Arkansas Department of Human Services, DAB No. 423 (1983)

GAB Decision 423
Docket No. 82-186

April 29, 1983

Arkansas Department of Human Services;
Ford, Cecilia; Garrett, Donald Teitz, Alexander


The Arkansas Department of Human Services (State) appealed a decision
by the Health Care Financing Administration (Agency), disallowing
$1,419,515 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance was
based on an audit report which found that the State made excessive
Medicaid payments to certain long-term care providers.

The State's major arguments were that the Agency could not adjust for
the federal share of the payments prior to the State's recovery of the
payments from the providers and that the Agency should be estopped from
collecting the overpayments because the State relied on and complied
with the relevant federal regulations. For reasons stated below, we
conclude that these payments represented costs which were not allowable
under applicable regulations and which could be adjusted, under section
1903(d)(2) of the Act, prior to recovery from the providers and that the
Agency is not estopped from collecting the overpayments.

I. Case Background

The Agency based its disallowance on an audit report prepared by the
Department of Health and Human Services Audit Agency. /1/


(2) The stated objective of the federal audit was to evaluate "the
effectiveness of the State agency's controls over the costs of related
party transactions entered into by Medicaid nursing facilities"
participating in the Medicaid program.

The audit report noted that federal regulations at 42 CFR 447.284
(1980) provided that the costs of services, facilities and supplies
furnished by organizations related to the provider by common ownership
or control must not exceed the lower of the cost to the organization or
the price of comparable services, facilities, or supplies purchased
elsewhere. The regulation also required that the provider's cost
reports identify related organizations and costs. The audit report
noted further that the State plan, section 3-6 of attachment 4.19-d,
contained a similar provision with regard to related party transactions.

The auditors reviewed 32 nursing homes and determined that in 27 of
the homes "the State agency accepted payments for leases and services
between related organizations that were significantly in excess of
costs." Audit Report, p. 5. The auditors concluded that excessive
payments were made to the 27 nursing homes, resulting in an overpayment
of $1,419,515 FFP.

II. Participation of the Arkansas Nursing Home Association

The Arkansas Nursing Home Association (Intervenor), which included in
its membership the 27 nursing homes that were the subject of the
disallowance from which the State appealed, requested permission to
intervene in this dispute. The Board exercised its discretion under 45
CFR 16.16(b) to allow the Intervenor to participate in this appeal.
This participation was limited to submitting a brief and supporting
documents "concerning matters (Intervenor) feels should have been
advanced by Appellant but were not, due to the alleged conflict that
exists between (Intervenor) and Appellant." Board's Ruling, p. 4.

In its brief the Intervenor argued that the related party lease
payments which the audit report found were contrary to federal
regulations and the State plan provisions were consistent with the State
plan and, therefore, allowable.

(3) The Intervenor's argument is essentially that in related party
situations the provider can recover either the cost to the related
party, or the prevailing price under the "prudent buyer" concept,
whichever is higher. The prudent buyer concept has a proviso that "the
costs of such services and supplies are consistent with costs of such
items provided by independent third party providers in the same
geographic area." State Ex. C, sec. 3-6. The plan amendment finally
approved in January 1978 does not contain a separate specific definition
of the "prudent buyer concept" in the excerpt furnished us. Id.
However, in the State Plan amendment of March 1978 (approved April 24,
1978) there is a specific definition of the prudent buyer concept.
State Ex. D, p. 3-12.

3-8 Prudent Buyer Concept

The purchase or rental by a facility of any property, plant
equipment, services, supplies, etc. will not exceed the cost that a
prudent buyer would pay in the open market to obtain these items.

Essentially, what the Intervenor is contending is that the State Plan
provides that the provider can recover the cost to the related
organization or the fair market price, whichever is higher; while the
position of the Agency, based on specific federal regulations, is that
the amount recoverable in such a situation is the cost to the related
organization or the fair market price, whichever is lower.

Examination of an example in the Audit Report (Agency Ex. V) will
show how great a difference in dollars such a difference in approach can
make. A nursing home owned and operated by a husband and wife since its
construction in the early 1960's transferred its license as a Medicaid
provider without consideration to a corporation in which the husband and
wife and their two children owned 100 percent of the stock. The husband
and wife retained ownership of the building, which they then leased to
the new corporation. In the three-year period covered by the audit,
lease payments totaled $163,175, but the audit found from review of the
owner's records that the actual cost of ownership during the same period
was $10,971. Id. at p. 6.

