GAB Decision 182
May 29, 1981 California Department of Health Services -- San Joaquin
Foundation; Docket No. 79-147-CA-HC Ford, Cecilia; Teitz, Alexander
Settle, Norval
The California Department of Health Services appealed from a
disallowance by the Health Care Financing Administration (Agency) of
$331, 475 /1/ in Federal financial participation (FFP) claimed by the
State for payments to the San Joaquin Foundation for Medical Care
(Foundation), under contract with the State as a prepaid health plan
provider pursuant to Title XIX of the Social Security Act. The costs
were incurred during the period August 1, 1970 through March 31, 1972.
With the concurrence of the State, the Board granted the Foundation's
request to participate in this appeal as a party.
The disallowance was based on HEW (now HHS) Audit Agency Report ACN
30013-09. The State originally disputed the findings of the HEW audit
based on a subseuqnt State audit. During litigation between the State
and the Foundation, the State performed another audit, which also was a
basis for disputing the HEW findings. The Agency's reconsideration in
this case was delayed during preparation of the second State audit.
The recorcd in this appeal consists of the State's application for
review, the Agency's response, the Record of Reconsideration (SRS Docket
No. ME-CA7401), six State exhibits, six Agency exhibits (seven were
marked but the Agency withdrew one), and the transcript of the hearing
held on March 26, 1981. There was no post-hearing briefing. At the
hearing, the parties stipulated to introduction of a State-prepared
summary of contested findings and amounts in dispute (see State Exhibit
1, Introduction, p. 4; Transcript, p. 6), which we use here as a basis
for the computations in our determination.
The Audit involved a number of different findings and issues. Our
decision deals with the various elements of the disallowance separately,
under the headings below. (2) Partial Month Eligibles"
Of the contested disallowed amounts, $176,950 (of which the Federal
share was $88,475) represents alleged overpayments by the State to the
Foundation for benefits for recipients who fall under the parties'
rubric of "partial month eligibles" (State Exhibit 1, Introduction,
p.
4; Transcript, p. 3). The term covers both persons who were only
eligible for benefits for a portion of a month and persons who were
retroactively determined to be eligible and for whom the rolls were
later adjusted (Record of Reconsideration ("RR"), Tab 3, p. 20). The
HEW auditors determined that the Foundation overstated the number of
these recicpients by 21,685 for the period August 1, 1970 through
September 30, 1971 (id). The auditors found that:
Foundation records showed that an increase of 40,502 count was
reported to (the State) during the period August 1, 1970 through
September 30, 1971. Based on the Caseload Movement and Expenditure
Reports (Form CA-237) for the above period, we determined that the
increases due to new applications, restorations and transfers totaled
only 18,817 rather than 40,502, or a difference of 21,685. Based on
this, the over-payment totals $176,950 (21,685 count times $8.16 average
cost). Id., pp. 20-21.
In the 1973 State audit, the State's auditors arrived at a
disallowance of $185,737, which cannot be usefully compared to the
Federal figure because the State amount related to a substantially
different time period and overlapped on one or more items which the HEW
audit treated separately. /2/ Later, as a result of the 1978 State
audit, the State discounted both the earlier State and HEW audit
results, and concluded that the State actually owed the Foundation
$225,932; but this finding, too, is of little use here. /3/ At the
hearing the State and the Foundation presented evidence and argument
solely on the issue of whether HEW's audit findings on the amount of the
disallowance were reasonable and based on proper methodology
(Transcript, pp. 76-139; State Exhibit 1, Issue 9).
Nowhere in the record does the State contest the determination that
the costs involved were unallowable; the dispute concerns the amounts,
if any, which should be disallowed.
The focus of the dispute over methodology concerns two different
audit approaches used by the HEW auditors, which produced substantially
different answers to the question of how much should be disallowed for
partial month eligibles. The final disallowance was based on the method
which produced the higher figure.
The first method involved examination of a form identified as the
M208. Undisputed testimony and HEW draft audit findings indicate the
following: the M208 was a form prepared by county officials and sent to
the Foundation every two or three days, specifically identifying
individuals who were determined to be eligible to participate in the
Foundation's program. Transcript, mined to be eligible to participate
in the Foundation's program. Transcript, pp. 79, 92, 103, 123. These
numerous forms were summarized on worksheets, prepared by Foundation
staff, which were used as part of the process of billing the State.
