GAB Decision 334
June 30, 1982 California Department of Health Services -- Accounts
Receivable; Docket No. 81-36-CA-HC Ford, Cecilia; Teitz, Alexander
Garrett, Donald
The California Department of Health Services appealed a decision by
the Health Care Financing Administration, disallowing $22,276,023 in
federal financial participation claimed by the State under Title XIX of
the Social Security Act. Based on an audit report issued by the United
States General Accounting Office (GAO), the Agency determined that the
State had failed to return the federal share of amounts which the State
had identified as overpayments to providers of services under the
Medicaid program.
During Board proceedings, the Agency reduced the disallowance to
$12,737,069 and then to $6,091,802, based on analysis and documentation
submitted by the State. The Agency also specified what documentation it
would accept as showing that the State had recovered certain other
amounts from the providers and had returned the federal share. Since it
may take the State several months to produce this documentation, the
parties agreed to brief the remaining legal issues so that the Board
could proceed to decision, leaving the parties to resolve the factual
issues concerning the amount in dispute.
The remaining issues are 1) whether the manner in which the Agency
took this disallowance placed an improper and inequitable burden on the
State; 2) whether the State audits on which the Agency now relies for
the disallowance provide a factually and legally supportable basis for a
disallowance; 3) whether the fact that the audit findings are disputed
by the providers renders them unreliable; and 4) whether the Agency can
recover overpayments made to providers which have been declared
bankrupt. For reasons stated below, we conclude that the State has not
been unduly burdened. The Agency has sufficiently narrowed the basis
for the disallowance, and the State has been provided adequate
opportunity to respond. We also conclude that there is sufficient
factual and legal support for the disallowance, even where provider
appeals are pending or the provider has been declared bankrupt. The
State audits were reliable and identified provider costs which were
unallowable under the State plan and which, therefore, did not meet
federal requirements.
(2) This decision is based on the parties' written submissions.
Several telephone conference calls held in the case primarily concerned
procedure. Thus, we have not relied on them for any of our substantive
conclusions on the legal issues.
Discussion
I. Whether the manner in which the Agency took this disallowance
placed an improper and inequitable burden on the State.
A. Background
In April 1979, the GAO reviewed certain "accounts receivable" records
of the State of California to determine whether the State was promptly
identifying and recovering Medicaid overpayments and properly returning
the federal share. Based on the GAO report of its review, /1/ the
Agency issued a disallowance letter in February 1981. This letter
stated that the Agency had made a detailed examination of GAO findings
that the State had claimed $31,514,909 in federal financial paticipation
(FFP) in identified overpayments to providers of services under the
Medicaid program (called Medi-Cal in California), and concurred in the
findings. Since some of the GAO "findings" duplicated other federal
audits, the Agency disallowed only $22,276,023.
On appeal, the State objected strenously to the Agency relying on the
GAO report, saying it was evident from the report that GAO was concerned
only with how the accounts receivable were handled and that neither the
report nor the disallowance letter contained any review of or evidence
that the accounts at issue represented overpayments. The State
presented an analysis of its various accounts receivable included in the
disallowance, explaining why some of them did not represent overpayments
or were duplicative.
The State also expressed concern that the disallowance amount
represented the accounts receivable as they existed in April 1979 but,
since that time, the State had collected and returned the federal share
of approximately $5.5 million of the disallowed amount. To identify
each account involved and manually update it could be extremely
burdensome, the State pointed out, and the State should not be require
to bear this burden where the Agency had relied on factual allegations
from a review two years prior to the disallowance. According to the
State, "It is not equitable or proper procedure for (3) HHS to force the
State to research and prove facts upon which HHS wishes to rely in its
disallowance. At the very least, it must be required of HCFA that the
disallowance letter reflect an actual state of affairs which it knows to
exist at the time it takes action upon it." Request for Review, p. 6.
In response, the Agency withdrew a substantial part of the
disallowance, relating to the State's "miscellaneous" accounts
receivable. Further, the Agency reduced the disallowance in the
remaining two categories: Los Angeles County Hospitals and Community
Hospitals. The basis for this reduction was the Agency's examination of
the State audits from which the accounts receivable were derived. The
Agency explained that the Audits Bureau of the California Department of
Health Services performed fiscal year end audits of reimbursable
hospital costs for each year, and then informed the State's fiscal agent
of overpayments to hospitals due to claims for payments for services in
excess of the "upper limits" of payments, as identified by the audits.
