Arkansas Department of Human Services, DAB No. 717 (1986)

GAB Decision 717

January 8, 1986 Arkansas Department of Human Services; 
Settle, (John) Norval D.; Teitz, Alexander G. Ballard, Judith A.
Docket No. 84-253;  ACN 06-20156

This case is before the Board on remand from the U.S. District Court
for the Eastern District of Arkansas.  Arkansas v. Heckler, No.
LR-C-83-467 (E.D. Ark., September 17, 1984).  That court reversed Board
Decision No. 423, which had upheld a determination by the Health Care
Financing Administration disallowing payments made to 27 Medicaid
providers which HCFA found to be in excess of the amounts properly paid
under the Arkansas State plan for Medicaid.  Essentially, the court held
that it was arbitrary to require the State to repay the federal share of
the alleged overpayments where the approved State plan established a
provider appeal process and appeals by the providers were still pending.
The court also determined that there were factual disputes requiring a
hearing.

During proceedings before the Board on remand, HCFA agreed to withdraw
the disallowance of payments to five providers, and the State stipulated
to certain facts and agreed that HCFA had properly adjusted the federal
share of part of the excess payments made to three of the providers.
The Board held a hearing, as directed by the court, and otherwise
developed the record to reflect the current status of the providers'
appeals. /1/ None of those appeals are still pending at the
administrative level although seven related court cases are still
pending.


The State did not deny generally that the providers had received
payments in excess of what the providers were entitled to under the
State plan.  Rather, the State advanced a number of reasons why, in the
State's opinion, HCFA should be precluded from(2) disallowing the
federal share of those excess payments.  The State's arguments raised
the following major issues:

* Does section 1903(d)(3) of the Social Security Act preclude HCFA from
adjusting the federal share of excess payments which the State has not
recovered from the providers?

* Is HCFA precluded from taking this disallowance because HCFA approved
the State plan provision establishing a provider appeals process?

* Does the partnership concept in the Medicaid program require that HCFA
establish that the State was at fault in making the excess payments to
the providers or in failing to recover them?

* Is HCFA precluded from taking this disallowance based on the theory of
equitable estoppel because of HCFA's actions or inactions related to
development and implementation of the State's system for reimbursing
providers?

* Did HCFA improperly use 1977 cost data in calculating some of the
excess payments?

* For the reasons stated below, we conclude that HCFA is not precluded
from taking the disallowance on the basis of any of the theories
advanced by the State here.  In summary, those reasons are:

* The excess payments to the providers here are not "medical assistance
furnished under the State plan" and, therefore, section 1903(d)(3) does
not apply.

* The State plan provision establishing a provider appeal process is not
a basis for preventing HCFA from adjusting the federal share of the
excess payments here since no appeals are pending at the administrative
level and since, with respect to many of the excess payments, the State
did not take any action to recover from the providers.

* HCFA acted reasonably in requiring the State to repay the federal
share of the excess payments even if the State was not at fault in
making, or failing to recover, the excess payments, and the disallowance
does not violate the partnership concept in the Medicaid program.

* None of HCFA's actions or inactions provide a basis for estopping HCFA
from taking this disallowance since the State did not prove the basic
elements necessary to estop a private party, let alone establish
affirmative misconduct by HCFA.(3)

* Use of the 1977 cost data was proper, since it was consistent with the
State plan reimbursement system, of which the providers had notice prior
to the rate periods in question.

Below, we first set out the undisputed facts regarding what the State
plan specifies about provider reimbursement, how that plan was developed
and implemented, and what the federal auditors found.  We then address
each of the major issues listed above, resolving questions of fact where
necessary to our determination and stating the basis for our conclusions
of law.

A major flaw in the State's arguments here was that they were too
general and did not relate with sufficient detail to the specific excess
payments at issue here.  Thus, we have also included here a discussion
of the specifics of some of the excess payments with the reasons why it
appears that the State has not been able to recover them.  Through this
discussion, we reinforce the conclusion, reached in previous Board
decisions and upheld in court, that HCFA is reasonable in placing the
burden for unrecovered excess payments on the states, even though in
some instances the loss of funds may have been unavoidable.

Background.

Title XIX of the Social Security Act (Act) establishes a program of
medical assistance to the needy, including services in a skilled nursing
facility (SNF) or intermediate care facility (ICF).  In order to receive
federal financial participation (FFP) under Title XIX, a state must have
an approved state plan for Medicaid, meeting the requirements set out at
section 1902 of the Act.

Section 1902(a)(13)(E), as added by section 249 of Public Law 92-603,
required that state plans provide for payment of SNF and ICF services
"on a reasonable cost-related basis, as determined in accordance with
methods and standards which shall be developed by the State on the basis
of cost-finding methods approved and verified by the Secretary."
Regulations implementing this requirement provided that states had to
set reasonable cost-related rates no later than January 1, 1978.  The
regulations also established certain standards states had to meet in
order to have their reimbursement systems approved.

Section 447.84 of 42 CFR (and its predecessor provision at 45 CFR
250.30(a)(3)(iii)(D)) provided that state plans had to specify what
items of expense would be allowable costs to be used in calculating
reimbursement rates.  That section included the following provision:

   Purchases from related organizations:  Costs applicable to services,
facilities, and supplies furnished to a(4) provider by organizations
related to the provider by common ownership or control shall not exceed
the lower of the cost to the related organization or the price of
comparable services, facilities or supplies purchased elsewhere.
Providers shall be required to identify such related organizations and
costs in the State's uniform cost report(s).

The purpose behind this provision was to control provider profits, which
were restricted primarily to a return on owners' equity (with the
further possibility, where class rates were used, of facilities which
kept costs below the norm receiving an incentive payment).  41 Fed.
Reg. 27300, 27301 (July 1, 1976);  see also State's Response to
Intervenor's Brief, Docket No. 82-186, unnumbered pp. 2, 3. /2/ Federal
regulations also required that states establish systems for auditing
provider costs, including desk reviews of cost reports submitted by
providers and on-site audits of at least 15% of the providers each year.
42 CFR 447.290 et seq.


Although the states had the option of adopting the retrospective
reimbursement system used in the Medicare program, Arkansas decided to
develop its own rate methodology.  The State submitted several proposed
plan amendments which were found to be unacceptable.  The version
submitted January 11, 1978, however, was approved and made retroactive
to January 1, 1978.  The State subsequently, in March 1978, submitted
further amendments to the plan, which were also approved retroactive to
January 1, 1978.  Simply stated, the State's plan established a
prospective rate-setting system under which providers were to report
costs for each calendar year.  These costs would then be used to
establish a per diem rate to be paid for services provided in the
State's fiscal year (July 1 to June 30) starting six months after the
end of the reporting year.  The State calculated the rates generally by
taking the 80th percentile of allowable costs for each class of facility
and adjusting by an inflation factor.(5)

The State's plan contained a provision on related-party transactions
which used wording different from the federal regulation.  As discussed
below, the State said that it intended this provision to comply with the
federal requirement;  the providers alleged that a "prudent buyer
concept" provision in the plan was to be an exception permitting a
provider to claim more than the cost to the related organization.