(4) The Intervenor's contention is that the provider is not limited
to the $10,971 cost of ownership in determining what is properly
allowable in its cost report to determine its per diem reimbursement
rate. It claims that if the $163,175 is no greater than the fair market
rental in the area the full amount is to be used as its cost basis.

The Agency position is that the State Plan does not say that; the
State Plan still limits the recoverable cost to the lower of the actual
cost to the related party or the fair market price. If the State Plan
did mean what the Intervenor says it does, it would be invalid since it
would contradict the federal regulation. The Intervenor's answer to
this is that the Agency approved the State Plan, and is therefore
estopped from asserting its invalidity.

The interesting point here is that the Intervenor's position is not
the position of the State. The State does not claim that the State Plan
permits the use by providers in their cost reports, in related party
situations, of cost or market, whichever is higher, even though the
regulation says the lower. In its Response to the Intervenor's Brief,
the State, after discussing the background of the cost-related
reimbursement regulation, states under "B. State Plan Provisions", that
"the related party lease transactions were still subject to the lower of
Cost Rule." (Unnumbered third page)

The State stresses that "The Arkansas State Plan is in full
compliance with the Federal Regulations and it will consistently be
maintained in such a fashion." (Unnumbered seventh page) The State does
not claim that the Agency is estopped from enforcing the federal
regulation because the approved State Plan differs from it. The State
has no reason to claim such estoppel because its position is that the
State Plan conforms with the regulation.

The Board is of the opinion that it need not reach the merits of the
Intervenor's argument. The controversy before the Board is between the
State and the Agency. On the specific issue raised by the Intervenor
there is no dispute between the State and the Agency. The State
asserted that the federal regulation in related party situations calls
for a recognition of the cost to the related party or the fair market
price, whichever is lower (what the State refers to as "lower of
cost").The State also asserted that this is (5) what its State Plan
provided. It has other defenses to the disallowance, but is not relying
on what the State Plan said or meant.

The effect of the Intervenor's brief is to dispute the State's claim.
This is a collateral dispute between the Intervenor and the State which
does not affect the outcome of the dispute in this appeal. As the Board
explained in the preamble to the Board's regulations:

The Board's primary responsibility is to deal with disputes between
HHS and its grantees, and Board resources are not great enough to permit
us to substantially expand our role. Furthermore, HHS has no direct
relationship with the subgrantee, and disputes between the subgrantee
and the grantee generally should be resolved between those parties.

46 Fed. Reg. 43816 (1981)

The Board's rule envisages, for example, a situation where an
intervenor questions the parties' agreed upon interpretation of an
applicable regulation or raises the question of the application of a
regulation that the parties had not focused on which would affect the
outcome of the dispute between the parties. In such a case, the Board
would consider the merits of the intervenor's arguments. The Board in
its decision-making process is bound by applicable laws and regulations
(45 CFR 16.14) and would be, therefore, obligated to consider the effect
of a regulation on the parties' dispute.

However, that is not the situation in this case. The Intervenor is
in essence requesting the Board to decide the question of the proper
interpretation of a portion of the State plan which is not in dispute
between the parties. Unlike a regulation, the Board is not required to
consider questions concerning a state plan unless the question is raised
in the parties' dispute. As stated above, the parties do not contest
the meaning of the State's plan and, therefore, it is not necessary for
us to consider questions relating to the plan's meaning.

The Board's Ruling on the scope of Intervenor's participation did
state that Intervenor could present matters that the State would not
present because of an alleged conflict between the State and Intervenor.
Intervenor's (6) presentation could arguably fit within this general
category. However, the context of the Board's ruling was the dispute
between the State and the Agency, and to what extent Intervenor's
participation would aid the Board in deciding that dispute. In short,
it is obvious from Intervenor's submission that Intervenor's
participation does not relate to the issue before the Board, but creates
a new one which the Board need not reach to resolve the dispute between
the State and the Agency. /2/


(7) III. General Background of the Dispute Between the State and the
Agency

Title XIX of the Social Security Act provides for the payment of
federal monies to states to aid in financing state medical assistance
programs. Any state that wishes to participate in the Medicaid program
must develop and submit a plan that meets certain requirements set forth
by the Secretary of HHS. Realizing that many states might have
difficulty financing a Medicaid program even if subsequently reimbursed
by the federal government, Congress also established a funding mechanism
by which HHS advances funds to a state, on a quarterly basis, equal to
the federal share of the estimated cost of the program. After review of
the State's quarterly statement of expenditures, the Secretary may
adjust future payments to reflect any overpayment or underpayment which
was made to the State for any prior quarter. Section 1903(d) of the Act.

