New York State Department of Social Services, DAB No. 302 (1982)

GAB Decision 302

May 28, 1982 New York State Department of Social Services; Docket No.
81-206-NY-HC Garrett, Donald; Teitz, Alexander Settle, Norval


The New York State Department of Social Services appealed a decision
by the Health Care Financing Administration, disallowing $722,295 in
federal financial participation (FFP) claimed by the State under Title
XIX of the Social Security Act. Based on an audit performed by the New
York State Office of the State Comptroller, the Agency determined that
the State had included unallowable costs in calculating the rate used to
reimburse a certain provider of Medicaid services.

The major issues presented are 1) whether the Agency can disallow
prior to the time when the State uses the audited costs to establish a
final revised reimbursement rate for the provider; and 2) whether the
Agency properly relied on the State Comptroller's audit as a basis for
disallowance. For the reasons stated below, we conclude that the Agency
properly relied on the State determination here in finding that
unallowable costs had been included in the original rate. However, the
Agency cannot merely disallow the federal percentage of these costs, but
must consider their effect on amounts of FFP actually paid to the State.
The record nevertheless supports a disallowance of at least $694,716.
Accordingly, we uphold the disallowance in this reduced amount.

This decision is based on the parties' submissions.

Case background

On September 7, 1977, the United Cerebral Palsy Association of New
York State, Inc. (UCP) received a permit from the State to occupy ten
buildings at Willowbrook Development Center (later called Staten Island
Developmental Center -- SIDC) and to use the included furnishings and
equipment to provide services to about 650 former Willowbrook residents.
The UCP facility, called the Karl D. Warner Center (Center), was to be
funded under Medicaid as an intermediate care facility for the mentally
retarded (ICF/MR).

The State established an interim daily rate of $85 for Center
services, based on UCP's budgeted costs of operating the Center.
Included in this budget were the costs of services to be provided by the
State, such as personal services and fringe benefits of State employees
(2) working in three of the UCP occupied buildings, as well as costs of
fuel, electricity, and water for all buildings.

The State Comptroller General's Office later performed an audit to
determine the actual costs incurred by the State in UCP's operation of
the Center and the resulting reimbursement due to the State. Audit
Report NY-ST-17-79, Appeal File, Exhibit I. Also, at the request of the
State's ICF/MR Medicaid Program Bureau (then responsible for the rate
setting function for ICF/MRs), the auditors were to determine the actual
Medicaid rate for the first year of the Center's operation, September 7,
1977 to September 30, 1978. Audit Report, p. 1. The auditors found
that UCP had overestimated the portion of costs for State-provided
services chargeable to Medicaid when it submitted its budget requesting
an interim rate. UCP had budgeted $3,562,616 for these costs. The
auditors found that the State-related Center expenditures for the
audited period actually totalled $4,982,549. However, since $2,865,522
of that amount had already been recovered by the State by its rate used
for the SIDC, the auditors found that only the remaining $2,117,027
should have been included in UCP's rate. The auditors also made other
findings, including that UCP administrative costs had been overstated
and that the number of certifiable client days claimed for Medicaid
reimbursement had been understated.

Subsequently, the audit report was adopted by the HHS Inspector
General Audit Agency. ACN 02-14509. Based on the report, the Health
Care Financing Administration determined that UCP had incorrectly
calculated its Medicaid per diem rate and that this resulted in a
Medicaid overpayment of $1,445,589, the difference between the
$3,562,616 budgeted for State-provided services and the $2,117,027 which
the auditors identified as the amount which should have been included in
UCP's rate. /1/ The Agency disallowed $722,795, as the federal share of
the $1,445,589 "overpayment."


Discussion

I.Whether the Agency can disallow prior to when the State establishes
a final rate for the provider.

The State argued that section 1903(d)(3) of the Social Security Act
precluded the Agency from disallowing any overpayment of FFP until the
(3) amount had been recovered from the provider and that, in any event,
no overpayment of FFP could be found until the State established a final
revised reimbursement rate for the provider.

a. Whether the Agency must wait until recovery

Section 1903(d)(1) of the Act requires the Secretary to estimate the
amount of Medicaid funding to which a state will be entitled, prior to
the beginning of each quarter. Section 1903(d)(2) requires the
Secretary to pay the amount so estimated, "reduced or increased to the
extent of any overpayment or underpayment which the Secretary determines
was made . . . for any prior quarter . . . ." As discussed more fully in
previous Board decisions, the Agency has consistently interpreted the
term "overpayment" in section 1903(d)(2) to include any payments made to
a state and later determined by the Secretary to be unallowable, that
is, not in accordance with federal program requirements. Massachusetts
Department of Public Welfare, Decision No. 262, February 26, 1982;
Florida Department of Health and Rehabilitative Services, Decision No.
296, May 13, 1982; see, also, California Department of Health Services,
Decision No. 244, December 31, 1981; New York State Department of
Social Services, Decision No. 284, April 29, 1982.

