New York State Department of Social Services, DAB No. 810 (1986)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

DATE: November 19, 1986

DECISION

The New York State Department of Social Services (State, NYSDSS)
appealed a disallowance by the Health Care Financing Administration
(HCFA) of $55,596,244 in federal financial participation (FFP) claimed
under Title XIX (Medicaid) of the Social Security Act (Act). The
disallowance was based on three HCFA regional office reviews designed to
identify and initiate the recovery of the federal share of overpayments
paid by the State to providers of Medicaid services. In the course of
the appeal, after the submission of documentation by the State, the
parties entered into a stipulation which reduced the amount in dispute
to $17,737,603.

The major issues presented are whether section 1903(d)(2) of the Act
authorizes HCFA to demand that the State repay the FFP share of
identified overpayments to medicaid providers, even though the State may
not have yet recovered the overpayments from the providers, and whether
HCFA can base the disallowance on draft audit reports and other records
which the State alleges were never finalized or were merely tentative
findings. For the reasons discussed below, we affirm our previous
decisions in holding that HCFA may adjust under section 1903(d)(2) for
overpayments prior to any State recovery from the providers, and that
HCFA does not have to wait until completion of a provider's appeal of an
overpayment determination to recoup the federal share from the State,
where the State itself would recover at an earlier point. We
additionally find, however, that HCFA cannot use draft audit reports
prepared by the State as a basis for disallowing FFP. Accordingly, we
uphold the disallowance in part, and reverse it in part.

General Background

Title XIX of the Act provides for the payment of federal monies to
states to aid in financing state medical assistance programs. Any state
that wishes to participate in the Medicaid program must develop and
submit a plan that meets

- 2 -

certain requirements set forth by the Secretary of the Department of
Health and Human Services (HHS). Realizing that many states might have
difficulty financing a Medicaid program even if subsequently reimbursed
by the federal government, Congress also established a funding mechanism
by which HHS advances funds to a state, on a quarterly basis, equal to
the federal share of the estimated cost of the program. After review of
the state's quarterly statement of expenditures, the Secretary may
adjust future payments to reflect any overpayment or underpayment which
was made to the state for any prior quarter. Section 1903(d) of the
Act.

Specifically, section 1903(d)(2) of the Act states:

The Secretary shall then pay to the State . . . the amounts so
estimated, reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this
section to such state for any prior quarter and with respect to
which adjustment has not already been made under this subsection. .
. .

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

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

As we discuss below, previous Board decisions have upheld HCFA's
interpretation that section 1903(d)(2), and not 1903(d)(3), governs the
recovery of the federal share of payments made to providers in amounts
in excess of the rate authorized under the State Medicaid plan. The
Board has examined circumstances under which HCFA can reasonably rely on
state documents for a disallowance, including those situations where a
state itself considers the determination of an overpayment sufficiently
reliable so as to allow the state to act to recover the overpayment.

Case Background

HCFA conducted a series of reviews of various State records that,
according to HCFA, revealed three categories of overpayments (discussed
below) to Medicaid providers where the State had not yet recovered the
overpayments and credited the federal share to HCFA. HCFA disallowed
$55,596,244 FFP, citing section 1903(d)(2) of the Act and various Board
and federal court decisions. HCFA declared

- 3 -

that its calculation of the amount of the overpayments was based only
upon the best figures available, because the State had failed to comply
with requests for further documentation of the actual amount of the
overpayments.

A. Overpayments resulting from adjustments in providers' per diem
reimbursement rates.

This category of overpayments was based on HCFA's report, "A Review of
Cash Management Procedures in New York State Department of Social
Services" (FO 5.36), dated March 22, 1985. (State Ex. 3) This report
concluded that the federal share of overpayments in this category
totalled $47,249,598. 1/ The report was based on the following State
documents:

-- a State Bureau of Audit (BOA) "Summary of Draft Reports
Sent to Providers for Period Ending March 21, 1984." (State Ex.
4) This report covered 318 providers which allegedly had
received Medicaid overpayments of $60,325,213. -- a May 9,
1984 internal State memorandum entitled "Status of Cases"
detailing a backlog of audits from the State Department of
Health (DOH). (State Ex. 5) This memorandum detailed audits
which needed either meetings or final reports. The total
amount in this category was $42,500,000. 2/

The BOA summary, detailing the amounts owed by the 318 providers,
carried a handwritten footnote on the amount of overpayments due, which
read:

At draft report stage, represents an estimate. Based on audit
experience, this impact will be substantially reduced due to DOH &
provider comments and drafts, computation of rates by DOH &
approval by DOB [Department of Budget], hearing results and court
review.

