup
overpayments by adjusting
prospective rates based on later audits, under
state law the amounts
initially received by the providers were not in
excess of what the providers
were entitled to receive under the approved
state plan. 5/
While Alaska's inability to recoup these amounts from its providers
is
unfortunate, that inability does not render these payments
medical
assistance expenditures for which FFP is available under
section
1903(a)(1) of the Act. These amounts are overpayments because
they
exceed the amounts that would have been paid had Alaska applied
its
rate-setting methods and standards to accurate data in the
first
instance. Accordingly, these amounts, which are in excess of
properly
calculated rates, are in excess of the amounts which are "reasonable
and
adequate to meet the costs which must be incurred by efficiently
and
economically operated facilities." Section 1902(a)(13)(A).
Federal regulations require that the state plan must set out the
methods
and standards to be used in determining rates and that payments must
be
in accordance with those methods and standards. 42 C.F.R. ..
447.252(b)
and 447.253(g). Under section 1903(a) of the Act, in order
to qualify
for FFP, Alaska's claim must be in accordance with its approved
State
Medicaid plan. Here, State auditors found that the payments were
higher
than those that should have been paid under the methods and standards
in
Alaska's rate-setting system. Therefore, since Alaska does not
dispute
the accuracy of the auditors' calculations (Alaska Reply Br. at 10,
17),
we conclude that these amounts must be repaid to HCFA in accordance
with
well established principles governing the repayment of
firmly
established overpayments.
Alaska argued that the terms of its plans in effect before September
1,
1986 did not require audit adjustments. (These plans either
merely
stated that the MRC had statutory authority for the "audit
function"
(Alaska Exs. 38 and 39) or just provided for "periodic on-site
audits"
(Alaska Exs. 36 and 37).) Consequently, Alaska argued, there
could be
no overpayments based on audit findings, as a matter of law.
Alaska Br.
at 16. Alaska further argued that the explicit requirements
for audit
adjustments inserted in the State plan and State regulations (7
AAC
43.693) in 1986 were invalidated by the holding in Cordova that
Alaska
lacked sufficient statutory authority for the requirements.
Therefore,
Alaska claimed that it cannot be compelled to refund the federal
share
of excess payments identified by its auditors.
Regardless of whether State law precluded Alaska from recouping
excess
payments from its providers, Alaska's duty to refund the federal
share
of these amounts to HCFA is not affected. The relationship
between
Alaska and its providers is a matter of State law and does not
affect
the distinct relationship that Alaska has with HCFA in administering
the
federal Medicaid program, which is determined by federal law.
Because FFP is only available in rates set in accordance with the
State
plan, Alaska is required to adjust its claims to reflect these
audit
findings. If payments have, as in Alaska's case, been based on
unsound
data which was shown by audits to include unallowable costs and
costs
attributed to incorrect cost centers, then the providers have
been
overpaid within the meaning of section 1903(d)(2). These amounts
were
not payments for medical assistance under the plan, so Alaska
must
refund the federal share. Sections 1903(a)(1) and 1905(a) of the
Act
(payments for medical assistance); Section 1903(d)(2) (refund of
FFP).
Even if the State plan did not spell out the effect of an audit,
or
establish a mechanism for adjustments via subsequent rate changes
or
cash settlements as Alaska argued, that does not legitimize
the
overpayments.
Also, there is no basis for concluding that the type of
audit-based
adjustment at issue here is somehow inconsistent with prospective
rate
setting in general. Prospective rate-setting systems have been
used by
the states for their Medicaid programs for many years. See
Illinois
Department of Public Aid, DAB No. 467 (1983). A
distinguishing
characteristic of prospective rate systems is that there needs
to be no
retrospective adjustment to reflect the actual costs of
providing
services during the rate period. DAB No. 467 at 5.
Here, Alaska
presented no authority to support the proposition that there is
also an
inherent prohibition on audit-based adjustments to correct errors
that
occur in setting prospective rates. In fact, as the Board
has
previously observed, "[A]djustments for erroneous cost or
statistical
reporting are consistent with a prospective-only system."