The fiscal agent then set up the accounts receivable based on this
information.
The Agency related these "upper limits" to statutory provisions
at
sections 1903(a)(13)(D) and 1903(i)(3) of the Act, requiring that the
State reimburse the lower of "reasonable cost" or "customary
charges"
for impatient hospital services. The Agency cited federal regulations,
implementing these statutory standards, at 42 CFR Part 447, Subpart C
(1980) (formerly 45 CFE 250.30), particularly section 447.252(c). This
section provides that FFP is available in expenditures for payments for
services that do not exceed the upper limits. The "reasonable" cost
of
inpatient hospital services is determined by reference to Medicare
standards set forth in federal regulations and a manual referred to as
the HIM-15.
When the State claims and receives FFP for payments which exceed the
upper limits, the Agency argued, the Agency has the right and
obligation, under section 1903(d)(2) of the Act, to recover the federal
share of the overpayments.
Attached to the Agency response to the State's appeal was a schedule
showing the providers involved, by name and identification number; the
relevant fiscal year; the HIM-15 provisions which the audits alleged
the profider had violated in reporting its costs and the corresponding
federal Medicare regulations; and the "final settlement amount due
State" as found by the State audits.
In light of the revised disallowance, the State was provided an
opportunity to respond to the Agency's position. The State then
submitted extensive documentation to show the current status of its
accounts receivable after adjustements, where providers had prevailed
(4) on appeal from the State audit findings, or where the State had
collected overpayments and returned the federal share. /2/ The State
explained this submission as follows:
While we continue to deny HCFA's right to take disallowances in this
fashion, and to put upon the State the burden of producing the evidence
which HCFA needs to show that there is any amount currently owing the
State and why, we have chosen as a second argument to respond to the
factual basis for the alleged "determinations" of overpayments. This
was done both as a second line of defense to the disallowance, and to
support our first argument by showing the absurdity which results when a
disallowance is taken in this fashion.
State's Sjupplemental Brief, p. 2.
Based on the State's documentation, the Agency reduced the
disallowance amount to $6,091,802. The adjusted disallowance represents
payments to 11 Los Angeles County Hospitals and 26 Community Hospitals
during fiscal years ending June 30, 1974 through September 30, 1977.
The Agency explained why it considered some of the State's documentation
insufficient and, as a result of a telephone conference call held by the
Board, clarified for the State what it would accept to show that the
State had made further recoveries and had adjusted the federal share.
The parties agreed that production of these documents might be difficult
and would take several months, but the State agreed to produce the
documentation.
B. Discussion
The State has continued to assert throughout Board proceedings that
an improper and inequitable burden has been placed on it by the Agency's
reliance on the GAO review of the accounts receivable, two years prior
to the disallowance. This argument has some merit. As the State
pointed out, it is doubtful that the Agency actually made a "detailed
examination" of the GAO findings prior to issuing the disallowance
letter, as the Agency alleged it had. Such an examination surely would
have resultd in a reduced disallowance amount from the beginning, and
the State would not have had to present as complete an analysis of its
(5) accounts receivable figures during formal Board proceedings. In our
opinion, the Agency should have at least taken a more cooperative
approach and discussed the matter with the State first. However, this
is not a sufficient reason to reverse the disallowance.
In identifying overpayment amounts in circumstances such as here,
there is a joint burden: the Agency must provide sufficient detail
concerning the basis for the disallowance to enable the State to
respond, but the ultimate burden of documenting the allowability of
costs claimed rests with the State. New York Department of Social
Services, Decision No. 151, February 26, 1981. While the original
disallowance letter here was deficient in some respects, the Agency
ultimately based its disallowance on State audits, providing detail from
those audits and explaining the legal basis for the disallowance. The
State has been provided an adequate opportunity during Board proceedings
to repond, and the Agency has cooperated by making adjustments and by
explaining what documentation it would accept. Thus, we do not think
that the State was unduly burdened by the fact that the disallowance
letter was somewhat overbroad.
We agree with the State that basing a disallowance on figures from
State audits (or accounts receivable records), where adjustments are
being made on an ongoing basis, places a difficult burden on the State
to trace and identify how the disallowance figures relate to the current
status of the alleged overpayments. Balancing this consideration,
however, is the fact that the State has the responsibility for
maintaining and producing the records and can, perhaps, modify its
system to make such information more readily available. Moreover, the
Agency should not be precluded from recouping the federal share of
overpayments merely because these accounting adjustments are difficult.
