Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: New York State Department of Social Services
DATE: September 21, 1995
Docket No. A-94-19
Control No. A-92-02001
Decision No. 1536
DECISION
The New York State Department of Social Services (State)
appealed a determination by the Regional Administrator,
Health Care Financing Administration (HCFA) disallowing
$14,649,672 in federal financial participation (FFP) for
unrecovered overpayments made to providers under title
XIX (Medicaid) of the Social Security Act (Act). The
State submitted additional documentation, and HCFA
reduced the disallowance to $8,013,142. After further
negotiations, the State indicated it was appealing only
part of this amount: $1,536,313 in FFP related to
overpayments based on the State's draft audit findings
for non-fraud or abuse provider audits and $2,536,985 in
FFP for Short Term Investment Pool (STIP) interest earned
by the State on State-only funds which HCFA attributed to
overpayments, which were discovered as a result of State
audits of Medicaid providers, and which were either never
reported or which were not reported timely to HCFA. The
disallowance was based upon the results of an audit by
the Office of Inspector General (OIG) which reviewed the
State's collection and credit procedures during the
period April 1, 1988 through March 31, 1991.
The State contended that HCFA improperly required it to
refund the federal share of overpayments resulting from
situations other than fraud or abuse within 60 days of
the State's issuance of a draft audit report. In the
State's view, the amounts identified in the draft audits
were not sufficiently certain to be subject to recovery
under State law. The State also argued that HCFA lacked
authority to compel it to pay imputed interest attributed
to overpayment amounts which were allegedly not timely
credited to HCFA.
As discussed below, we uphold the disallowance for the
non-fraud and abuse overpayments and reverse the
disallowance of STIP interest. Under the State's process
here, we conclude that in non-fraud or abuse cases,
issuance of a draft audit constitutes written notice from
a State official of a specified overpayment amount
subject to recovery. Thus, under federal regulations,
overpayments are "discovered" at the draft audit stage.
We further conclude that HCFA lacked authority to compel
the State to pay imputed interest attributed to certain
overpayments.
Statutory and Regulatory Background
Title XIX of the Act authorizes federal grants-in-aid to
states to help finance state Medicaid programs. A state
that wishes to participate in the Medicaid program must
develop and submit a plan that meets specific
requirements set forth in the Act or by the Secretary,
Department of Health and Human Services (HHS).
The Medicaid program provides for FFP in medical
assistance only for expenditures made in accordance with
an approved state plan. Section 1903(a)(1) of the Act
requires the Secretary of HHS to pay participating
states--
an amount equal to the Federal medical assistance
percentage . . . of the total amount expended . . .
as medical assistance under the State plan . . . .
Section 1903(d)(2)(a) authorizes the Secretary to make
quarterly advances and to adjust the federal share of
estimated Medicaid expenditures in amounts--
reduced or increased to the extent of any
overpayment or underpayment which the Secretary
determines was made under this section to such State
for any prior quarter and with respect to which
adjustment has not already been made under this
subsection.
In 1986, section 9512 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA), Public Law No. 99-
202, amended section 1903(d)(2)(c), as follows:
For purposes of this subsection, when an overpayment
is discovered, which was made by a State to a person
or other entity, the State shall have a period of 60
days in which to recover such overpayments before
adjustment is made in the Federal payment to such
State on account of such overpayment. Except as
otherwise provided in subparagraph (D), the
adjustment in the Federal payment shall be made at
the end of the sixty days, whether or not recovery
was made . . . .
Section 1903(d)(2)(D), referenced in the section above,
was amended, as follows:
In any case where the State is unable to recover a
debt which represents an overpayment (or any part
thereof) made to a person or other entity on account
of such debt having been discharged in bankruptcy or
otherwise being uncollectible, no adjustment shall
be made in the Federal payment to such State on
account of such overpayment (or portion thereof).
Effective April 4, 1989, HCFA promulgated regulations at
42 C.F.R. Part 433, Subpart F, to implement the COBRA
provision. The basic requirements for refunds of
overpayments are set forth in 42 C.F.R. 433.312, as
follows:
(a) Basic rules. (1) Except as provided in
paragraph (b) of this section, the Medicaid agency
has 60 days from the date of discovery of an
overpayment to a provider to recover or seek to
recover the overpayment before the federal share
must be refunded to HCFA.