The State plan, as approved by HCFA, also contained a provision
establishing an administrative appeal process for providers who
contested State rate determinations.

In order to ensure that the initial rates set under the new system were
accurate, the State hired the accounting firm of Touche Ross and
Company, which audited 100% of the providers' cost reports in 1978. The
State also developed its own auditing staff to perform desk reviews of
the cost reports and establish the rates and to later perform on-site
audits, which were done on 15% of the facilities each year.

As part of the desk review process, the State used a guideline of $85
per bed per month to determine the reasonableness of lease costs
reported by providers, regardless of whether the parties to the lease
were related or not.  Four providers (Appletree, Morrilton, Riverview,
and Mitchell) appealed from determinations based on use of this
guideline, or from later determinations that related-party transactions
had been improperly reported, and the last three received decisions in
their favor from the "Ad Hoc Committee" set up pursuant to the State
plan provision establishing an appeal process.  The Commissioner of the
State department administering the Medicaid program tried to reverse
these decisions, but was precluded by court order from doing so.  The
Commissioner also sought an opinion from the State Attorney General on
the related-party provision in the State plan, who determined that the
provision should be interpreted consistently with the federal
requirement.  Ultimately, the State also amended its State plan to
provide for an appeal process under which a hearing officer would
recommend a decision, which the Commissioner could then adopt or
reverse.  We discuss these events in greater detail below.

Having learned that the State was having difficulties with providers in
the area of related-party transactions, HCFA asked HHS auditors to
review the situation.  These federal auditors reviewed provider cost
reports and cost of ownership figures and found that 27 providers had
been reimbursed at rates in excess of what they were entitled to under
the State plan and had received excess payments totalling $1,952,967.(
6)

HCFA then disallowed $1,419,515, the federal share of these excess
payments, which the State had previously claimed on its Medicaid
expenditure reports.  HCFA conceded in the recent proceedings before the
Board that $171,440 FFP had been incorrectly disallowed since, under the
State definition of "related party" (found to be the applicable
definition by this Board in Arkansas Department of Human Services,
Decision No. 540, May 22, 1984), five of the provider transactions
questioned by the auditors were not related-party transactions.  This
reduced the amount in dispute here to $1,248,075.

In addition, when questioned at the hearing on its actions regarding
Marshall Nursing Center the State admitted that HCFA had properly
recouped its share of the $2,240 excess payment to that provider.  The
State also acknowledged that it had recouped part of the excess payments
from two other providers (Autumn Hills and Zimmerman), so that HCFA's
adjustments of those amounts were proper.

   Analysis

Section 1903(d)(3) does not require HCFA to wait until the State
recovers the excess payments.

When HCFA took this disallowance, it directed the State to adjust the
federal share of the excess payments on the State's quarterly
expenditure report.  HCFA did this based on section 1903(d)(2) of the
Social Security Act.  Section 1903(d) governs payments to states under
the Medicaid program, establishing a system through which states receive
federal funds based on their estimated expenditures prior to the
beginning of each calendar quarter. Section 1903(d)(2) provides that,
after estimating a state's expenditures, 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. . . ."

This Board has previously held in a number of decisions that, when HCFA
disallows Medicaid expenditures claimed by a state (and that
determination, if appealed, is upheld by this Board), the Secretary has
determined that the state has been overpaid and payment to the state may
be adjusted under section 1903(d)(2).  The Board has based this
conclusion on HCFA regulations and longstanding HCFA policy.  See,
generally, 45 CFR Part 201;  see also section 1903(d)(5) of the Act
(providing that, where there is a final disallowance determination, the
disallowed amount, plus interest, may be offset against subsequent
payments made to the state).  (7)

The states have not generally challenged HCFA's authority to offset the
federal share of a disallowed amount against a payment to a state for a
later quarter, but have argued that, where the disallowance is taken
because a state has overpaid a Medicaid provider, HCFA cannot adjust the
federal share until the state has recovered the overpayment from the
provider.  The states have based this argument primarily on section 1903
(d)(3).  That section provides:

   The pro rata share to which the United States is equitably entitled,
as determined by the Secretary, of the net amount recovered during any
quarter by the State or any political subdivision thereof with respect
to medical assistance furnished under the State plan shall be considered
an overpayment to be adjusted under this subsection.

The states argued that this constituted a limiting definition of the
term "overpayment" in section 1903 (d)(2) and therefore HCFA could not
adjust for provider overpayments which had not been recovered.

The Board rejected this argument.  The Board pointed out that section
1903 (d)(3) was not worded as a definition of "overpayment," but was
intended to prescribe the circumstances under which "medical assistance
furnished under the State plan" would be "considered an overpayment."
The term "medical assistance" is defined in section 1905 (a) of the Act,
which sets out what services and individuals can be covered under a
state plan.  Also, state plans establish methods of determining what
providers can be paid for particular services.  The Board reasoned that,
if a provider has received improper payments (such as payments for
services or individuals not covered under a state plan, or for services
not in fact rendered) or excess payments (such as payments at a rate in
excess of the rate established in accordance with the state plan), those
payments do not constitute "medical assistance furnished under the State
plan" and therefore section 1903 (d)(3) does not apply.  (For a summary
of the Board's reasons, see New York State Department of Social
Services, Decision No. 311, June 16, 1982.)

This analysis has been upheld in two United States Court of Appeals
decisions, Massachusetts v. Secretary, 749 F.2d 89 (1st Cir. 1984),
cert. denied, 105 S.Ct. 3478, and Perales v. Heckler, 762 F.2d (2d Cir.
1985).  See also Florida v. Heckler, Civ. No. 82-0935 (N.D. Fla. 1984).
Nonetheless, Arkansas pressed the same argument here, relying on the
District Court decision in Missouri Department of Social Services v.
Heckler, No. 84-4106-CV-C-5, W.D. Mo., Sept. 10, 1984, which reversed
Board Decision Nos. 448 and 459,(8) based on the Massachusetts district
court decision later overturned by the First Circuit.  The Missouri
decision has been appealed to the Eighth Circuit, but that court has not
yet decided the case.

Arkansas presented no substantial reason why we should conclude that our
previous decisions were wrong, but argued that we should follow the
Missouri District Court decision since Arkansas is in the same circuit
as Missouri.  Arkansas cited no cases for the proposition that the Board
is bound by the Missouri decision on this basis, and we know of none.
/3/ Thus, given that our previous decisions have been upheld by two
courts of appeals, we reaffirm here the result reached there: section
1903 (d)(3) does not preclude HCFA from adjusting the federal share of
amounts claimed by a state for payments to a provider which are later
determined to be improper or in excess of what the provider is entitled
to.