We also note that, in order to take a disallowance, the Agency must
identify the status of the overpayments at a particular point in time.
While the lag between the time the State records were examined and the
date the disallowance letter was issued in this case was longer than
usual, some time lag is inevitable so the need for adjustments can not
realistically be eliminated.
As discussed below, Agency policy is that, where a supportable
disallowance determination is made, the State must adjust the federal
share on the next quarterly statement of expenditures (or on an
installment basis if the requirements of 45 CFR 201.66 are met). The
State's argument is essentially a policy argument that this is not
administratively efficient where these types of overpayments are
involved. Thus, the State may wish to discuss with the Agency ways in
which both parties might benefit from modifying the policy.
(6) II. Whether the State audits provide a factually and legally
supportable basis for the disallowance.
The State agreed with the Agency that the disallowance now relates
only to payments found to be due to the State as a result of hospital
"cost settlement" audits used to determine reimbursable costs under
Medicare principles. State's Supplemental Brief, p. 7. The State did
not deny the Agency's allegation that these audits found that providers
had exceeded applicable "upper limits" of costs and that FFP was not
available in payments in excess of these "upper limits." Moreover,
the
record shows that these audits were performed in accordance with
established standards under Section 14105 of the California Welfare and
Institutions Code. Agency Response to State's Supplemental Brief,
Exhibit C.
The State argued, however, that the Agency unreasonably relied on
these audits, which were not final State determinations, and therefore,
the disallowance was not factually and legally supportable. The State
incorporated by reference arguments it had made in a previous appeal,
Board Docket No. 79-105-CA-HC. The Board decided that case in favor of
the State, concluding that there was an insufficient basis in the record
to support a finding that the provider payments in question there
represented unallowable costs. California Department of Health
Services, Decision No. 159, March 31, 1981. That decision was based on
the lack of specificity in the Agency findings, the uncertainty as to
whether the payments violated any federal or State plan requirement, and
the fact that the State auditor's findings were disputed. A later Board
decision reversed a disallowance, based on the State's accounts
receivable records, where a number of different factors led the Board to
conclude that the disallowance was not sufficiently supported by the
record. California Department of Health Services, Decision No. 244,
December 31, 1982.
On the other hand, the Board has upheld a number of disallowances
based on the cost settlement audits performed by states, holding that,
where the Agency had made a supportable disallowance determination, the
Agency could adjust for excess payments to providers (in which the
federal government had participated). The federal share of such excess
payments constituted an "overpayment" of federal funds under section
1903(d)(2) of the Act, even if the state had not yet recovered the
excess amount from the provider. See, e.g., 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, New York State Department of Social Services, Decision No.
284, April 29, 1982, and Decision No. 302, May 28, 1982.
(7) Through these decisions, the Board has developed some standards
for use of state audits as a basis for disallowance. Where, as here,
the State conducts audits as part of its provider reimbursement system,
in accordance with established standards, the Agency may reasonalby rely
on those audits as a basis for disallowance provided:
- The Agency provides sufficient detail as to the audits from which
the disallowed amounts are derived.
- The State is provided an opportunity to show that
-adjustments have been made to the audit findings;
-the audits are not reliable for some reason;
-the State has already recovered the amount identified in the audit
as an overpayment and has already adjusted the federal share; and
-the State never claimed FFP in the overpayment in the first place.
Here, as pointed out above, the Agency has provided during Board
proceedings sufficient detail concerning the audits and the State has
been provided adequate opportunity to show where adjustments have been
made, either to the audit findings or to the federal share of the
recovered overpayments.
The State was also provided an opportunity to question the
reliability of the audit findings. The State did not contend that the
auditing methods were unreliable, but alleged several other reasons why
the State audits here should not be relied on. The major reason
advanced by the State was that the providers were disputing some of the
audit findings, so that the State determination lacked finality. This
issue is discussed below.
The State also questioned the legal sufficiency of the disallowance
on the basis that the Agency did not relate the HIM-Manual provisions,
cited in the audits as a basisi for questioning certain amounts, to the
amounts still disputed by the providers and reflected on the State's
accounts receivable records. This problem appears to stem, at least in
part, from errors made by the State's fiscal agent in establishing the
accounts, and the Agency used the audit figures because it determined
they were more reliable. The State did not allege that its own records
could not show this relationship. Moreover, all of the amounts from
which the acounts receivable were purportedly derived were in violation
of some HIM-Manual provision and, therefore, resulted in payments to the
providers in excess of applicable upper (8) limits. It is not the
violation of any specific provision of the manual but the fact that the
payments exceeded the upper limits which makes them unallowable for FFP.