South Dakota
Dept. of Social Services, DAB No. 934 at 18 (1988). The
fact that
Alaska was found not to have reserved explicitly for itself
the
authority to adjust its payments to the providers, does not render
the
excess amounts payments made in accordance with the methods
and
standards to be used in determining rates. 6/
In this regard, Alaska's reliance on New York State Dept. of
Social
Services, DAB No. 311 (1982) is misplaced. Alaska cited that
decision's
reference to "overpayments" as "amounts paid to a provider in
excess of
what the provider was ultimately entitled to under the State
plan."
Alaska relied on this statement to support its argument that in light
of
its inability to collect these amounts from its providers there was
no
overpayment under its State plan because it was legally obliged to
make
the higher payments to the facilities. 7/ Alaska uses the
statement
from DAB No. 311 out of context. In fact, the Board has
specifically
said that whether a state used prospective or retrospective
rate-setting
methods, amounts in excess of those payable based on the rate
ultimately
determined to be correct were not medical assistance payments for
which
FFP was available. See New Jersey Dept. of Human Services, DAB
No. 683,
at 7. When the Board refers to payments of what the provider
is
ultimately entitled, this refers only to payments at the correct
rate.
The circumstances here where State court and administrative
decisions
apparently obligate Alaska to pay excess amounts to certain
providers by
precluding recoupment cannot somehow be applied to turn those
excess
amounts into proper payments as a basis for claiming FFP. Moreover,
in
any event, we are not persuaded that the Cordova and Our Lady
of
Compassion decisions precluded Alaska from recouping for the
entire
period or that the rationale for those decisions was sound.
Since
overpayments for fiscal years after 1986 were not at issue in
Cordova,
it is not clear that that decision must be interpreted to
preclude
Alaska from recovering overpayments from providers for those
later
periods. Moreover, although the proposed administrative decision
in Our
Lady of Compassion Care applied the Cordova court's reasoning
to
invalidate the application of Alaska's 1986 audit
adjustment
requirements, the binding effect of that decision is questionable
as
well.
Furthermore, in concluding that audit-based adjustments were not
implicit
in the Alaska statutes providing for the audit of provider
records, the
Cordova decision relied in part on the incentive provided
by prospective
rates (because a provider could retain any amount paid in
excess of its
costs). However, we do not see this incentive component
as a persuasive
rationale for a provider's absolute right to rely on
payments of the rate
initially set when it was based on erroneous data.
Arguably, what occurred
here was not an adjustment to a rate but merely
a corrected calculation to
reflect the payment rate to which the
facility was actually entitled under
Alaska's rate-setting system.
Alaska cited to no express provision in State
law precluding the
recomputation of provider rates based on corrected
data. Also, HCFA
found that in July of 1985, Alaska had actually set
"prospective" rates
for only 11 of 27 providers for the rate year beginning
July 1, 1984.
In addition, at the time of the HCFA review, only two rates had
been
finalized for the next rate year. HCFA Ex. 2. Alaska's
failure to
actually implement its rates prospectively undercuts relying on
the
prospective nature of its rate-setting system as justification
for
claiming FFP in excess payments. 8/
We are also not persuaded by Alaska's argument that providers are
to
retain rates higher than those derived from applying State methods
and
standards to accurate provider data, as an incentive contemplated
under
the prospective payment system. Under the incentive theory,
profits are
not to be awarded arbitrarily, but are intended to encourage and
reward
particular provider behavior: control of costs, or efficiency
of
operation. See, e.g., 46 Fed. Reg. 47968 (September 30, 1981); 48
Fed.
Reg. 56054 (December 19, 1983). Permitting providers to
retain
excessive payments based on rates calculated using inaccurate
financial
reports (for example where costs had been misidentified as
allowable)
does not serve such a purpose.
We also find the Cordova court's logic flawed. Under the State plan
the
rates were not treated as immutable once set since the State plans
did
provide for adjustments in the initial payment in some
circumstances.