Id., pp. 91, 123-124. There were 773 of the worksheets for the audit
period, and HEW auditors selected 25 of these for review, which covered
1691 persons. Id., pp. 79-80. The auditors then compared these 1691
names with names on the M208 forms, and found a discrepancy: (4) there
were 82 more persons shown on the worksheets, an error rate of 4.85%.
Id. Using statistical extrapolation techniques, this error rate was
translated into a potential disallowance of between $13,072 and $18,985
at the 90% confidence level (mid-point: $16,029). Id., pp. 80-81;
State Exhibit 1, Issue 9; State Exhibits 2 and 3.
The second audit method -- used by the HEW auditors to produce the
recommended disallowance of $176,950 in the final audit report --
involved examination of a different form, the CA237. Unlike the M208
and the Foundation's worksheets, which contained data on individual
eligibility changes, the CA237 was a monthly summary of case load
changes prepared by the County primarily as a report to the State.
Transcript, pp. 81-82, 92-93. The HEW auditors extracted from the CA237
forms for the audit period the total of partial month eligibles
(18,817), and compared this figure to the total reported by the
Foundatioon (40,502); the difference of 21,685 reflected an alleged
error rate of about 53.5%, which was translated (based on an average
premium rate per eligible of $8.16) into a recommended adjustment of
$176,950. Id., pp. 82-84; RR, Tab 3, pp. 20-21.
Thus, the two methods produced grossly different error rates. The
final HEW audit report uses only the second (higher) rate, and does not
mention the alternative method or its lower results. RR, Tab 3, pp.
20-21. The latter method is disclosed only in a draft of the HEW audit
report (State Exhibit 3). That draft report discussed the method and
results of examining the M208 forms (as explained above), and stated
that "for comparison" the auditors also examined the CA237 forms.
The
draft report goes on to state:
. . . the count was overstated by up to 21,685 count and the
Foundation has been overpaid. The over-payment could total as much as
$176,950 . . . we recommend that (the State) develop procedures for the
Foundation to accurately detemine the increases in count from the Forms
M-208 and that (the State) and the Foundation redetermine the total
number of increases for partial month and retroactive approvals.
Benefits dues should be adjusted on the basis of the redetermined count
and the Federal share returned accordingly. State Exhibit 3, pp. 3-4
(emphasis added).
The draft audit report did not make a specific disallowance
recommendation; rather, it recommended that the State "make further
determinations and return Federal funds as appropriate" and improve
procedures to increase accuracy in recipient count from the M208 forms.
Id., p. 5. (5) The draft audit report is the chief underpinning of the
State's claim. /4/ The State argued that "the HEW auditor never
attempted to reconcile the apparent different error rate conditions of
4.85% and 53.5%" and that the preliminary draft audit report "seriously
undermined the auditor's conclusions. . .the final HEW audit report was
unfairly manipulated so that the weaknesses inherent in the Audit
agency's position would not be evident to the reader." State Exhibit 1,
Exhibit 9, pp. 3-4. The State presented as a witness a certified public
accountant who testified that the difference in the error rates was
significant, and reasonably should had led the auditors to do additional
work to determine which rate is more nearly correct. Transcript, pp.
78, 94, 131-133.
The Agency's argument, as presented at the hearing by one of the
original auditors, was that the examination of M208 forms was merely a
"probe" sample to see if there was a problem; when the probe indicated
there was, the auditors used the CA237 forms to arrive at the amount of
the disallowance. Id., pp. 97-99, 104-111. The auditor felt the M208
was not entirely reliable, the CA237 was, and, in any event, examining
the M208 forms was a much more tedious and time-consuming process than
reviewing the CA237 forms. Id., pp. 98-99, 100-105, 121-122. But no
attempt was made to verify the CA237 data in relation to the underlying
M208 forms or other county records. Id., p. 121.
In our view, the Agency had and has a valid concern about the amount
which the State should receive; the record clearly shows that State and
HEW audits indicated an overpayment during the period in question. The
record also shows, however, that the Agency set its disallowance at the
highest possible level in the face of evidence that reasonably counseled
further inquiry. The difference in error rates disclosed by the two
audit methods is very great. While the Agency witness attempted to show
that the M208 examination were merely a probe, nothing else in the
record suuports that view, and the record as easily may be read to
suggest that the choice of the highest possible figure was arbitrary.
