GAB Decision 170
April 30, 1981 California Department of Health Services; Docket Nos.
79-20-CA-HC, 79-210-CA-HC, 80-123-CA-HC Ford, Cecilia; Settle, Norval
Teitz, Alexander
The State of California appealed three determinations by the Health
Care Financing Administration (HCFA), disallowing a total of $7,613,820
in Federal financial participation (FFP) claimed under Title XIX
(Medicaid) of the Social Security Act (Act) during the period January 1,
1971 -- July 31, 1977. The appeals have been considered jointly without
objection by the parties.
Introductory Summary
The amounts disallowed represent the Federal share of "duplicate"
payments to fee-for-service providers for services rendered to Medicaid
patients for whom the State had also made premium payments to prepaid
health plans (PHPs). The State admits that these payments were in error
and violated applicable regulations and that HCFA has, with a minor
exception discussed below, correctly determined the amount of FFP
claimed for these payments. The State argues, however, that the Board
can, through adjudication, establish that these errors were within a
reasonable tolerance level and, thus, allow FFP in these payments.
The Department of Health and Human Services (HHS, formerly HEW) has
adopted, by regulation, a policy that fiscal disallowances based on
error rates determined through quality control samples will be imposed
only for eligibility errors in excess of specified tolerance levels.
These regulations were not in effect for the Medicaid program during the
relevant time period. Moreover, the State concedes that these
"duplicate" payments can best be classified as "claims processing"
errors. The quality control disallowance provisions have never applied
to this type of error. The State contends, nonetheless, that since the
Department and the courts have recognized the impossibility of running
an error-free public assistance program, the Board should read the Act
as permitting a reasonable tolerance for errors and, based on the
evidence submitted by the State, determine that the errors here were
reasonable, unavoidable, and de minimis, considering the circumstances
at the time they were made.
The State has submitted evidence of good faith efforts to reduce
errors, and we recognize that it may be impossible to eliminate errors
completely, particularly in an experimental program such as the State's
PHP program here. Moreover, the position which HCFA has taken in
disallowing these payments is not entirely consistent with the
Department's current position in recognizing the need for tolerance
levels, at least in some circumstances. On the other hand, to find for
the State here we would have to adopt a a tenuous and convoluted
reasoning process, substituting our own judgment for that of the Agency
in an area of complicated programmatic concerns. Under the applicable
regulations these were erroneous payments. While the statute may permit
FFP in erroneous payments where the Secretary has excercised rulemaking
authority to establish a reasonable tolerance level, Maryland v.
Mathews, 415 F. Supp. 1206 (D.D.C. 1976), a standard of reasonableness
for errors should be based on empirical studies and a consideration of
all relevant factors. Even if we were to hold that in some
circumstances the Board could, by adjudication, formulate a rule
consistent with Departmental policy as expressed in a later regulation,
it would be inappropriate for the Board to exercise such authority here.
There are too few guides as to what the standard should be. Moreover,
to adjudicate the issue we would have to intrude into an area of program
operations more wisely left to the administering agency. There is no
way of establishing reasonableness with mathematical precision and the
determination of where, within a range of reasonableness, a tolerance
level will be set necessarily involves a policy judgment. Accordingly,
for reasons stated more fully below, we conclude that the disallowance
should be upheld, except with respect to $52,000 for which adjustment
has already been made.
This decision is based on the parties' submissions and on oral
statements made by the parties at an informal conference held with the
Panel Chair on January 29, 1981.
Case Background
Generally, Medicaid services under Title XIX (called Medi-Cal in
California) are provided to eligible recipients through a
fee-for-service system, the medical providers being paid directly by the
State for the specific services provided.Title XIX also authorizes
states to provide medical care through contracts with health insurance
organizations, which provide health care to the recipient in return for
a prepaid monthly premium. In California, these health insurance
organizations are called prepaid health plans (PHPs). With the
encouragement of the Federal Government, California began funding
experimental PHP projects in 1968 and began contracting with PHPs on a
regular basis in May 1972.