1/ This figure was calculated with a FFP rate of 46%. In its
disallowance determination, HCFA stated that the correct FFP rate was
50%. Consequently, the amount of disallowed FFP in this category was
adjusted to $51,412,500.

2/ Adding the total overpayment figures from the BOA summary
($60,325,213) and from the DOH memorandum ($42,500,000), we arrive at a
total of $102,825,213. Using a 50% rate of FFP, HCFA's disallowance
figure totals approximately $51,412,500 in this category. - 4 -

The memorandum detailing the DOH audit backlog stated in its opening
paragraph:

[I]t should be understood that based on audit experience the
estimated Medicaid impact will be substantially reduced due to
appropriate DOH and provider comments on the merits of the audit
adjustments, certification of final rates by DOH and DOB, formal
hearing and court decisions.

The stipulation entered into by the parties in the course of this appeal
reduced the amount of FFP at issue in this category to $14,389,924.

B. Overpayments made to closed or bankrupt providers.

HCFA's "1984 Financial Management Segment of the State Assessment
Report," dated December 7, 1984 (State Ex. 7), identified $9,000,000
($4,500,000 FFP) as amounts overpaid to closed or bankrupt facilities as
of May 9, 1984. This figure was apparently taken from the May 9, 1984
memorandum. (State Ex. 5) The report did not identify the closed or
bankrupt providers by name, relevant time periods, or individual amounts
at issue.

The stipulation reduced the amount of FFP at issue in this category to
$2,243,665.

C. Overpayments identified and awaiting collection by the New York
Deputy Attorney General (DAG).

This category of overpayments was based on HCFA's report, "Review of
Overpayments Identified at New York State Department of Social Services"
(FO 5.29), dated May 24, 1984. (State Ex. 8) The report found that a
review of DOH's Central Control Log as of January 31, 1984 indicated
that there was $3,728,825 ($1,864,413 FFP) in overpayments which had
been referred to the DAG for collection. The report stated that this
amount had been in this status since May 31, 1981. This figure was
apparently based on a February 4, 1984 HCFA memorandum identifying 28
providers' audits which had been forwarded to the DAG. (State Ex. 9)

The stipulation reduced the amount of FFP at issue in this category to
$1,104,014.

The State Audit Process

For the period during which the alleged overpayments at issue occurred,
DOH had responsibility in New York State for the audit of
provider-submitted financial and statistical - 5 -

reports used to calculate rates of payment for various types of Medicaid
providers. Effective April 1, 1983, that responsibility was transferred
to NYSDSS.

After cost reports are presented to NYSDSS by a provider, a brief
entrance conference is conducted with the provider. Next, NYSDSS audits
the provider-supplied cost reports and reviews supporting documents to
determine if the submitted claims are proper. An exit conference is
held with the provider where NYSDSS presents its findings and asks for
further information. After giving the provider the opportunity to
furnish additional information, NYSDSS issues a draft audit report. The
draft report "identifies the items on the cost report which are being
disallowed and advises the provider of the basis for the proposed action
and the legal authority therefor." 18 N.Y.C.R.R. 517.5(a). The report
also contains a statement of any estimated overpayment, or "Medicaid
impact" in the State's terminology. The provider has 30 days to
comment. Any comments by a provider are then evaluated by NYSDSS audit
personnel. Upon completion of their review, NYSDSS issues a final audit
report to the provider. At this time, DOH sets reimbursement rates
based upon the final report.

Originally, a provider had only 30 days to request a hearing after
receipt of the final audit report, according to former 18 N.Y.C.R.R.
518.1(f). Effective January 2, 1986, however, new New York State
regulations, at Part 17 of N.Y.C.R.R., give a provider 60 days to
request a hearing. The new procedures are also available to providers
contesting overpayment determinations covering periods prior to January
2, 1986.