Alaska Exs. 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, and 39
(State plan
amendments for rate years at issue). Federal regulations
required, and
the plans provided for, an appeal process whereby dissatisfied
providers
could protest their rate determinations and obtain
adjustments. 42
C.F.R. . 447.253(c). Also, providers could
request a budget amendment
during a fiscal year (to adjust for significant
changes) whereby the
rate would be adjusted for the remainder of the rate
year. See, e.g.,
Alaska Exs. 38 and 39 at 3-4. All the State
plans provided for some
type of mid-rate-year adjustment to reflect changed
circumstances. The
1985 plan referred to adjustments based on a
year-end conformance
report: if actual patient days exceeded
"established variances" from
approved budget, "future prospective payment
rates will be adjusted to
reflect the actual total financial requirements and
volumes of the prior
period." State Plan Amendments 85-6 and 85-5,
Alaska Exs. 36 and 37, at
2. All the State plans effective from July 1,
1985 forward provided for
some type of year-end conformance adjustment
whereby a later year's rate
would be adjusted to reflect the circumstances
during the prior year.
For example, the State plan for hospitals for the rate
year beginning
July 1, 1987 called for the reduction of a subsequent year's
rate based
on a comparison of approved and actual charges per adjusted
admission
for the 1987-1988 rate year. Alaska Ex. 33 at 8-9.
Alaska further contended that HCFA must defer to its
reasonable
interpretation of the cash settlement provision of its post 1986
State
plans--i.e., as requiring audit adjustments to be treated
as
overpayments only to the extent authorized by statute. Alaska
asserted
that in light of the Cordova decision holding that
audit-based
recoupment was not required, the State plan provision could not
be
interpreted to require that these amounts be treated as
overpayments.
In support, Alaska cited DAB No. 934. Alaska Br. at 23,
n. 17. The
circumstances in DAB No. 934 are distinguishable
and that decision does
not support Alaska's arguments here. In DAB No.
934, the Board reversed
HCFA's determination that South Dakota had not
calculated certain LTC
facility reimbursement rates in accordance with its
approved state plan.
The Board discussed the factors to be considered in
cases involving the
interpretation of state plan provisions. The Board
noted that under the
Boren Amendment, a state's rate-setting methods were
accepted so long as
it provided the requisite assurances. Moreover,
HCFA had not found that
South Dakota's rate setting was inconsistent with any
federal
requirement or policy. The Board found both that South Dakota
had a
reasonable interpretation and consistent state practice concerning
the
patient days number to be used in its rate calculation and that
South
Dakota's prospective reimbursement methodology did not
require
comparison of the "anticipated costs" figure used in the
rate
calculation and the actual costs incurred during the rate year.
Here,
however, there is no dispute between HCFA and Alaska as to
the
interpretation of the methods and standards specified in the State
plan
for determining facility rates, so our holding in DAB No. 934
is
inapplicable. The absence of statutory recoupment authority does
not
present a state plan interpretation question analogous to that
presented
in DAB No. 934. For this reason, we also do not consider
Michigan Dept.
of Social Services, DAB No. 971 (1988) to advance Alaska's
position
here. DAB No. 971 involved the interpretation of the
rate-setting
system's treatment of depreciation. Alaska relied on
Washington Dept.
of Social and Health Services, DAB No. 693 (1985), and
argued that the
Cordova decision had the effect of retroactively modifying
its post-1986
State plans to invalidate the provision for cash settlements
of
overpayments with facilities. However, the circumstances here are
not
analogous to those in DAB No. 693. In that decision, a state
court
judgment required recalculation of facility payment rates based on
a
determination that the initial rate had not been adequate to
reimburse
an efficiently and economically operated facility. In DAB No.
693 both
HCFA and Washington had agreed that the state plan provisions for
rate
setting were retroactively modified.
Moreover, Alaska's position that the amounts in question are
not
overpayments is also undermined by the fact that it does not
dispute
that overpayments were made to one facility where Alaska had made
errors
in the 1987 rate calculation. Alaska Br. at 2, note 2. We
see no
distinction for federal purposes between this circumstance and
the
circumstances here where there were errors in the reported data
upon
which the rate calculation was based. Alaska determined through
its
audits that proper calculations would have resulted in lower rates
for
some facility fiscal years. Regardless of the origin of the error,
the
incorrect rate calculation resulted in a rate that did not comply
with
the methods and standards set forth in the State plan and approved
by
HCFA.