(2) The agency must refund the federal share of
overpayments at the end of the 60 day period
following discovery in accordance with the
requirements of this subpart, whether or not the
State has recovered the overpayment from the
provider.
"Discovery" is defined in 42 C.F.R. 433.304 as --
Identification by any State Medicaid agency official
or other State official, the federal government, or
the provider of an overpayment, and the
communication of that overpayment finding or the
initiation of a formal recoupment action without
notice as described in 433.316.
42 C.F.R. 433.316 sets forth the rules of discovery for
all types of overpayments, as follows:
(a) General rule. The date on which an overpayment
is discovered is the beginning date of the 60 day
calendar period allowed a State to recover or seek
to recover an overpayment before a refund of the
federal share of an overpayment must be made to
HCFA.
(b) Requirements for notification. Unless a State
official or fiscal agent of the State chooses to
initiate a formal recoupment action against a
provider without first giving written notification
of its intent, a State Medicaid agency official or
other official must notify the provider in writing
of any overpayment it discovers in accordance with
State agency policy and procedures and must take
reasonable actions to attempt to recover the
overpayment in accordance with State law and
procedures.
(c) Overpayments resulting from situations other
than fraud or abuse. An overpayment resulting from
a situation other than fraud or abuse is discovered
on the earliest of (1) the date on which any
Medicaid agency official or other State official
first notifies a provider in writing of an
overpayment and specifies a dollar amount that is
subject to recovery; (2) the date on which a
provider initially acknowledges a specific overpaid
amount in writing to the Medicaid agency; or (3) the
date on which any State official or fiscal agent of
the State initiates a formal action to recoup a
specific overpaid amount from a provider without
having first notified the provider in writing.
(d) Overpayments resulting from fraud or abuse. An
overpayment that results from fraud or abuse is
discovered on the date of the final written notice
of the State's overpayment determination that a
Medicaid agency official or other State official
sends the provider.
(e) Overpayments identified through Federal reviews.
If a Federal review at any time indicates that a
State has failed to identify an overpayment or a
State has identified an overpayment but has failed
to either send written notice of the overpayment to
the provider that specified a dollar amount subject
to recovery or initiate a formal recoupment from the
provider without having first notified the provider
in writing, HCFA will consider the overpayment as
discovered on the date that the Federal official
first notifies the State in writing of the
overpayment and specifies a dollar amount subject to
recovery.
(f) Effect of changes in overpayment amount. Any
adjustment in the amount of an overpayment during
the 60 day period following discovery (made in
accordance with the approved State plan, federal law
and regulations governing Medicaid, and the appeals
resolution process specified in State administrative
policies and procedures) has the following effect on
the 60 day recovery period:
(1) A downward adjustment in the amount of the
overpayment subject to recovery that occurs after
discovery does not change the original 60 day
recovery period for the outstanding balance.
(2) An upward adjustment in the amount of an
overpayment subject to recovery that occurs during
the 60 day period following discovery does not
change the 60 day recovery period for the original
overpayment amount. A new 60 day period begins for
the incremental amount only, beginning with the date
of the State's written notification to the provider
regarding the upward adjustment.
* * * *
(h) Effect of administrative or judicial appeals.
Any appeal rights extended to a provider do not
extend the date of discovery.
The regulations further provide that the state must
refund the federal share of overpayments that are subject
to recovery to HCFA through a credit on the state's
Quarterly Statement of Expenditures (QER) (Form HCFA-64)
and that the credit must be made whether or not the
overpayment has been recovered by the state from the
provider unless the provider has been determined to be
bankrupt or out of business in accordance with section 42
C.F.R. 433.318. 42 C.F.R. 433.320(a).