After the administrative hearing is conducted, the hearing officer
recommends a decision to the NYSDSS Commissioner who renders the final
decision. After the Commissioner's determination is issued, a provider
has four months to commence an action contesting an adverse
determination in the New York State judicial system. A court decision
may serve to change the rates set in the audit process.

In response to Board questions as to when in the audit process the State
may act to recover an overpayment from a provider, the State explained
that 17 N.Y.C.R.R. 517.15 provides that withholding of payments
constituting the amounts identified in the final report shall commence
after issuance of a decision after hearing or, if no hearing was
requested, within 60 days of receipt of the final report. Section
517.16 of 17 N.Y.C.R.R., however, specifies that the State may commence
recoupment of overpayments not sooner than 15 days after issuance of the
final audit report, upon notice to the provider. Further, section
517.16(b) provides that if a hearing is timely requested but not
scheduled to

- 6 -

commence with 90 days of receipt of such request, the recoupment of
overpayments shall be stayed until the hearing begins. In line with the
above regulations, the State explained that as a general rule it waits
at least 15 days after the final audit report is issued before acting to
recoup overpayments by withholding current or future payments on claims
submitted by the provider.

Analysis

The State contended that HCFA is not entitled to its share of a Medicaid
overpayment until it has been firmly established and recovered. The
State stressed that the cooperative federalism concept behind the
Medicaid program, designed by Congress as a joint federal-state funded
program, supported its position that section 1903(d)(3) of the Act, and
not section 1903(d)(2), should govern HCFA's recovery of the federal
share of Medicaid overpayments.

In addition to generally disputing HCFA's right to recoup the federal
share of overpayments, the State contended that the particular facts of
this appeal warrant reversal of the disallowance. The State claimed
that HCFA's disallowance letter was deficient because it failed to
provide specific details of the alleged overpayments. The State further
attacked HCFA's use of State documents in its reports for the
determination of overpayments. These documents, according to the State,
merely referred to draft audit reports or estimates and were, therefore,
inaccurate and unreliable.

We discuss each of this arguments in turn.

I. Whether HCFA can demand the federal share of overpayments paid to
providers prior to their recovery by a state.

The general question of whether HCFA has the authority to demand from
states the federal share of identified Medicaid overpayments to
providers prior to the actual recovery of the overpayments by the states
has been examined by the Board in a series of decisions. In these
decisions, the Board has held that improper or excess payments to
providers do not constitute "medical assistance" within the meaning of
the Act, and that, therefore, HCFA is empowered by section 1903(d)(2) of
the Act to adjust the federal share of these payments, even if a state
has not yet recovered the amounts from the providers. For a summary of
the Board's reasoning on this question, see, e.g., New York State
Department of Social Services, Decision No. 311, June 16, 1982, and
California Department of Health Services, Decision No. 619, January 28,
1985. A number of the Board's decisions on this issue have been
reviewed in court; the district courts have - 7 -

split on the question, but three Courts of Appeals have upheld the
Board's reasoning. 3/

The State's arguments as to how sections 1903(d)(2) and (d)(3) should be
interpreted and why 1903(d)(3) should govern HCFA's recovery of
overpayments have been previously raised by the State and rejected by
the Board in Decision No. 311. The Board's reasoning in rejecting the
State's arguments was upheld by the Second Circuit Court of Appeals in
Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985).

In telephone conferences with the Board, however, the State maintained
that the Board's upholding of HCFA's interpretation of section
1903(d)(2) subverts the spirit of the Medicaid program as a cooperative
federal-state effort. Asserting that the themes of "partnership" and
"cooperative federalism" run throughout the Act and were recognized by
various courts, the State argued that requiring states to return the
federal share of overpayments prior to actual recovery would violate
Medicaid's partnership concept by placing the full financial burden of
uncollectible overpayments on the states.