II. HCFA's decision not to impose a particular
adjustment mechanism
by federal regulation does not obviate Alaska's
obligation to repay the
federal share of identified overpayments.
Alaska maintained that because HCFA declined to promulgate
regulations
specifying methods by which states must apply the results of
required
audits to their various payment systems, federal law does not
require
any audit-based adjustments. Alaska Br. at 25-29. Alaska
cited HCFA's
responses to comments on its audit rule, 42 C.F.R. . 447.253(e),
which
show that more detailed regulations were considered but rejected,
to
support its contention that HCFA was attempting to enforce a
policy
which it had specifically chosen not to adopt. Alaska Br. at 28;
Alaska
Exs. 23 and 24. Alaska's argument that HCFA's decision not to
specify
an audit adjustment mechanism by regulation meant that no adjustment
of
the federal share of excess payments is required must fail, however.
In its response to comments showing concern about the lack of
specificity
in its interim final rule on audits, HCFA stated that the
lack of detail was
"consistent with the statutory requirement for audit
and the general
statutory emphasis on State, rather than Federal,
activity in this
area." 48 Fed. Reg. 56046, 56053 (December 19, 1983)
(preamble to final
rule). More detailed requirements for audit
activities, related to the
former federal statutory requirements for
reimbursement systems, were deleted
with implementation of the Boren
Amendment because HCFA believed "the
specific requirements regarding
desk reviews and audits are not needed to
implement the amendment, and
that retaining them could limit States'
discretion to design audit
programs to meet their needs." 46 Fed. Reg.
47964, 47967 (September 30,
1981) (preamble to interim final rule).
HCFA clearly did not by this
choice intend to permit states to ignore audit
results, as the next
sentence of the preamble just cited read:
"However, we expect that
States will, under the revised regulations[,]
maintain the minimum level
of audit activity needed to ensure that payments
are being made in
accordance with their State plans and to detect and correct
provider
fraud and abuse." Id.
Moreover, when responding to a comment concerning rate
adjustments
following provider appeals, HCFA indicated that it did not find
a
prescriptive federal rule mandating either retroactive or
prospective
adjustments to "be appropriate or in keeping with the intent of
State
flexibility [since] . . . fair and reasonable rate adjustments
are
implicit in an appeals process[.]" 48 Fed. Reg. 56052 (December
19,
1983). We consider HCFA to have applied the same reasoning to the
audit
requirement as it did to the requirement for a provider appeal
process
which it discussed in the immediately preceding section of the
preamble,
that is, that adjustments to assure payments are made in accordance
with
the state plan are implicit in each general requirement. Thus,
the
history of the regulation shows that HCFA intended to leave to
the
states the selection of recovery and adjustment methods appropriate
to
the particular pattern of their payment methodologies. The
discretion
provided to states in setting recovery and adjustment
procedures,
however, in no way undercuts the basic requirement that federal
funding
is limited to payments made in accordance with the state
plan.
Therefore, Alaska's apparent inability to recoup overpayments
from
providers under procedures it devised and relied upon cannot
alter
Alaska's obligation to repay the federal share of these excess
payments.
III. In seeking refund of the federal share, HCFA may rely
on
Alaska's audit findings since Alaska did not demonstrate that
its
findings have been revised or are otherwise unreliable.
Alaska contended that for the amounts at issue in Docket No.
A-93-151,
HCFA relied improperly on audit reports furnished by State
contractors,
because Alaska had not "accepted" the reports. Alaska Br.
at 13.
However, Alaska explained this lack of acceptance as primarily
a
response to the Cordova decision, and did not indicate that
this
reflected on the reliability of the reports themselves. Alaska
advanced
no reasons for distinguishing the types of audit findings made in
those
cases from the earlier audits where Alaska sought recoupment.
Id.
