GAB Decision 234
November 30, 1981 California Department of Health Services Docket No.
80-132-CA-HC Ford, Cecilia; Garrett, Donald Teitz, Alexander
This is an appeal by the California Department of Health Services
(State) from the determination of the Director, Bureau of Program
Operations, Health Care Financing Administration (Agency), disallowing
Federal financial participation in the amount of $1,147,876 claimed
under Title XIX of the Social Security Act. The amount disallowed
represents payments by the State in fiscal years 1973, 1974 and 1975 to
Foundation Community Health Plan (FCHP), a prepaid health plan, for
Medicaid recipients enrolled in the plan. The Agency determined that
such payments exceeded, by the amount disallowed, the cost for
comparable services provided under the fee-for-service system, in
violation of 45 CFR 250.30(b)(4). The Agency subsequently increased the
amount of the disallowance to $1,329,331. (Reply to Petitioner's
Response to Invitation to Brief, dated September 1, 1981, pp. 8-9.) For
the reasons explained below, we sustain the disallowance in the
increased amount.
This decision is based on the State's application for review and on
written information and briefing supplied by the parties both sua sponte
and at the Board's request. We have determined that this decision can
be made based on the written record without a hearing or an informal
conference.
Applicable Law
The State receives reimbursement under Title XIX for a percentage of
payments made for medical services provided to persons eligible for
"Medi-Cal," the State's Medicaid program. Persons eligible for Medi-Cal
may obtain services from providers on a "fee-for-service" (FFS) basis,
in which case the State pays the providers for actual services rendered,
or they may enroll in a "prepaid health plan" (PHP), in which case
the
State pays the plan a fixed monthly amount for each person enrolled
(capitation payment) regardless of actual services rendered. While the
Federal government will reimburse states for payments to PHPs for
Medicaid eligibles, Federal regulations limit the payments to the cost
of comparable services provided under the FFS system. Specifically, 45
CFR 250.30(b)(4) provides that --
(2) The upper limit for payment for services provided on a prepaid
capitation basis shall be established by ascertaining what other third
parties are paying for comparable services under comparable
circumstances. The cost for providing a given scope of services to a
given number of individuals under a capitation arrangement shall not
exceed the cost of providing the same services while paying for them
under the requirements imposed for specific provider services.
Both parties agree that the regulation prohibits the State from
making payments to a PHP exceeding the amount it would have cost to
provide health care services to the individuals involved on a FFS basis.
The method used to determine compliance with this provision both in this
case and in a prior appeal by the State (discussed below) was to compare
payments made the FCHP for Medi-Cal eligibles to FFS costs for Medi-Cal
recipients who were not enrolled in FCHP but who resided in the same
area served by it.
Prior Board Decision
The disallowance in this case was based on findings of the HEW Audit
Agency and the U.S. General Accounting Office pertaining to fiscal years
1973, 1974 and 1975. Before the disallowance was taken, however, the
Board issued a decision regarding the disallowance of similar costs
claimed by the State for calendar year 1974. Foundation Community
Health Plan (California State Department of Health), Decision No. 89,
March 24, 1980. That disallowance was based on a report issued by the
State Auditor General in April 1975 which concluded that excess payments
of $802,388 (after deducting $661,500 saved in claims processing costs)
for 1974 had been made to FCHP. The State appealed that disallowance on
the ground that certain categories of Medi-Cal recipients enrolled in
FCHP required both more care and more costly types of care than did
persons in the same categories who remained under the FFS system, so
that there was "adverse selection" in the FCHP population. The State
argued that since the provision of comparable services to FCHP enrollees
would have cost more under the FFS system, the fact that payments to
FCHP were in excess of those made for Medi-Cal recipients not enrolled
in the plan did not indicate a violation of Section 250.30(b)(4).
