GAB Decision 564
Docket No. 84-23
August 22, 1984
California Department of Health Services;
Garrett, Donald; Settle, Norval Ballard, Judith
The California Department of Health Services (State) appealed a
determination by the Health Care Financing Administration (Agency)
disallowing the federal share of certain payments made by the State to
providers for services claimed under Title XIX of the Social Security
Act (the Act). State auditors had determined that the payments to
providers were overpayments and the Agency determined that the federal
share should have been returned to the Agency as soon as the State
auditors identified the overpayments. The Agency primarily relied on
section 1903(d)(2) of the Act as authority for taking the disallowance
and for requiring the State to return the amount of the overpayments
immediately on identifying them in State audits.
The State disputed whether the Secretary has authority to disallow
these payments and whether the Secretary made an adequate determinaton
that the payments were overpayments under section 1903(d)(2). We
conclude that, although section 1903(d)(2) authorizes the Secretary to
disallow for overpayments of federal financial participation (FFP), the
Agency cannot reasonably require the State to adjust its claims prior to
the State's final administrative determination, under the circumstances
here. As we discuss below, the Board previously has upheld - and we
again confirm - the right of the Agency to immediately adjust for FFP in
state-identified Medicaid overpayments in appropriate circumstances.
The additional narrow question presented here is whether provider
payments which California found did not meet conditions established by
State law or regulation under a State medical payments program, where
Medicaid funds coincidently are involved, are tantamount to the kind of
Medicaid overpayments we previously have dealt with, so that the
Agency's right to adjust is available in the same way. We hold that
they are not. (2) This determination is based on the written record,
which also incorporated the record from an earlier appeal. /1/
How the Dispute Arose
The following facts are undisputed. California law provides for a
comprehensive system of community mental health services known as the
Short Doyle program. The State contracts with the counties to deliver
mental health services under this program. The counties are the
providers. The counties, however, frequently subcontract with local
professionals, including skilled nursing care and other types of
facilities, to provide the mental health services for the counties.
Some of these subcontractors are also Medicaid providers; they treat
Medicaid beneficiaries as well as Short Doyle beneficiaries, and some
services are covered by both programs. To the extent that beneficiaries
receiving services are federally eligible for Medicaid, the State claims
FFP in the payments made for services covered by Medicaid. To prevent
double billing, all services are billed through the Short Doyle program
to the counties, which then bill Medicaid services to the State Medicaid
agency on a monthly basis. At the end of the fiscal year, the counties
file cost reports with the State which include the Medicaid costs
associated with the Short Doyle program. The State makes final payments
to the counties on the basis of these cost reports and also audits the
reports, making adjustments to the extent that any of the costs reported
are unallowable due to noncompliance with either Medicaid or Short Doyle
requirements.Appellant's Opening Brief, pp. 12-13.
Here, State auditors had determined that, for various reasons,
certain counties had been overpaid during fiscal years 1972 through
1977. The counties appealed these overpayment determinations through
State administrative process and the State recorded the amounts appealed
in its "accounts receivable" category as amounts owed the State by
the
counties. The State did not adjust its claims for FFP to reflect the
amount of the overpayments until it actually recovered amounts after the
appeals process was complete.
The federal auditors, in the process of examining State accounting
records to determine whether the State was claiming nonfederal costs for
FFP, reviewed the accounts receivable category and the State audit
reports which served as supporting documentation for the overpayment
determinations. The State acknowledged that the monies recorded (3)
represented audit findings which were being appealed.The Agency
determined that the State should immediately adjust its claims for FFP
to reflect the federal share of the alleged overpayments rather than
waiting until the State recovered the funds after the appeals process
was completed, and disallowed the federal share of the overpayments.
/2/
The Issues
The State argued that section 1903(d)(2) did not authorize this
disallowance because the language of the provision was limited to
overpayments made as a result of errors in the estimation or payment
process, which the State said were not the kind of errors found here.
The State also asserted that the section did not apply to overpayments
made by the State to providers. Moreover, the State argued that nothing
in section 1903(d)(2) or in Agency regulations required that the State
immediately refund FFP upon the issuance of a State audit report and
before resolution of appeals taken from the report.