We conclude that while a disallowance of some amount for partial month
eligibles is appropriate, the disallowance cannot be upheld as it now
stands.
At the same time, we belive the Agency should have an opportunity to
complete the inquiry because even the State's audits -- which
incidentally (6) were based on a review of M208 forms (see Tab 21, p.
2) -- suggest overpayments. The State has a reasonable obligation to
facilitate the Agency's further inquiry by assisting in locating
relevant data and culling it from other records, and Agency auditors
should be provided the opprotunity to re-examine the data (in
particular, the forms M208 for the audit period) so that they may, by
means of full review or a valid sampling technique, modify or reaffirm
the disallowance. If the State disagrees with the Agency determination
after that review, the State may seek the Board's review (and, given the
delays which have already occurred in this matter, the Board will
provide priority expedited review).
Duplicate Capitation Payments
The HEW audit report found as follows:
The Foundation's procedures were not adequate to assure that the
recipient count reported to (the State) did not include duplicates. The
recipient count reported to (the State) during the period August 1, 1970
through March 31, 1972 included 3,484 duplicate count for San Joaquin
(County) and 382 duplicate count for Amador (Country). As a result the
Foundation was overpaid $33,099 (Fedeal share $16,540). These
overpayments occurred because neither (the State) nor the Foundation
specified the method to be used in developing the number of recipient
count and, as explained below, the procedures adopted by the counties
were inadequate. RR, Tab 3, p. 18. /5/
The report goes on to explain that San Joaquin County duplicated its
count for the last three work-days of each month essentially because of
an over-lapping count for additional eligibles on different reporting
forms, and Amador County because it also erroneously reported additional
eligibles on two different reporting forms. Id., pp. 18-19.
The State's first audit did not distinguish between duplicated
recipient counts, and partial month and retroactive eligibles (RR, Tab
35, p. 10). After the second audit, the State argued that the $33,099
adjustment was improper because HEW auditors extrapolated from figures
for only a few (7) weeks as samples of the audit period, and the samples
were not representative (RR, Tab 36, p. 5). The State argued that State
auditors" . . . estimate that only $10,000 to $12,000 in duplicate
payments were made," although the State added, "In candor, we must
state
that we cannot back these estimates up with the hard data we would
like." Id. The Agency responded that the recommended adjustment was
based on a 100 percent review for each month, and not a sample. Agency
Response, pp. 8-9.
At the hearing the State stated its position differently: while the
HEW auditors did perform a ". . . 100% review to accumulate all
recipients reported on the last 3 work-days of each month for the entire
contract period," the auditors double-checked their work only by
selecting a sample of 50 cases from a "Daily Approval List," a process
which the State ambiguously claimed it was "unable to validate." State
Exhibit 1, Issue 1.
The Agency's witness, one of the auditors who performed the HEW
audit, testified that they had, indeed, done a 100% review of records to
arrive at the 3484 duplicate count figure; subsequently they took a
sample of 50 names from the daily approval list and certain "batch
vouchers" within three days prior to the end of the month, and found
"that in every one of the 50 cases," there were duplications.
Transcript, p. 214. The testimony was that the latter sample was not
the basis for the disallowance, but was merely a check. Id., p. 215.
The State provided no evidence or argument to the contrary. Id., pp.
216, 220.
We uphold this disallowance. The record supports its reasonableness,
and the State has provided no substantial evidence or argument in
support of its position that the duplicate payments were less than those
established by the HEW audit.
Terminated Eligibles
The HEW auditors determined that the Foundation was overpaid $128,740
(Federal share $64,370) in benefit dues for recipients whose eligiblity
had terminated. RR, Tab 3, pp. 13-14. At the first of the month
counties reported the number of eligible recipients to the Foundation on
census forms, which were adjusted during the month on M208 forms for,
among others, those who moved away or whose benefits were retroactively
discontinued. For the period August 1, 1970 through March 31, 1972, the
auditors detemined that 15,513 eligible recipients became ineligible in
this manner, but were not deducted by the Foundation from the number of
eligible persons for whom the Foundation billed the State.