Agency regulations establishing requirements for reimbursement of
long-term care providers in Medicaid provide that states must audit
providers' costs to ensure that claimed costs are allowable, allocable,
and reasonable. /2/ Further, these regulations provide that states "must
account for overpayments found in (such cost settlement) audits . . .
no later than the second quarter following the quarter in which the
overpayment was found." 42 CFR 447.296 (1978).


For its argument that, in spite of these provisions, the Secretary
was precluded from adjusting for the disallowed costs here prior to
recovery from the provider the State relied on section 1903(d)(3) of the
Act. That section provides:

The pro rata share to which the United States is equitably entitled .
. . of the net amount recovered during any quarter by the State . . .
with respect to medical assistance furnished under the State plan shall
be considered an overpayment to be adjusted under this subsection. (4)$
TThe effect of this section has also been discussed in numerous Board
decisions. In Massachusetts, cited above, we held that section 1903(
d)(3) did not apply where the Secretary had made a supportable
disallowance determination since unallowable costs were not "medical
assistance furnished under the State plan." We further held that,
although payment at an interim reimbursement rate (and a corresponding
claim for FFP in the payment) might be proper under the state plan, the
state plan also defined the limits fo final payment. Thus, once a final
rate, lower than an interim rate, was established and it was determined
that an excess payment had been made to a provider as a result, the
excess payment could no longer be considered "medical assistance."

This basic analysis was also set forth in California, cited above and
relied on by the Agency in response to this appeal. In reply, New York
attempted to distinguish the situation here by explaining that New York
had a different rate-setting system from California, stating:

New York has adopted a rate setting mechanism whereby final rates are
established on a prospective basis. Where it is found that a rate was
improperly inflated as the result of the overestimation of costs, the
rate would be retroactively adjusted downward and the provider thereupon
becomes liable for the repayment of amounts received as "overpayments."
The initial rate is not an interim one, as is the case in California,
but is final. All payments made to a provider in accordance with the
established rate are, therefore, valid and allowable under the State
plan.

Reply brief, p. 29 (Emphasis in original)

A similar argument was raised in Florida, also cited above. In that
case, the Board stated:

While the State is correct that the systems differ in some respects,
the State has pointed to nothing which would leade us to conclude that
the resulting excess payments should be treated any differently. The
excess payments arising from either system have the same status: they
are amounts paid to a provider in excess of what the provider was
entitled to under the applicable state plan.

Here, New York has admitted that if an "initial" rate was improperly
inflated, because of overestimation of costs, the rate would be subject
(5) to retroactive adjustment. /3/ Thus, while the State may
appropriately pay based on the established "initial" rate, it is the
retroactively adjusted rate which ultimately determines the proper
payment to the provider as "medical assistance" and the availability of
FFP.


b. Whether the Agency must wait until a final rate is established

The State argued that this disallowance was "premature" and that the
existence of an overpayment could not be determined prior to the time
when the audited costs submitted by UCP were used to establish a final
revised Medicaid reimbursement rate for the Center. The State contended
that the amount by which the provider overestimated costs had not been
firmly and finally established since the provider was contesting the
audit findings and the provider appeals process had not been exhausted.
Further, the State argued that waiting until a revised rate could be
compared with the prior "erroneous" rate was consistent with the Agency
regulation providing for accounting for overpayments, found as a result
of audits, within a stated timed period. According to the State, no
overpayment could be found until the revised rate had been finally
established. Imposition of a disallowance prior to this point, the
State argued, would be unfair since the amount currently claimed to be
an overpayment might be significantly reduced upon further review.

In response, the Agency argued that --

in the circumstances of this case, although the exact amount of the
overpayment may not be determined until UCP's appeal of the audit
findings is considered, the existence of an overpayment is supported by
substantial evidence and is not denied by Appellant. As a result of the
provider's appeal, the amount of the overpayment may be reduced, or it
may not. In either care, postponing adjustment of FFP pending final
appeal of the audit findings allows the State interest-free use of a
substantial amount of Medicaid funds other than for medical assistance.

Agency brief, p. 7.

The Agency stated that its regulation on accounting for overpayments
"simply defines the time limit within which a state must report
overpayments that the State finds in an audit" and "did not limit the
Respondent's statutory authority independtly to disallow and adjust (6)
a claim for FFP when Respondent determines that an overpayment exists."
Agency brief, p. 7.

The State replied:

An overpayment cannot be established by merely asserting that the
provider overestimated the portion of its costs that were chargeable to
Medicaid . . . . An overpayment, if one in fact exists, will not be
equivalent to the amount by which costs have allegedly been
overestimated.

