New Jersey Department of Human Services, DAB No. 416 (1983)

GAB Decision 416
Docket No. 82-177

April 29, 1983

New Jersey Department of Human Services;


The New Jersey Department of Human Services (State) appealed a
decision by the Health Care Financing Administration (Agency)
disallowing $10,710 in federal financial participation (FFP) claimed by
the State, under Title XIX (Medicaid) of the Social Security Act (Act),
for calendar year 1979. The disallowance represented alleged
overpayments made by the State to two independent laboratories
participating in the State's Medicaid program. The disallowance was
based on an HHS Audit Agency report (ACN 02-20210), which alleged
improper billing practices for certain services performed by the
laboratories.

The State initially contested the full disallowance. However, after
it appealed, the State obtained repayment of some of the disallowed
costs from the laboratories, and adjusted for the federal share, thereby
reducing the amount in dispute to $8,531.50. This amount represented
the FFP in amounts paid to one of the laboratories for tests performed
in regard to Pelvic Inflammatory Disease (PID) cultures.The Agency
alleged that the laboratory billed the State (which subsequently billed
Medicaid) for a more costly level of laboratory procedure than it
actually performed. The Agency determined the amount of the
disallowance based upon its examination of a number of claims submitted
by the laboratory, and upon irregularities in the laboratory's past
billing practices, as revealed by specially designed computer programs.

The State did not challenge the Agency findings regarding the claims
actually reviewed by the auditors; rather, it contested the validity of
the sampling techniques employed by the Agency. The State also
challenged the Agency's request for immediate repayment of the
disallowed FFP and argued that the Agency must wait to collect the
overpayment until the State has recovered the overpayment from the
laboratory.(2) The Agency denied that its sampling method was invalid,
arguing that a general review of the laboratory's claims, performed by
specially-designed computer programs, showed that the laboratory was
consistently using incorrect billing procedures.

For the reasons discussed below, we uphold the disallowance in part
and reverse in part.

Background

Agency auditors employed specially designed computer programs in
order to obtain an overall picture of the billing practices of
independent laboratories participating in the State's Medicaid program
for calendar year 1979. Use of these computer programs resulted in a
summary profile showing the types of tests for which the laboratories
received significant reimbursement. The auditors determined that two
laboratories showed a pattern requiring audit attention. Federal
auditors then conducted an on-site review of the laboratories,
accompanied by a Medical Review Analyst - Laboratory Consultant employed
by the State. (See, Affidavit of Phyllis Valeri, submitted by State)

The auditors' review showed the following:

1. Billing for tests not performed which included:

(a) billing for higher value definitive culture or culture with
sensitivity when a culture or culture screening was done.

(b) billing for additional sensitivity discs that were not used.

2. Billing for individual tests that were performed as part of an
automatic chemistry profile.

3. Adding on tests not ordered by the physician.

4.Billing for tests not supported by a physician order form.

5. Billing for higher value tests when less costly acceptable tests
were available.

(3) The Agency disallowed for the practices in items (1) through (4),
finding that the practice identified in item (5) was abusive but did not
violate federal regulations. (Agency Brief, p. 3) The issues in this
appeal now concern only tests identified in item (1) dealing with PID
culture tests, because the State concurred in items (2) through (4).

As noted above, the auditors found that the laboratory had routinely
billed three types of culture screenings (Gonorrhea, Beta Strep, and
Vaginal Monilia), which constituted its PID work-up, under a higher
value procedure code that indicated culture with sensitivity study or
definitive culture. (Audit Report, p. 4) Culture tests with sensitivity
studies are reimbursed at a higher value ($6) than culture tests or
culture screenings ($3). The auditors reached their conclusions in the
following manner.

The auditors reviewed 32 paid claims containing 90 PID cultures. For
each of the 90 tests reviewed, the laboratory billed under a definitive
culture or sensitivity study code. According to the State health care
professional who assisted the auditors in their review, the test used by
the laboratory was considered a screening procedure, rather than a
sensitivity test. However, the laboratory considered the PID workup a
culture test reimbursable under the higher procedure code. (Audit
Report, p. 18; Affidavit of Phyllis Valeri) Further, the auditors'
review of the technical worksheets and the "results slips" returned to
physicians indicated that sensitivity studies were not made on the
sample claims. Thus, the auditors found, for all the claims reviewed,
that the laboratory had billed for tests it did not perform.