In addition, the regulations provide that if the amount
of an overpayment is adjusted downward after the state
has credited HCFA with the federal share, the state may
reclaim the amount of the downward adjustment on Form
HCFA-64. 42 C.F.R. 433.320(c). However, downward
adjustment to an overpayment amount previously credited
to HCFA is allowed only if it is properly based on the
approved state plan, federal law and regulations
governing Medicaid, and the appeals resolution processes
specified in state administrative policies and
procedures. 42 C.F.R. 433.320(c).
Factual Background
The disallowance was based upon the findings of an OIG
audit entitled "Review of Selected Collection and Credit
Procedures Utilized by the New York State Department of
Social Services During the Period April 1, 1988 through
March 31, 1991." The audit was conducted to determine
whether the State established procedures to properly
identify all collections, recoveries, and other credits
related to the Medicaid program and whether the
appropriate federal share of identified collections and
credits was being used to offset reported expenditures
within the time frames required by 42 C.F.R. Part 433.
The auditors determined that the State understated the
credits applicable to overpayments resulting from
situations other than provider fraud or abuse (e.g.,
overpayments identified in reimbursement rate and
financial cost report audits). The auditors found that
the State did not report certain of these identified
overpayment amounts as credits, nor did it report the
appropriate federal share of these credits within 60 days
of the discovery date. State Exhibit (Ex.) 1, at 14.
The auditors noted that the State's Audit and Quality
Control Medical Facilities Audit Unit (A&QC) performed
audits at institutional care providers, such as hospitals
and nursing homes. Id. If an overpayment was
identified, a draft audit was issued by A&QC to the
provider explaining the details of the review including a
specific overpayment amount. Id. The provider was then
given 30 days to submit a response to the draft audit
report, which A&QC took into consideration before issuing
a final audit report. After the final audit report was
issued, the provider was given a choice of either making
direct payments within 60 days to the State's Office of
Fiscal Management (OFM) or having a portion of its future
billings withheld by OFM until the full amount of the
overpayment was recovered. Id.
The auditors' review further found that A&QC waited
approximately 60 days after issuance of the final audit
report to notify OFM of the overpayment amount. In turn,
OFM set up an accounts receivable file if the provider
chose not to make direct payments. After an additional
60 days, the provider-related overpayments were reported
as a credit to the federal government on the QER by using
either the accounts receivable files or direct payment
records. The audit report indicated that as a result of
the use of the accounts receivable to report Medicaid
credits, subsequent write-offs of remaining balances
resulted in improper reductions of credits reported to
the federal government by OFM. Id. at 15. In addition,
the auditors found a timing problem related to the
required 60-day reporting period; they found the periods
of time between the dates when draft and final reports
were issued to providers were, in some instances, several
years. Id. at 16. The auditors concluded that under the
relevant regulations, the State should have reported the
provider overpayments initially identified in the draft
audit reports within 60 days of the first notification to
the provider, and that any later recomputations adjusting
the overpayment amount could have been reported on the
appropriate QER.
In determining the total amount of credits due the
federal government, the auditors also computed interest
that they determined the State earned through its STIP by
not reporting the appropriate federal share of credits
associated with fraud or abuse and non-fraud or abuse
overpayments. Id. at 8, 18. The interest was computed
using STIP rates provided by the State which the auditors
applied to the federal share of overpayment credits they
determined were due the government. Id. The auditors
determined that had the State reported these overpayments
and credited current federal drawdowns of Medicaid funds
within 60 days of discovery, the State would have had to
substitute its State Purposes Funds, which are invested
in its STIP, to replenish the Medicaid account used to
pay current Medicaid expenditures. Id. at 13. The
auditors viewed the assessment of interest as a cash
management issue; they found that if the State had
reported the overpayments within 60 days of their
discovery, as required, the drawdown of federal monies
would have been reduced. The auditors concluded that
instead, the State improperly held federal funds and was
able to earn interest on the federal share of the
overpayments. Id.
Analysis
I. Under the State process presented here, issuance of a
draft audit which notifies a provider that a certain
amount of money is owed to the State constitutes
discovery in non-fraud or abuse overpayments.
Under the relevant statutory and regulatory provisions, a
state has 60 days from discovery of an overpayment to
recover or attempt to recover the overpayment before the
federal share of the overpayment must be refunded to
HCFA, whether or not recovery in fact is made by the
state. Section 1903(d)(2)(C) of the Act; 42 C.F.R.