Thus, we conclude that the disallowance is legally supportable.
In general, we find that the State audits were a reliable basis for
disallowance since they were performed under the State system for
auditing providers to determine reimbursable costs, that system required
that such audits meet established standards, and, given our conclusions
below, the State has presented nothing which convinces us that the
audits were unreliable.
III. Whether the fact that the audit findings are disputed by the
providers renders them unreliable.
The State argued that some of the amounts in dispute here were under
appeal by the providers and that, in these circumstances, the State
determination of an overpayment was not final and should not be relied
on. The State argued:
This disallowance suggests that every time a cost settlement audit
finds an improperly claimed cost, that is enough to support a finding
that the provider was overpaid. This is simply not true. The appeals
documents we have provided make it clear that the cost settlement
process is a highly complex one, involving both factual and legal
issues. Rarely do the appeals involve questions as to which there is a
clear answer in the statutes and regulations.
State's Supplemental Brief, p. 9. n.3
According to the State,
The findings of the cost settlement audit are invariably based upon
the legal and interpretative assumptions most favorable to the State.
They are generally altered in the provider's favor upon further review.
There is no basis for a federal decision that the unreviewed audit
findings are sufficient to answer the question of the costs properly
allowable the provider. Until that question is answered, no overpayment
can be found, because one must be certain of the cost allowable the
provider before determining that the provider received amounts in excess
of that cost.
(9) The disallowance, by treating cost settlement audits as though
they were simply audits for clear errors, completely distorts their
nature and intent. Of course it is one of the purposes of these audits
to disclose such errors. But to the extent this occurs, the State is
quick to recoup funds. It is in connection with the other major purpose
of cost settlement audits -- the resolution of legal issues and
discretionary (judgmental) decision making -- that an adversary process
is necessary before a proper cost allowance can be determined.
State's Supplemental Brief, pp. 9-10.
In support of this, the State pointed to requirements in the Medicare
program establishing an appeals process for determination of Medicare
allowable costs for hospitals.
The Board asked the State to explain why it took the position that an
overpayment determination was not sufficiently final until the end of
the entire adversary process when the State itself would recover from
the provider at the conclusion of the first level of the State's
provider appeal process. The State replied:
We agree that completion of the first level of appeal (during the
period involved in this audit) results in a determination on factual
issues which is sufficiently reliable to support a federal demand for
adjustment of the State's claim. We would agree that the federal
government can make an adjustment at that time in any case where the
State's decision that an overpayment occurred is based on a ground which
could form the basis for a disallowance under federal law.
State's Response to Board's Questions, p. 1.
The State asked the Board to establish a rule which would require the
Agency to make its own independent analysis of the facts and the law
until the State findings were sufficiently final to be reliable.
State's Response to Board's Questions, p. 4.
In declining to adopt the rule proposed by the State, we note that
there are countervailing considerations here. As we noted in Decision
No. 159, the State is put into a difficult position in defending
disallowance of an overpayment which is disputed by a provider, since
the State cannot jeopardize its litigation with the provider. On the
other hand, the State has control over the provider appeal process and,
as the Agency has pointed out, federal recovery of unallowable costs
should not have to wait for the end of State administrative proceedings.
(10) All of the amounts in question here involved payments found to
be in excess of upper limits. While these findings were contingent on
proper application by the auditors of Medicare cost principles, the
State has not convinced us that the Agency should be required to
separately examine each application of a cost principle merely because
it is disputed by the provider. Establishing the costs is a State
function and the State auditors have expertise in applying the cost
principles. The State's assertion that its auditors had an incentive to
question costs on every conceivable basis is not convincing. The
auditors had to use accepted auditing standards. Also, we do not think
the State would jeopardize its relationships with providers by making
outrageous overpayment demands. Moreover, the State itself considered
the audit findings sufficiently valid to set up accounts receivable on
the basis of the audits and to recover after the first level of appeal.
Here, the State's documents show that many of the amounts in dispute
had already reached the second level of appeal. In addition, for those
providers listed as being at the first level, the documents indicate
that the appeals had been filed at least as early as 1978 or 1979.