In support of this "adverse selection" argument, the State submitted
a report prepared by the State on the "Prepaid Health Research,
Evaluation and Demonstration" (PHRED) project funded by an HEW grant
awarded during an earlier stage of proceedings in the prior appeal. A
specific objective of the grant was to investigate the issue of adverse
selection raised by the case, and proceedings were delayed at the
State's request pending the results of the PHRED project. The PHRED
project concluded (3) that there was some adverse selection with respect
to two of the four categories of Medi-Cal recipients enrolled in FCHP
and that, taking into account the savings to the State in claims
processing costs for FCHP enrollees, there was no net overpayment to
FCHP. In proceedings before the Board, the Agency challenged the
validity of the PHRED report only in one specific respect -- its failure
to take into account the use of "Medi labels" in the FFS system. (The
Medi label system in effect required that special authorization be
obtained from the State for the provision of outpatient services to a
Medi-Cal recipient in a given month after two claims had been submitted
for that individual in that month.) Based on information furnished by
the State regarding the effect of this factor on the PHRED report's
conclusions, the Board found in Decision No. 89 that there had been an
overpayment to FCHP of only $297,000 rather than the $802,388 disallowed
by the Agency.
Amount of Disallowance
As noted above, the disallowance in the case now before us was based
on audit findings pertaining to fiscal years 1973, 1974 and 1975. The
disallowance represents the difference between average FFS costs and
FCHP per capita rates for each category of Medi-Cal eligible multiplied
by the number of eligibles. (Response of the Health Care Financing
Administration to Petitioner's Application for Review, dated January 16,
1981, Appendix 2, pp. 5-6 of audit report.) The Agency subtracted
$802,388 from this amount on the ground that it had already disallowed
$802,388 for calendar year 1971 based on findings of the California
Auditor General. In its application for review, however, the State
argued that the Agency was precluded by the Board's Decision No. 89 from
disallowing any additional amounts for calendar year 1974, and that it
was possible that more than the $802,388 already excluded by the Agency
pertained to calendar year 1974. It stated that the Agency should be
required to clearly identify and then exclude from the disallowance all
costs pertaining to calendar year 1974. The Agency subsequently agreed
to do so.
The Agency's "Reply to Petitioner's Response to Invitation to Brief"
shows the following breakdown of costs:
July 1, 1972 - June 30, 1973 ......... $421,058
July 1, 1973 - December 31, 1973 ......... $805,121
January 1, 1975 - June 30, 1975 ......... $103,152
Subtracting the total for these periods ($1,329,331) from the amount
of the overpayment found by the auditors for fiscal years 1973, 1974 and
1975 ($1,147,876 plus $802,388) leaves $620,933 as the amount
attributable to calendar year 1974. This, of course, is less than the
$802,388 disallowed by the Agency for calendar 1974 in the prior case.
(4) The State now argues that the discrepancy between the $802,388
overpayment previously identified by the Agency for calendar year 1974
and the $620,933 overpayment which the Agency now attributes to the same
period calls into question the accuracy of the amounts which the Agency
seeks to disallow for the remaining periods. It argues that the Agency
should be "required to show the Board that the audits upon which it
relies were properly done," and that if the Agency is unable to explain
the discrepancy, "the disallowance should be dismissed on the basis that
the alleged overpayment amounts are so lacking in credibility that they
cannot form the basis of a requirement that the State repay federal
funds." (State's submission dated October 14, 1981, pp. 2-3, 7-8.)
We do not accept the State's argument that the discrepancy between
the two figures implies that the amounts which the Agency now seeks to
disallow for the periods exclusive of calendar year 1974 are inaccurate.
The disallowance taken by the Agency in the prior appeal was based
directly on the overpayment identified by the State Auditor General for
calendar year 1974. The disallowance in this case is based on audits
conducted independently of the State by the HEW Audit Agency (HEWAA) and
the U.S. General Accounting Office (GAO). The fact that the HEWAA and
GAO found a smaller overpayment for calendar year 1974 than did the
State Auditor General does not necessarily call into question the
reliability of HEWAA's and GAO's audit methods. The difference in
results could just as easily raise questions about the reliability of
the State Auditor General's methods. In the absence of any
identification of specific deficiencies in the HEWAA and GAO audits, we
cannot conclude that they are in error. Moreover, since the Board in
Decision No. 89 sustained only $297,000 of the Agency's $802,388
disallowance, we do not see how the State is prejudiced by the fact that
the Agency is now excluding $620,933 rather than $802,388 for calendar
year 1974. Accordingly, we conclude that the amount in dispute was
correctly determined by the Agency to be $1,329,331.