The District Court decision in the Arkansas case on remand here does not
require a different result.  That court did not hold that HCFA could
never adjust the federal share of a provider overpayment but considered
the matter to be one of timing, noting that the providers were
contesting the overpayment determinations using the appeal process set
out in the state plan.  We discuss next how the provider appeal process
affects our decision here.

The provider appeal process does not provide a basis for reversing the
disallowance.

   The issues here.

As we understand it, one of the major factors in the reasoning of the
District Court in the Arkansas case was that it was arbitrary to require
the State to repay the federal share of an overpayment while a provider
appeal was pending since the State plan provided a right of appeal and
the State was precluded from recovering the overpayment from the
provider prior to completion of the appeal process.  The District Court
described the State as being(9) "whipsawed" by HCFA's disallowance on
the one hand and the required administrative appeal process on the
other.

A Medicaid regulation (no longer in effect) permitted states to wait
until completion of a provider appeal before accounting for the federal
share of amounts identified in state audits as overpayments to nursing
homes.  42 CFR 447.296, as interpreted in Action Transmittal 77-85.  In
Decision No. 423, the Board determined that this regulation did not
apply where HCFA had made its own audit findings.  The Board did not
explain this distinction (although it had been discussed in other Board
decisions cited in Decision No. 423), and the court found this lack of
explanation to be arbitrary.  Essentially, the Board's reasoning was
that the purpose of the regulation was to place a duty on states to
report to HCFA provider overpayments found by state auditors (after a
grace period during which the state could resolve its initial audit
findings), and, therefore, the regulation was irrelevant to the question
of when HCFA could adjust amounts it had independently determined a
state had been overpaid.  When HCFA is relying on a state finding that a
provider has been overpaid, there are reasons for waiting until the
state has tested its preliminary findings through state processes, but
the same considerations do not apply when HCFA has used its own
processes.

As the Arkansas Court recognized, however, where a HCFA disallowance is
based on a finding in a federal audit that a provider has included
unallowable costs in its cost report, the State is put in a difficult
position.  The State cannot automatically recover from the provider the
amount the federal auditors determined was overpaid to the provider but
must give the provider an opportunity to show that the audit findings
are incorrect or that the disallowed costs can be offset by other
allowable costs.

In Decision No. 423, the Board focused on the fact that the State was
not disputing the legal conclusion that costs in excess of the costs of
ownership to the related party had been included in the rate
calculations contrary to the State plan.  The Board did not fully
consider the effect of the related provider appeals, where providers
were contesting the audit findings.  Since no appeals are currently
pending at the administrative level, however, new questions are
presented to us on remand.

As developed by the State during this proceeding, the State's argument
regarding the appeals process has two components:

* that the State would not have received adverse administrative
decisions on the related-party question if the appeal process
established in the State plan were not defective and that HCFA(10) bore
equal responsibility for those defects because HCFA approved the State
plan;  and

* that court proceedings resulting from appeal by the providers of
administrative decisions upholding disallowances of related-party
overpayments were merely an extension of the State plan appeal process
and should be treated no differently for purposes of determining when
HCFA can adjust for the overpayments.

We discuss each of these arguments below.  In addition, we address
several points raised by the State which appeared to indicate that there
might be a continuing dispute about the overpayment amounts.

   HCFA's approval of the State plan.

HCFA stated, and the State did not deny, that nothing in federal
regulations required the State to include in its State plan a provider
appeal process, nor did federal regulations preclude this.  Thus, HCFA
argued, the decision to include a process and the determination about
what that process should be were entirely within the State's discretion.
The State pointed to HCFA's role in providing advice to the State and to
the fact that HCFA had, in a letter dated July 30, 1980, advised the
State to alter its process.  The State argued that the State should not
bear the entire burden caused because the unrevised process resulted in
decisions in conflict with the State plan.  To show what went wrong with
the process, the State presented testimony from a State official who was
a member of the Ad Hoc Committee which rendered some of the decisions
referred to.

We first note that this argument applies to only three of the 22 nursing
homes whose reimbursement rates are still at issue here.  These
providers were the ones involved in the State cases which brought the
issue to HCFA's attention.  The State never actually took action to
recover many of the excess payments discovered in the federal audit, and
by the time it took action against many of the providers, the appeal
process had been amended in the State plan and the disallowances were
upheld at the administrative level, except for one case where the
Arkansas Commissioner found that due process had not been afforded the
provider (Gardner Nursing Center) and another where he reversed the
disallowance as in conflict with a previous settlement with the provider
(Ouachita Convalescent).

In any event, we do not think that approval of an appeal process in the
State plan can be transformed into an obligation on the part of HCFA to
participate in rates which the State admits were(11) in contravention of
the State plan and federal regulations.  Indeed, a HCFA witness
testified and a State witness affirmed that, in approving the State plan
appeal process, HCFA did not make any representation that FFP would be
available in payments solely because a provider appeal was successful.
The District Court decision did not address this issue, nor imply that
HCFA must participate ultimately in the overpayments, but referred to
the administrative appeal process as raising the question of when HCFA
could recover the overpayments.

Moreover, we do not think that the appeal process established in the
State plan initially was so defective on its face that HCFA had a duty
to disapprove of it.  While a provision for review by the Commissioner
(as in the revised version) is a safeguard for the State agency, the
process established initially had other advantages (such as greater
appearance of independence).  In any event, the testimony by the Ad Hoc
Committee member and the written decisions issued by the Committee
indicate that the results of the providers' appeals were attributable to
the way the related-party provisions were drafted and implemented and to
the Committee's belief that the lease costs were reasonable.  If the
related-party provision had been more clear, there might never have been
a problem.

Thus, we do not agree with the State that the fact that HCFA approved a
provider appeal process which ultimately led to several decisions
adverse to the State involving related-party transactions requires HCFA
to participate in all provider overpayments involving related-party
transactions.

   The effect of court proceedings.

As indicated above, no provider appeals are currently pending at the
administrative level, but seven appeals are pending in State courts (six
in Circuit Court, one in Supreme Court).  The State argued that the
court cases were merely an extension of the State plan appeal process
since the State Administrative Procedure Act provided a right to appeal
to court from State agency action.  The State also said that it was
precluded from recouping the overpayments from the providers since the
courts had stayed agency action pending the appeals and that, therefore,
HCFA should not be permitted to adjust the federal share of the
payments.

The District Court decision in this case found that the disallowance was
arbitrary in light of HCFA's approval of the appeal process in the State
plan and the regulatory provision at 42 CFR 447.296, interpreted in
Action Transmittal 77-85, requiring the State to adjust for overpayments
no later than the second quarter(12) following the quarter in which
found as a result of a state's provider appeal process. /4/ Nothing in
the court's decision implies that HCFA must wait to recover the federal
share of an overpayment pending a provider's appeal to court.  The State
plan provision sets up an appeal process at the administrative level;
appeal to court is by independent operation of the State's
Administrative Procedure Act.  The fact that the appeal to court is, in
a sense, a "continuation" of the administrative appeal is insignificant,
given that the State plan confers no right to appeal to court and HCFA's
approval was limited to the State plan provision.