Thus, it is likely that many, if not all, of these cases have been
decided at the first level and perhaps even at the second level. Given
these factors, the reliability of the audits in general, and the fact
that the State has had an opportunity to show any adjustments made to
the audit findings, we conclude that the Agency should not be required
here to make its own independent findings of fact, or conclusions on the
applicable cost principles.
The Board did ask the Agency to explain what its policy was for
requiring the states to adjust for overpayments found in hospital cost
settlement audits, noting that it appeared that for nursing home
overpayments the Agency allowed the states six months after the provider
appeal process was exhausted. The Agency admitted that it had such a
policy, between 1977 and 1981, for nursing home overpayments but stated
that it had always been its policy for hospital overpayments to require
adjustment on the next quarterly statement of expenditures after the
identification of an overpayment through a State audit. The Agency
explained this difference as related to differences between
reimbursement methods for the types of providers. The Agency also
pointed out that its policy in Medicare is to recover overpayments to
hospitals as soon as notice is given that an overpayment has been found,
prior to appeal by the provider.
The State did not point to any policy statement which would conflict
with these assertions.
Further, the Agency may reasonably have a different policy for when
it will require states to adjust for overpayments on their own and when
it will require adjustment based on an Agency determination. See, (11)
Decision No. 262, cited above. The Agency policy for adjustments where
there is a federal disallowance determination is that the adjustment be
made on the next quarterly statement of expenditures (or on an
installment basis if the requirements of 45 CFR 201.66 are met).
IV. Whether the Agency can recover overpayments to providers which
have been declared bankrupt.
Some of the amounts in dispute here were identified by State audits
as overpayments to providers which have now been declared bankrupt. In
Decision No. 262, cited above, the Board held that excess payments to
bankrupt providers constituted "overpayments" under section 1903(d)(2)
of the Act and that the Agency could require adjustment of such excess
payments even though the state would never recover them from the
provider. There, we stated,
While it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, Congress gave each state the authority to
administer the program within the state. The matter before us concerns
the State's administration of the Medicaid program. It is the State's
responsibility to expeditiously recover any overpayments that may have
been made. The Agency has no direct role in the recovery of such
overpayments. The Agency is not unreasonable, therefore, in requiring
the State alone to bear the burden which may result from delays in the
collection of overpayments from providers, notwithstanding the fact that
the providers might at some time declare bankruptcy.
Decision No. 262, pp. 13-14; see, also, Decision No. 296, cited
above, pp. 8-9.
The Board asked the State to brief the issue of whether Decision No.
262 was controlling with regard to the bankrupt providers here.
In response, California argued:
In this case, HCFA has made no determination that the amounts owed by
the three bankrupt providers had been finally adjudicated as
overpayments by the State, nor did HCFA itself audit the basis
underlying each account receivable. It may well be that these amounts
were never appealed due to the provider's bankruptcy, and that had there
had been an appeal, the initial finding would have been reversed. It
may also be that the basis on which an overpayment was found is
unrelated to any federal issue.
(12) As stated above, we have concluded that the State audits were
reliable and that a federal issue of allowability is raised for all the
amounts in dispute here. The State's argument concerning the status of
the overpayments is largely speculative, and we are not persuaded that
the overpayment determinations should not be considered final.However,
if the State presents evidence and analysis to show the Agency that some
of these amounts should not have been identified as overpayments to the
bankrupt providers, the Agency should consider making an adjustment in
favor of the State.
Conclusion
For reasons stated above, we uphold the disallowance in an amount to
be determined by the parties. If the parties cannot agree on the
factual issues regarding the amount, the State may return to the Board
within 30 days after receiving as adverse final decision from the
Agency. /1/ "States should Intensify Efforts to Promptly Identify and
Recover Medicaid Overpayments and Return the Federal Share" (HRD-80-77);
Request for Review, Exhibit B. /2/ The State also claimed that
some of the amounts covered by the disallowance related to provider
payments made solely from State funds. The State subsequently agreed
that adjustments had already been made so that this was no longer an
issue. See Confirmation of Telephone Conversations and Invitation to
Brief, May 21, 1982. /3/ As an example of this type of issue,
the State cited the question of the proper rate of reimbursement for
"extended care" provided by Los Angeles County. The Agency eliminated
amounts related to this issue from the disallowance here, however.
OCTOBER 22, 1983