Collateral Estoppel Argument
The State in its application for review in this case asserted that
since the Board in Decision No. 89 had accepted the PHRED report's
findings of adverse selection, the Agency should be collaterally
estopped from denying that adverse selection was present in the years in
question in this case. It requested that the Agency recompute the
disallowance on the asumption that there was some adverse selection in
the population of Medi-Cal recipients enrolled in FCHP, or
alternatively, that the Board reduce the disallowance based on the same
percentage of overpayment found in Decision No. 89. The Agency took the
position, however, that Decision No. 89 "never addressed the question
whether adverse selection occurred in 1972, 1973, or 1975, time periods
covered by the instant (5) disallowance." It further contended that the
PHRED report was "primarily based on calendar year 1974 cost and
utilization data," and that its "conclusions regarding adverse
selection. . . (cannot) be validly applied beyond the 1974 calendar year
to 1972, 1973, or 1975." (Response to Petitioner's Supplemental
Statement in Support of Application for Review, dated April 3, 1981, p.
3.)
We adopt the tentative conclusion of the Panel Chair (now called
Presiding Board Member) in his May 7, 1981 Invitation to Brief, that
Decision No. 89 did not address the issue of whether adverse selection
existed in other than calendar year 1974, the period of time involved in
that case. As stated in the Invitation, while the Decision does not
preclude a finding of adverse selection in other years, there is no
evidence that the Board considered the question outside the context of
the particular facts of the case. Accordingly, we reject the State's
collateral estoppel argument. /1/
Adverse Selection in Periods Other Than Calendar Year 1974
The Invitation to Brief suggested, however, that, if the State could
show that there was no significant change in the data on which the PHRED
report relied in the years covered by the disallowance in this case, the
Board might find that adverse selection existed in those years to the
same extent as found in Decision No. 89. The State was therefore
invited to provide additional briefing and documentation in support of
its appeal. The State has now furnished data, described below, designed
to show that in fact there was no significant change.
(6) The State concedes that "the data is not conclusive," but asserts
that "neither does it support HCFA's contentions that no adverse
selection occurred and that no stability was shown." (State's submission
dated October 14, 1981, p. 7.)
The State's position appears to be in effect that the Agency bears
the burden of showing that no adverse selection occurred. On the
contrary, however, we conclude that the State must affirmatively show,
if not conclusively, at least with a fair degree of certainty, that
there was adverse selection among the population of Medi-Cal eligibles
enrolled in FCHP. The applicable regulation provides that the upper
limit for payments to a PHP for Medicaid eligibles "shall be established
by ascertaining what other third parties are paying for comparable
services under comparable circumstances." The Agency's comparison of the
FCHP payments to payments for services to Medi-Cal eligibles residing in
the area served by FCHP who received services under the FFS system is a
reasonable one. The regulation does not require that the Agency rebut
any conceivable objections that may be advanced by the State once the
Agency has made a prima facie showing of comparability. In this case,
placing such a burden on the Agency would render the regulation
virtually unenforceable, since the process of analyzing the
characteristics of the two populations is a complicated and
time-consuming one, as illustrated by the PHRED report. The State's
position is particularly untenable in view of the fact that the State
Auditor General, in the report that was the basis for the prior
disallowance, operated on the assumption that the two populations were
comparable. Thus, the State bears the burden of proof, and, as
discussed below, we find that the State has not met that burden.
The basic methodology used by the PHRED project was to determine the
actual FFS per capita cost for each of two major categories of Medi-Cal
recipients (those receiving Aid to Families with Dependent Children
(AFDC), and those receiving Aid to the Totally Disabled (ATD)), and to
then adjust it to match the FCHP "utilization pattern," that is, the
quantities and types of health care services actually used by the same
categories of FCHP enrollees. According to the PHRED report, this
yielded the cost that would have been incurred under the FFS system to
provide the same services as were actually provided to the FCHP
enrollees.To the extent tha this figure was higher than the cost of
services provided to persons remaining under the FFS system, the PHRED
report concluded that FCHP has suffered adverse selection and that there
was no overpayment. Decision No. 89, p. 3. This conclusion was based
on a comparison of FCHP and FFS figures (for both the AFDC and the ATD
categories) on the number of admissions per month and the cost per
admission for hospital services, and the utilization and cost per unit
of service for ambulatory services. (State's Response to Invitation to
Brief, dated July 10, 1981, pp. 2-3.) As noted previously, the data
examined was for calendar (7) year 1974 only. The Invitation to Brief
suggested that one way of showing that the findings based on this data
were valid for other periods of time without requiring the production of
utilization data (which might be difficult to obtain) would be to
demonstrate that there were no significant changes in the FCHP
population or in the cost of services provided.
