DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: FY 1981 Medicaid Quality Control Disallowances
Docket Nos. 85-108 85-130 85-132 85-134
85-136 85-137 85-144 85-155 85-176
Decision No. 948
DATE: April 18, 1988
DECISION
Nine states (States) appealed Medicaid Quality Control (MQC)
disallowances
of federal financial participation by the Health Care
Financing
Administration (HCFA). HCFA determined that these states had
exceeded
certain target "error rates" in the operation of their Medicaid
programs
(Title XIX of the Social Security Act) during the fiscal year
ending
September 30, 1981 (FY 1981). The nine states are (in the order
as
docketed above) Alaska, Rhode Island, Hawaii, Nebraska, Oklahoma,
Washington,
Idaho, Delaware, and West Virginia. The disallowances for
the nine
states total $12,280,908. 1/
At the parties' request, the proceedings in these appeals were
separated
into two phases. The first phase was intended to encompass
"common
issues" pertaining to all appellant States; the second phase was
to
cover those matters which could only be analyzed upon an examination
of
the disallowances for specific states.
On March 24, 1988, we issued a proposed decision and offered the
parties
the opportunity to comment on our proposed analysis. We took
this
approach because of the complexity of the issues in this
multi-state
case and because our analysis hinged on an issue that was
treated
somewhat collaterally in briefing and arguments during the
lengthy
development of the record in this case. We also offered the
parties the
opportunity to develop the record concerning the impact here of
a
recently-released study of the AFDC and Medicaid quality control
systems
prepared by the National Academy of Sciences.
In response to the proposed decision, counsel for both parties informed
us
by telephone that they had no comments, with the exception of certain
agreed
upon clarifications related to the remand in the appeal
(discussed in
footnote 11 below). Accordingly, we are essentially
adopting our proposed
decision as final.
In this decision, we consider one of the common issues raised by
the
States, the valuation of "excess resource" errors in the
Medicaid
quality control system. 2/ We defer consideration of issues in
the
appeals which relate to the statistical validity of HCFA's
sampling
process. Our resolution of the excess resources issue in favor
of the
States may eliminate many of the disallowances, and the
statistical
issues will be sharpened if developed in the context of a
disallowance
for a particular state. The States may develop
state-specific issues in
any further proceedings following the remand.
The excess resources issue concerns the dollar amount of error for
those
cases in the quality control sample in which Medicaid recipients
had
financial resources in excess of program limits. HCFA's practice for
FY
1981 was to measure as an error the total amount of the
Medicaid
payments made to recipients with excess resources. The States
argued
that the amount of the error should be measured as the lesser of
the
amount of the Medicaid payments or the excess resources.
As we explain below, we conclude that HCFA's methodology for
measuring
excess resource errors in the MQC system is unreasonable and
arbitrary
under the circumstances of the cases before us. HCFA's
methodology is
not obvious from the language of the regulations, was never
published in
program-wide policy guidance, conflicts with the underlying
purposes of
the MQC system, and was not uniformly and consistently applied by
HCFA
during the period in question. Indeed, the methodology was
expressly
rejected by Congress in legislation effective for subsequent
periods.
We emphasize that our decision concerns only the amount of error
that
should be calculated for purposes of determining sanctions under
the
quality control system. The States did not dispute the
assumption
underlying HCFA's position that the individuals in question with
excess
resources were ineligible under both statute and regulation. As
we
explain below, the issue with which we are presented arises because
of
the unusual situation that the amount of erroneous payments which
these
ineligible recipients received might, in certain cases, vastly
exceed
the amount which the Medicaid program would have saved if the States
had
processed the cases correctly in the first place, by excluding
the
recipients from the program until the excess resources had
been
expended.
Accordingly, we remand the appeals to HCFA to recalculate the error
rate
for each state according to the methodology subsequently ratified
by
Congress. If, at the conclusion of all proceedings on remand, there
are
states still subject to disallowances, HCFA can issue
revised
determinations which, if still disputed, would be subject to
Board
review (presumably on an accelerated basis given the development of
the
record which has already occurred). A further advantage of
this
approach is that it enables HCFA to consider the recent report of
the
National Academy of Sciences on the AFDC and Medicaid quality
control
systems.