As to this issue of the compatibility of HCFA's position on recovery of
overpayments with the cooperative federalism

3/ In Massachusetts v. Heckler, 576 F. Supp. 1565 (D. Mass 1984), the
Board's decision in Massachusetts Department of Public Welfare, Decision
No. 262, February 26, 1982, was reversed on the grounds that HHS had not
established that payments to a provider at an interim rate higher than a
final rate constituted an overpayment for purposes of section
1903(d)(2). In Massachusetts v. Secretary, 749 F.2d 89 (lst Cir.
1984), cert. denied, 105 S.Ct. 3478, however, the United States Court of
Appeals for the First Circuit reversed the judgment of the District
Court and upheld Board Decision No. 262. That court found HCFA's
interpretation of section 1903(d) reasonable and based on sound policy
considerations. On October 1, 1984, the United States District Court
for the Northern District of New York affirmed Board Decision No. 311 in
Perales v. Secretary, Case No. 83-CV-900, aff'd sub nom. Perales v.
Heckler, 762 F.2d 226 (2d Cir. 1985). On November 4, 1986, the United
States Court of Appeals for the Eighth Circuit, in Department of Social
Services v. Bowen, Appeal No. 84-2483, reversed a District Court
decision and upheld the Board's decision in Missouri Department of
Social Services, Decision No. 448, June 30, 1983.

- 8 -

foundation of the Medicaid program, the Board has previously concluded:

[W]hile it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, the states have the primary
responsibility of 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. . . . 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.

Decision No. 311, p. 7.

The district court in Perales, cited in footnote 3, supra, supported
this view for similar reasons, and concluded that:

The partnership upon which plaintiff relies does not in and of
itself entitle the State to disclaim or abdicate its own
obligations in order to make its own responsibilities easier to
bear.

Slip op., p. 21.

The Court of Appeals for the First Circuit said in the Massachusetts
case:

Since Medicaid is a joint program of the state and federal
governments for providing health care, it is 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 89, at 96.

- 9 -

The State cited several cases which the State had not referred to in
earlier cases before the Board for the general proposition that Medicaid
is a partnership program. The State did not argue specifically how
these cases would change the Board's analysis, upheld in Perales and
Massachusetts, of how the partnership concept affected the issues here.

In light of the State's failure to offer any new arguments as to why our
past decisions and the courts' opinions supporting HCFA's interpretation
of section 1903(d)(2) are incorrect, we affirm, once again, that HCFA is
entitled to recover the federal share of Medicaid overpayments prior to
any actual recovery by the State. 4/

II. Is there a sufficient factual basis for a disallowance here?

In its appeal the State made parallel arguments as to why the
disallowance should be reversed on factual grounds. First, the State
attacked the disallowance letter as inadequate to support a disallowance
because it failed to provide detail sufficient to enable the State to
respond to the disallowance. The unreasonableness of HCFA's
disallowance, the State asserted, was shown by the fact that the
stipulation so greatly reduced the amount at issue between the parties.

Closely related to that argument, the State emphasized that the
disallowance itself lacked factual support. In compiling its
disallowance, HCFA, according to the State, merely transferred figures
from various State documents and used them as a basis for the
disallowance without any independent verification or analysis of the
figures. The State maintained that the documents cited by HCFA in its
reports were not accounting records, but were management records based
on estimates and non-finalized audit reports. The State claimed that
HCFA chose to ignore the explicit warnings on some of the documents
(e.g., State Exs. 4 and 5) that the documents' conclusions were
tentative and likely to

4/ Congress modified the overpayment recovery rules in the
Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. 99-272.
Section 9512 of this act amended section 1903(d)(2) of the Act to
provide that in cases where a state is unable to recover an overpayment
due to a provider's bankruptcy, HCFA would no longer be able to recoup
the federal share. This provision, however, applies to only those
overpayments identified for quarters beginning on or after October 1,
1985. - 10 -

be significantly altered as more information became available and the
audit resolution process developed. Therefore, the State continued,
HCFA's reliance on these documents as a basis for a disallowance cannot
stand.