(4) The State also argued that, even if section 1903(d)(2) did
authorize the disallowance, the section required an independent
determination that there were overpayments for federal purposes and that
here the Agency had simply incorporated State audit findings. The State
pointed out that the majority of the overpayments identified by the
State auditors related to violations of State requirements in a program
run by the State in which some costs of services provided were
coincidently eligible for payment under Medicaid. The State argued that
there were no violations of federal requirements involved in those
overpayments, and that a number of the audit findings had been reversed,
either on appeal or as a result of a State determination not to enforce
a particular State requirement. Thus, the State argued, the payments
were not necessarily unallowable under federal law, and the State audit
findings were not a final determination that there were in fact
overpayments.
The Authority To Adjust for Overpayments Under Section 1903(d)(2)
This Board has previously held that section 1903(d)(2) authorizes the
Secretary to adjust FFP claimed by a state for a payment made to a
Medicaid provider where the Secretary properly determines the payment
was unallowable, based on a state audit, even though the state has not
yet recovered the payment from the provider. Massachusetts Department
of Public Welfare, Decision No. 262, February 26, 1982; Florida
Department of Health and Rehabilitative Services, Decision No. 296, May
14, 1982. /3/ The Board reached this conclusion (5) by reading several
statutory provisions together. We briefly repeat part of that analysis
here.
Section 1903(a)(1) of the Act authorizes payment of FFP in the amount
expended as medical assistance under the State plan. Section 1905(a)
defines medical assistance in terms of the care and services provided
and persons eligible to receive the services. (The State here claimed
the payments as medical assistance under the State plan.) Under section
1903(d)(1) the Secretary must "estimate" the amount to which a state
is
entitled under section 1903(a) prior to the beginning of each quarter.
Section 1903(d)(2) provides, in part:
The Secretary shall then pay to the State, in such installments as he
may determine, 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. . . .
The State argued here, however, that the language, "any overpayment
or underpayment which the Secretary determines was made under this
section," refers only to errors made in (6) estimating or paying FFP and
not to payments made by states to providers. We do not agree. Federal
payment of FFP to states is an ongoing process which includes estimating
expenditures based on quarterly reports filed by the states, and then
adjusting, in future quarters, those estimates to reflect the states'
actual allowable expenditures. See 45 CFR 201.5. The Board has held
that the statute permits FFP only in State expenditures which meet
federal requirements. The Agency has consistently interpreted the term
"overpayment" together with section 1116(d) of the Act to include
amounts previously paid to a state which have been determined to be
unallowable as charges to federal funds. The term "overpayments" in
section 1903(d)(2) may include the federal share of amounts a state paid
for improper provider claims, such as duplicate payments, payments for
ineligible services or recipients, or excessive reimbursements because
of invalid reimbursement rate determinations. It may also include the
federal share of state administrative expenditures which are otherwise
unallowable under applicable federal law or the state plan, or the
difference between estimated and actual expenditures. If payments made
by a state to a provider of medical services are the basis for a state's
claim for FFP but are unallowable under federal law or the state plan,
FFP is also unallowable. Here, the State claimed and received FFP in
payments made to providers. If those payments are determined to be
unallowable under federal requirements, there is also an overpayment of
FFP under section 1903(d)(2).
If we were to read section 1903(d)(2) in the restrictive manner
argued by the State, it would have little or no meaning. We doubt that
Congress intended to set out specific authority to correct only
mathematical or other technical errors made in estimating and paying
grant awards since authority to correct such errors is self-evident.
Moreover, as we discussed above, section 1903(a) must be read in
conjunction with section 1903(d). Thus, the words, "under this section"
must refer not only to the estimation and adjustment process, but also
to payment for State expenditures for medical assistance and other costs
as provided in section 1903(a)(1). Finally, many aspects of federal law
and the state plan apply to payments made to providers for medical
assistance, not just to payments by the federal government to the State.
In other words, applicable law addresses what payments made to providers
are eligible for federal participation.
The State also argued that the statute does not authorize a
requirement that states immediately refund FFP in overpayments
identified in state audit reports, notwithstanding ongoing appeals, and
that a regulation cited by the Agency, 42 CFR 447.296, does not apply to
these payments.Moreover, the State argued that the Agency had
acknowledged, in (7) proposed regulations providing for recovery of the
federal share of overpayments, that the timing of federal recovery of
its share of overpayments is a matter of policy rather than of law. 48
Fed. Reg. 14664, April 5, 1983. Thus, the State argued, in the absence
of an Agency regulation establishing such a policy, the State was not
required to immediately adjust its claims. As we stated in Decision No.