Background on the Medicaid Quality Control System
Prior to the establishment of the current MQC system in April
1978,
similar quality control reviews had been operating in both the AFDC
and
Medicaid programs, although no program-wide disallowances based
on
quality control findings had been successfully imposed. See,
e.g.,
California Dept. of Social Services, DGAB No. 319 (1982);
California
Dept. of Social Services, DGAB No. 170 (1981) (discussing the
history of
quality control in AFDC and Medicaid).
In order to provide perspective to the present controversy, we
summarize
some of the relevant history:
o In 1971, the Department issued a
regulation requiring
state
plans for
several Social Security Act programs,
including
Medicaid, to
contain provisions for a quality control
system
for measuring
and reducing errors made in
determining
recipient
eligibility and payment amounts. See 45
C.F.R.
205.40 (1972)
(which adopted earlier requirements of
the
Handbook of Public
Assistance Administration); 36 Fed.
Reg.
3860 (February
27, 1971).
o In 1972, the Department first
proposed to take
fiscal
disallowances
based on extrapolation from a quality
control
sample.
After much controversy, the Department in 1975
issued
regulations
which provided for disallowances in the
AFDC
program for
errors in excess of established
"tolerance
levels." 45 C.F.R. 205.41. The Department stated that
the
tolerance levels
were based on a recognition that,
"a
requirement . . .
that states eliminate all
erroneous
payments,
with a resultant disallowance of Federal
financial
participation in any erroneous payments is unrealistic."
40
Fed. Reg. 21737
(May 19, 1975).
o These AFDC fiscal disallowance
provisions were struck down
by
the court in
Maryland v. Mathews, 415 F. Supp. 1206
(D.D.C.
1976), because
the "tolerance levels were
arbitrarily
established at 3% and 5% without the benefit of an
empirical
study." Id. at 1214. Subsequently, the Department revoked
the
disallowance
provisions and indicated that states would
only
be held fiscally
accountable for individually
identified
erroneous
payments to ineligibles. 42 Fed. Reg. 14717
(March
16, 1977).
o In April 1978, the Department
implemented a redesigned
quality
control system
for the Medicaid program. State's Ex. 2, p. 4.
o In March 1979, the Department
issued new provisions
for
disallowances
based on quality control samples, in both
the
AFDC and Medicaid
programs. 44 Fed. Reg. 12578, 12585
(March
7, 1979), 42
C.F.R. 431.801. Disallowances would be taken if
a
state exceeded the
national average error rate and its
error
rate had not
improved by a prescribed amount over the
last
period. No
disallowances were ever imposed under
these
regulations,
because the Secretary decided to
suspend
disallowances
in states with acceptable corrective
action
plans.
o On January 25, 1980, the
Department issued the
regulations
directly
pertinent to this dispute, which
authorized
disallowances in the Medicaid program for fiscal years
1981,
1982 and
1983. 45 Fed. Reg. 6326, 42 C.F.R. 431.802.
The
regulations are
based upon the goal of achieving a
four
percent error
rate within three years. Using as a base
period
the error rate
calculated between July and December
1978,
target rates
were set for each state to require a
one-third
improvement
each year in the amount the base year error
rate
exceeded the four
percent goal. Fiscal disallowances
were
authorized for
the amount by which the MQC error rate
estimate
exceeded the
target error rate.
o The Department alleged that the
new quality control
standards
were
mandated by the "Michel Amendment," which the
Department
asserts was
adopted by means of a reference in a fiscal
year
1980 continuing
appropriations resolution, Pub. L. 96-123.
3/
The continuing
appropriations resolution appropriated
funds
"to the extent
and in the manner" provided for in a
pending
bill which in
turn referred to a conference report on
the
supplemental
appropriations bill for the previous
year.
(Neither of
these other bills were, themselves, enacted).
See
States' Ex. 9.
That conference report set a 4 percent goal
for
state error rates,
and directed that disallowances should
be
based on requiring
incremental reductions in state
error
rates, from a
July-December 1978 base period, to achieve
that
goal by September
30, 1982.