With respect to the regulation and action transmittal, we have explained
above why we do not think that those provisions were intended to apply
where the determination about an overpayment has been made by HCFA
itself and HCFA is not relying on state audit findings.  Even if these
provisions did apply, however, the State is mistaken that they provide a
basis for precluding HCFA's action here.  Action Transmittal 77-85
specifies that its definition of when a provider overpayment is
considered to be "found" is limited to exhaustion of appeals at the
administrative level and does not extend to court appeals.  In every
instance here, the requiste two quarters following the administrative
decision have expired.

We also disagree with the State's position that, as long as the
"overpayments" are being litigated in court, the issue of whether there
was an "overpayment" remains alive and has not finally been determined.
With the possible exception of factual issues such as what were the
actual costs of ownership and how are the rates correctly calculated
(which we discuss below), the issues between the State and the providers
are not the same as those before us.  Here, the State conceded the legal
point that the federal regulations and State plan preclude reimbursement
for more than the costs of ownership and, therefore, the rates paid here
were in excess of what was permitted.  The legal issues before the State
courts are not decisive on the question of whether the State received
more FFP than what it was entitled to under the State (13) plan (that
is, whether the State has been overpaid). Rather, the State courts have
before them issues such as whether the State is precluded from
recovering the excess payments from the provider because the rates were
consistent with the commonly held interpretation of the State plan
(which was not necessarily the correct one) or because the State had
allowed the providers to charge higher costs in previous years.

We also note that there is a further policy reason for not requiring
HCFA to wait until state court decisions have been reached:  as
demonstrated by the specific cases at issue here, state court processes
often take years, and waiting could potentially cost the federal
government an enormous amount of interest.  (Providing a grace period to
the states, as HCFA once did and has proposed to do again, is within
HCFA's discretion, but we do not think it is required.)

   Disputes about the overpayment amounts.

The District Court was also concerned that a forum had been established
in which the providers could dispute whether they had received
overpayments and that the providers were disputing the HCFA findings.
In focusing on the fact that the State had admitted that providers had
claimed costs in excess of what was permitted under the State plan and
federal regulations for related-party transactions, our previous
decision did not adequately consider whether the overpayment amounts had
been correctly determined.  Recognizing this, we specifically asked the
State on remand to identify any inaccuracies in the federal audit
findings.  The State then stipulated that the cost of ownership figures
were accurate, noting that no evidence had been produced by the
providers during their appeals to show that the figures were inaccurate.
State's Report to Board, May 28, 1985. /5/

.

In the course of Board proceedings, the State did raise several
questions about what the federal auditors did, however.  The major issue
raised was whether the auditors properly used 1977 cost data in
determining some of the excess payment amounts.  We discuss below why we
conclude that use of the 1977 cost data was(14) proper.  The State also
presented an affidavit and testimony by one of the owners of the
Marshall Nursing Center, who attested:  "The Federal auditor never
reviewed with any nursing home personnel, my accountant, or I, the final
cost of ownership figures developed, or any resulting computation of
patient days, and overpayment of the per diem rate." Appeal file, Docket
No. 83-253, Ex. V.  At the hearing, he qualified his statement by saying
that the auditors had spoken with his partner but not with him.  This
testimony was contradicted by one of the federal auditors, who said he
had talked with the State witness.  The auditor's testimony was more
credible since he testified from his workpapers about the precise dates
on which he spoke to the nursing home owners and about the surrounding
circumstances and, on the whole, appeared less confused than the State's
witness.  In any event, the State did not deny that the auditors
obtained the relevant figures from the nursing homes, nor did the State
present any evidence that any of those figures were inaccurate or that
the resulting calculations did not take into account any offsetting
costs which should have been considered.

Finally, when the Board pointed out in its Order to Develop the Record
that there appeared to be some discrepancies between the figures given
by the State as the amounts the State sought to recover from two
providers (Holland Nursing Center and Ouachita Convalescent) and the
amounts found by the federal auditors to have been overpaid to those
providers, the State alleged for the first time that its figures should
be used because it had had the opportunity to substantiate the figures
through the provider appeal process.  The State did not present any
evidence that supported its figures, nor even provide any analysis
explaining the discrepancies.  Thus, we decline to substitute the
State's figures for those providers for the federal auditors' figures,
particularly in light of the State's previous stipulation. /6/

(15)

Thus, we find that the federal audit findings regarding the differences
in the amounts actually paid and the amounts that should have been paid
using costs of ownership are factually accurate, notwithstanding the
provider appeals.

In summary, we conclude that the State's arguments about the effect of
the provider appeal process on the timing of HCFA's adjustment of the
federal share of these excess payments have no continuing validity.

The partnership concept is not violated by this disallowance.

   Previous Board and court decisions.

The State invoked the "partnership concept" in the Medicaid program, as
discussed in the case of Harris v. McRae, 448 U.S. 297 (1980), arguing
that, as long as the State can demonstrate that it followed the
mechanisms and procedures set out in the State plan, approved by HCFA,
there should be a sharing of any loss when the State cannot recover an
excess payment from a provider.

The Board considered a similar argument in New York State Department of
Social Services, Decision No. 311, June 16, 1982, affirmed in the
Perales decision cited above.  In Decision No. 311, we stated:

   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.

   At p. 7.

The issue was also addressed in the Massachusetts decision, with respect
to which party should bear the loss when a provider has declared
bankruptcy.  The First Circuit said:

   Since Medicaid is a joint program of the state and federal
governments for providing health care, it is(16) appropriate to inquire
whether imposing that portion of the rate differential at issue on
Massachusetts or the Secretary will better conserve the limited pool of
resources available for that purpose.  Since only Massachusetts deals
directly with the providers, and since the state is empowered to perform
on-site audits of these institutions, it is clearly the party best able
to minimize the risks resulting from dealing with insolvent providers.
The fact that Massachusetts will in any event bear a share of the loss,
and so already has some incentive to minimize these risks, diminishes
but does not destroy the force of this observation.  Placing an
additional burden on the state will increase its incentive to take care,
whereas the Secretary remains powerless to reduce the risks no matter
what the costs imposed on her.

   749 F.2d at 96.

The First Circuit distinguished the Harris decision on the basis that it
required only that the federal government participate in legitimate
state expenditures under an approved Medicaid plan, concluding:

   Harris thus attributes to Congress the intention that no state should
be obliged by the Medicaid statute to pay for a service unless the
Secretary pays her share, not that the Secretary must pay her share of
every out-of-pocket state expense no matter how incurred.

   749 F.2d at 95.

   HCFA's involvement here.