262, p. 8, n. 6, the statute itself provides authority for the Secretary
to adjust the federal share immediately where overpayments have been
determined to have been made. The Agency has consistently taken the
position that section 1903(d)(2) provides for authority for immediate
recovery once an overpayment is established. The Agency's proposed
regulations are consistent with that position, and the preamble to those
regulations asserts that the statute provides authority to set out a
reasonable policy for recovery of the federal share of provider
overpayments.
Thus, we conclude, as we have before, that section 1903(d)(2)
provides authority for adjusting FFP in provider payments which are
unallowable under federal requirements.
Use of State Audit Reports and State Identification of Overpayments as
the Basis for a Determination Under Section 1903(d)(2)
The State argued that the Agency had not made an adequate
determination of an overpayment under section 1903(d)(2) because the
Agency relied solely on State accounts receivable and audit reports.
The State asserted that, during the course of the State appeals process,
many of the payments questioned in the audits were determined not to
have been overpayments, /4/ and that certain of the audit findings were
adjusted and were no longer a basis for overpayment determinations. /5/
Thus, the State argued, the audit reports and (8) accounts receivable
were not a reliable basis for a determination that there were federal
overpayments.
The Board held, in Decision No. 334, p. 7, that where a state
conducts audits as part of its provider reimbursement system, in
accordance with established standards, the Agency may reasonably rely on
the audits as the basis for disallowances, with some exceptions.
The State has not pointed to any weakness or fault in the audit
reports themselves, and the Agency asserted that it had tested the
audits to ensure that they met auditing standards and were reliable.
The State asserted that the audit reports were not a reliable basis for
a determination that there were federal overpayments because some of the
findings were adjusted and others were overturned upon appeal. We do
not think that, simply because some findings were reversed or waived, we
should automatically find that the Agency cannot generally rely on the
State's audit reports and the action taken by the State in pursuing
repayment of the amounts identified by the auditors. The fact that
records may be subject to later adjustment does not render them
unreliable at a particular point in time. Decision No. 262, p. 17. In
Decision No. 334 the Board declined to adopt a rule that the Agency
could not rely on California findings until the completion of the entire
appeals process. The Board pointed out that California had control over
the provider appeal process and federal recovery of unallowable costs
should not have to wait for the end of State administrative proceedings,
where the State itself could recover after the first level of appeal.
At p. 9. /6/ Thus, generally, the State has not shown here that the
accounts receivable and audit reports were an unreliable or unfair means
of determining that the State made overpayments to its providers.
The Adequacy of the Agency's Determination in This Case
The additional question newly presented in this case, to which we now
turn, is whether the improper payments California identified here should
be treated the same as the (9) kind of overpayments dealt with in
previous Board decisions and the discussion above.
The State asserted that most of the overpayments here did not involve
violations of specific Medicaid requirements at all, but were related
solely to violations of additional State requirements under California's
Short Doyle program. /7/ Indeed, the State asserted that these costs
were specifically allowable under the Medicaid program.
If the State is accurate about the payments' allowability under
specific provisions of the Medicaid law and regulations (and we assume
accuracy for our purposes here, as the record does not deal with the
cost items themselves), then the costs would be unallowable only because
of one thing: Office of Management and Budget (OMB) Circular A-87, made
applicable here by 45 CFR 74.171. OMB Circular A-87 contains general
cost principles for determining whether costs incurred by state and
local governments are allowable as charges to federal grants. Among
these principles is a provision which requires that costs, to be
allowable, be "authorized or not prohibited under State or local laws or
regulations." Part I, C.l.b. Since the Agency did not deny that the
costs are otherwise allowable under specific Medicaid requirements, this
provision is the sole basis for the Agency's position that the costs
here are federally unallowable and, therefore, FFP in the costs should
be recovered immediately as an overpayment to the State.
Implicit in HCFA's position is the assumption that a finding that a
provider is not entitled to payment because the provider has failed to
meet a State program requirement is tantamount to a finding that the
related cost incurred by the State agency (i.e., the payment made to the
provider) is unauthorized or is prohibited. In general, we think this
is a reasonable assumption; such State requirements generally establish
not only the provider's right to receive payment but also the scope of
the State agency's authority to make payments. /8/ But this does not
necessarily lead to a (10) conclusion that immediate adjustment of the
State's claims here is required. Under the facts in this record, we
conclude that immediate adjustment is not required, because of the
following factors:
First, it should be kept in mind that we are dealing here essentially
with a question of timing: should the State return the sums reflected
in its determinations now, or after its administrative adjudication
confirms the findings? /9/ We do not dispute the applicability of the
OMB Circular provision, nor that costs ultimately found to fit its
prohibition should be adjusted. However, the simple generality of the
Circular provision does not speak to how or when a determination is made
that the provision is violated; the timing of an adjustment based on
the provision; nor, indeed, anything to do with the process by which a
determination is made about whether the provision applies. The
provision is a simple statement that a certain factor makes a cost
unallowable; it is silent on all the other germane considerations. As
we discuss below, when faced with this kind of generality, and absent
any contrary indications found (11) elsewhere, both the Circular and
prior Board decisions favor according defence to a state's
interpretation of its own law, regulations, and administrative
processes.