In response to the Invitation, the State submitted, first, charts
showing (1) the average number of enrollees per month and (2) the total
annual enrollment, for each of several categories of FCHP enrollees
(including AFDC and ATD) for the yars 1972 through 1976. (State's
Response to Invitation to Brief, dated July 10, 1981, pp. 3-4.) The
State commented with respect to this data: "It would appear from this
data that the FCHP population changed very little over the period during
which the program existed. Persons moved into the program over its
early months, stayed in it with remarkable consistency during the middle
period, and moved out over the closing months." (State's Response to
Invitation to Brief, dated July 10, 1981, p. 4.) The Agency disagreed,
contending that the figures submitted by the State showed "substantial"
changes in the AFDC and ATD categories both before and after calendar
year 1974. (Reply to Petitioner's Response to Invitation to Brief,
dated September 1, 1981, pp. 2, 8.)
The concern in this case, however, is the effect of any changes in
population on the PHRED report's conclusions. The Invitation to Brief
thus specifically asked the State to discuss the extent to which any
changes in the number and characteristics of Medi-Cal recipients
enrolled in FCHP during the period 1972 through 1976 would have affected
utilization. The State responded without further explanation that the
data provided ". . . suggest(ed) the utilization patterns remained
essentially the same." (State's Response to Invitation to Brief, dated
July 10, 1981, p. 6.) In the absence of any analysis of the effects of
the changes on the PHRED report's conclusions, however, this data cannot
support the State's contention that the PHRED report's conclusions were
valid for periods other than calendar year 1974.
Information provided by the State regarding per capita costs contains
a similar deficiency. The State submitted a chart showing the
capitation rate for various categories of FCHP enrollees for periods
from July 1972 through May 1976. It commented with respect to this
data: "the breakdown of the FCHP rates shows little that would not be
expected. The rate crept upward, as did all costs of medical care. . .
It did not do so at an unusual pace." (State's Response to Invitation to
Brief, dated July 10, 1981, pp. 5, 5a, and 6.) The State submitted in
addition charts showing the change in FFS costs per eligible per month
for (8) acute inpatient hospital care and for hospital outpatient
services for the periods in question in this case. (State's Response to
Invitation to Brief, dated July 10, 1981, Exhibit B, Charts A and B.) It
also referred to FFS cost data contained in the audit reports on which
the current disallowance is based. (Stat's Response to Invitation to
Brief, dated July 10, 1981, p. 7.) In response to the Invitation's
request that the State discuss the manner which any variations in per
capita costs would affect the PHRED report's analysis, the State
commented: ". . . we have noted no factors which present clear
irregularities. It would appear that the characteristics of the FFS and
FCHP populations most likely remained comparable (to their respective
characteristics in calendar year 1974) during this period." (State's
Response to Invitation to Brief, dated July 10, 1981, p. 7.) The Agency
contends, on the other hand, that "the FCHP capitation figures evidence
so substantial a change between 1972 and 1975 as to make unreliable
PHRED's 1974 conclusions when applied to 1972, 1973, or 1975." (Reply to
Petitioner's Response to Invitation to Brief, dated September 1, 1981,
p. 5.) The State's response is not supported by any analysis of how the
variations in per capita costs would have affected the PHRED report's
conclusions. In the absence of any such analysis, the data submitted by
the State regarding per capita costs cannot advance its case.