Moreover, despite having attempted to collect the excess
payments
identified by other audit reports, Alaska claimed to have
subsequently
"revised" the audit findings to determine that the auditors'
findings
were incorrect as a matter of law, based on the State Supreme
Court's
holding in Cordova that there was no legal authority for recoupment
of
overpayments under the prospective payment system. Alaska Br. at
23-25.
The record does not support this claim.
Elsewhere, Alaska made clear that but for the interpretations of
the
Cordova court and the subsequent administrative decision, it
would
continue to rely on the audit findings. Alaska stated:
. . . it is not DHSS [the State Medicaid agency] that
originally
"disavowed" the auditors' conclusions; rather, the State
Supreme
Court and an administrative law judge rendered decisions
that
undermined the auditors' "overpayment" findings. Left on
its
own course, DHSS would not have disavowed the audit findings
to
avoid financial penalty by HCFA; instead -- as its
initial
actions demonstrate -- it would have vigorously pursued
recovery
of what State auditors concluded were "overpayments" made
during
the periods in which the Audit Function/cash settlement were
in
effect.
Alaska Reply Br. at 10.
The Board has frequently reiterated the circumstances under which HCFA
is
permitted to rely on state audit findings: HCFA must provide
sufficient
detail to identify the records from which disallowed amounts
are derived, and
must allow a state the opportunity to show that it has
made adjustments to
audit findings, that the records on which the audit
was based are for some
reason unreliable, that the overpayments have
been recouped and FFP already
refunded, or that the state never claimed
FFP for the overpaid amounts in the
first place. California Dept. of
Health Services, DAB No. 1254, 5 at
(1991) (and decisions cited
therein). The state has the burden of
showing that it has revised its
findings, specifically that it has changed
its determination and found
that funds previously identified as overpayments
were in fact expended
for medical assistance. California Dept. of
Health Services, DAB No.
1391, at 8 (1993). Alaska has not met that
burden here.
In support of its contention, Alaska cited three Board decisions.
Alaska
cited these cases for the general proposition that HCFA is not
entitled to
disallow overpayment amounts based on state audit findings
if a state
establishes that it has reduced the overpayments based on a
reevaluation of
the facts and applicable law or on a court or
administrative decision
requiring payment of the costs.
In one case, the Board held that a disallowance must be reduced to
reflect
a determination by a state administrative law judge that the
underlying
audits had applied an incorrect methodology. Specifically,
the state
auditors had calculated the overpayments by a statistical
projection method,
but used a "mean precision level" rather than the
"lower precision level"
routinely used by state administrative law
judges. California was
permitted to rely on the amounts derived by
administrative proceedings rather
than its original audit findings.
California Dept. of Health Services, DAB
No. 1240 (1991).
In another case, when reviewing the disputed amount for one provider,
the
Board held that HCFA could not rely on certain state audit findings
where the
state had established that they were "amounts from uncompleted
audits," and
that subsequent documentation "was sufficient to show that
the original State
audit determination on which HCFA relied was
incorrect[.]" New Jersey
Dept. of Human Services, DAB No. 683 at 15
(1985). In the third
decision cited by Alaska, DAB No. 1391, the Board
found that California
failed to show that its audit findings were
incorrect, and upheld the
protested disallowances.
These decisions are inapposite here. In each of the first
two
decisions, where the Board found that overpayment amounts were
reduced,
the state showed that it had erred in identifying as
overpayments
amounts that were in fact expended for medical assistance within
the
meaning of sections 1903(a)(1) and 1905(a) of the Act. Here,
however,
Alaska relied on a court's determination that its actions to
recover
overpayments were unauthorized as a matter of law, and not on
a
determination that the expenditures identified as overpayments
were
actually payments that Alaska ought to have made in light of the
State
plan's methods for calculating rates, despite the audit findings.
In
the third decision, the Board rejected the state's argument that
by
compromising overpayment claims against providers the state had
revised
its original overpayment findings.