HCFA responded by claiming that the disallowance letter contained
sufficient information and that there was more than adequate factual
basis for HCFA to take a disallowance. As to the sufficiency of the
disallowance letter, HCFA argued that on the basis of the disallowance
letter and the documents cited therein, the State was able to produce in
the discussions that lead to the stipulation detailed lists of
individual providers, their respective audit years, and their respective
original and adjusted overpayment amounts. HCFA contended that any lack
of information for individual providers was directly attributable to the
State's failure to comply with HCFA's repeated requests for further
documentation before the disallowance was issued. HCFA cited a March
15, 1985 letter from a HCFA official in which the official informed the
State that, if no additional. records were made available, HCFA would
have to proceed on the information before it. (State Ex. 11, p. 2) HCFA
also referred to its disallowance letter, which reiterated that the
State's failure to furnish further information had forced HCFA to base
its disallowance on the only figures ever supplied by the State.

As to the reliability of the information contained in those records,
HCFA asserted that the figures in those records had been supplied to
HCFA by the State only after there had been an initial determination
that an overpayment had occurred. HCFA pointed out that the
overpayments at issue were made by the State during the period 1970
through 1980 and were identified as overpayments by the State prior to
April 1, 1983, and that each overpayment had been the subject of some
type of audit report issued to the affected provider. HCFA claimed that
under New York State law the audit reports should have become final
within 30 days unless the provider objected. Therefore, according to
HCFA, the only reason the audit reports continue to be non-final is the
State's own failure to respond to a provider's objection by issuing a
final report. Because the finality or non-finality of the audit reports
is a matter within the State's power and beyond HCFA's control, HCFA
concluded that to allow the State to postpone indefinitely, by
refraining from issuing a final report, the determination that an
overpayment had occurred would undermine the express provisions of
section 1903(d)(2) of the Act. Furthermore, HCFA contended that there
is no requirement for absolute finality when it comes to recouping
overpayments, arguing that the entire Medicaid funding system is based
on the use of estimates which are always subject to later revision.
Therefore, according to

- 11 -

HCFA, the fact that the amount of the overpayments in dispute remains
subject to possible revision does not constitute a valid reason for
delaying the recovery of the federal share.

A. The sufficiency of the disallowance letter.

The required contents of a disallowance letter and HCFA's reliance on
state records and findings as the sole basis for a disallowance have
been previously examined by the Board. In California Department of
Social Services, Decision No. 244, December 31, 1981, the Board reversed
a disallowance because HCFA's basis for determining the amount of
overpayments was insufficiently supported by the record. The Board
held:

Where . . . a federal audit merely adopts the figures from State
records, assuming that overpayments for State purposes are
necessarily overpayments for federal purposes, and where the State
has shown that this assumption may not be warranted, the Respondent
must provide more specific evidence and authority to support its
allegations.

p. 10.

In California and other decisions, the Board has developed standards for
use of state audits or other findings as a basis for disallowance. The
Board has determined that HCFA may reasonably rely on state findings
provided:

o The Agency provides sufficient detail as to the audits or
other sources from which the disallowed amounts are derived; and

o The State is provided the opportunity to show that

-- adjustments have been made to the State findings;

the findings are not reliable for some reason;

the State has already recovered the amount identified
as an overpayment and has already adjusted the federal share;
and

-- the State never claimed FFP in the overpayment in the
first place..- 12 -

Ohio Department of Public Welfare, Decision No. 637, April 2, 1985,
p. 12.

The Board's analysis depends on various factors such as the nature of
the overpayments involved; the nature of the state findings involved;
the extent to which HCFA independently determined that the state had
claimed unallowable costs; the issues raised by the state; and the
evidence the state has provided in support of its positions. In each
case, the Board will consider the particular circumstances in
determining the adequacy of the record before it.

In support of its position that the disallowance letter was inadequate,
the State specifically cited California Department of Heath Services,
Decision No. 734, March 28, 1986. There the Board stated, at page 11:

In evaluating whether the Agency has provided sufficient detail to
enable a state to respond, the Board generally will find that HCFA
meets its burden by identifying the names of the providers which
allegedly received overpayments, the respective amounts, and the
relevant time periods. If HCFA does this, the burden shifts to the
State to make the showings listed above. The Board must then
analyze the record as a whole to see whether there is a factual and
legally supportable basis on which to uphold the disallowance.

