DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State Department of Social Services
Docket No. 87-36
Decision No. 909
DATE: October 16, 1987
DECISION
The New York State Department of Social Services (State/New York)
appealed
a determination by the Health Care Financing Administration
(Agency/HCFA)
disallowing $11,075,875 in federal financial participation
(FFP) claimed
under Title XIX (Medicaid) of the Social Security Act
(Act). The
disallowance was based on the Agency's finding that the
State had made
overpayments to certain Medicaid providers. The Agency
found that the
State had paid the providers at per diem rates which were
subsequently
adjusted downward "because the State agency found errors
during the review of
the provider's rate setting methodology." Notice
of Disallowance, p.
l. The Agency further found that the State had not
credited the federal
government for its share of amounts identified as
overpayments, resulting
from negative rate adjustments, but not yet
recouped from the providers.
During the course of this appeal, the State documented its recovery
of
funds from the providers, and subsequent credit to the Agency,
thereby
reducing the amount in dispute to $835,701. See HCFA Supplemental
Reply
Brief, pp. 2-3. For the reasons discussed below, we uphold
the
disallowance of this amount.
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 certain requirements set forth by the Secretary
of the Department of
Health and Human Services (HHS). Under section
1903(a) of the Act, funding is
available at the "federal medical
assistance percentage" rate for amounts
expended "as medical assistance
under the State plan." State plans must
set out methods and procedures
for determining the amounts to be paid to
providers of Medicaid
services, including per diem rates paid to
institutional providers.
Sections 1902(a)(30)(A); 1902(a)(13).
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. . . .
Facts and Issues
In its brief, New York explained that it initially reimburses
Medicaid
providers, for services to recipients, based on its best cost
estimates
at the beginning of a given year. New York then adjusts those
payments,
in this case downward, based upon its determination of the actual
costs
incurred by each provider. New York characterizes this process as
one
of "negative retroactive rate adjustment." 1/
HCFA alleged that, since it provided the State with FFP based on
the
State's payments to the providers at the initial rate, it should
receive
credit for the federal share of the difference between the
State's
payments at the initial and adjusted rates because this
amount
represented an overpayment within section 1903(d)(2) of the Act.
The central issue of this appeal, therefore, is whether
negative
retroactive rate adjustments are overpayments. New York argued
that the
adjustments were not overpayments for the following reasons:
o The negative retroactive
rate adjustments are not
audit
based.
o Under the new federal
policy, as contained in the
State
Medicaid
Manual, adjustments in prospective
reimbursement
systems are not overpayments and past Board decisions
have
said that
prospective and retrospective reimbursement
systems
are
equivalent for purposes of overpayments.
o The State should be
allowed to use estimates in its
payment
system
since the Agency uses an estimated payment system.
Further, in its reply brief, New York pointed out that the same
negative
retroactive rate adjustments as those covered in this disallowance
were
the subject of another draft audit report. The State argued that
HCFA
is implementing a final disallowance decision before the State has
had
an opportunity to fully pursue its appeal rights before this Board.
I. Negative Retroactive Rate Adjustments Are Overpayments.
A. An Overpayment Determination Need Not Be Audit Based
New York indicated that its rate adjustments are made as the result of
a
normal rate review process which is not comparable to an audit
process.
The State contended that these negative retroactive rate
adjustments
have no audit basis, and are not determined by fraud,
wrongdoing,
incorrect, or inappropriate payments or similar audit
findings. Rather,
the adjustments constitute modifications of the
initial rate, responding
to the difference between estimated and actual
provider costs, as
opposed to overpayments which reflect payments for
services
inappropriately paid for or not delivered. Since these
adjustments are
not audit based, New York concluded, they are not
overpayments. New
York Brief, pp. 5-6.
As HCFA noted, the State cited no authority for its assertion
that
negative retroactive rate adjustments which are not audit based
cannot
be considered overpayments. The Board has previously held that
rate
adjustments based on desk reviews of providers' cost reports,
rather
than on on-site audits of the costs, gave rise to overpayments
under
section 1903(d)(2). See Florida Department of Health and
Rehabilitative
Services, Decision No. 296, May 14, 1982; aff'd, Florida v.
Heckler,
Civ. No. 82-0935 (N.D. Fla. 1984). The State itself
considered the
adjustments sufficiently reliable so that the State listed the
resulting
excess payment amounts as amounts to be recovered from the
providers.
We do not find it significant here that there was no allegation of
fraud
or wrongdoing. The State is entitled to receive federal funding
only
for amounts expended in accordance with an approved state plan.
New
York's State plan may allow the State to pay providers at an
initial
rate based on estimated costs, subject to later adjustment where
the
actual costs differ from the estimate. Once the rate has been
adjusted
downward, however, it is the adjusted rate which sets the
appropriate
amount of the payment under the State plan. The difference
between
payment made to the provider at the initial rate and payment at
the
adjusted rate is an excess payment. If, as occurred here, a state
has
received federal funds based on payment at the initial rate, the
state
has received an overpayment of FFP which HCFA is entitled to
recover.
This reasoning has been set out in numerous Board decisions. Three
U.S.
Circuit Courts of Appeals have upheld our analysis on this issue. 2/
New York has not presented anything here which distinguishes this case.
Thus, we conclude that the State's negative retroactive rate
adjustments
resulted in a determination that excess payments had been made
to
providers, and that HCFA properly determined that the federal share
of
those excess payments was an overpayment to be adjusted under
section
1903(d)(2).