There are implications that some terminated eligibles may have been
subsumed under the State's findings concerning "partial month
eligibles," and the State's audits did not separately address a category
of questioned costs dealing with terminated eligibles. RR, Tabs 5, 7;
Tab (8) 35, pp. 3, 5, 9; Tab 36, p. 2. The State has not contested the
amount of the disallowance; rather, the State argues that it is
unreasonable to recover payments for retroactively terminated eligibles
at all. Tab 36, p. 6; State Exhibit 1, Issue 2, p. 3.
The State argues essentially that the reduction in terminated
eligibles was effectively represented in the capitation rate negotiated
between the State and the Foundation, based on which the Foundation was
paid by the State, since the rate was the quotient of dividing relevant
medical cost data by the recipient count reported by the counties.
State Exhibit 1, Issue 2, p. 1. According to the State, " . . . if the
count was overstated (due to a lack of knowledge of retroactively
terminated eligibles) during the contract negotiation stages, the
premium rates would, by definition, be lower than they otherwise should
have been (had the effect of retroactively terminated eligibles been
considered)." Id.
The difficulty with this argument is that it means only that a lower
capitation rate obviously results from including ineligible persons in
the number used as a divisor of the medical cost data; it begs the
question whether the Agency should share in the costs related to those
ineligibles.
The State argues that the HEW auditors used "parochial hindsight"
in
ignoring the method of computing the capitation rate, since "if the
Audit Agency's proposed changes to the eligibility count had been known
during the negotiation phases of the contract, the premium rates would
undoubtedly have been negotiated at a higher level . . . ." Id., p. 2.
The State also claims that the HEW auditor had knowledge that the
alleged overstatement of recipient count at the time of contract
negotiations did indeed result in lower premium rates.Id.
At the hearing, although the State tried to show through testimony
that the logic of the rate-setting process made the later disallowance
anomalous, the testimony appeared to indicate that the process actually
was one of negotiation tantamount to bargaining, so that rates could not
be said to be ineluctible extrapolations from known numbers; certainly,
there was no evidence that the negotiators specifically focused on how
to accommodate terminated eligibles. Transcript, pp. 153-155;
168-169, 186-188, 198, 200. Further, there is no substantial evidence
that the State did, in fact, specifically include terminated eligibles
in the capitation rate computation. What the HEW auditors did or did
not know was never made clear, and the Agency argued persuasively that
that was essentially irrelevant. Id., pp. 191, 195-199.
A main point argued by one of the State's witnesses, Director of
Finance of the Foundation, was that persons would continue to receive
services through the month even though terminated since they still
carried an eligibility card (Transcript, p. 150). If someone was
eligible for a part of a month, (9) the Foundation got a premium for the
full month; the "system" did not inform the Foundation that there
was
an ineligible until after the fact. Id., pp. 150-151. That being so,
argued the State, it was never contemplated that there would be an
attempt to adjust after termination. Id., p. 152. As part of this
presentation, the State's witness disclosed that the Foundation would
always pick up additions from the form M208, but not deletions because,
according to the witness, the Foundation needed to get funding for the
new eligibles, whereas the terminated eligibles still allegedly were
receiving services during some post-termination period (id., pp.
157-159, 161-163). But the HEW auditor then offered contradictory
testimony, which on balance we find to be more specific and informed,
and thus more persuasive, that cards were not released to persons
determined to be ineligible by the counties. Id., pp. 173, 177-179.
Terminated eligibles, according to this testimony, generally were not
involved in a partial month eligibility situation, since as a practical
matter they kept their eligibility cards, received services, and were
not disclosed on the M208 forms to the Foundation as ineligible until
they had had their cards taken away. Id.; see also, HCFA Exhibit 7,
which rather more ambiguously makes a similar point in a letter from a
State official to the Foundation. The auditor also testified that the
disallowance was calculated only for terminations where the county held
the eligibility cards. Transcript, p. 190.
Thus, the Foundation did note additions, but not deletions, and their
argument for the different treatment is not persuasive in view of the
weight of testimony. The State has not presented any evidence
specifically supporting the argument that the capitation rate was built
on inclusion of payment for these ineligibles; in any event, that
argument would go to the question of mutual rights and liabilities under
the contract between the Foundation and the State, not directly to the
question of what costs the Agency should share. The State has not
offered, and we are not aware of, any legal basis for a conclusion that
the Agency should share in costs attributable to ineligibles.