After the California Auditor General reported that payments were
being made to fee-for-service providers for services which should have
been covered by premium payments to PHPs, the HEW (now HHS) Audit Agency
performed a series of audits to identify the amount of such "duplicate"
payments. The following disallowances resulted:
Board Docket No Audit Control No. Period *2*Amount of Disallowance
80-123-CA-HC 00210-09 June $1,109,006 1972-June
1973 and August 1973 - December
1973 month of
371,047(estimate) July 1973 and
periods prior to June 1972
79-20-CA-HC 80215-09 September 429,973 1 - December
31, 1975 79-210-CA-HC 90203-09
January 5,703,794 1,
The State does not dispute the amount of duplicate payments with one
exception. Included in the disallowance in Docket No. 79-20-CA-HC is
$52,000 which the State originally claimed for the Federal share of
payments to Los Angeles County but later repaid after recouping the
amounts from the County. HCFA at first took the position before this
Board that the fact that the State had made adjustments for these
payments would not be a basis for reversal of the disallowance. The
State persuasively argued, however, that by recouping the money from the
County it had avoided duplicate payments, and HCFA now concedes that the
disallowance should be withdrawn with respect to this $52,000. See
Memorandum to file dated February 5, 1981; Transcript, pp. 78-80.
Thus, the amount remaining in dispute is $7,561,820.
As the State points out, "The payments are not truly duplicated, as
no other provider has been paid for the specific service. However, they
do pay for services which should have been provided by the PHP which
received the capitation payment for the specific recipient." Application
for Review, Docket No. 79-20-CA-HC, p. 2. Causes of this duplication,
identified in August Report ACN 80215-09, included inadequate controls
over the issuance of temporary Medi-Cal cards by county welfare
departments; errors made by fiscal intermediaries in screening claims
for proper Medi-Cal labels; and errors made by the State's computer
system in issuing permanent Medi-Cal cards. During the period audited,
the State took steps to correct for these errors and reduced the rate of
errors significantly. See State's submission of Decemeber 23, 1980.
The State does not deny that these duplicate payments were contrary
to the requirements of applicable regulations. /1/ While some of the
causes of duplicate payment errors are related to the eligibility
determination process, the State admits that the errors are not
eligibility errors or errors in the rate of payment, so that the
category into which the errors best fit is that of claims processing
errors. Transcript, p. 42; see, also, 42 CFR Sec. 431.800(b).
History of Tolerance Level Provisions
The issue here is best understood if viewed in the historical context
of the Department's efforts to deal with erroneous payments in the Aid
to Families with Dependent Children (AFDC) Program and in the Medicaid
Program involved here.
Efforts to reduce error in AFDC resulted in the evolution of "quality
control," a system of sampling assistance cases to assess the accuracy
of eligibility determinations and calculation of payment amounts. The
system is "designed to measure error rate levels and to provide
information on the nature and causes of errors so that corrective
actions and other administrative improvements may be undertaken." 43 FR
29311, July 7, 1978. Beginning in the early 1970's the Department
proposed a series of rules to use extrapolation from quality control
samples as a means of determining the amount of erroneous payments made
by a state for its entire AFDC caseload during the sampling period, and
to base disallowances on that extrapolation. These rules were highly
controversial and no disallowances were taken pursuant to the early
versions. In a revised notice of proposed rulemaking published on May
19, 1975, the Department asserted that it was required by the Social
Security Act to exclude from FFP "States' erroneous payments to
ineligible recipients and overpayments to eligible recipients above
reasonable limits established by the Secretary." 40 FR 21737. The
proposal was said to reflect "the Secretary's awareness that under the
administrative structures presently existing in most States, a
requirement at this time that States eliminate all erroneous payments,
with a resultant disallowance of Federal financial participation in any
erroneous payments is unrealistic." 40 FR 21737.
The final rule, which appeared in the Federal Register on August 5,
1975, provided for disallowance of FFP for that portion of a state's
expenditures for ineligibles represented by a case error rate in excess
of 3% and for overpayments represented by a case error rate in excess of
5%, commencing with the July-December 1975 quality control sampling
period. In the case of Maryland v. Mathews, 415 F. Supp. 1206 (D.D.C.
1976), the District Court for the District of Columbia found that these
"tolerance levels were arbitrarily established at 3% and 5% without the
benefit of an empirical study" and, therefore, the regulation was framed
in an arbitrary and capricious manner and was an abuse of discretion.