If we were to apply this standard literally to the facts of this appeal,
we might agree with the State that the disallowance letter was
deficient. The disallowance letter did not mention providers by name,
respective amounts, or relevant time periods. The disallowance letter
did, however, refer to three HCFA regional reports that had been made
available to the State. At least one of these reports (State Ex. 3) did
explicitly refer to the BOA March 31, 1984 summary, which did list
providers by name, with respective amounts and relevant time periods.
The other two HCFA reports, cited in the disallowance letter, did not
refer to any specific State documents which listed individual providers
by name, but it is clear from our reading of the record how HCFA arrived
at those figures from State documents.

The Board's concern in Decision No. 734 and other decisions was that
HCFA had to supply enough information to a state to enable it to respond
effectively to the disallowance. Clearly a state would find it
extremely difficult, if not impossible, to contest a disallowance that
summarily declared, without providing any details, that overpayments

- 13 -

had occurred. In this particular case, we find that the State has been
able, quite effectively, to respond to the disallowance. Furthermore,
as HCFA pointed out, the State was not so handicapped by the alleged
lack of factual detail in the disallowance letter that it was not able
to produce extensive lists of providers that provided the basis for the
stipulation. We also note that the record shows repeated HCFA requests
for information and documentation with which the State failed to comply.
We disagree with the State that the stipulation's reduction of the
amount in dispute showed that HCFA's taking of the disallowance was
incorrect. HCFA has always shown a willingness to reduce a disallowance
if a state produces evidence that the initial disallowed amount is no
longer accurate (usually because of subsequent state actions such as
collecting the overpayments or reversing its initial findings). Here,
once the State did produce documentation, HCFA accordingly reduced the
disallowance. We thus find that HCFA did act with the best information
available to it and did supply the State with enough detail to contest
the disallowance. 5/

B. The use of draft audit reports.

Having found that HCFA met its primary obligation under the standards
set forth in Ohio, supra, we now turn to the State's contention that the
findings on which the disallowance was based were not reliable.
Essentially, the State claimed that its auditors never definitively
established the existence of overpayments, but merely issued draft
reports or made tentative conclusions.

Our past decisions have concluded that HCFA is entitled to recoup the
federal share of an overpayment based on a state determination which is
sufficiently final and which has not been modified by the state. Here
the State is arguing that it never formally identified overpayments
because any findings of overpayments were tentative under New York State
law as they were based on non-final audits. The State argued that in
its audit process draft audits did not have the status of definitive
findings by auditors. HCFA responded that those findings, even at the
non-final audit

5/ As a practical matter, now that the State has finally supplied HCFA
with updated lists of providers and overpayments in dispute, we find
that it would essentially be a hollow exercise for the Board, after the
extensive briefing that has occurred, to declare the disallowance
reversed on the basis of a deficient disallowance letter. If the Board
were to so rule, HCFA could immediately reissue the disallowance letter,
with the updated lists attached. - 14 -

stage, were sufficient identification of the existence of an overpayment
for HCFA to recoup its share. 6/ HCFA focused on the fact that the
payments in question occurred anywhere from six to sixteen years ago.
HCFA cited Missouri Department of Social Services, Decision No. 448,
June 30, 1983, arguing that it would be unreasonable to require HCFA to
wait indefinitely for a state to refrain from establishing an
overpayment until a provider completed the appeals process.

Our decisions in this area have recognized the role that auditors and
their expertise have in the Medicaid reimbursement system. One of the
tools that auditors traditionally employ is the draft audit. It focuses
on concerns that auditors have and allows the audited party to address
those concerns. The draft report is a preliminary step that does not
necessarily reflect the auditors' ultimate conclusions. HCFA's auditors
themselves use this approach. In a typical case, a draft report is sent
to a state. The state's

6/ The State initially made an argument that HCFA has inconsistently
interpreted when an overpayment becomes sufficiently firmly established
so as to initiate recovery of the federal share. The State cited a
December 26, 1984 letter from a HCFA official which stated that the
federal share of an overpayment must be credited to HCFA "after issuance
of the final audit report." (State Ex. 11) The State also declared that
at a Medicaid conference another HCFA official stated that an
overpayment occurs when "the provider has gone through all the appeal
systems. . . ." (State Ex. 13)

When, in a series of telephone conferences, the Board sought to
narrow the issues in dispute between the parties, the State did not
repeat this argument. HCFA had explained that the alleged former
interpretation applied to only one category of overpayments --
overpayments identified in draft audit reports by NYSDSS -- where
HCFA was willing to wait for final audit reports. As to the
alleged latter interpretation, HCFA stated that it was an
expression of one individual's opinion that the State could not
have reasonably relied upon.