433.312(a). The issue here is whether issuance of a
draft audit report identifying overpayments in non-fraud
or abuse cases constitutes "discovery" of an overpayment
within the meaning of the relevant regulations.
The State maintained that HCFA improperly used the date
of issuance of a draft audit report as the date of
discovery. The State argued that the amounts identified
by draft audits are not sufficiently certain and are thus
not subject to recovery by the State until issuance of a
final audit report. 1/ The State read the phrase,
"subject to recovery," in 42 C.F.R. 433.316(c)(1), as
meaning when a state, under state law, may legally begin
recovery of the overpayment from the provider. The State
contended that under its State law, it may begin recovery
only after it issues the final audit report.
For the reasons discussed below, we conclude that the
plain language of the regulation as well as its context
and history support HCFA's position. We agree with HCFA
that the regulatory changes effected by HCFA pursuant to
COBRA clearly contemplate that the date a draft audit
report is issued may be considered the date of discovery
for overpayments resulting from situations other than
fraud or abuse.
The regulation specifically provides that an overpayment
under these circumstances is discovered on the date on
which any Medicaid agency or other state official "first
notifies a provider in writing of an overpayment and
specifies a dollar amount that is subject to recovery."
42 C.F.R. 433.316(c)(1) (emphasis added). 2/ The use
of the phrase "first notifies" indicates that there need
not be a final determination of an overpayment or a final
overpayment amount; instead all that is required is that
an overpayment in a specific amount be identified.
The State would have us read the phrase "subject to
recovery" as meaning that a state must be legally able to
begin its recovery of the funds. The words "subject to
recovery" simply indicate that the amount specified is
the amount of the overpayment referred to and recognizes
the fact that not all audit findings necessarily lead to
or require recoveries. That the notice must specify a
dollar amount "subject to recovery" cannot be reasonably
read in context as meaning that the State must have an
unconditional legal right to recover that amount at that
time. To interpret the phrase this way would contradict
the statutory provision that requires a state to adjust
the federal share of discovered overpayments at the end
of the 60-day period following discovery, whether or not
the funds have been recovered or whether or not any
administrative or judicial appeals are complete. Section
1903(d)(2)(C) of the Act; 42 C.F.R. 433.312(a)(2) and 42
C.F.R. 433.316(h). 3/ Thus, the State's legal recovery
process does not determine the time of "discovery." In
any event, under State regulations, a draft audit report
may automatically become final if no objections are
received within 40 days after the mailing of the draft
report. 18 NYCRR 517.6(a); State's Brief at 11, 12. 4/
This undermines the State's contention that the amount
identified in a draft audit report is too tentative to be
subject to recovery by law.
Moreover, a reading of the regulation as a whole supports
the view that the amount indicated in the initial notice
may be a tentative amount which could be subsequently
reduced or increased. The regulation specifically
provides that states may reclaim overpayment amounts
previously refunded to HCFA if it is later determined
through the State audit and appeals resolution process
that these payments were allowable. Also, the regulation
specifically states that the 60-day period is not
extended because of any appeal rights extended to the
provider. 42 C.F.R. 433.316(h). Thus, HCFA recognized
in the regulations that although the state process of
recovery of an overpayment may extend longer than the 60-
day period, the statute nevertheless requires that the
federal share must be credited to HCFA at the conclusion
of the 60-day period.
Furthermore, the fact that discovery is defined
differently for overpayments resulting from fraud and
abuse than for overpayments in non-fraud and abuse cases
supports HCFA's position that, in the latter cases,
issuance of a draft audit report identifying overpayments
may constitute discovery. In fraud and abuse cases,
discovery is "the date of the final written notice of the
State's overpayment determination" sent to the provider
by the State. 42 C.F.R. 433.316(d). If HCFA had
intended that only final audit reports could be used as
the basis for its recovering overpayments in non-fraud
and abuse cases, it presumably would have used language
similar to what it used for the fraud and abuse cases. 5/
Instead, the provisions on non-fraud and abuse
overpayments refer to when a state official "first
notifies" a provider.