The Court held that the regulation was inconsistent with the Social
Security Act "by preventing the states from furnishing assistance as far
as practical given the conditions of the state, and is therefore
invalid." 415 F. Supp. at 1212.
The Court in Maryland also concluded from its interpretation of Title
IV-A of the Act (AFDC) that "payments which are not made properly,
pursuant to the approved plan, are not to be matched by federal funds,"
but upheld the Secretary's authority, under Section 1102 of the Act, to
promulgate a regulation providing for disallowances of FFP only for
erroneous payments in excess of a reasonable established tolerance
level. 415 F. Supp. at 1212. The Court's decision was based, in part,
on a recognition of the complexity of the eligibility determination
process and the impossibility of totally eliminating errors.
No regulation setting tolerance levels had been promulgated for the
Medicaid Program up to that point. A system of quality control for
Medicaid eligibility determinations was used in the early 1970's,
discontinued in 1973, and then reinstituted effective July 1, 1975. 40
FR 27222. The Medicaid quality control system was revised on April 1,
1978, to include measurement of payment errors due to uncollected third
party insurance and claims processing errors.
After the decision in Maryland, the Department made empirical studies
and proposed new regulations applicable to both the AFDC and Medicaid
programs. 43 FR 29311, July 7, 1978. The new regulations, as proposed,
would have set as an ultimate goal an error rate of 4% for both payments
to ineligibles and overpayments to eligibles. The Department received
and considered over a long period of time comments on these proposed
regulations. Final regulations adopted on March 7, 1979, provided that,
to avoid a disallowance, a state must either not exceed the national
weighted mean payment error rate calculated for a specified base
sampling period or must meet a prescribed rate of reduction in the
percent of payments in error. 45 CFR 205.41 (AFDC) and 42 CFR 431.801
(Medicaid); 44 FR 12578.
The March 7 final rule did not adopt the 4% ultimate goal which had
been proposed. The preamble explained that the Department was instead
undertaking an 18-month study to determine a reasonable ultimate goal
for eligibility error rates in each program. Setting of this ultimate
goal was related to a recognition that at some point further error
reduction is not cost-effective. 44 FR 12578. These rules also provide
for waiver of disallowances based on quality control error rates where a
state demonstrates that its failure to meet the standard is due to
factors beyond its control, including "sudden and unanticipated workload
changes which reult from changes in Federal law and regulation." 42 CFR
431.801(f), 44 FR 12591.
The preamble to the July 7, 1978 proposed regulations had requested
suggestions regarding a proposal to apply quality control fiscal
reductions to Medicaid claims processing errors, the kind in issue here.
The discussion of this proposal explained that a lower error tolerance
level was being considered for claims processing than for eligibility
errors because "claims processing errors are more easily controlled with
appropriate management and computer system techniques." 43 FR 29314.
Commenting on this proposal, a number of states suggested that no
tolerance level should be set for claims processing errors at that time
because of the lack of empirical data and that separate tolerance levels
should be set for different types of errors. In response to these
comments, the Department determined, "For the time being, we will not
set a tolerance level for these types of errors." 44 FR 12590.
Amendments to the March 7, 1979 rules were enecessitated by
Congressional action. 44 FR 55314, September 25, 1979 (proposed rule);
45 FR 6326, January 25, 1980 (final rule). Based on a directive in
Section 201 of the Labor-HEW Appropriation Bill for Fiscal Year 1980
(H.R. 4389), as referenced in the Continuing Resolution for Fiscal Year
1980 (P.L. 96-123), the amended rules require states to reduce their
eligibility payment error rates in AFDC and Medicaid to 4% by September
30, 1982. The amended rules also provide for the possibility of waiver
of a disallowance where a state has made a good faith effort to meet its
target error rate by timely implementing a corrective action plan
reasonably designed to meet the target error rate.42 CFR 431.802(f)(2)(
v), 45 FR 6333.
Arguments
The position which HCFA has taken in this appeal is that the absence
of any formally promulgated regulation establishing a specific tolerance
level for the types of errors in question here is determinative of the
issue. HCFA argues that "until such time as applicable regulations are
enacted, the agency is required to enforce existing regulations. . .,"
including regulations denying FFP in these erroneous payments.