Inasmuch as the State has not pursued this argument and we are
finding that HCFA may not recover the federal share of an
overpayment until the issuance of a final audit report -- a
position similar to that enunciated in the December 26, 1984
letter, we find no need to rule as to whether HCFA had, in fact,
issued contradictory interpretations which would be binding on it.

- 15 -

comments are then examined and evaluated. The auditors then issue a
final report, and, on the basis of the final report, only then does HCFA
take action.

The Board has held that in instances where HCFA relies on state
documentation HCFA can recover the federal share only when a state
itself could act to recover the overpayment from the provider. Usually
that stage has been, as here, when the final audit report is issued.
Cf. Pennsylvania Department of Public Welfare, Decision No. 765, July
10, 1986.

In Missouri the question was whether an overpayment determination was
firmly established when a provider was appealing the overpayment
determination through the administrative and judicial appeal systems of
Missouri. The Board held there that HCFA did not have to wait to recoup
the federal share of the overpayment until completion of the appeals
procedure because Missouri itself considered the overpayment
sufficiently final to recover the overpayment from the provider and did
not have to wait for completion of the appeals process. Here, contrary
to HCFA's implication, the State asserted that final audit reports were
not issued because all of the draft audit reports were contested, and we
have no reason to believe that the State was merely delaying the
issuance of final reports. The State explained that under its
regulations it cannot recover the overpayment unless a final audit
report is issued. If for State recovery purposes, then, an overpayment
is not "identified" until completion of the final audit stage, we hold
that likewise HCFA should not be allowed to recover the federal share,
based solely on the State's determination, until that stage is reached.

HCFA was quite understandably concerned about when the final audit
reports will be issued, given the length of time since the draft audits
were prepared. Part of the delay was probably due to the transfer of
functions from DOH to NYSDSS. The stipulation is evidence that NYSDSS
is beginning to resolve the backlog of draft audit reports. There is
nothing, however, to prevent HCFA from independently reviewing the
providers' claims for FFP, particularly for providers which have closed
or gone bankrupt, and reaching its own determination as to whether
adjustments are called for under section 1903(d)(2) and then issuing a
disallowance. Furthermore, HCFA could resolve by regulation the
controversy over the use of state audit findings to identify
overpayments. On April 5, 1983, HCFA proposed new regulations to
require states to establish procedures to identify overpayments to
providers and report them to HCFA. 48 Fed. Reg. 14664. The proposed
regulations would require states to identify at each stage of the
reimbursement

- 16 -

process, including the receipt of audit results, tentative overpayments
to providers. The states would be required to make an adjustment of FFP
within certain time periods, e.g., two years if a tentative finding was
appealed. HCFA, however, has so far failed to issue a final regulation
or to clarify at what stage state determinations should be used as a
basis for adjusting FFP.

In these circumstances, we find that the State has adequately shown that
under New York State regulations it could not have recovered the
overpayments at the draft audit stage. The State has thus shown that
the draft audits were not sufficiently reliable to justify HCFA's use of
them as the basis for this disallowance.

We do accept, however, HCFA's position that HCFA is not precluded from
recouping the federal share of an overpayment solely because the
provider is appealing the overpayment determination. We concluded that
that position was reasonable in Missouri, supra. The State is in no way
prejudiced by our rejection of its argument to the contrary. HCFA has
always adopted the policy of adjusting a State's FFP if the provider is
successful in the appeals process. If the provider proves the original
overpayment determination erroneous, any corresponding FFP, previously
recouped, will be restored to the State.

Conclusion

For the reasons cited above, we find that that part of the disallowance
attributable to draft audit reports should be reversed. We sustain the
disallowance for all the overpayments to providers which have received
final audit reports.

________________________________ Norval D. (John) Settle

________________________________ Alexander G. Teitz

________________________________ Judith A. Ballard Presiding
Board