Therefore, we uphold this portion of the disallowance.
"Prior Authorization" Costs
The HEW audit resulted in a disallowance of $167,924 (Federal share
$83,962) representing State reimbursement to the Foundation for costs of
"prior authorization" of certain services provided by the Foundation.
RR, Tab 3, p. 40. The auditors determined that this was not provided
for in the contract between the State and the Foundation, and was a
function which could not be delegated under State procedures. Id., pp.
40-41.
Shortly after the HEW auditors had completed their field work, but
before the audit report was issued, the State amended the contract. The
contract amendment provided approval for the costs in question.
Transcript. p. 9; State Exhibit 1, Issue 4; RR, Tab 25. The State
argued that the amendment was a "written ratification of a prior
existing oral agreement, so it was not in essence a retroactive
amendment." Transcript, p. 9. (10) The Agency's position essentially
was that payment here would be unreasonable because there was inadequate
evidence of the oral agreement, prior authorization was inappropriately
exercised by a provider under State law, and, generally, that the use of
a retroactive amendment (which had problems passing muster within the
State) "smells." Transcript, p. 39.
We reverse this disallowance in the amount of $161,134 and uphold it
in the amount of $6119; the balance of $671 is not in dispute. /6/
(11) The Agency did not dispute that the payments in question were made
during the period of the audited contract, nor that the services for
which the costs were incurred were rendered, nor that the services were
appropriate, nor that the State bore its 50% share of the costs.
Transcript, pp. 41, 43-45. The Agency did not argue that there was any
specifically applicable rule that would prohibit payment in the
circumstances here nor, in spite of an invitation, did the Agency argue
that Agency approval was required. Id., p. 10; State Exhibit 1, Issue
4. Further, Agency counsel said the Agency would "stipulate to the fact
that the State did duly approve" the contract amendment. Id., p. 43;
see also p. 44.
The Agency did try to show that there was no oral agreement to bridge
the gap between the audited contract and the contract amendment, but
that merely begged the unanswered question whether one was required; in
any event, the Agency did not present evidence adequate to rebut the
State's evidence that there was an oral understanding. See Transcript,
pp.9, 23, 44-45; amended contract in State Exhibit 4, Issue 6 (stating
that "both parties have entered into a verbal agreement effective July
31, 1970"). The Agency's evidence (other than its bare assertions)
consisted of Exhibits 2, 3, 4, 5 and 6 (5 was withdrawn during the
hearing after its relevancy was questioned; Transcript, p. 62).
Exhibits 4 and 6 are both letters between State officials discussing how
to overcome the recalcitrance of the State's Department of General
Services (DGS) for approval of contracts (as to the DGS position, see
HCFA Exhibits 2 and 3). As the State argued (Transcript, pp. 47, 51,
60), it is not clear whether these letters refer to the specific
transaction in question here (even the Agency witness admitted confusion
about dates, amendments, and the relevance of these letters; id., pp.
52-57). Even if the letters were clearly relevant, they at best provide
only ambiguously suggestive language that State officials were, as the
Agency appears to imply, colluding to contrive a spurious after-the-fact
agreement. The letters merely appear to be a record of bureaucrats
exchanging views on how best to present their argument to other
bureaucrats in order to overcome technical hurdles. In any event, the
DGS eventually approved the arrangement, and it is useful to remember
that the State provided half the funds, which helps rebut the highly
speculative proposition that the State was acting in bad faith.
Transcript, pp. 39, 42-44.
The Agency also argued that the disallowance was justified based on
certain State regulations which prohibited delegation of the prior
authorization function. Transcript, pp. 45, 63. However, the contract,
as amended, gave the Foundation prior approval authority, with the State
rather ambiguously reserving the "right to be the final authority"
on
matters pertaining to prior authorization. State Exhibit 1, Issue 4;
see also, Transcript, p. 70. As previously stated, we do not find the
contract amendment invalid, and, as Agency counsel pointed out, if the
amendment stands, this collateral issue disappears. Transcript, p. 44.