The Excess Resources Issue
"Excess resource" errors arise when a Medicaid recipient, who
would
otherwise be eligible for Medicaid, has financial resources which
exceed
the prescribed levels. The parties agreed that, when an
individual
possesses excess resources, the case should be treated as an error
for
purposes of the quality control sample. The parties' dispute
concerned
how to measure the dollar amount of the error for that
individual. For
FY 1981, HCFA calculated the amount of the error as the
total amount of
all Medicaid payments to the individual with excess
resources. The
States argued that the proper treatment of such cases
was instead to
measure the lesser of: (1) the total amount of Medicaid
payments, or
(2) the dollar amount by which recipient's financial resources
exceeded
the maximum level permitted by the state.
The effect on the MQC system of the two different approaches may
be
illustrated as follows. Suppose a Medicaid recipient retains $500
in
excess resources for three months, January through March.
Throughout
these three months, the state treats the recipient as eligible
for
Medicaid and pays $1000 in Medicaid benefits to this recipient
for
services received each month. In fact, the individual lost
his
eligibility as of March after retaining the excess resources for
two
months. Suppose March is a review month in the state's MQC system
and
this individual's case is selected as a sample case. Under
HCFA's
approach, the error for the payment to this ineligible individual
would
be $1000. Under the States' "lesser of" approach, the payment
error
would be $500.
HCFA essentially argued that the regulations' definition of
"eligibility
error" required the use of the total Medicaid payments
methodology,
since the definition in effect established excess resource cases
to be
one type of eligibility error for MQC purposes and did not authorize
the
treatment of such errors in a manner different than any other type
of
eligibility errors. The States, on the other hand, argued that
the
regulations were silent on the question of how to value excess
resource
cases and that the States should be permitted to use the "lesser
of"
methodology since, as HCFA itself acknowledged in July 1981 when
it
adopted use of the methodology for a time, this approach was a
fairer
and more accurate way to measure this type of error.
Below, we examine the MQC regulations, the history of HCFA's policy
and
the overall purposes of the MQC system. As we summarized above,
we
conclude that HCFA's methodology for the computation of excess
resource
errors is both arbitrary and unreasonable under the circumstances
of
these cases. It is not required by regulations and is inconsistent
with
the purposes of the MQC system. It penalizes the States by
expanding
the MQC disallowance provisions beyond the stated purposes
of
identifying potential dollar savings and improving program
management.
Moreover, HCFA never issued binding program policy guidance
implementing
its policy and failed to apply its policy consistently and
uniformly
during the period. The policy is also inconsistent with
Congressional
intent as expressed in subsequent legislation.
1. The Agency's position has no explicit support in the
language of
the regulations.
As primary support for its position, HCFA relied on the definition
of
"eligibility error" in 42 C.F.R. 431.800, part of the "Michel
Amendment"
regulations providing for MQC disallowances. Section 431.800
provides:
"Eligibility error" means that Medicaid
coverage has been
certified or payment
has been made for a recipient under
review
who-- (1) Was ineligible
when certified or when he received
services under the State's plan;
* * * *
As presented in its brief, HCFA argued that:
a Medicaid "payment" is erroneous if it
is made to a recipient
who was
ineligible when he or she was certified eligible or
when
he or she received medical
services. Thus, if a State
determines
an individual to be eligible,
when in fact the individual is
ineligible because of his or her ownership of excess
resources,
any (and all) Medicaid
payments made to such an individual as a
result of this erroneous eligibility determination must be
cited
as erroneous under the Michel
Amendment regulations. The Michel
Amendment regulations leave MQC reviewers with no other choice.
HCFA's Brief on Common Issues, p. 76 (emphasis in original).
We find that HCFA is simply wrong in its argument that section
431.800
requires its method of valuing excess resource errors. 4/
While,
ordinarily, the Agency's reading of the applicable regulations
would
have great weight, the reading advanced here has no explicit
support
from the language of the regulation itself. While it is true
that the
regulation does require an excess resource case to be viewed as
an
eligibility error for MQC purposes, the regulation provides
no
requirements for the measurement of that error. Neither the language
of
the regulation itself, nor the preambles to the proposed or the
final
rule, provide any requirement or even indication that HCFA must
follow
some particular methodology in valuing excess resources cases.