Memorandum in Support of Respondent's Motion for Summary Judgment,
Docket No. 79-20-CA-HC, p. 3. According to HCFA, the rule that the
Board is "bound by applicable laws and regulations," at 45 CFR 16.8(a),
precludes the Board from finding that the duplicate payment errors here
were within a reasonable tolerance level and that, therefore, FFP is
available.
The State admits that no tolerance regulation applies to the payments
in question but argues that the absence of such levels "indicates not
that no tolerance level should exist but only that there is not at the
moment a recognized fixed level at which a tolerance is pegged," and
that the regulations may serve as a guide to what is reasonable.
Application for Review, Docket No. 79-20-CA-HC, p. 3.
The State points out that the Act provides for Federal participation
in a percentage "of the total amount expended during such quarter as
medical assistance under the State plan . . . ." Section 1903(a)(1) of
the Act. The State takes the position that improper or erroneous
expenditures, which are of a rate sufficiently low that it cannot within
the realm of practicality be reduced, are so necessarily a part of the
proper expenditure of funds for medical assistance that they must be
considered eligible for FFP under the quoted language." State's Brief,
p. 7. According to the State, "if HEW had the power to promulgate a
regulation providing for tolerance levels, then the statute upon which
the regulation is based must allow tolerance" and the statute may be
directly interpreted to determine the scope of those tolerances.
State's Brief, p. 4.
In support of its argument, the State cites the recognition, in
Department regulations and the Maryland case, that programs such as
Medicaid cannot conceivably be run error-free. Thus, the State argues,
a reasonable error rate is a necessary cost of doing business, a cost
which should not be borne solely by the states. Transcript, p. 8;
Application for Review, Docket No. 79-20-CA-HC, p. 1.
Because the State views the matter, in part, as a question of
interpretation of the concept of "cost" in the Medicaid statute, the
State takes the position that "this Board may find in the adjudicatory
context that as to this particular narrow program (PHPs) a particular
rate of error is within the normal cost of the program and is within the
tolerance which the Federal government has allowed." Transcript, p. 8.
Part of the State's argument is the proposition that the PHP program
cannot be lumped together with the general Medicaid Program for the
purpose of determining what a reasonable overall error rate would be
since the duplicate payment problem is unique and since most of the
errors occurred while the PHP program was in its experimental stages.
State's Brief, p. 13; Application for Review, Docket No. 79-20-CA-HC,
p. 2. Thus, the figures which the State presents as its error rates for
the periods in question are duplicate payment amounts as a percentage of
total PHP capitation payments.
The State characterizes the showing which a state should be permitted
to make to avoid disallowance of erroneous payments as a showing "that
the amount of the misexpenditure either is impossible to avoid
altogether, given the nature of the program, or is of so small a scope
that the cost of attempting to avoid that error rate would be greater,
or arguably greater, at least, than the error rate itself." Transcript,
pp. 6-7. Presumably, the State would apply the "unavoidability"
standard to the initial stages of the PHP program and the
"cost-effective" standard to later stages, after the State had taken
corrective action to reduce duplicate payment errors, but failed to
eliminate them completely.
The State also argues in the alternative that FFP is available in de
minimis errors under Section 1903(a)(7) of the Act. This section
provides for FFP at a 50% rate in amounts "found necessary by the
Secretary for the proper and efficient administration of the State
plan."
HCFA acknowledges that, although it has never been considered as a
policy matter whether Section 1903(a)(7) could be used to pay for some
errors, arguably the Secretary could treat some errors as an
administrative cost under that section. Transcript, p. 69. However,
the State claimed FFP in the "duplicate" payments here as medical
assistance costs rather than as administrative costs. In any event, we
do not reach the issue of whether FFP might be allowable in some
erroneous payments as an administrative cost under Section 1903(a)(7),
since our ultimate decision concerning the appropriateness of the Board
establishing the reasonableness of errors through adjudication would be
the same.
Discussion
1. Board Authority
In analyzing the State's argument, we begin with the proposition that
the payments in question were unallowable under applicable regulations.