All of the individual overpayments found in the sample were for at
least $3, the difference between the higher rate for sensitivity tests
and the lower rate for screening procedures. However, the total
overpayment the auditors identified for the sample was not $270 (90 X
$3) but was $288. During the course of Board proceedings, one of the
auditors explained the $18 difference. Apparently, at some time during
the audit period, the State had raised its reimbursement rates to $9 for
the sensitivity tests and $6 for the screening procedure (still a $3
difference). According to the auditor, in addition to claiming for
tests not actually performed, the laboratory made certain "clerical
errors," (4) claiming the $9 rate before it was in effect. Thus, in
these instances, the auditors found that the laboratory claimed $6 in
excess of what it should have been paid. These clerical mistakes
accounted for the additional $18 overpayment found in the sample claims.
/1/


On the basis of the review of the 90 PID cultures, the auditors
concluded that all PID culture billings submitted by the laboratory for
1979 were improper. The auditors recommended disallowance of FFP in an
amount estimated by determining what percent of the total amount paid
for the sample claims was an overpayment and applying that percentage to
the total amount claimed for PIDs. The Agency accepted the auditors'
conclusions and took the disallowance appealed here.

The Parties' Arguments

The State challenged the disallowance on the basis of the invalidity
of the review techniques used by the auditors. The State argued that in
sampling the 32 cases, the auditors did not use either a set of random
numbers or a random number generator to determine the sample, and that
the sample as a consequence was not statistically valid. The State
pointed out that it is improper to make a projection based on an invalid
sample. Citing a Board decision for the proposition that "the assurance
factor is critical in applying any statistical evaluation" (University
of California -- General Purpose Equipment, Decision No. 118, September
30, 1980, p. 7), the State noted that the degree of sampling error was
not calculated and argued that the Agency's failure to calculate the
sampling error further tainted the disallowance. Finally, the State
argued, the auditors' apparent reliance on the use of ratio estimates to
project the overpayment amount from the claims actually audited created
a degree of sampling bias which could affect this sample in some manner,
although the extent of the effect could not be evaluated. (State Brief,
pp. 10-11)

(5) The State argued that the sampling deficiencies inherent in this
sample made the Agency's reliance upon it both unfair and improper. The
State drew an analogy between the alleged deficiencies in this audit and
those found in the disallowance discussed in Decision No. 118. In that
case the auditing agency failed to specify either the method used to
calculate the projected disallowance, or the method used to make
adjustments to the projection, and provided no analysis regarding the
sufficiency of the sample size or the adequacy of using an unrestricted
random sample. (Decision No. 118, at p. 7)

The State pointed out that in Decision No. 118, the Board recognized
its duty to inquire into the validity of the sampling technique to
determine if the sample provided a reliable basis for taking a
disallowance. (State Brief, pp. 8-9) The State argued that the Board
should apply the same basic rationale used in reversing the disallowance
in Decision No. 118 to reverse this disallowance.

The Agency argued that, under the circumstances, the disallowance was
proper. The Agency pointed out that the laboratory in question was one
of two selected for an audit based on the results of computer programs
which disclosed a systematic pattern of aberrant billing practices. The
audientors' examination revealed that, for 100% of the claims reviewed,
the wrong procedure code was used for billing, resulting in an
overpayment to the laboratory. Thus, the Agency argued, the results of
its examination in addition to the computer reviews led the auditors to
conclude that all PID claims submitted by the laboratory for federal
reimbursement had been improperly billed. The Agency admitted that
while there is a possibility that some of the claims had, in fact, been
properly billed, the disallowance in this instance was justified and
reasonably based upon the the results of the auditors' review. (Agency
Submission, March 11, 1983, p. 4) Finally, the Agency contended that the
burden rested with the State to prove that the disallowance was not
justified and that the expenditures claimed by the State were
reasonable.

Analysis

Although neither party focused on it in their briefing, we think that
there are two components to this disallowance which should be considered
separately: an amount representing billing for tests not actually
performed and an (6) amount representing "clerical errors." The total
overpayment ($288) in the sample claims included the overpayments due to
clerical errors, and, therefore, the estimate based on the $288
overpayments also included estimated overpayments attributable to
clerical errors. Below, we discuss the two components individually. We
then consider the State's argument that it was not required to repay any
overpayment until it recovered the amount from the laboratory.