State counsel took the position that State administrative practice was
(12) not violated by this arrangement (id., p. 70). The Board is not in
a position to second guess the State on interpretations of its own
administrative restrictions in circumstances like those here.
The final matter to be considered concerning "prior authorization"
costs concerns the $9348 portion which allegedly represented an excess
over allowable rates for consultant fees (see discussion under footnote
6), providing a separate basis for this portion of the disallowance.
The State Administrative Manual (SAM) set a rate of $15 per hour for the
professional services involved in this disallowance, and the HEW
auditors found that some services had been charged at a slightly higher
rate; the auditors questioned the excess over the $15 rate (RR, Tab 3,
pp. 43-44). It is important to note that the Agency witness, one of the
original HEW auditors, did not find the rates charged unreasonable;
rather, the disallowance was taken solely because the rates exceeded the
amounts mentioned in the SAM. Transcript, pp. 72-74. The State's
position was that the SAM was merely a non-binding guideline, and that
the State sometimes simply had to pay what the market required; the
Agency did not dispute this. Transcript, pp. 71, 73-74. The Agency's
Exhibit 2 contains an indication that the SAM policy could be waived (p.
2). The amended contract provided for payment of fees for consulting
doctors at a higher rate. (State Exhibit 1, Issue 4). Based on these
considerations, we are not persuaded that the record supports the
disallowance.
Overstatement of "Medically Needy Only" (MNO) Recipients
The Agency disallowed $75, 676 ($37,838 FFP) /7/ for alleged
overpayments by the State for a certain category of recipients (MNOs)
who were ineligible. The overpayment allegedly resulted from a
reporting process failure attributed to Foundation procedures. RR, Tab
3, p. 15. The State did not contest the substantive eligibility issue;
rather, the dispute concerns the amount of the disallowance and how it
was determined.
The HEW audit report indicates the disallowance was computed as
follows:
First, the auditors determined that there was an overstatement of 213
recipients, so that the State overpaid the Foundation $1,333 ($667 FFP).
The State has not disputed this (see Transcript, p. 247), and we uphold
this portion of this disallowance without further analysis. (13) Second,
using the Form MC-177 (Record of Health Care Costs) for 49 randomly
selectecd MNO recipients, the auditors determined that 46, or 94%, were
ineligible, and estimated therefore with a probability of 90% accuracy
that FFP paid for the ineligibles was between $29,457 and 44,886 (with
the "most likely," or mid-point figure, being $37,171). RR, Tab 3,
p.
16. $37,171 + $667 = $37,838, the amount of FFP disallowed.
At an earlier point in the dispute, the State argued essentially that
its own audits had found different results, which had to be
interpolated, and that the Agency in any event should credit the
Foundation for adjustments to eligibility count and resulting billings
made outside the audit period. RR, Tab 35, p. 6; Tab 36, p. 4. At the
hearing, the State indicated that its "original response relative to
this issue may in retrospect be in error" (State Exhibit 1, Issue 3) and
proceeded to attack the HEW audit methodology. The State argued that
the sampling may have been biased and that even assuming that the sample
was valid, the estimated nature of the proposed adjustment reasonably
calls for use of the lower range limit of the disallowance rather than
the mid-point of the range, which would result in an adjustment
downwards in the FFP disallowance of $8,381. Id.; and Transcript, pp.
227, 261.
The speculation about bias arises from the fact that the percentages
of the sample items used, in relation to the time periods from which
drawn, appeared quite different for three times periods: 26% fell in
the period 8/70 - 12/70, 8% fell in the period 1/71 - 6/71, and 66% fell
in the period 7/71 - 3/72. State Exhibit 1, Issue 3. /8/ But there are
several reasons why these figures alone are not sufficient to persuade
us the sample was unbalanced. First, the 66% sample was for an
eight-month period, whereas the two other periods were of only four and
five months. Second, the sample size -- 49 -- was numerically small, so
that expressing its breakdown by period and percentage tends to distort
perception of the magnitude of the differential. Third, the State's
witness affirmed that while the sample size was small, it was
statistically sufficient in this case (Transcript, p. 258). Fourth, the
audit report describes a similar sample of the same kind of records for
a different time period (not in issue in this appeal) which produced an
error rate only slightly higher, indicating some consistency in the
sampling results (RR, Tab 3, p. 17; Transcript, pp. 254-258).