Under other circumstances, this might be dispositive of the case. HCFA
is correct that, under 45 CFR 16.8, the Board is bound by applicable
laws and regulations. Here, however, the State argues that Section
1903(a)(1) of the Act must be read to subsume into the concept of
"medical assistance" costs certain costs which might, if one examined
them separately, be unallowable, but which are associated with errors
within a reasonable tolerance and are therefore allowable. In this
context, Sec. 16.8 does not preclude our review, since one may view the
regulations as either silent on costs within a tolerance level (if one
applies) or as in conflict with the statute. That is to say, it is too
facile an answer to respond that it is determinative of the issue that
the payments in question here were erroneous under applicable
regulations; we have an obligation to go further to determine whether
the regulations may be incomplete, and therefore inapplicable, or even
at odds with the statute, if one agrees with the State. Although we
ultimately conclude that, even if the Board could establish a tolerance
level through adjudication, to do so would be inappropriate, nothing
precludes our review in the first instance.
2. Possibility of Proceeding by Adjudication
The State cites SEC v. Chenery, 332 U.S. 194 (1947) (Chenery II), for
the proposition that in certain situations an administrative agency must
retain the power to deal with problems on a case-by-case basis if the
administrative process is to be effective. Chenery II does indicate
that an agency may sometimes proceed by adjudication in appropriate
circumstances, such as where an agency may not have had sufficient
experience with a particular problem to establish a hard and fast rule.
332 U.S. at 202-203. The State argues that here, where California was
experimenting with a new medical delivery system, "this is precisely the
situation which could not be handled through prospective rulemaking . .
. ." State's Brief, p. 6.
While Chenery II, and other cases cited by the State (State's Brief,
p. 10), support the notion that an agency may proceed by adjudication in
certain circumstances, they also, however, stand for the proposition
that "the choice made between proceeding by general rule or by
individual, ad hoc litigation is one that lies primarily in the informed
discretion of the administrative agency." 332 U.S. at 203. As discussed
below, there are a number of factors here which weigh against a choice
of proceeding to establish a reasonable tolerance for errors by
adjudication.
Moreover, as the cases indicate, the position that an agency may
proceed by adjudication is premised on the view that the matter involved
is one of statutory interpretation. The Court in Chenery II spoke of
"filling in the interstices" of the statute involved there, and of
"case-by-case evolution of statutory standards." 332 U.S. at 203.
While
we do not find it necessary to reach the issue here in view of our
conclusion that it would be inappropriate for us to proceed by
adjudication, we note that this may not be a matter of statutory
interpretation. The State's argument that the concept of "cost" in
the
Act necessarily includes reasonable errors is not supported by any
legislative history nor does it necessarily follow from the fact that
the Department has promulgated regulations allowing a reasonable
tolerance for errors identified through quality control samples. The
State's reliance on the Maryland v. Mathews case, cited above, is
misplaced in this regard. While the Court in Maryland did recognize the
practical impossibility of running an error-free program, the case does
not support the position that reasonable errors should be considered a
necessary cost of the program in which the Federal Government is
required to participate. The Court in Maryland rejected the states'
argument there that erroneous payments could be considered payments made
as "aid or assistance" under Title IV-A. 415 F. Supp. at 1211-1212.
Moreover, the Court discussed the Secretary's authority to promulgate a
regulation allowing FFP in erroneous payments up to a reasonable
established tolerance level as deriving from the Secretary's authority
under Section 1102 of the Act. That section provides that the Secretary
"shall make and publish such rules and regulations, not inconsistent
with (the Act), as may be necessary to the efficient administration of
the functions with which (he) is charged" under the Act. The Court's
holding that the Secretary could exercise this authority to promulgate a
regulation permitting a reasonable tolerance for errors determined
pursuant to quality control does not necessarily mean that the statute
may be directly interpreted to provide for tolerances and to determine
what their scope should be.
3. The Choice of Adjudication or Rulemaking
Even if the statute could be interpreted to permit a reasonable
tolerance and a determination of reasonableness could be made on a
case-by-case basis, the choice to proceed in that manner should be based
on an informed judgment as to the appropriateness of adjudication rather
than rulemaking. There are a number of factors which weigh against our
deciding that adjudication would be appropriate here.
The disallowance determination which we are reviewing here is a
determination that a tolerance level does not apply, not a determination
that the errors disallowed were above a level which was reasonable.