Finally, as HCFA pointed out, the State's objections to
HCFA's using the issuance date of a draft audit report as
the date of discovery were directly addressed and
rejected in the preamble to the final regulations. In
response to comments submitted by two state agencies on
HCFA's Notice of Proposed Rulemaking, the preamble states
as follows:
Two States suggested that the date of discovery
should be redefined to conform with State audit
policies and procedures. They stated that defining
discovery as the date of a State's first written
notice to the provider is contrary to proper audit
procedures. One State cited Departmental Grant
Appeals Board Decision 810 as concluding that
amounts cited in draft audit reports are only an
interim step in the discovery process, and any
amounts contained in these reports are not properly
subject to recovery. Both States agreed that the
date of discovery should be defined as the date of
the final written notice to the provider of an
overpayment determination.
54 Fed. Reg. 5454, at 5457 (February 3, 1989). At the
very least, the states' comment indicates that the states
understood the proposed regulation, which was not
modified, to provide that the date of discovery in non-
fraud and abuse cases may be the date of issuance of a
draft audit report.
Moreover, in response to the comment, HCFA stated:
The statute contemplates that discovery be based on
documented actions which specify an overpayment
amount and indicate that the State is beginning its
recovery efforts. We believe that the issuance of a
draft audit report could establish initial discovery
if the State notified a provider in writing of a
specific amount subject to recovery. If discovery
does occur through identification of an overpayment
in a draft audit report, the regulations allow the
State to reclaim the Federal share of the
overpayment that was refunded to the extent that the
State subsequently makes a downward adjustment based
on the approved State plan, Federal Medicaid law and
regulations, and the appeals resolution process
specified in State administrative policies and
procedures.
Id. at 5457. Furthermore, in the section of the preamble
discussing the provisions of the regulation, HCFA
explained:
Written notification may indicate either a tentative
or final overpayment amount to be recovered. . . .
However, regardless of the form of the State's
notice, under these regulations written notification
occurs at the point where the State documents its
communication by giving the provider written notice
regarding a specific dollar amount subject to
recovery.
54 Fed. Reg. 5454. The preamble further reiterates the
statutory and regulatory provisions, stating:
. . . the changes made to section 1903(d)(2) by
section 9512 of COBRA do not require us to consider
whether the State is able to recover the overpayment
by the end of the 60 day period, except for
uncollectible amounts [related to bankrupt or out of
business providers]. We recognize that the
overpayment debt collection process followed by the
State is sometimes prolonged and legally
complicated. However, the plain wording of sections
1903(d)(2)(C) and (D) does not permit the Federal
Government to delay the adjustment to FFP by
allowing the State a recovery period of more than 60
days while the State awaits the exhaustion of
provider appeals or judicial review or the execution
of repayment plans.
54 Fed. Reg. 5455. Thus, the preamble language clearly
supports the interpretation of the regulatory provisions
which HCFA advanced in this appeal.
The State took the position, however, that HCFA cannot
rely on the preamble which was not part of the regulatory
language "to impose a substantive requirement on the
State, i.e., to start recovery of overpayments at the
draft audit stage." State's Reply Brief, at 2. In
support of its position, the State cited New York State
Dept. of Social Services, DAB No. 818 (1986), in which
the Board determined that the preamble in question there
was not an appropriate vehicle for the imposition of a
substantive requirement which could have been stated in
the regulation but was not. Contrary to the State's
assertion, the preamble at issue here does not impose a
substantive requirement on the State. Rather, the
preamble language provides nothing more than an
interpretation of the regulatory definition of when an
overpayment resulting from situations other than fraud
and abuse is discovered. Moreover, this case is
distinguishable from DAB No. 818, where the Board found
that preamble imposed a limitation not apparent on the
face of the regulation and not required by the statute.
6/ Here, as previously discussed, the interpretation in
the preamble is directly supported by the language of the
regulation.