(14) Having determined that there is no persuasive evidence of bias in
the sample, we also conclude that the Agency did not unreasonably set
the recovery amount at a mid-point. The State's witness repeatedly
testified that the question of where to set the amount was a "judgment
call" (Transcript, pp. 226-227, 258, 260). The witness stated he likely
would have chosen the lower limit because it would mean the error is at
least that amount, but he acknowledge that to do so would also mean that
the actual error rate would very likely be considerably higher (Id, pp.
226-227, 231, 234). The State's main point was that given the
possibility of bias in the sample, the auditor should have been more
conservative (Id, p. 227), but since we do not find that there was such
bias, this point becomes less persuasive. Choosing the mid-point, as
the State's witness acknowledged, means that the auditor chose the most
probable error point. Id., p. 233. An Agency witness testified that
general Agency policy was to choose the most reasonable estimation of
where the error occurred Id., p. 243), and that while reasonableness
dictates that one be more conservative if sampling is less reliable,
that did not appear to be appropriate here (Id., pp. 246-247). We
uphold the disallowance.
Other Issues
A portion of the disallowance concerned $56,627 related to a contract
with the University of California (State Exhibit 1, Issue 5). Of this
amount, the State conceded that $1,193 was unallowable (id., Issue 6).
At the hearing, the Agency stipulated to the withdrawal of the remainder
($55,434) of this disallowance (Transcript, p. 272).
Another portion of the disallowance concerned $20,793 related to
allegedly unexpended funds (State Exhibit 1, Issue 8). At the hearing,
the parties agreed to a further exchange of information in support of a
tentative resolution (Transcript, pp. 292-294), and subsequent to the
hearing, the Board was advised of the parties' agreement. Two other
findings of the HEW audit were uncontested, $1,969 for "unauthorized
interest" and $1,190 for certain payments to consultants. (State
Exhibit 1, Introduction, p. 4).
Thus, $80,579 ($40,290 FFP)of the original disallowance is no longer
in dispute before the Board.
Conclusion
Based on the foregoing, the disallowance is upheld in part and
reversed in part, as follows:
Partial month eligibles":
Disallowance of $176,950 ($88,475 FFP) reversed, provided that the
State facilitates Agency redetermination (see discussion). (15)
Duplicate capitation payments:
Disallowance of $33,099 ($16,549 FFP) upheld.
Terminated eligibles:
Disallowance of $128,740 ($64,370 FFP) upheld.
"Prior authorization" costs:
Disallowance reversed in the amount of $161,134 ($80,567 FFP) and
upheld in the amount of $6,119 ($3,060 FFP); balance of $671 ($335 FFP)
not in dispute.
Overstatement of MNO recipients:
Disallowance of $75,676 ($37,838 FFP) upheld.
Other issues:
The balance of $80,579 ($40,290 FFP) is not now in dispute before the
Board.
In summary, we uphold the disallowance in the amount of $243,634
($121,817 FFP), we reverse in the amount of $338,084 ($169,042 FFP), and
$81,250 ($40,625 FFP) is not in issue (Totals: $662,968 ($331,484
FFP)). /1/ Because of an Agency computation error, this amount should
be $331,484. See discussion in footnote 5 below. /2/ This audit
was for the period July 1, 1969, through September 31, 1972, a period
which included, but was more than three times as long as, the period of
the HEW audit for this disallowed item. Further, the State auditors
included in the $185,737 the sum of $33,079 attributable to duplicate
recipient counts, which the HEW auditors separately questioned (RR, Tab
3, p. 18; Tab 35, p. 10). Differences are also attributed to
unspecified "varying audit procedures" (RR, Tab 4, and Tab 21, p.
2),
and the audit appears to have been based on examination of the form M208
rather than the CA237 (id, see discussion below). There are
implications that some "terminated eligibles" -- a separate disallowance
category -- may have been included (see discussion on p. 7 below).