Thus, our analysis of the issues of reasonableness would involve, not an
evaluation of whether the Agency properly considered all relevant
factors, but an initial examination of how the question should be
approached. First, we would have to determine whether the standards of
"unavoidability" and "cost-effectiveness" proposed by the
State are the
correct measures of reasonableness. We would have to consider whether
the PHP program may be examined separately or must be viewed in the
context of the State's entire Medicaid Program, whether duplicate
payment errors can be examined apart from other claims processing
errors, and whether other states' experiences are relevant. The amount
of factual data which would need to be accumulated is potentially
staggering. The Department's setting of tolerance levels for
eligibility errors took place in the context of the quality control
system which provided the necessary data and experience. The quality
control system did not apply to Medicaid claims processing errors until
1978, so that system would not provide information relating to this type
of errors. Setting a tolerance level for these error would involve an
after-the-fact construction of a data base.
As the Court indicated in Maryland, the determination of what is a
reasonable tolerance for errors is one which should be based on
empirical studies and consideration of all relevant factors. Where a
determination of what is reasonable requires expertise and experience in
program operations, a comparison of various states' performance, and an
evaluation of the feasibility of reducing errors in a cost-effective
manner, we think that the regulatory (or legislative) process is the
most appropriate one for making such a determination.
Moreover, there is no way of determining with mathematical precision
the exact point at which a tolerance level should be set. The concept
of reasonableness may lead to identification of a range within which
errors should be tolerated, but the choice of a specific figure within
that range involves a policy judgment. Where a matter involves an
exercise of programmatic judgment, the Board will not normally
interfere.
The State argues that the regulations promulgated may serve as a
guide to the Board as to where a tolerance level should be set. Those
regulations do not, however, set a tolerance level for claims processing
errors, the type of errors involved here. In part in response to
states' comments, the Department determined in 1980 that there was
insufficient empirical data available as a basis for setting such a
tolerance. The discussion of this indicates also that there is reason
not to adopt the same standard for claims processing errors as for
eligibility errors. Thus, this is not a situation where we could
analogize to a standard set through the regulatory process, merely
applying it to an earlier period.
Given all these considerations, we have determined that, even if we
could proceed by adjudication to set a tolerance level for the State's
errors, we should not do so.
This conclusion does not, however, preclude the Agency from choosing
to reevaluate its own power in this regard. Some of the barriers to the
Board proceeding by ad hoc adjudication here do not apply to HCFA. As
the State argues, to a certain extent it is the victim of the slowness
of the regulatory process. If the quality control disallowance
provisions had not been so controversial and a tolerance level had been
set for this type of error, the State may have possibly met the standard
or qualified for a waiver based on the experimental nature of the
program or the State's prompt corrective action. The HCFA policy of
disallowing for all individually identified erroneous payments does not
afford the State this possibility. /2/ While we agree with HCFA that it
is difficult to consider $7 million as a de minimis amount of errors,
HCFA arguably could allow FFP in some of the payments as an
administrative cost, or interpret the statute to permit a tolerance, or
exercise rulemaking authority to retroactively allow FFP in reasonable
errors on a proper showing.
Conclusion
For the reasons stated above, we conclude that the disallowance
should be upheld, in the reduced amount of $7,561,820. /1/ HCFA relied
in Docket Nos. 79-20-CA-HC and 79-210-CA-HC on the provisions of
45 CFR 249.82(c)(6)(vii), but based the disallowance in Docket No.
80-123-CA-HC on Section 249.82(b)(1). While it appears that the first
cited section provides a stronger basis for a determination that FFP is
not available in the payments, we do not need to reach the issue here
since the State concedes that FFP is not available in payments to
fee-for-service providers for recipients enrolled in PHPs. Application
for Review, Docket No. 79-20-CA-HC, p. 1; State's Brief dated May 22,
1979, p. 7; Transcript, p. 15. /2/ HCFA admits that the states
are not expected to run an error-free Medicaid Program. It nevertheless
supports its position for disallowing for all individually identified
erroneous payments, not only on the regulatory language, but on the
basis of fairness. It claims that there is an informal or de facto
tolerance built in by the "horse and buggy" audit system. Since the
limited number of auditors permits examining only a small portion of a
state's entire Medicaid Program, for every error discovered by the
auditors for which repayment is required, there may be ten times as many
in the unaudited parts of the program. This argument overlooks the fact
that if there is an overall tolerance level, a state may, if it works
hard enough, be able