Improper Bills for Higher Value PID Tests Than Performed

The Agency based its determination that all the PID claims were
overpaid by the difference between the higher and lower rates ($3) on
the following factors:

* The auditors made an initial determination, on the basis of special
computer programs that the provider had engaged in aberrant billing
practices.

* State health care professionals advised the auditors that the
laboratory considered the PID work up to be a test reimbursable at the
higher code. This indicates that the laboratory routinely billed for
the higher value tests, increasing the probability that all of the
billings were incorrect.

* The review conducted by the Agency revealed that, for 100% of the
claims examined, the laboratory billed for higher value PID tests than
it performed. /2/


(7) These factors justified disallowance at the higher rate for all
PID tests claimed at that rate since these factors raised a reasonable
doubt concerning the propriety of every bill claimed (at least to the
extent of the $3 difference between the test claimed and the test
performed). Certainly, these factors were sufficient to shift the
burden back to the State to show that not all of the claims were
improper. The Board has consistently held that the burden to document
expenditures ultimately rests with the grantee. See, e.g., Bullock
County Health Services, Inc., Decision No. 360, November 30, 1982.

The State has not met that burden. The State had the opportunity,
through other means, to demonstrate that one or more of the bills were,
in fact, properly paid at the higher rate. Instead, the State chose
merely to attack the Agency's methodology. We find, however, that the
Agency used its examination of a limited number of claims, not to
demonstrate scientifically that 100% of the claims were overpaid, but as
support (along with other factors) for its conclusion that bills for
these tests were of questionable validity, and as such, were
unallowable. This was a reasonable conclusion under the circumstances,
and the State has presented nothing to rebut it. Further, since we do
not view this component of the disallowance as based on a scientific
sample, we do not reach the State's arguments concerning Decision No.
118.

Accordingly, we uphold the disallowance to the extent it involves a
$3 overpayment for each PID culture claimed at the higher code. This
amount can easily be calculated, without reference to a sampling
technique, by simply multiplying the number of PID tests claimed at the
higher code by $3, and then applying the FFP rate (50%).

Clerical Errors

A smaller part of the disallowance was based on the auditors'
findings that clerical errors were made by the laboratory, claiming at
the $9 rate when it was not in effect. This resulted in an additional
overpayment of $18 in the claims examined by the auditors. The Agency,
in effect, then adopted an estimate from this admittedly limited and
judgmental examination to the universe of bills under scrutiny here.

(8) We can sustain the disallowance only for the $18 actually
identified as due to clerical errors and not for estimated errors. In
this component of the disallowance, we have evidence only of erratic
billing errors that were not necessarily part of a pattern. Since these
errors were related to a rate change which took place at some point
during the audit period, it is unreasonable to assume such errors were
made throughout the period. There would be no basis for assuming that
the universe contained clerical errors in the same ratio as the sample
since there is no assurance that the sample was presentative in this
respect.

Accordingly, we uphold the disallowance of the $18 but reverse this
component of the disallowance to the extent it represents an estimation
from this amount.

Repayment of the Disallowance

The State also argued that the Agency's demand for immediate
reimbursement of the disallowed funds, prior to completion of the
State's recovery against the laboratory, placed an unfair burden on the
State, forcing it to shoulder the financial loss, and that such action
was contrary to the spirit of cooperative federalism.

The State noted that the Agency relied on section 1903(d)(2) of the
Act (42 U.S.C. 1396b(d)(2)) for the proposition that a state is required
to reimburse the Agency upon final notice of a disallowance. The
section provides:

... the Secretary shall pay to the State, in such installments as he
may determine, the amount so estimated, reduced or increased to the
extent of any overpayment or underpayment which the Secretary determines
was made under this section to such State for any prior quarter and with
respect to which adjustment has not already been made under this
section.

The State argued that this section of the Act does not mandate
immediate reimbursement upon final notice of disallowance, but merely
demonstrates that the Secretary has the discretion to require payment
under appropriate circumstances. The State asserted that such
circumstances are not present here. (State Brief, pp. 14-15) The State
supported its argument by (9) citing 45 CFR 201.66 (1979), which permits
a state to repay disallowed FFP by installment where a state has
received Medicaid funds subsequently determined to be unallowable. The
State alleged that further support for the Secretary's discretion is
found at section 1903(d)(5), which provides that a state may choose to
retain disallowed funds pending a final determination with respect to
the payment amount for claims, where services were rendered after
October 1, 1980.