Arkansas attempted to distinguish the Massachusetts decision on the
ground that, in Arkansas, HCFA was actively involved in a day-to-day
role and could mitigate its losses.  We disagree with the State for
several reasons.  Both Massachusetts and Arkansas were operating under
the same regulations, which place on the State the responsibility for
entering into agreements with providers, reviewing cost reports,
determining rates, paying providers, performing on-site audits,
profiling problem areas, and taking steps to recover overpayments from
providers.  The fact that HCFA had the authority to itself examine the
providers' records, and did so here, does not alter the fact that the
State is the party which administers the Medicaid program in Arkansas,
as in Massachusetts.  Moreover, we do not agree with Arkansas that the
evidence here establishes that HCFA is so actively involved in the
day-to-day operation of the(17) program that it should share the burdens
equally.  Rather, HCFA's role was primarily one of monitoring whether
the State was complying with federal requirements.

   The State's responsibility.

In any event, we do not think that the fact that the State had a system
for performing desk reviews of cost reports and on-site audits of
providers at a rate of 15% per year, in accordance with HCFA
regulations, automatically exonerates the State from any responsibility
for these excess payments.  As HCFA pointed out, the regulations
establish minimum standards;  if these measures are inadequate to
prevent excess payments, the State has the duty to take additional
steps. /7/


The State presented testimony that auditors performing desk reviews were
limited in what they could do to prevent the excess payments here
because they had less than three months after receiving the providers'
cost reports to review the reports and establish the new rates, and
because the reporting form was inadequate.  The State itself set up its
system to require rate-setting within such a limited time period,
however, and could have devoted more audit resources to the task if this
was necessary.  The State said the form was a problem because, although
it contained a space for identifying related-party transactions, it did
not contain space for reporting costs of ownership.  (The State blamed
HCFA for the inadequacy of the form;  we discuss this allegation in the
next section.) The State also said that many providers did not identify
related-party transactions on the form.  There is uncontradicted
testimony in the record, however, that nursing home owners were required
to file ownership information with the State; that the desk reviewers
could have easily obtained access to this information;  and that the
federal auditors had been able to develop provider profiles identifying
the related-party transactions.  See, e.  g., TR I, pp. 207-208.  The
State presented information to show that the federal auditors missed at
least one related-party transaction which the State had later identified
and argued that it was impossible to identify every such transaction and
to obtain(18) 100% compliance.  /8/ We recognize that there is some
merit to this argument, but that does not persuade us to alter our
conclusion that the State is in a better position than HCFA to prevent
excess payments in the first instance.


We also disagree with the State that mere compliance with the 15%
on-site audit requirement exonerates the State here.  The State was
required in the first year of the new reimbursement system to audit 100%
of the cost reports and hired Touche Ross to do this.  The federal
auditors found that one of the problems in the State's implementation of
the system was that State officials advised the Touche Ross auditors to
apply the "prudent buyer concept" to related-party leases, rather than
advising them to allow no charges in excess of the actual costs of
ownership of the related party.  The State pointed out that the document
on which the federal auditors relied for this finding (a series of
questions from the Touche Ross auditors and the State responses to those
questions) did contain some responses which referred to the correct rule
that the costs of ownership should be used if lower than the price of
comparable services purchases elsewhere.  But the document is at best
ambiguous on the point and the fact that the Touche Ross auditors did
not disallow any provider costs on the basis of the related-party
provision (although these transactions were not uncommon in the State)
supports a finding at the very least that the State did not provide
clear guidance to the Touche Ross auditors in this area.  This is
significant because, as discussed below, some of the administrative and
court decisions precluding the State from recovering the excess payments
relied in part on the fact that the State had audited the providers in
previous years and not disallowed such payments.

The State has the responsibility to ensure that its own auditors
understand the State plan provisions and, also, if it appears that in
application the requirements are not clear, to inform the providers of
the correct interpretation.  Yet, an examination of (19) the
administrative and court opinions shows that at least some State
auditors had failed to disallow excess costs for related-party
transactions.  Moreover, there is no evidence that providers were
specifically informed of the correct meaning of the provision prior to
July 3, 1980, when the State Attorney General's decision was sent out to
providers.

Finally, we do not think that the record supports the conclusion that
the State made reasonable efforts to recover the excess payments once
they were identified in the federal audit.  The record shows that the
State did not take any disallowance action against the providers for a
substantial amount of the excess payments and that some of the State
disallowances that were taken were not issued until as late as December
1983, although the State was notified of the final federal audit report
in April 1982. /9/


In response to the Board's inquiries about why the State had never taken
any action at all to recover some of the excess payments, the State
argued that it was excused from its inaction because of the 15% audit
requirement.  This argument has no merit whatsoever.  The federal
auditors had already identified the excess payments.  The State then had
a duty to act on this information and cannot reasonably blame its
failure to recover the payments on the 15% requirement.

Thus, while we do not find that the State acted in "bad faith," we do
not think that record supports the State's assertions that it was
without fault in how it implemented and enforced the system, nor that
HCFA is otherwise required by the partnership concept in the Medicaid
program to participate in payments which are contrary to federal
requirements and the State plan.(20)

   The State has not established that HCFA should be estopped.

   The legal standard.

As the District Court noted in this case, the State's estoppel argument
was integrally related to its other arguments concerning HCFA's role in
the approval and implementation of the State's reimbursement system.
While the District Court said that, since HCFA's action was arbitrary,
HCFA should be "estopped," the District Court did not address the
applicability of the formal defense of equitable estoppel, which the
State continued to press on remand.  In light of the limited nature of
the District Court's statement, and the fact that no provider appeals
are currently pending under the State plan appeal process, we do not
think that we are bound by the District Court's statement on this issue.

In order for the State to prevail on its estoppel claim, the State was
required to establish that all of the essential elements of estoppel are
present and that the particular circumstances of this case warrant the
conclusion that an agency of the Federal Government can be estopped.

The essential elements of estoppel are:

   (1) The party to be estopped must know the facts;

   (2) he must intend that his conduct shall be acted on or must so act
that the party asserting the estoppel has the right to believe it is so
intended;

   (3) the latter must be ignorant of the true facts;

   (4) he must reasonably rely on the former's conduct to his injury.

   United States v. Georgia Pacific, 421 F.2d 92, 96 (9th Cir. 1970)

The party asserting estoppel has the burden of showing that all of these
elements are present.

While there have been federal district court and court of appeals
decisions applying estoppel against the government in particular
circumstances, the Supreme Court has never permitted an application of
estoppel, as such, although it has declined to say a situation could
never arise where estoppel would be appropriate.  Heckler v. Community
Health Services of Crawford County, 467 U.S.  , 104 S.C.(21) 2218, 2224
(1984);  Schweiker v. Hansen, 450 U.S. 785 (1981).  The Supreme Court
has said that, if there were ever to be estoppel against the government,
it would have to be based on "affirmative misconduct." INS v. Hibi, 414
U.S. 5, 8 (1973).  The Court has never defined "affirmative misconduct"
or outlined its essentials.  But from the cases it appears to require
something more than negligently giving wrong advice.  See, e.g., Hansen,
450 U.S. at 790.