Section 1903(d)(2) of the Act states:

The Secretary shall then pay to the State... the amounts 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 subsection....

Section 1903(d)(3) of the Act states:

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.

IV. Parties' Arguments

On appeal, the State did not challenge the Agency's findings
concerning the nature of the payments disallowed here. The State did
raise a numberof substantive issues, primarily related to the Agency's
authority to adjust for amounts which the State had not recovered from
the providers. Below, we discuss the State's arguments under the
following general issue headings:

(8) 1. Whether the Agency is precluded from adjusting for these
excess payments prior to recovery of the payments from the providers.

2. Whether the Agency's approval of the State's plan estops the
Agency from disallowing the excess payments.

V. Discussion

1. Whether the Agency is precluded from adjusting for these excess
payments prior to recovery of the payments from the providers.

The State argued that the federal audit and subsequent disallowance
were premature in that the State's administrative process with regard to
the questioned overpayments was not yet completed. The State conceded
that overpayments may have resulted from the payments to the providers;
however, the State contended that, in accordance with its State Plan, it
should be given sufficient time to complete its administrative process
with regard to these costs. The State asserted that this administrative
process included the State's issuance of a disallowance letter to a
provider and the provider's right to appeal from that disallowance
letter. The State did not cite to any provision in the Act or the
implementing regulations to support its argument that the Agency must
refrain from collecting any overpayments until the State completes its
administrative process.

We are not persuaded by the State's argument. The State did not
question the Agency's authority under the statute to adjust for excess
payments. Indeed, the Board has found on numerous occasions that
section 1903(d)(2) provides the Agency with the authority necessary to
adjust these overpayments. See, e.g., Illinois Department of Public
Aid, Decision No. 404, March 31, 1983.

Section 1903(d)(1) of the Act requires the Secretary to "estimate"
the amount that a State will be entitled to under section 1903(a) 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...." The statute (9) nowhere defines
"overpayment." However, the Agency has consistently interpreted the term
to include amounts, previously paid to a State, which have been
determined to be unallowable, i.e., not authorized by the statute. See,
Massachusetts Department of Public Welfare, Decision No. 262, February
26, 1982, p. 5.

Agency regulations establishing requirements for reimbursement of
long-term care providers in Medicaid provide that state must audit
providers' costs to ensure that claimed costs are allowable, allocable,
and reasonable. 42 CFR 447.250 et seq. (1978). Further, these
regulations provide that states "must account for overpayments found in
audits... no later than the second quarter following the quarter in
which the overpayment was found." 42 CFR 447.296.

The State asserted that such an adjustment can be made only after the
State's administrative procedures were exhausted. As stated above, the
State did not provide any authority to support this proposition. /3/


As discussed above, the auditors determined that certain nursing
homes were receiving excessive Medicaid reimbursement. The State
conceded this. Therefore, the Agency is entitled under section 1903(
d)(2) to make an adjustment for these overpayments at this time.

(10) IV. Whether the Agency's approval of the State's plan estops the
Agency from disallowing the excess payments.

The State alleged that the Agency, by its position that the State
alone must absorb the risk of recovering from audited providers, ignored
the Medicaid program's concept of cooperative federalism. According to
the State, the Agency required that the State, which was a partner with
the federal government in all other respects of the Medicaid program,
stand alone in attempts to recover payments from providers. As an
example of the Agency's rejection of the concept of cooperative
federalism, the State pointed to the Agency's approval of the basic plan
requirements and enforcement methodologies to be used by the State in
administering its plan and the Agency's subsequently holding the State
100 percent responsible for overpayments which were not detected by
these approved methods.

A similar argument has been raised in other cases before the Board.
In New York State Department of Social Services, Decision No. 311, June
16, 1982, the Board discussed why it is not unreasonable for the Agency
to place the burden for recovering payments from providers on the
states:

(While) it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, the states have the primary responsibility
for administering the program, including the duty to take steps to
prevent improper payments in the first instance and to identify and
recover overpayments in a timely manner when they do occur. In some
instances the loss of funds might be unavoidable. However, to sort out
these cases would be difficult, requiring a highly judgmental
case-by-case analysis. Viewing the program as a whole, therefore, we
think that the Agency is not unreasonable in requiring the states to
bear the burden of unrecovered overpayments.

p. 7.