/3/ The 1978 audit covered the period July 1, 1969 to January 1, 1975,
and was represented as examining anew items the parties previously had
subsumed under the title of "partial month and retroactive eligible
recipients," called in his audit "retroactive eligibles" (RR,
Tab 35,
pp. 3-4). Now, however, "duplicate recipient count" was siad not to
be
covered, although it still had "to be interpolated . . .to resolve this
item" (id., p. 10). When the 1978 audit report was issued, counsel for
the State acknowledged that it was useless for determining what was
overpaid or underpaid during the shorter time periods of earlier audits,
and stated that State auditors had been asked to interpolate the
findings to the shorter periods; later the State said that this could
not be done "for technical reasons" (id. p. 5; Tab 36, p. 3). The
new
audit did not say there were no errors; rather, it concluded that at
some point during the five-year period of the audit, the Foundation
ceased receiving payments altogther on behalf of partial and retroactive
eligibles, which allegedly "more than off set the earlier overpayment"
(RR, Tab 36, p. 2; and Tab 36, appended audit report, p. 4 and
"summary of adjustments" following p. 8). /4/ The State also
argued that the analysis of the M208 forms underlying the first HEW
audit method was defective because the sample was insufficiently random.
The State argued that the HEW auditor should have selected line items
randomly from all of the worksheets rather than using all line items
from randomly selected worksheets. State Exhibit 1, Issue 9. The
Agency's witness acknowledged that the sample of M208 forms was
defective. Transcript, pp. 97, 110. /5/ Note that the FFP
computation here apparently reflects an error, since 50% of $33,099
would be $16,549 or $16,550 depending on how one rounds. This error
also is reflected in the total amount reported as the FFP disallowance
by the auditors, which we have increased by $9. The error is also in the
stipulated summary prepared by the State. See State Exhibit 1,
Introduction, p.
sum of $16,138 which HEW determined was not allowable on other grounds.
RR, Tab 3, p. 40; Transcript, pp. 64-65. The latter sum was made up of
$14,974 in consultant's fees, $671 in interest, and $493 for actuarial
expenses. Id. The interest is not in issue here (see State Exhibit 1,
Introduction, p. 4 and Issue 7; Transcript, p. 65). The State
presented only a brief conclusory statement (State Exhibit 1, Issue 7)
and no evidence concerning reasonableness of the actuarial expenses.
Moreover, the State had originally not disputed the auditor's finding
that the contract did not cover actuarial expense (Application for
Review, Exhibit II, p. 4). Accordingly, we uphold the disallowance of
this amount. This leaves the consultant's fees ($14,974), and some
apparent confusion concerning what was at issue in relation to those
fees. The audit report indicated that $9348 of the $14,974 was
disallowed because it represented an excess over allowable rates (Tab 3,
p. 43), as discussed herein. $4771 was disallowed because it was not
supported by adequate documentation, and $855 was misclassified (id.,
pp. 43-45).$4771 + $855 = $5626 + $9348 = $14,974. At the hearing, the
parties focused only on the excess rate portion, and did not mention the
problems of alleged lack of documentation and misclassification of
costs; in fact, the parties appear to have erred by, first, misstating
the $14,974 figure as a slightly lower and illogical figure (Transcript,
p. 65) and second, by assuming that the latter incorrect amount was all
related to the excess rate issue. Id., pp. 65-66. The audit report
makes it clear that only $9348 relates to the excess rate issue, and the
parties did not clearly address the balance of $5626. The earlier
record does not elsewhere contain any State arguments specifically
addressed to this amount. We note that all but $855 of the amount is
related to adequacy of documentation, and we urge the parties to try and
resolve this matter by agreeing on submission and review of further
information or affidavits, as they have done with another issue in this
case. We must uphold the disallowance of the $5626 because we have no
basis upon which to do otherwise; but given the confusion in the
record, we will afford the State the opportunity to present argument on
this particular matter (i. e., the $5626 portion of the disallowance)
within 60 days after receipt of this decision, if unable to reach an
agreement with the Agency. $5626 + $493 = $6119, the amount of this
disallowance upheld (subject to further review of the $5626 portion).
/7/ Unlike other elements in dispute, the parties frequently addressed
this one in terms of the amount of FFP rather than the overall
disallowance amounts. /8/ These figures were drawn by a State witness
from HEW audit workpapers, according to testimony. Transcript,
p. 223. The Agency witness, the HEW auditor who prepared the figures,
had left the hearing by the time this issue arose. We take the figures
at face value because the Agency has not disputed their validity.
OCTOBER 22, 1983