In its initial brief on remand, the State relied on the Court of Appeals
decision in the Crawford County case for the proposition that HCFA's
inactions related to the development and implementation of the State's
reimbursement system constituted a basis for applying estoppel against
HCFA.  When the Board pointed out at the hearing that this decision had
been overturned in the Supreme Court, the State alleged that actions of
a HCFA employee, during that time that he was on detail to the State
under the Intergovernmental Personnel Act, constituted "affirmative
misconduct."

Below, we discuss the State's allegations concerning HCFA in general and
then address the State's allegations concerning the detailed employee in
particular, stating why we do not think that any of these allegations
are supportable.  Our general observation about the State's estoppel
argument, however, is that the State failed to explain how its
allegations, even if proven as fact, would establish the elements of
estoppel outlined above and, in particular, to show how any detriment
was a direct result of the actions or inactions the State alleged.
Moreover, as we discuss below, most of the allegations were not
substantiated by the evidence in the record.

   HCFA's actions or inactions, in general.

Basically, the State said that, in implementing the reimbursement
system, the State had relied on HCFA's expertise in the Medicaid
program.  The State alleged the following as failures in HCFA's conduct:

* HCFA approved the State plan provision on related-party transactions
even though it was ambiguous;

* HCFA approved the State plan appeal process even though it was
defective;

* HCFA approved the provider cost report form even though it did not
have a space for identifying costs of ownership of the related party;(
22)

* HCFA established the mechanisms for desk reviews and on-site audits
which were insufficient to ensure 100% compliance.

We do not think that these allegations support an estoppel defense for
the following reasons:

* The State drafted the State plan provision on related-party
transactions and, for its own reasons, chose language less clear than
the federal regulation.  The only testimony presented by the State by
someone involved in the State plan development (that of a HCFA official)
shows that HCFA was concerned with other aspects of the State plan,
which were unsatisfactory.  There is no evidence that the State asked
HCFA's advice on the related-party provision.  (HCFA commented on the
deletion of a word from the provision but was assured by the State that
no change in meaning was intended.) The purpose of HCFA's review of the
State plan was to ensure that the system complied with federal
requirements.  While not as explicit as the federal regulation on
related-party transactions, the State plan provision is sufficiently
clear (particularly when read in light of the federal requirement) that
HCFA's action in approving it was reasonable. /10/ In any event, given
the purpose of HCFA's review, the State could reasonably rely on the
approval only as showing that the provision complied with federal(23)
requirements.  That is not at issue, here, however. /11/ The question is
whether the State complied with the provision in practice in calculating
its reimbursement rates, and the State admitted that it did not.  The
State had the duty to make sure that its own auditors, the providers,
understood how to apply the provision in specific instances.

 

* As we have discussed above, we do not think that the appeal process
initially set out in the state plan was so defective that HCFA had a
duty to disapprove it, particularly since there was no federal
requirement that such a process be included in a State plan.  In any
event, only three of the providers at issue here won decisions from the
Ad Hoc Committee.  Moreover, there is no evidence that HCFA ever
represented to the State that federal funding would be available for
excess payments made to a provider solely on the basis that the provider
had won an administrative appeal.

* There is uncontradicted testimony in the record that, while HCFA may
ask a state to submit its cost report forms, HCFA(24) does not
specifically review those forms for approvability.  The State developed
the form and, while it would have been helpful if HCFA had pointed out
that there was no specific space for identifying actual costs of
ownership, this is not necessarily a violation of the federal
requirement.  We agree with the State that the better reading of the
federal regulation on related-party transactions (quoted at pages 4-5
above) is that the cost report should identify the actual costs of
ownership of the related party, but, as HCFA pointed out, this would not
necessarily require a space on the same sheet as that which identifies
that a related-party transaction occurred;  there are other parts of the
cost report for identifying costs.  Moreover, even if HCFA did approve
the form, we do not see how the State could reasonably rely on that
action as meaning that HCFA would participate in rates which reflected
more than actual costs of ownership.  We also note that the State
auditors had a means of remedying this problem by obtaining the cost of
ownership information where it was lacking.

* As noted above, the federal provisions on desk reviews and audits were
intended as minimum standards.  There is no evidence that HCFA ever
represented to the State that these measures would ensure 100%
compliance with the rate-setting requirements or that HCFA represented
it would participate in rates which did not meet federal requirements so
long as the State met the audit requirements.  Moreover, there is
substantial evidence in the record that the State (in part through
Touche Ross) audited the providers, yet failed to disallow related-party
costs in excess of the actual costs of ownership, even though the
auditors could have obtained the requisite information.

We also are not persuaded that estoppel should apply based on the
State's arguments that HCFA should have done more when it became aware
that there were problems with implementation of the related-party
provision.  HCFA did timely warn the State that federal funding would
not be available, suggest a possible change in the appeal process, and
send in the federal auditors.  Even if HCFA should have done more,
however, we do not see how the State could have reasonably relied on
HCFA's inaction to justify its own inaction or to justify making
payments in excess of what the State plan permitted.  Moreover, once the
federal auditors had identified the excess payments, the State should
have taken prompt action to recover them, but did not in many instances,
and we do not see how the State's inaction in this regard could be
attributable to HCFA's conduct.  (25)$TThe actions or inactions of the
detailed employee.

Undisputed evidence in the record establishes the following facts.  A
HCFA employee was detailed to the State under the Intergovernmental
Personnel Act for the period December 1979 - December 1980.  While on
detail, the employee was paid partly by the federal government and
partly by the State government.  Prior to being detailed to the State,
this employee had not worked for the Medicaid program, but had worked on
Medicare issues:  specifically, he had been involved with certification
standards for nursing homes.  The original purpose of the detail was so
that the employee could assist the State in the area of certification of
nursing homes.  After the employee had been on detail for a short time,
however, the State asked to change the detail so that the employee could
act as Director of the State's Office of Long Term Care (OLTC), which
had responsibility for provider reimbursement, as well as other
responsibilities.  After the Ad Hoc Committee had issued decisions
adverse to the State in the Morrilton Manor, Riverview, and Mitchell
Nursing Home cases, and the State court had said that these decision
could not be overturned by the State Commissioner, the detailed employee
(in his capacity as Director, OLTC) issued memoranda authorizing payment
to the nursing homes at the rates initially established.  The detailed
employee had also issued a memorandum to providers, informing them of
the State Attorney General's opinion on the related-party provision.

The State argued generally that it considered the detailed employee to
be a HCFA employee, even when on detail to the State, and that it had
relied on this employee's expertise.  The State either alleged or
implied the following specific actions or inactions of the detailed
employee, as a basis for estopping HCFA from taking this disallowance:

* The detailed employee advised the owner of the Marshall Nursing Center
that its related-party transaction was proper and that the lease charge
was reasonable.

* The detailed employee approved payment of the higher rates to the
nursing homes receiving Ad Hoc Committee decisions in their favor.

* The detailed employee failed to fulfill his responsibilities as
Director, OLTC.