Second, there has been no federal determination of any unallowability
under the Medicaid law and regulations per se. The State's argument that
the funds are allowable under the federal Medicaid law is not contested.
This is different situation from our earlier cases, which all dealt with
determinations of violations of specific Medicaid requirements.
Third, while in one sense the OMB Circular provision can be
considered a Medicaid requirement (it is incorporated into Medicaid
requirements by 45 CFR 74.171), the Circular provision is a general,
government-wide cost principle. The Circular does not contain any cost
eligibility requirements specific to the Medicaid program, and it is
silent on the issue of when a cost becomes unauthorized under State law.
In the absence of a cost-specific determination by the Agency that State
laws or regulations, identified in the determination, were violated and
that these requirements made the costs unallowable under the OMB
Circular provision, the Circular provision is not triggered until the
State determines that its own law or regulations prohibit these costs.
We do not read the provision as a draconian override of state
administrative process; in fact, the Circular contains an indication,
in its statement of Policy Intent, that it was meant to be applied in a
way which would be tailored to the concerns of particular programs:
This Circular provides principles for determining the allowable costs
of programs administered by State, (and) local . . . governments under
grants from . . . the Federal Government. They are designed to . . .
promote efficiency and better relationships between grantees and the
Federal Government. The principles are for determining costs only and
are not intended to identify the circumstances nor to dictate the extent
of Federal and State or local participation in the financing of a
particular project. They are designed to provide that
federally-assisted programs bear their fair share of costs recognized
under these principles except where restricted or prohibited by law. .
. .
46 Fed. Reg. 9548, January 28, 1981.
Fourth, we are dealing here with State determinations of whether
there have been violations of State law or regulations, using State
administrative process in a State forum. The Agency has not gone behind
these elements to examine on its own the costs in question. The Board
has frequently (12) held that we generally give deference to a State's
interpretation of its own laws, regulations and administrative process.
A state ought to be entitled to a reasonable exercise of its own
administrative prerogatives, without the disincentive of a federal
collection demand before the state has finally determined what its own
program requirements are.
When the disallowance here was developed, the auditors assumed the
sums in issue were typical federal overpayments. Neither the audit
report nor the final Agency decision refer to OMB Circular A-87. The
OMB provision is, of course, no less applicable because of this history;
but this history does bear somewhat on the fairness of the
determination. The Agency is an incidental beneficiary of a State
initiative to recover funds under its own program. The funds here would
not be recovered - or recoverable - but for the State's own laws and
regulations, and, as we have said, the State is entitled to some
deference in determining what its own laws and regulations mean. Even
aside from other considerations, it would simply be unfair to use an
ambiguous general cost principle as a means of collecting these funds
before the State has finally determined, through its own process, what
its own requirements mean.
Conclusion
We conclude that the Agency is not entitled to immediate recovery of
the overpayments identified by California based solely on violations of
State laws and regulations; the Agency may recover only after
California determines, through reasonably expeditious use of its own
administrative adjudication processes, that it is owed the sums. To the
extent either the State or Agency determines that any of the payments
here relate to violations of specific Medicaid requirements, those sums
must be adjusted promptly, in accordance with the Board's earlier
decisions and our discussion above. /1/ Board Docket No. 80-42-CA-HC.
/2/ The State appealed the disallowance in February 1980;
however, the parties agreed to negotiate about the issues raised in the
appeal and the Board closed the case, with the understanding that the
parties could reopen the case should they be unable to resolve all of
the disputed issues. The parties reduced the disputed amount from
$3,871,002 to $853,753. The Agency offset this amount against the
State's federal share of medical assistance payments under Title XIX of
the Act for the quarter ending December 1983, and this appeal is from
that offset. In a telephone conference held by the Board, the parties
agreed to sever from this appeal issues concerning the major part of the
amount offset because those issues involved primarily questions about
documentation. The amount at issue in this decision is $193,158. The
State submitted to the Agency documentation purportedly showing that it
has already repaid $40,880, and that the amount in dispute should be
$152,278. The Agency refused to review the documentation on the ground
that the figures continually change as the provider appeals at the State
level are completed and the amounts involved in the overpayments
disputed at the State level are recovered. The Agency indicated that
the Agency would review documentation regarding any portion of the
disallowance which the Board upholds and work with the State to
determine the final amount still due. /3/ Both of these
decisions were reviewed by federal district courts, but neither court
determined that section 1903(d)(2) limited authority to adjusting for
errors made in the estimation and payment process. In Florida v.