As the State pointed out, the statute at section 1903(d)(5) applies
only to services performed after October 1, 1980. The services involved
here were performed in 1979. The State has not argued that the
provision may be retroactively applied. Further, our reading of the
statute leads us to conclude that the statute applies to the resolution
of disputes over the amounts of claims which arise between the
Department of Health and Human Services and grantees of the Department,
not to internal state dispute resolution systems. (Pub. L. 96-499,
Section 961) The regulation at 45 CFR 201.66 does, as the State pointed
out, permit repayment of disallowed Medicaid funds by installment.
However, the regulation permits repayment subject to specified criteria.
Specifically the regulation provides:

(a) Basic Conditions. When a State has been reimbursed Federal funds
for expenditures claimed under titles I,... XIX or XX which are later
determined to be unallowable for Federal financial participation, the
State may make repayment of such Federal funds in installments provided:

(1) The amount of the repayment exceeds 2 1/2 percent of the
estimated annual State share for the program in which the unallowable
expenditure occurred...; and

(2) The State has notified the Regional Commissioner in writing of
its intent to make intallment repayments. Such notice must be given
prior to the time repayment of the total was otherwise due.

The State has neither argued, nor demonstrated, that it met any of
the specified criteria for repayment by installment.

The Board has previously analyzed the applicability of section 1903(
d)(2) of the Act to facts similar to those present here. In
Massachusetts Department of Public Welfare, (10) Decision No. 262,
February 26, 1982, the Commonwealth of Massachusetts raised, and we
rejected, the same argument as the State made here, i.e., that under
1903(d) the Secretary may recover an overpayment of funds from a state
only to the extent that it has been recovered by the state from the
provider. In that decision, we noted that section 1903(a) of the Act
permits FFP only for payments made under an approved state plan. We
determined that the Commonwealth had made overpayments to providers, but
that section 1903(d)(2) did not limit federal recovery of FFP to those
instances where the state had recovered the overpayments from providers.
Section 1903(d)(2) simply authorized an adjustment based on the
Secretary's determination that an overpayment had been made. As we
discussed in that decision, 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, i. e.,
not in accordance with federal program requirements. Further, had the
drafters of section 1903(d)(2) wished to ensure the outcome suggested by
the Commonwealth (in this case the State), they could have done so by a
simple amendment limiting the Secretary's recovery of any overpayment to
the amount recovered by a state from the provider. Decision No. 262,
pp. 5-7; See also, Florida Department of Health and Rehabilitative
Services, Decision No. 296, May 14, 1982.

In this instance, the Secretary has made the determination that there
has been an overpayment of FFP to the State. As a result of this
disallowance, the State received funds which were not being applied
toward costs incurred under an approved state Medicaid plan. Thus, the
practical result of accepting the State's position would be to allow the
State to retain FFP for unallowable costs. Even though the State is
purportedly attempting to recover these funds from the provider, there
is no statutory or regulatory authority cited by the State which permits
the State to retain the funds while seeking reimbursement from the
laboratory.

Under Medicaid, FFP is paid to participating states and is
distributed in accordance with an approved state plan. A state has
primary liability to the Agency with regard to the expenditure of those
funds. Therefore, a state action for the recovery of overpayments from
a laboratory is not an impediment to the Agency's demand for repayment
from the state. /1/ The State had questioned why the overpayment in the
sample was $18 more than $270, but did not dispute the auditor's
explanation. Apparently, there were six clerical errors found in which
there was a $3 overpayment in addition to the $3 overpayment found
elsewhere, for a total $6 overpayment ($9 - $3). /2/ During the
course of this appeal, the question arose about whether the laboratory
was licensed to perform the type of tests for which it billed. The
State admitted that the laboratory was not licensed to perform the
monilia component of the PID sensitivity test but claimed it was
licensed to perform the other two components. We do not need to reach
the issue of whether the laboratory was licensed to perform the higher
value tests, however, because the auditors' review indicated that, in
100% of the sampled claims, the laboratory conducted only screening
tests, yet billed for the more expensive level of tests.

JULY 07, 1984