We disagree with the State that the actions of this employee while on
detail to the State constitute the actions of a federal employee, simply
because the federal government paid part of his salary and fringe
benefits.  There is uncontradicted testimony by the employee(26) and a
HCFA official that, while on detail, the employee had no authority to
speak for HCFA, and the State presented no evidence to contradict this
or to show that the employee held himself out as having such authority.
Moreover, it would be unreasonable for the State to rely solely on this
employee's advice about reimbursement issues, given that this employee
had no experience in that area.  As a final general observation, we note
that this employee was not involved at the point in time when the State
initially developed and implemented its reimbursement system, when the
key problems arose.  With respect to the specific allegations, we find
the following:

* The testimony by the owner of Marshall Nursing Center about his
conversation with the detailed employee is not credible since the owner
said he talked to the employee in his capacity as Director, OLTC, and
also said that this occurred in early 1979, which was before the
employee assumed that position (indeed, it was at the time the employee
was working for the Medicare program).  Moreover, even if the
conversation did take place as the owner said it did, it would not
establish estoppel.  Under the State plan provision, the related-party
arrangement itself is not improper.  The key issue is to what extent
will the lease charges be recognized as costs to the provider.  The
owner did not testify that the detailed employee said that the entire
lease charges would be allowable, even if they exceeded the costs of
ownership to the related party.  Finally, we note that advice to one
provider hardly constitutes a basis for precluding HCFA from recovering
all of the excess payments.

* Although the record does show that the detailed employee acted to
approve payment to the providers who won their administrative appeals,
this action was required by State court order.  It is wholly incidental
that the detailed employee was the one who actually took the mandated
action for the State agency.  In any event, the State provided no
adequate explanation of how this action could constitute a basis for
estoppel.  When the action occurred, the State had already incorrectly
calculated the three providers' rates and was precluded by court order
from reducing them.

* Although the position description for the Director, OLTC, shows that
the Director has some responsibilities in the area of provider
reimbursement, we do not see how the detailed employee's failure to take
more actions than what he did take in this area amounts to inaction on
the part of HCFA sufficient to give rise to estoppel.  The
State's(27)witness who later assumed this position testified that the
State's Commissioner had ultimate authority for the administration of
the program within the State and, if the detailed employee was not
performing properly, the Commissioner must share in that responsibility.
Moreover, it cannot fairly be said that the detailed employee's
failures, if any, in fulfilling the duties of the position of Director,
OLTC, can be considered conduct by HCFA upon which HCFA intended the
State to rely.

In summary, the State failed to establish that the basic elements of
estoppel were present, much less to show affirmative misconduct which
might provide a basis for applying estoppel against the federal
government.

The federal auditors' use of 1977 cost data was proper.

The State alleged that the federal auditors had improperly used calendar
year 1977 cost data in calculating the excess payments for State fiscal
year (FY) 1979.  The Board questioned the State as to how use of this
cost data could be improper when it appeared to be required by the State
plan reimbursement method.  The State did not deny that its State plan
called for use of calendar year 1977 costs in determining the FY 1979
rates.  Instead, the State presented testimony by a State auditor that
he thought it was unfair to examine 1977 cost reports based on the
related-party provision, which did not go into effect until January
1978.  In a post-hearing brief, the State argued that use of the 1977
data was improper retroactive application of a requirement.

This argument has absolutely no merit whatsoever.  The State plan was
premised on use of historic cost data to establish prospective rates.
The State plan provision was not applied to establish 1977 rates but was
applied to establish FY 1979 rates.  No retroactive application of a
requirement is involved.

Moreover, it is not clear that the 1977 cost reports were submitted
prior to approval of the related-party provision.  One State witness
testified that the cost reports for any calendar year were not due until
March of the following year.  In any event, this is not an instance of a
reporting requirement being applied against a provider.  The question is
whether the State must repay the federal share of payments to the
providers which exceeded the rates calculated in accordance with the
State plan.  The State knew that the rates for fiscal year 1979 had to
meet the related-party requirements.  Thus, the federal auditors
properly used the 1977 cost data in determining what the rates should
have been for FY 1979.(28)$% Analysis of specific provider overpayments
reinforces our conclusions.

As mentioned above, the State neglected in general to relate its
arguments to the specific excess payments at issue here.  Examination of
the specifics points up many of the weaknesses in the State's position.
Moreover, it reinforces in our minds the conclusion that trying to apply
the State's proposed analysis and to determine in any specific instance
whether a state failed to take proper actions in preventing an
overpayment or in attempting to recover it would require a highly
judgmental and difficult process.  To illustrate this, we present in
this section some of the information concerning specific provider
overpayments which the State produced in response to the Board's
requests.

With respect to excess payments to three nursing homes (Star City
Convalescent, Dumas Nursing Center, and Prescott Manor), the State took
no action to disallow the related-party transactions and to recover the
resulting excess payments from the providers.  The State explained this
as follows:  "In each of these cases, a 1978 field audit neither noted
or disallowed costs, and this lack of activity was considered State
approval for further actions on the same lease." State's submission
dated September 16, 1985, p. 5.  In light of this, it would be possible
to attribute the loss of a potential recovery to the State's failure to
adequately apprise its auditors of the correct application of the
related-party provision.  On the other hand, an analysis of whether the
State was at fault would also have to consider matters such as whether
the State's inadequacies were because of lack of guidance from HCFA and
whether the State could have in any event recouped, given the type of
analysis which led to many of the providers winning their appeals of
related-party disallowances.  While we have concluded above that we do
not think that HCFA's actions or inactions require participation in
these costs under the partnership concept or an estoppel theory, it is
much more difficult to evaluate what constitutes actual fault on the
part of the State and the record does not provide definitive answers in
that regard.

A similar analysis pertains to Gardner Nursing Center and to Ouachita
Convalescent.  The State did take disallowances against these two
providers, but, in the Gardner case, the Commissioner reversed the
hearing officer's decision (which found for the State) on the basis that
the provider had not been given due process and, in the Ouachita case,
the hearing officer reversed the State's disallowance because it
contravened a settlement previously entered into between Ouachita and
the State agency.  It would appear that the State's own actions
precluded the recovery from these providers, but all of the various
factors that affected(29) the State's implementation and enforcement of
the related-party provision would have to be analyzed in order to
determine whether the State should be faulted for these actions.

With respect to four nursing homes (Geriatrics/Jonesboro, Geriatrics/
Blythesville, Geriatrics/West Memphis, and Geriatrics/Forrest City), the
State disallowed the related-party costs and the disallowance was upheld
by a hearing officer under the State's revised appeal process.  However,
the common owner of the homes transferred them, and the State courts
found that the State could not recover the excess payments from the new
owner.  Arguably, the State could have prevented this situation by not
entering into a provider agreement with the provider unless it contained
a provision protecting the State if the home was transferred or,
possibly, by acting more quickly to recover the excess payments.  But,
again, determining if it was the State's fault that this occurred would
be a highly judgmental process, requiring greater development of the
specific facts and an analysis of all of the factors which created the
situation.