Heckler, Case No. TCA 82-0935, Mem. Op., D.C. Fla, N.D., Tallahassee
Div., January 5, 1984, Florida acknowledged that it had made
overpayments in the form of payments made to providers at a rate which
was later determined to be incorrect and payments which were
duplicative, in excess of maximum rates, or otherwise erroneous. The
court found that the payments were not proper under Title XIX and that
the Agency was entitled to offset the amount against future claims for
FFP. Massachusetts v. Heckler, Civ. Action No. 82-1048-G, Mem. Op., D.
Mass., January 12, 1984, on the other hand, involved the question of
whether certain "excess payments" made by Massachusetts to its providers
under the retrospective reimbursement system set out in the approved
State plan were "overpayments" within the meaning of section 1903(d)(2).
Massachusetts advanced funds to facilities providing services to
Medicaid patients in the form of interim rates which were calculated on
the basis of the costs for prior periods. These rates proved to be
higher than the final rates calculated later on the basis of actual
costs for the quarter involved. Massachusetts was unable to recover the
difference between the interim rates and the final rates because the
providers had ceased to operate for one reason or another. The court
held that these "excess payments" were not overpayments within the
meaning of section 1903(d)(2) because they had been paid as medical
assistance under an approved State plan. Thus, the court held, the
federal share did not have to be returned to the federal government
until Massachusetts recovered the funds from the providers, at which
time the Agency's pro rata share would be an overpayment under section
1903(d)(3). /4/ The State asserted that between the time the Agency
took the disallowance in 1980 and this reopening of the appeal, the
original amount of overpayments disallowed by the Agency was reduced
from $2,517,213 to $523,981 because the State appeals process resulted
in findings that the remainder were not overpayments. Appellant's
Opening Brief, pp. 4-5. /5/ Exhibit 3 submitted by the State
contained correspondence which indicated that in 1978 the State decided
not to enforce a provision of the State Code requiring a facility
providing services under the Short Doyle program to have a written
contract with a county. The State therefore adjusted audit findings
made because providers lacked written contracts. /6/ In the
Agency's proposed regulations concerning federal recovery of its share
of provider overpayments, states are required to report "tentative
overpayments" as soon as they are identified. They then must adjust
their claims for payments to noninstitutional providers (such as a
county) within 90 days. The proposed regulations specifically preclude
provider appeals as a basis for postponing adjustments. 48 Fed. Reg.
14665, April 5, 1983. /7/ Of course, to the extent the State or
HCFA can identify sums in the disallowance which involve a violation of
any specific provision of Medicaid laws or regulations, those sums
should be adjusted promptly in accordance with our discussion above and
earlier Board decisions. /8/ We can conceive of some
circumstances in which a State law or regulation might grant the State
agency authority to pay a provider (or to waive collection of payments
already made), even if the provider has not fully met all of the
requirements which establish a provider's right to payment. Given the
general reasonableness of HCFA's assumption, however, we conclude that
HCFA can employ such an assumption so long as the State has the
opportunity to show that it is not warranted in a specific instance.
/9/ The State argued that it should not have to adjust its
Medicaid grant upon adjudication that there was an overpayment, but only
upon actual collection of the amount from the provider. We reject this
argument because, as we have previously held, once the State makes a
determination upon which the Agency can reasonably rely, here a final
administrative adjudication, the Agency may require the State to adjust
its claims for FFP. One further qualification we note, based on
Decision No. 334, is that if the State recovers the disputed
overpayments from the provider after the first level of appeal, then the
State may be required to adjust its claims for FFP upon that recovery,
rather than waiting for the final determination, because at that time
the recovered funds would be an overpayment under section 1903(d)(3),
which provides that the federal share of any amount "recovered" with
respect to medical assistance furnished under the State plan shall be
considered an overpayment to be adjusted under section 1903(d)(2).
JANUARY 08, 1985