Reply brief, p. 2.

Each party's argument has some merit. We agree with the Agency that
it may disallow in some circumstances where an overpayment to a provider
has been identified, even though a state may not have established a
final rate for the provider. As the State has pointed out, however, a
determination that particular unallowable costs have been included in
calculating a provider's reimbursement rate is not tantamount to a
determination that the provider has been paid, and the State has claimed
FFP in, an equivalent amount of excess payments. For example, if other
allowable costs were underestimated, this would have an offsetting
effect so that the ultimate overpayment to the provider would not be as
great as the overestimated costs.

Here, the State has made a determination that certain costs of
State-provided services were overestimated by UCP, and that these costs
had already been recovered by the State through SIDC's rate. The State
alleged that the provider was appealing the rate determiation. However,
the record shows that UCP took only two exceptions to the auditor's
findings relevant to determining the reimbursement rate for the period
in question here. On exception related to $196,461 in central office
administrative costs the auditors had questioned. These were not part
of the costs of State-provided services and the Agency did not include
these costs in the disallowed amount. Agency brief, p. 13, note 4.

The other exception involved a claim by UCP that its independent
accountants had mistakenly not included $107,102 of Center expenses in
their certified statements of actual costs. The auditors noted that, as
of October 1980, UCP officials were still unable to provide any
documentation of the additional $107,102. Audit report, p. 19.
Further, UCP's letter of March 17, 1981, appealing the Medicaid
reimbursement rate, does not repeat the exception taken in response to
the audit report. /4/

(7) Since UCP is not contesting the auditors' findings concerning
State-provided services costs, and the State has not even alleged that
Center costs reimbursable to the State were potentially higher than the
auditors allowed, we do not accept the State's position that the
auditors' findings in this area lacked finality. /5/


As discussed more fully below, the Agency therefore reasonably relied
on the State determination that unallowable costs of $1,445,589 had been
improperly included in calculating UCP's initial rate. The State has
not denied that it claimed FFP in payments made to UCP at that rate.
Thus, the federal government has participated in payments at a rate
based on a substantial overestimation of costs and may properly seek
return of the federal share of any resulting overpayment to the
provider.

On the other hand, we are not convinced that the extent of the
over-estimation is equivalent to the overpayment to the provider. The
auditors did not here identify any underestimate of costs included in
the initial rate which would offset the overestimation of State-provided
services costs. However, the auditors did determine that UCP had
understated the number of patient days chargeable under Medicaid. In
determining the acutal overpayment to the provider, the Agency must take
into account the number of patient days claimed at the initial rate. /6/
The State also alleged that not all costs were included in the rate
formula since there were cost ceilings related to particular functions
(although the State did not state how these ceilings would affect the
amount in dispute). Reply brief, p. 2.


Given our conclusions that there were unallowable costs included in
the rate determination but that the resulting overpayment was not (8)
necessarily equivalent to the amount of these costs, the question
remains how this affects the disallowance. We could remand to the
Agency to recalculate what effect the overestimation of costs had on the
rate determination and the amount of the resulting overpayment to UCP.
This would, however, permit the State to have the use of a substantial
amount of federal funds long after the auditors' findings have been
established. Upon examination of the record, we believe there is a more
reasonable approach.

According to the auditors, UCP claimed ICF/MR Medicaid reimbursement
for 216,768 patient days at the per diem rate of $85. Thus, UCP
received at least $18,425,280 in Medicaid payments for the period in
question. /7/ The auditors found that UCP had allowable actual costs of
only $16,839,387. Thus, even treating the $196,461 in administrative
costs disputed by UCP as allowable, UCP had at the most $17,035,848 in
allowable costs and received an overpayment of at least $1,389,432. The
federal share of that amount, $694,716, may properly be adjuted for
prior to the State's final determiation concerning the administrative
costs.


II. Whether the Agency properly relied on the State Comptroller's
audit

The State argued that the Agency could not rely on the State audit
here since there was no evidence that the Inspector General Audit Agency
conducted an independent review of the audit in order to ensure that it
was performed in accordance with generally accepted auditing standards
and otherwise satisfied federal requirements. For this position, the
State relied on Federal Management Circular (FMC) 73-2 /8/ (9) and on
the Board's decision in Calfiornia Department of Benefit Payments,
Decision No. 71, December 14, 1979.

The Agency asserted in response that it had reviewed the audit report
and had based its disallowance not only on the report, but also on the
response to the draft report submitted by the State's Office of Mental
Retardation and Developmental Disabilities (OMRDD). Further, the Agency
presented a detailed analysis of previous Board decisions on Agency use
of state audits.