The State also contended that the Board's decision in New
York Dept. of Social Services, DAB No. 810 (1986) applied
here. In Decision 810, the Board found that HCFA could
adjust for overpayments prior to any State recovery from
the provider and did not have to wait until the
completion of a provider's appeal on an overpayment
determination to recoup the federal share. The Board
also found that the HCFA could not recover overpayments
based on a draft audit because the draft audits were not
sufficiently reliable. 7/ The Board stated, however,
that HCFA could resolve by regulation the controversy
over the use of state draft audit findings to identify
overpayments, but had up until that time failed to issue
a final regulation indicating at what stage state
determinations should be used. We conclude that HCFA
rectified the problems noted in the Board's decision in
DAB No. 810 when it promulgated the regulations at issue
here; thus, that decision simply is not controlling.
Therefore, we agree with HCFA that in New York,
consistent with the regulatory requirements, the date of
discovery in non-fraud or abuse situations is the date of
issuance of draft audit reports, if these reports give
the provider initial notice that an overpayment in a
certain amount has occurred which must be repaid.
II. The regulatory provisions of 45 C.F.R. 433.316 are
consistent.
The State contended that requiring the refund of the
federal share of tentatively identified overpayments
within 60 days of the issuance of the draft audit
conflicts with the requirement at 42 C.F.R. 433.316(b).
Section 433.316(b) provides that the State must take
reasonable actions to attempt to recover the overpayment
in accordance with state law and procedures. The State
argued that under New York State law and procedures, it
cannot attempt to collect non-fraud and abuse
overpayments until a final audit report is issued. Thus,
if discovery in this instance is considered issuance of
the draft audit report, then the regulatory provisions
are inconsistent.
The fact that the 60-day period may begin on issuance of
the draft audit report in non-fraud and abuse
overpayments does not prevent or conflict with the
State's undertaking recovery action in accordance with
its policies and procedures. The regulatory provision at
42 C.F.R. 433.316(b) only directs that the State take
reasonable action to attempt to recover the overpayment
and does not require that the amount actually be
recovered before the refund is required to be made. As
previously noted, under State law, a draft audit report
sent to a provider, which indicates the items being
disallowed and the basis and legal authority for the
proposed action as well as the amount of the overpayment,
constitutes notice to the provider from a state official
that the overpayment will be recouped from the provider
unless the provider objects and the overpayment finding
is modified in accordance with the State's process.
Thus, issuance of the draft audit report constitutes
reasonable action to attempt recovery pursuant to the
regulation.
III. The interest earned by the State on funds in the
STIP does not constitute an applicable credit.
HCFA argued that had the State reported these
overpayments and credited current federal drawdowns
within 60 days of discovery, as required, the drawdown of
federal monies would have been reduced and the State
would have had to utilize its State Purpose funds, which
are invested in its STIP, to replenish the Medicaid
account used to pay current expenditures. HCFA Brief at
24. Thus, HCFA contended that, in essence, by not timely
reporting the appropriate federal share, the State had
use of these funds for current Medicaid expenses and was
able to retain an equivalent amount of state monies
earning interest in its STIP. HCFA contended that it
should be credited with a portion of the interest the
State "was able" to earn by not reporting the federal
share of overpayments on a timely basis. HCFA Brief at
24. HCFA also argued that pursuant to OMB Circular A-87,
in order for a cost to be allowable, it must be net of
all applicable credits. OMB Circular A-87, Attachment A,
Section c.1.g. HCFA contended that the interest it
attributed to the overpayment amounts at issue here which
were not timely refunded constitutes an applicable credit
which should be used to reduce the State's drawdown of
funds. HCFA argued that allowing the State to retain the
interest earned on its STIP would be granting the State a
windfall. HCFA also stated that the rationale applied in
New York State Dept. of Social Services, Decision No.
1049 (1989) should apply here. In that case, the Board
stated that interest earned on United States' money is
interest that belongs to the United States and that
interest earned prior to crediting the federal government
with its share must be applied as a credit. Id., at 6,7.