We adopt that discussion here.

The State also asserted that it was misled "by the representation
that the Federal audit requirements set forth in the regulations would
be sufficient to enforce compliance."

(11) State Reply Brief, p. 8. The State concludes, therefore, that
the Agency should share the responsibility for any resulting lack of
enforcement.

The State made nothing more than a general statement here that
estoppel should lie against the Agency. The State did not set forth the
required elements for estoppel nor show why the Agency should be
estopped and, therefore, has not carried the required burden of proof
necessary in establishing estoppel. Furthermore, the estoppel argument
cannot be supported on the basis of recent Supreme Court decisions. In
both Schwelker v. Hansen, 450 U.S. 785 (1981) and INS v. Miranda, 103 S.
Ct. 281 (1982), the Court found summarily that the facts did not justify
estopping the federal government on the basis of representations by
federal employees. The implication in the cases is that the only
possible basis for applying estoppel would be if there were affirmative
misconduct on the part of the federal officials involved.

We find that the State failed to show that a government employee
engaged in affirmative misconduct with regard to the approval of the
State's plan. The State did not identify any particular incident of
misconduct by a government employee, but instead stated generally that
the Agency was responsible for the promulgation of the regulations
governing the requirements concerning state plans. Without any evidence
of specific "affirmative misconduct" by a government employee the State
has not satisfied the "further requirement" described by the Supreme
Court in Hansen, supra, necessary to estop the Agency from disallowing
these costs.

Conclusion

For the reasons stated above, we sustain the disallowance. /1/
"Review of Medicaid Reimbursement to Nursing Homes for Related
Party Transactions for the Period July 1, 1978, through June 30, 1981,
Arkansas Department of Human Services," Audit Control Number 06-20156,
April 15, 1982. /2/ Even if we were to consider the merits of
the Intervenor's arguments, we believe from the Intervenor's preliminary
briefing that the result in this case would be the same.To accept the
Intervenor's interpretation of the State plan would place the plan in
direct conflict with the federal regulation. Intervenor argued that the
State's decision to provide an exception to its related party
reimbursement scheme by recognizing reasonable lease costs between
related parties finds support in a number of judicial decisions which
have found that related party provisions cannot be applied inflexibly.
(p. 18) Intervenor cited several cases which all apply to Medicare,
although one is referred to as pertaining to reasonable costs "to the
Medicaid program." (South Boston General Hospital v. Blue Cross of
Virginia, 409 F. Supp. 1380 (W.D. Va. 1976).) We also note that this
case cited by Intervenor has frequently been either distinguished or
questioned. See, e.g., Shaker Medical Center Hospital v. Secretary of
Health and Human Services, 686 F. 2d 1203, 1208 (6th Cir. 1982);
American Hospital Management Corporation v. Harris, 638 F. 2d 1208, 1213
(n.9) (9th Cir. 1981). The Intervenor also argued that the Agency is
estopped from enforcing the regulation on costs of related organizations
because it approved the contradictory provisions of the State Plan.
Even if they were contradictory, the State has not raised an estoppel
issue based on approval of this plan provision; therefore the
Intervenor cannot do so. Estoppel is an affirmative defense, which has
to be specifically raised and pleaded by the defending party. See Rule
8(c), Federal Rules of Civil Procedure. It is a defense which only the
State could assert; it chose not to do so and the Intervenor may not
therefore raise it. /3/ The Board is aware that the Agency has
interpreted the phrase in 42 CFR 447.296 "the quarter in which the
overpayment was found" to mean the quarter in which the states'
administrative hearing procedures are exhausted. See, HCFA-AT-77-85.
Even if this interpretation were applied to the facts of this case, it
would not affect the Board's finding here. The policy behind the
Agency's not requiring a State to adjust until the exhaustion of the
hearing procedures is to give the State time to resolve State audit
findings or to make a recovery. See, e.g., 41 Fed. Reg. 27304, July 1,
1976. In this case, federal auditors made an independent determination
of the overpayments. The State did not contest the auditors' findings,
and the dispute between the State and the provider is not over the
character or amount of the payments but over whether the State plan
provides for them (in spite of any federal requirement to the contrary).
Therefore, the outcome of the State's administrative procedures will
have no effect on the question of the amount of FFP overpaid.

JULY 07, 1984