B. The Policy in the State Medicaid Manual Does Not Apply Here
New York stated that in New York State Department of Social
Services,
Decision No. 526, March 30, 1984, this Board equated prospective
and
retrospective reimbursement systems, holding that which
particular
system of reimbursement is being used is irrelevant
regarding
recognition of overpayments. New York then pointed to a
recent
statement of federal policy presented in the State Medicaid
Manual,
section 2853.1 (October 1, 1985). That section provides:
An excess payment to an institutional
provider which you recover
through
adjustment to the per diem rate for a subsequent
period
is not an overpayment.
However, if you seek to recover such an
amount in a lump sum, by an installment repayment plan, or
by
withholding a portion of future
payments to the provider, that
amount is
deemed an overpayment.
The State argued that if retrospective and prospective systems
are
equivalent, as the Board determined in Decision No. 526, then
the
Manual's interpretation must be extended to both systems, and we
should
find that these adjustments were not overpayments. New York
Brief, pp.
7-8.
In Decision No. 526, the Board did not "equate" the two types
of
reimbursement systems, as the State alleged, although the Board did
say
that each system could give rise to overpayments. We affirm that
result
here. In our view, the State misreads the Medicaid Manual
provision as
treating all adjustments in prospective reimbursement systems as
not
being overpayments. This ignores the language limiting the statement
to
adjustments to rates for a subsequent period. What the Board
was
talking about was the type of adjustment which retroactively changes
the
rate set for current or past periods. Such changes may include
an
adjustment to a prospective rate which requires the type of
recoupment
referred to in the Medicaid Manual. The State did not allege
that its
negative retroactive rate adjustments did not fall within the
Medicaid
Manual description of adjustments giving rise to an overpayment.
We also note that previous Board decisions have recognized that HCFA
may
have legitimate policy reasons for treating various types of
findings
regarding excess or improper overpayments to providers differently
in
terms of when HCFA will require a state to adjust the federal
share.
See, e.g., Florida, pp. 11-12.
C. The State's Use of Estimates in Its Payment System
The State argued that since the Secretary has the ability to
make
estimated payments to states which may later be adjusted without
penalty
to the Agency, the states should not be penalized for
overpayments
resulting from overestimates of provider's rates. New York
Brief, pp.
8-9.
As the Agency noted, section 1903(d)(2) of the Act clearly authorizes
the
Secretary to reduce or increase payments to states based on
overpayments or
underpayments. Thus, it was clearly Congress' intent
not to allow
states to retain federal funds for overpayments. Indeed,
we consider it
somewhat disingenuous of the State to attempt to avoid
paying back the
federal share of the excess payments arising from
negative rate adjustments
while, at the same time, the State apparently
claimed $32.9 million in
additional federal funding for payments made to
providers as a result of
positive rate adjustments. See Notice of
Disallowance, p. 1. The
corresponding adjustment which HCFA wishes to
make for negative rate
adjustments simply ensures that the State will
receive only what it is
entitled to as amounts expended under its
approved state plan. It is
not a penalty, as the State's argument
suggests.
II. HCFA Has Not Prematurely Implemented a Final Decision
Against the
State.
With its reply brief, New York submitted a draft audit report for
the
period in question titled New York State Provider Overpayments.
New
York Ex. 5. New York noted that this document recognized that the
"area
of negative rate adjustments is pending before this Board." New
York
then cited language from the report which recommended that the
State
make a decreasing adjustment for the federal share of the negative
rate
adjustment outstanding balance. Based on this report, New York
argued
that HCFA was attempting to implement its final decision before
the
State exhausted its appeal rights. New York Reply Brief, p. 2.
HCFA has categorically denied that it was attempting to
prematurely
implement a final decision. HCFA Supplemental Reply Brief,
pp. 3-4. We
agree.
The audit report submitted by the State is nothing more than a
draft
report provided to the State for its comments. As HCFA correctly
noted,
if it were implementing a decision resulting from that draft
report,
several additional steps would need to be taken, none of which
have
occurred. HCFA Supplemental Reply Brief, pp. 3-4. The draft
audit
report is clearly making a recommendation and nothing more. HCFA
has
indicated that it will not act to implement that recommendation
until
the conclusion of this appeal. There is no evidence before us
that
would indicate otherwise.
Conclusion
For the reasons discussed above, we uphold the disallowance in the
amount
of $835,701.
________________________________
Cecilia
Sparks Ford
________________________________ Norval
D.
(John) Settle
________________________________ Judith
A.
Ballard Presiding Board Member
1. A draft audit report which the State submitted
with its reply
brief states:
Negative rate adjustments arise when an
initial rate based on
trended and estimated
data is later revised downward as a result of
estimates becoming actualized. For example, the inflation
factor
may be estimated at the time the initial rate
is set. Later, the
actual inflation
factor is calculated and the rate is adjusted.
New York Ex. 5.
This description is consistent with use of some types of
prospective
reimbursement systems, as well as a retrospective reimbursement
system.
Regardless of which system the State used, and irrespective of
whether
it is an inflation factor or costs which are adjusted, our
analysis
below would be the same.
2. See Massachusetts Department of Public Welfare,
Decision No. 262,
February 26, 1982; aff'd Massachusetts v. Secretary, 749 F.
2d 89
(1984), cert. denied, 472 U.S. 1017 (1985); New York State Department
of
Social Services, Decision No. 311, June 16, 1982; aff'd, Perales
v.
Heckler, 762 F. 2d 226 (1st Cir. 1984); Missouri Department of
Social
Services, Decision No. 448, June 30, 1983; aff'd, Missouri Department
of
Social Services v. Bowen, 804 F. 2d 1035 (8th Cir.
1986).