HCFA also argued that 45 C.F.R. 74.47(a), which
requires grantees to remit interest earned on advances of
federal grant funds, supports its contentions. 8/
Contrary to HCFA's arguments, we do not find the
situation here analogous to that presented in previous
Board decisions in which the Board upheld HCFA's
disallowance of interest. In those cases, the State
earned interest on either withheld current payments to
providers suspected of fraud and abuse and placed in a
separate interest-bearing account or on recovered
Medicaid funds placed in interest-bearing accounts. See
New York Dept. of Social Services, DAB No. 1049 (1989);
North Carolina Dept. of Human Resources, DAB No. 361
(1982), aff'd 584 F.Supp. 179 (E.D.N.C. 1984); New York
Dept. of Social Services, DAB No. 588 (1984); and New
York Dept. of Social Services, DAB No. 721 (1986). In
this case, there is no dispute that funds in the STIP
account were State-only funds. There is no dispute that
these funds do not represent overpayments actually
recovered and held by the State in its STIP.
Nevertheless, HCFA contended that it is entitled to
recover interest as if federal funds were improperly held
by the State and then invested in its STIP.
The auditors characterized this as a cash management
issue. State Ex. 1 at 13. The auditors found that by
failing to credit the federal government within 60 days
of discovery (whether or not the State had actually
recovered the funds), the State did not reduce its
federal drawdown of funds and was able to essentially
continue to "bank" its own State funds rather than using
those funds to pay current Medicaid expenditures. As a
result the State was "able" to earn interest on its
banked funds. Based on the audit findings, HCFA took the
position that because the State's continued drawdown of
federal funds enabled it to earn interest on its own
funds, the federal government "should be reimbursed for
the interest NYS was able to earn, beyond the 60-day
reporting period, on money that belonged to the Federal
Government." State Ex. 1 at 13.
Clearly HCFA's object here is to provide an incentive for
states to abide by the requirement to timely credit the
federal government with identified overpayment amounts.
To adopt HCFA's position here, however, would require
that we apply the regulations in a novel way, without the
states having sufficient notice. HCFA's position is
essentially that at the point in time when the federal
share of a particular overpayment amount should have been
credited to the federal government but was not, a
corresponding amount of State funds should be converted
to federal funds. Consequently, any interest earned on
that corresponding amount would be treated as interest on
federal funds.
The regulations on which HCFA relied do not provide
authority for this result. HCFA argued that the interest
earned on state-only funds constitutes an applicable
credit under OMB Circular A-87, Attachment A, section
C.1.g., or represents interest earned on advances of
grant funds which must be remitted to the government
pursuant to 45 C.F.R. 74.47(a)(1993). OMB Circular
A-87, Attachment A, section C.1.g., defines applicable
credits as those receipts or reduction of expenditure-
type transactions which offset or reduce expense items
allocable to grants as direct or indirect costs.
Examples of the kinds of transactions giving rise to an
applicable credit are; purchase discounts; rebates or
allowances; recoveries or indemnities on losses; sale of
publications, equipment, and scrap; income from personal
or incidental services; and adjustments of overpayments
or erroneous charges. Id. In each of these
transactions, there is a direct relationship between a
grant-related costs and some form of discount or credit.
One cannot infer from the treatment of these transactions
that interest earned on State-funds under the
circumstances here would also be an applicable credit.
While the federal share of any actual overpayment to a
Medicaid provider is an applicable credit and must be
returned to HCFA, the applicable credit regulations does
not create a federal interest in State funds simply
because there are overpayment amounts not yet credited to
HCFA by the State. Moreover, the interest earned here in
the STIP did not represent interest actually earned on
advances of federal grant funds or on actual recovered
overpayment amounts, unlike the interest addressed in the
prior Board decisions on which HCFA relied.
The regulations pertaining to overpayments and their
discovery simply do not give the State notice that state
funds will be converted to federal funds at the point at
which the State was obliged to credit a particular
overpayment amount to HCFA. Thus, absent express
authority for HCFA's action, we conclude that HCFA cannot
properly treat interest earned on non-federal funds as
interest earned on federal funds. Therefore, we reverse
the disallowance of $2,536,985 related to interest the
State earned through its STIP.