Furthermore, after its attempt to recover the overpayments based
on
authority in State law was defeated by Cordova, Alaska initiated
an
action for common law recoupment of the same overpayments, as well
as
overpayments to additional providers. Alaska Ex. 14
(Memorandum
Decision on common law recoupment); Alaska Exs. 4 and 1 (case
status
report and accompanying affidavit). This action indicates that,
for at
least these providers, Alaska considered that the audits
correctly
identified overpayments, and that the auditors correctly
recalculated
provider rates lower than had been paid. While Alaska has
indicated
that it has desisted from efforts to recover the funding from
some
providers based on the auditors' identification of overpayments,
Alaska
has not disputed that in determining that there were overpayments,
the
auditors properly applied Alaska's methods and standards to data
the
providers should have supplied in the first instance. Alaska Ex.
40.
Accordingly, we conclude that Alaska has not revised its audit
findings;
HCFA may reasonably rely on these findings in adjusting FFP paid
to
Alaska.
IV. HCFA may require Alaska to adjust for the federal
share of
overpayments even though Alaska has not recovered from the
providers,
because the providers are not bankrupt or insolvent as required by
the
statutory exception.
Alaska argued that since the State Supreme Court in Cordova rendered
the
disputed provider payments uncollectable, section 1903(d)(2)(D) of
the
Act relieves Alaska from the obligation to refund the federal
share.
Essentially, Alaska claimed that the structure of its Medicaid
payment
system, which according to the State Supreme Court provided for
no
audit-based adjustments to prospective payment rates, brought it
within
the statutory exception because it rendered collection of
any
prospective rate amounts from providers legally impossible.
This
argument has no merit.
Section 1903(d)(2)(D) states that the federal share of overpayments
need
not be refunded where a state is unable to recover a debt from
a
provider "on account of such debt having been discharged in
bankruptcy
or otherwise being uncollectable." As the conference report
explains,
the phrase "otherwise . . . uncollectable" was intended to extend
the
notion of bankruptcy to include providers which were insolvent or out
of
business but which had not availed themselves of the federal
bankruptcy
statute. H. Rep. No. 453, 99th Cong., 1st Sess. 548 (1985);
S. Rep. No.
146, 99th Cong., 1st Sess. 314-15 (1985).
The rationale for the general rule, that a state must refund the
federal
share of overpayments regardless of its ability to recover
from
providers, is that a state is in a better position than the
contributing
federal agency to control a contractual relationship between
itself and
a local provider, and thus should bear the associated risks.
The
limited exception in section 1903(d)(2)(D) for bankrupt
and
"out-of-business" providers established federal sharing of the
risk
where inability to recover occurred because of the acts of
providers
beyond a state's control. The exception is based on the
financial
condition of particular providers, not, as Alaska claimed, on
the
structure of a state Medicaid payment system--a matter entirely
within
Alaska's control.
According to its Supreme Court, Alaska failed in its drafting of the
State
Medicaid plan and associated statutes and regulations to create
specific
authority for recovery of improperly expended program funds. A
gap in
state administrative law, as interpreted by a state court, is a
consequence
of legislative events controlled by the state, not business
decisions of
private actors, and therefore does not provide a basis for
relief under the
exception of section 1903(d)(2)(D). Accordingly, this
exception is not
applicable here.
V. Alaska's arguments regarding amounts of
FFP not claimed during a
period of voluntary disallowance are not
sufficiently documented in the
record to be addressed in this decision.
Alaska asserted that it did not claim federal funding for payments to
LTC
facilities during fiscal years 1985 and 1986 in an effort to comply
with the
"Medicare upper limit" on Medicaid rates, and therefore the
portion of the
disallowance attributable to payments to these LTCs is
without factual
support. HCFA responded that it made an adjustment to
account for this
voluntary disallowance. HCFA Att. 9. However, Alaska
asserted
that HCFA did not provide a basis for reducing the disallowance
by a smaller
amount than Alaska had calculated ($31,609 rather than
$182,531), and
requested that the Board "direct the parties to confer in
an effort to reach
agreement about the dollar portion of the
disallowance amount that was never
claimed by the State[.]" Alaska
Reply Br. at 2. We therefore
uphold HCFA's calculation subject to
reduction should Alaska provide
explanation and documentation
substantiating its larger voluntary
disallowance figure. Alaska may
appeal that limited issue should the
parties not agree on the proper
amount of the reduction.