The Agency also criticized the State's response to the Invitation on
various other grounds. It contended that data regarding FFS utilization
should have been provided in addition to date regarding FCHP utilization
in order to provide a basis of comparison. (Reply to Petitioner's
Response to Invitation to Brief, dated September 1, 1981, p. 2.) We note
that the data provided by the State concerned changes in the FCHP
population, not FCHP utilization. We note further that the Invitation
to Brief requested only information regarding the FCHP population. In
any event, we need not reach the question whether information regarding
changes in the FFS pouplation would be required, since the State has not
even attempted an analysis of the effects of the changes in the FCHP
population. For the same reason, we need not address the Agency's
contentions that the average enrollment figures presented by the State
were incomplete or that the State cannot properly compare FCHP per
capita costs to FFS per capita costs. (Reply to Petitioner's Response
to Invitation to Brief, dated September 1, 1981, pp. 4, 6.)
Advers Selection in 1975 -- Another Approach
Another approach which the PHRED project took to determine whether
there was adverse selection was suggested by the fact that FCHP
cancelled its contract with the State in 1976, thus forcing all of the
FCHP enrollees to return to the FFS system. The PHRED project (9) found
that there was a change in the FFS utilization pattern after that time
which reflected the utilization pattern previously experienced by FCHP.
Decision No. 89, p. 3. Accordingly, the Invitation to Brief inquired
whether there was any way of measuring adverse selection during the time
periods in question in the instant case using this method. In response,
the State submitted documentation showing that for five categories of
service, FFS costs increased or decreased following the influx of the
ATD and AFDC recipients formerly enrolled in FCHP in the manner that
would have been expected based on their use of such services when
enrolled in FCHP. (State's Response to Invitation to Brief, dated July
10, 1981, pp. 7-10, and Charts A-E.) It contended that this data clearly
showed that the adverse selection found by the PHRED report in calendar
year 1975 continued in 1975. (The State did not contend that this data
showed adverse selection during 1972 or 1973, however.) (State's
Response to Invitation to Brief, dated July 10, 1981, p. 12.) The Agency
challenged the State's conclusion regarding adverse selection in 1975,
presenting a chart which showed that FFS admissions for acute hospital
services for the ATD category decreased following the termination of ATD
coverage by FCHP. (Reply to Petitioner's Response to Invitation to
Brief, dated September 1, 1981, p. 7 and Exhibit A.)
Even assuming that the State's data is accurate and that the Agency's
is not, however, the State has not provided a sufficient basis for
finding that the PHRED report's conclusions are validly applied to 1975.
The methodology in question here was used by the PHRED report merely to
confirm its conclusion, based on the analysis of utilization and costs
previously described, that adverse selection existed in 1974. (PHRED
report, pp. 10, 12, at Appendix 6 of Response of the Health Care
Financing Adminstration to Petitioner's Application for Review, dated
January 16, 1981.) Thus, in the absence of a showing by the State that
changes in population and in cost from 1974 to 1975 would not have
affected the PHRED report's primary analysis, we are reluctant to rely
solely on this secondary method of proving adverse selection. Moreover,
the State concedes that "the charts the State submitted show only trends
and are not without ambiguities." (State's submission dated October 14,
1981, p. 5.) While we do no believe that the State is required to prove
with absolute certainty that adverse selection existed, we cannot
reverse the disallowance with respect to 1975 based on admittedly
ambiguous and inconclusive data.
(10) Conclusion
For the reasons discussed above, we sustain the disallowance in the
amount of $1,329,331. /1/ The related doctrines of res judicata and
collateral estoppel are defined and distinguished in a quotation
from 1B J. MOORE, FEDERAL PRACTICE, P0.405(1), pp. 662-624 (2d ed.
1974), cited in n. 5 of Parklane Hoisery Co., Inc. v. Shore, 439 U.S.
322, 326 (1979): Under the doctrine of res judicata, a judgment on the
merits in a prior suit bars a second suit involving the same parties or
their privies based on the same cause of action. Under the doctrine of
collateral estoppel, on the other hand, the second action is upon a
different cause of action and the judgment in the prior suit precludes
litigation of issues actually litigated and necessary to the outcome of
the first action. The doctrine of res judicata does not apply here,
however, since the calendar year 1974 disallowance, passed on by the
Board in Decision No. 89, has been excluded from the disallowance taken
in this case. Collateral estoppel does not apply because the issue of
adverse selection in the other years (1972, 1973 and 1975) was not ruled
upon in that decision, nor was it even considered as necessary to the
outcome.
OCTOBER 22, 1983