Conclusion
For the above reasons, we uphold the disallowance of
$1,536,313 in FFP related to non-fraud and abuse
overpayments and reverse the disallowance of $2,536,985
in FFP for interest earned on state-only funds.
_____________________________
Judith A. Ballard
_____________________________
Donald F. Garrett
_____________________________
Cecilia Sparks Ford
Presiding Board Member
1. The State argued that draft audits as a general
rule are not sufficiently certain and thus an overpayment
is not identified for recovery purposes until a final
audit report is issued. Thus, the State here argued
solely about the timing of the recovery and did not argue
that the particular overpayment amounts identified in the
draft audit report were incorrect.
2. The State did not argue that the notice of the
draft audit findings was not notice from a "state
official" within the meaning of 433.316(c)(1).
3. The State argued that its interpretation of when
and how overpayments are subject to recovery under State
regulations and procedures was entitled to substantial
deference. The dispute here, however, is not about the
State's procedures for recovery, but about the meaning of
the phrase "subject to recovery" in federal regulations
regarding discovery.
4. The regulation in question provides that if the
State believes after review, including a closing
conference and consideration of any documentation and
information presented by the provider, that overpayments
have been made to the provider, "a draft audit report may
be issued identifying the items which are being
disallowed and advising the provider of the basis for the
proposed action and the legal authority therefor. When
feasible, the report will also specify the amount of the
overpayment." 18 NYCRR 517.5(a). Section (b) of that
regulation further provides--
The draft audit report must contain
a clear statement of the action to
be taken, must afford the provider
the opportunity to object to the
proposed action within 30 days of
receipt of this notice, must advise
the provider that failure to object
within the time provided may result
in adoption of the proposed action
as the final agency action . . . .
Id. (emphasis added). Section (a) of 18 NYCRR 517.6
states:
After receipt of the provider's
objection to the draft audit
report, or at any time after the
expiration of 40 days after the
mailing of the draft audit report
without objections having been
received, a final audit report may
be issued. . . .
(Emphasis added.)
5. The State attacked the validity of the regulations
on the basis that the regulations, unlike the COBRA 1985
amendment, differentiate when discovery occurs depending
on the type of overpayment involved. We are not
persuaded by the State's contentions that there is no
rational basis under the COBRA amendment for the
different regulatory definitions of when discovery occurs
depending on the kind of overpayment involved. Pursuant
to section 1102 of the Act, the Secretary is authorized
to promulgate regulations which are not inconsistent with
the Act and which are necessary for its efficient
administration. We agree with HCFA that defining
different dates of discovery does not conflict with the
statutory provision. We also find reasonable HCFA's
explanation that the regulations reflect the practical
reality that overpayments are discovered in different
ways, i.e., by the state, by the federal government, or
by the provider, and are subject to recovery in different
ways. HCFA's definition reasonably took these
considerations into account in defining when discovery
occurs for different types of overpayments. The preamble
explains the reasons for the varying definitions of when
discovery occurs and sets forth a rational basis for the
difference. See 54 Fed. Reg. at 5454.
6. The preamble in question here is consistent with
the general purpose of a preamble: it gives some
background for the regulation, summarizes the regulation
in simple terms and provides an interpretational guide
for aid in implementing the provisions in the regulation.
See DAB No. 818 at 7; Illinois Dept. of Public Aid, DAB
No. 667 (1985). In matters too numerous to all be
mentioned here, the Board has looked to the preamble of a
final regulation to confirm the plain meaning of the
regulation. Georgia Dept. of Medical Assistance, DAB No.
1488 (1994); New Jersey Dept. of Human Services, DAB No.
1434 (1993); and Arkansas Dept. of Human Services, DAB
No. 1328 (1992).
7. Under the State's regulations, the State itself
treats these reports as sufficiently reliable so that
they may automatically become the final agency action if
the provider does not object. Our decision in DAB No.
810 might have been different if we had more fully
considered the State's process as explained in the
present appeal.
8. We have cited to the 1991 Code of Federal
Regulations since the regulation as it appears there was
applicable during the period in dispute. We note,
however, that Part 74 of title 45 of the Code was amended
in August, 1994 and, as a result, the section numbers
were changed.