.Conclusion
Based on the analysis above, we uphold the disallowance in the amount
of
$1,277,372. This amount is subject to reduction, as
explained
immediately above, should Alaska substantiate that there should be
a
further reduction of the disallowed amount to fully account for
its
"voluntary disallowance." Should the parties not agree, Alaska
may
request Board review with respect to this limited issue within
thirty
days of receipt of HCFA's written determination.
Donald
F.
Garrett
Norval D.
(John)
Settle
Cecilia
Sparks
Ford
Presiding
Board Member
1. The total disallowance was originally
$1,308,981: $1,010,862
associated with Docket No. A-93-150 and $298,119
with A-93-151. Alaska
did not contest $53,834 of the disallowance,
which it attributed to its
rate calculation errors respecting a single
provider. Alaska Brief
(Br.) at 2; see also In the Matter of Our Lady
of Compassion Care
Center, Case No. 90-MRC-2, included as Alaska Exhibit
(Ex.) 17. (See
section V below.)
2. The disallowance underlying Docket No. A-93-150
was described as
involving payments for provider fiscal years ending June 30,
1985
through June 30, 1989, while Docket No. A-93-151 involved payments
for
provider fiscal years ending June 30, 1987 through December 31,
1988.
Alaska Exhibits (Exs.) 6 and 10. However, the detailed
chart
accompanying the disallowance letter for Docket No. A-93-150 shows
a
fiscal year for one provider ending December 31, 1984. Alaska Reply
Br.
at 2; Alaska Exs. 10 and 12.
3. Our Lady of Compassion Care is a "Proposed
Decision" by a hearing
examiner. According to the process described in
a memorandum dated
March 12, 1991 from the hearing examiner to the
Commissioner of the
Department of Health and Social Services, the
Commissioner is authorized
to adopt a proposed decision, remand for further
administrative
findings, or render an independent decision on the
record. HCFA Att. 7.
As HCFA pointed out, and Alaska nowhere
contradicted in its reply,
Alaska did not adopt the hearing examiner's
proposed decision. HCFA Br.
at 16. The Commissioner appears to
have responded to the decision by
issuing a settlement offer to the provider
"without taking a position on
the issues involved." HCFA Att. 7.
4. Consequently, Alaska indicated that it had not
accepted or
released to the providers the audits that were the basis for
the
disallowance in Docket No. A-93-151. While Alaska has not proceeded
to
implement these audits, it did not assert that the audit findings
were
distinguishable from the findings in earlier years' audits which
were
implemented.
5. State plan provisions in effect as of September
1986 provided for
"cash settlement . . .[with] the facility either in the
form of a
payment to or collection of funds" based on audit findings relating
to
prior fiscal years. Alaska Exs. at 29, 30, 31, 32, 33, 34, and
35.
Earlier State plans had no such provision. Because of the State
court
and administrative decisions holding that Alaska had no statutory
or
regulatory authority to adjust its prospective rates based on
audits,
Alaska also asserted that, notwithstanding this State plan provision,
it
could not treat the amounts at issue as overpayments.
6. Alaska relied on Austin v. Owsley County Health
Care Center, 1988
Ky. App. LEXIS 80 (Ct. App. Ky. 1988) for the proposition
that state
rate-setting systems could properly use unaudited costs with
no
provision for audit-based adjustments. Austin does not clearly
support
that proposition. Also, because this case concerns rates set
in
accordance with Alaska's methods and standards, the flexibility
accorded
states in general is not relevant.
7. Under the Boren Amendment, Alaska had the
responsibility and
flexibility to establish whatever rate setting system it
chose so long
as it could make the assurances required by section
1903(a)(13)(a).
Alaska cannot bootstrap what could be regarded as an
oversight on its
part in drafting its audit statute into a valid FFP
claim.
8. Furthermore, since rates at least for these years
had not been
timely set, this raises the question why Alaska did not have
correct,
audited data for its rate-setting purposes by the time it actually
set
the