With respect to the seven providers whose appeals are still pending in
court, we note that the appeals do not cover all of the amounts
disallowed for those providers, so presumably, for some unexplained
reason for the State took no action to recover all of the excess
payments for those providers.  In the case where the State Circuit Court
has rendered a decision reversing the disallowance (and the State agency
has appealed to the State Supreme Court), an analysis of the Circuit
Court opinion indicates that the provider won for several reasons,
including that the Court thought that the related-party provision was
ambiguous and that an October 9, 1981 letter from the Director, OLTC
(not the detailed employee) had acknowledged that the commonly-held
interpretation was that the "prudent buyer concept" was an exception in
the related-party provision.  As noted above, we do not agree that the
provision is ambiguous when it is read with the federal provision, as
required by the State plan.  This raises the further difficult question,
under the State's proposed analysis, of whether a state should be held
fully responsible for an excess payment when a state court reaches what
may be an incorrect result.  Moreover, the Director's letter was a
factor in the opinion.  If the difficulty was in the "commonly-held
interpretation" of the provision, the question arises whether the
difficulty was in the provision itself or in the way the State applied
it.

In summary, examination of the specific overpayments here strengthens
our conclusions in two areas:  that the State's general arguments simply
do not fit the facts in every instance(30) and that HCFA is reasonable
in holding the State responsible for the federal share of excess
payments to providers, without analyzing for each excess payment whether
the State was at fault.

Conclusion

Arkansas claimed and received federal funding for payments to providers
which were in excess of the payments to which the providers were
entitled under the Arkansas State plan for Medicaid.  These amounts do
not constitute "medical assistance furnished under the State plan," and
thus were properly disallowed, notwithstanding the fact that Arkansas
has not recovered all of the excess payments from the providers.  None
of the theories advanced by the State provides a current basis for
precluding HCFA from adjusting the federal share of the excess payments.
Accordingly, we uphold the disallowance, subject to a minor adjustment
if the State can make the requisite showing referred to in footnote 6 of
this decision.  /1/ The Arkansas Nursing Home Association requested and
received permission to participate in Board proceedings by submitting a
brief and having a representative present at the hearing.         /2/ In
view of this, we do not agree with the approach taken in some of the
State decisions on related-party leases, which emphasized that the lease
charges at issue were reasonable in amount.  The pertinent point is
that, in the related-party situation, the provider is in effect making
the lease payment to itself so the provider is in effect making the
lease payment to itself so the provider has incurred no real cost,
except to the extent of the costs of ownership.         /3/ We also note
that the Missouri case involved payments made to providers under a
retrospective reimbursement system at interim rates greater than the
final rates established under the state plan.  Part of the court's
reasoning was that the state plan authorized payment at an interim rate
so payment at the interim rate should not be considered an overpayment.
Under the Arkansas state plan, as both the State and HCFA interpret it,
no payment was authorized for a rate to the extent it was calculated
using a figure greater than the costs of ownership in a related-party
situation.         /4/ This section of the regulations was deleted when
the reimbursement requirements were revised in 1981.  46 Fed. Reg.
47964 (Sept. 30, 1981).  HCFA later proposed a rule which would require
states to report overpayments when they are first identified and then
make the appropriate adjustment of the federal share within 12 months.
48 Fed. Reg. 14665 (Apr. 5, 1983).  This proposal has never been
published in final form, however.         /5/ The State indicated that
it thought the intervenor, Arkansas Nursing Home Association, should
have the burden of contesting the figures if they were not correct. The
intervenor requested only limited participation in Board proceedings,
however, and when given an opportunity to show that it had relevant
information to produce, declined to do so.         /6/ One point which
the State clarified in response to the Board's order may have some
merit.  Apparently, the federal auditors included in the disallowance
for Gardner Nursing Center certain amounts reported by Gardner for
"unpaid stockholders' salaries." The State said in its response that it
determined these amounts were allowable provider costs because the State
plan was ambiguous on whether salaries had to be actually paid to be
allowable.  Since HCFA did not have an opportunity to respond to this
point, we do not reverse the disallowance.  However, our decision does
not preclude HCFA from making an appropriate adjustment if the State can
support this point and establish that no federal requirement was
violated by the costs.         /7/ A December 21, 1976 letter from the
Agency, deferring approval of the State's reimbursement system, stressed
that the State needed to develop an effective audit program.  /8/ A
        State witness testified that, as he recalled, the State had
uncovered two additional related-party situations;  the State presented
written documentation of only one of these:  a Commissioner's decision
involving Golden Years of Stuttgart (State's Hearing Ex. 11).  The
decision indicates that the State had already begun its audit of Golden
Years at the time the federal audit was initiated, so it is possible
that the federal auditors deliberately excluded it from their review;
in any event, we recognize that it may be impossible to identify all
related-party transactions.         /9/ The State alleged that a federal
auditor had asked the State Commissioner to delay disallowance actions
against the providers until the federal audit was concluded, but the
State offered no explanation of why it delayed its actions after that.
It appears from statements made on State's Hearing Exhibit 1 that the
reason the State did not act to recover some of the excess payments was
that the lease payments had previously been allowed by State auditors.
/10/ Subsection (b) of the State plan provision of related-party
transactions indicates that a related-party can furnish services or
supplies to the provider so long as the prudent buyer concept is adhered
to.  But this subsection merely permits the transaction. Subsection (a)
is the governing provision on the extent to which costs will be allowed
for related-party transactions, and it says that costs of services and
supplies furnished by related parties "will be recognized, at the cost
to the related organization." Moreover, the State plan requires
providers to report costs in accordance with federal requirements,
including the federal related-party provision.  Thus, the State
provision had to be read in light of the federal provision, which made
its meaning clear.         /11/ The intervenor nursing homes argued that
both HCFA and the State intended the "prudent buyer concept" to be an
exception to the "lower of cost" rule (that is, the lower of actual
costs of ownership or the price of comparable facilities, services, or
supplies purchased elsewhere).  In our previous decision, we found that
this argument was irrelevant in view of the State's admission concerning
the meaning of the State plan provision.  Here, we provided the
intervenor an opportunity to show how evidence on the intent of the
State and HCFA relative to the State plan provision would be relevant to
the dispute before us, and the intervenor declined to make such a
showing.  We note, however, that there is considerable evidence in the
record about what the providers showed during their administrative
appeals, yet there is no indication that the providers presented any
evidence that the initial intent of the provision was what the providers
said it was (although there was evidence that the "commonly held
interpretation" of the provision was that the "prudent buyer concept"
was an exception). With its brief in the previous appeal to us, the
intervenor presented no documentary evidence that the drafters had the
intent the intervenor said they did, other than the drafting history of
the provision.  We have studied that history and do not think it
establishes what the provider said it does, since it is not inconsistent
with the State's position about intent.

MARCH 28, 1987