The State's reply was that the Agency's assurances that the State
Comptroller's audit had been reviewed were conclusory in nature and did
not indicate what methods were used to guarantee that federal
requirements were met. According to the State, "If a review was
conducted, the appellant should be given the opportunity to determine
whether it was done properly. If there was no review, there should be
no disallowance." Reply brief, p. 3.

We do not agree with the State. We find that in the circumstances of
this case the State audit report provides a reliable factual basis for
the disallowance, even if the Agency did not review it in accordance
with FMC 73-2. The following factors support this position:

-- The State did not itself question the reliability of the audit and
intends to use it as a basis for establishing the final reimbursement
rate, except with respect to the adminstrative costs contested by UCP.

-- The State audit was performed in part at the request of the ICF/
MR Bureau, OMRDD, for the express purpose of establishing the final
reimbursement rate. As a cost settlement audit, it came within federal
regulations requiring that it be performed in accordance with generally
accepted standards. 42 CFR 447.294 (1978).

-- The State Comptroller's letter transmitting the audit report
specifically states that it was performed "in accordance with the
'Standards for Audit of Governmental Organizations,' issued in June 1972
(1974 reprint) by the Comptroller General of the United States
applicable to examinations of financial operations; and with the audit
requirements set forth in the 'Audit Guide for Hospitals and/or Skilled
Nursing Facilities, Health Insurance for the Aged and Disabled,'
published by the Department of Health, Educaton, and Welfare dated March
1977 . . . ." Appeal file, Exhibit I. (10) -- Since cost settlement
audits are a function of the State under the rate setting procedures,
this audit was not clearly used "in lieu of" a federal audit, within the
meaning of FMC 73-2.

-- The standards for allowability of costs to be included in
establishing reimbursement rates (although sometimes derived from
federal standards) are primarily State standards and the Agency was
reasonable in assuming that the State correctly applied them.

-- The particular audit finding involved here does not require
application of a complex or controversial cost principle for health
providers but rather the simple concept that UCP cannot claim as actual
costs of its operation costs which the State recovered through its SIDC
rate and did not charge to UCP.

Moreover, as the Agency effectively argued, Agency brief, pp. 8-12,
previous Board decisions do not require a contrary result.

Conclusion

For the reasons stated above, we sustain the disallowance in the
reduced amount of $694,716. This decision does not preclude the Agency
from examining whether the actual overpayment to the State ude to the
overestimation of UCP's costs was, in fact, greater, nor from
disallowing the federal share of any additional overpayment it
identifies consistent with the discussion above. /1/ Neither the State
auditors nor the Agency questioned whether the $2,865,522
recovered by the State through its SIDC rate should have been recovered
instead through UCP's rate although the auditors apparently found that
it was part of the cost of State services provided to Center residents.
In any event, the costs could not be included in UCP's rate so long as
UCP did not have to reimburse the State for them. 2 These regulations
were originally published at 45 CFR 250.30 (specifically, see section
250.30(a)(3)(ii)). They were redesignated at 42 CFR 450.30 on September
30, 1977 and recodified at 42 CFR 447.250 et seq. on September 29, 1978
without substantial change. Hereafter, cites are to the 1978 version.
/3/ We also note that New York in its original appeal referred to UCP's
estimated rate as an "interim" rate. /4/ A possible explanation
for is this that these expenses may have already been included by the
auditors in actual costs since the auditors verified costs substantially
in excess of UCP's certified costs for State-provided services. /5/ In
view of our conclusion that these findings have been final at least
since UCP failed to appeal them on March 17, 1981, we do not consider
whether, under other circumstances, 45 CFR 447.296 might be read to
permit the State a period of six months to obtain recovery of the funds.
These findings have been final for over a year. /6/ By way of
illustration, consider a provider with a rate of $85, based on budgeted
costs of $850 and estimated patient days of 10. The provider claims 9
patient days at $85 for a total of $765. If actual costs were $720, the
provider would be entitled to that amount. The overpayment is only $45,
not the full amount of the $130 overestimate. /7/ The audit report
actually shows revenue from "Medicaid fees" of $18,627,120. It
is unclear, however, whether this figure included Medicaid reimbursement
for services other than ICF/MR services. /8/ FMC 73-2 (also
published as OMB Circular A-73) sets forth policies to be followed in
the audit of federal operations and programs by executive departments.
With respect to reliance on non-federal audits, FMC 73-2 provides:
Reports prepared by non-Federal auditors will be used in lieu of Federal
audits if the reports and supporting workpapers are available for review
by the Federal agencies, if testing by Federal agencies indicates the
audits are performed in accordance with generally accepted auditing
standards . . ., and if the audits otherwise meet the requirements of
the Federal agencies.

OCTOBER 22, 1983