5/ Thus,
contrary to its argument, the Agency is not mandated by the
regulation
to follow a particular method in measuring the error.
HCFA did not directly rely on any statutory provision, and indeed,
the
statute, like the regulation, is silent on the specific issue.
HCFA
nevertheless argued that since a recipient with excess resources
would
be ineligible under the Social Security Act (Act) as well as
the
regulations (see, e.g., section 1902(a)(10) of the Act
limiting
eligibility to individuals with resources below prescribed limits),
the
statute supported its position that any payments subsequently
received
by such persons were erroneous. See States' Ex. 22 (April 15,
1982
memorandum from HCFA Director of Bureau of Quality Control to
Regional
Administrators).
We must reject this argument for the same reasons that we found
the
regulatory argument unconvincing. A statutory provision
prescribing
when a person becomes ineligible for benefits because of
excess
resources simply does not resolve the question of how to compute
under
the MQC system the value of the eligibility error resulting from
excess
resources. A recipient may be ineligible for a prescribed period
under
the terms of the Act, but this would not answer the question of
the
particular dollar amount of any resulting error that should be
counted
for purposes of the MQC sample. 6/ In concluding that neither
the
statute nor regulations support HCFA's error valuation methodology,
we
do not require HCFA to participate in or condone any erroneous
payments
made by states to ineligible individuals. We find merely that,
in the
limited sampling context of the quality control system in effect
during
this time period, there is no justification for valuing the error
in
excess of what the error would have cost the program if the case
had
been processed correctly. Furthermore, although we have concluded
above
that HCFA's approach is not, as HCFA argued, compelled by the
statute
and regulations, we recognize that this conclusion by itself does
not
prove that HCFA's method of error measurement is
necessarily
unreasonable. However, as the remainder of our analysis
below shows,
the record here contains ample evidence to show that HCFA's
approach
unreasonably overvalued the particular errors involved.
2. HCFA's position is contrary to the purposes of the MQC
program as
described in HCFA's own manuals and
policy guidance.
The MQC regulations at 42 C.F.R. 431.800(d)(1) and 42 C.F.R.
431.802(c)
incorporate by reference MQC manuals and other instructions
directly
issued by HCFA. None of these manuals and instructions
addressed the
issue of excess resources, but, in the 1978 MQC manual, HCFA
stated
generally that the MQC system "has proven to be an effective
management
tool in helping administrators identify where funds are being lost
and
in taking steps to correct the problem." States' Ex. 16. HCFA
also
stated that the "primary objective" of the MQC system was to
"measure,
identify, and eliminate or reduce dollar losses." Id.
These statements
indicate to us that the MQC system was intended to focus on
overall
program losses which could be avoided through better management.
Furthermore, in a 1980 program guidance for states, HCFA stated, in
the
context of addressing another measurement issue in the MQC system,
that:
The [M]QC program has always determined error
by comparing the
reality of case eligibility
determination (as it impacts the
review month)
with how eligibility should and would have
been
determined had the Agency properly acted
on timely and accurate
information from the
beneficiary(ies).
States' Ex. 25, p. 2 (Action Transmittal AT 80-42).
We agree with the States that HCFA's treatment of excess resource
errors
was inconsistent with these statements of purpose. These
statements
indicate to us that the focus of inquiry for the MQC system is
the
potential savings which would occur if a case had been
processed
correctly. These descriptions of the system seem logical for
a "quality
control" system, which, as its name indicates, is primarily
intended as
a device for the detection and correction of errors in the
operation of
the system.
HCFA's position clearly gives an inflated picture of this kind of
program
savings. If a state's eligibility review system operates
properly and
discovers an excess resource situation in the very month
that the excess
resources arise, it can, and apparently generally would,
give the individual
the option of spending the excess resources on
medical or other expenses
before eligibility is discontinued. HCFA in
its brief did observe that
whether a particular recipient would spend
excess resources is ultimately
speculative, since non-liquid assets such
as real estate might conceivably be
involved and that, in any event, the
state could not control the recipient's
decision of whether to spend the
resources. HCFA's Brief, pp.
86-87. HCFA, however, did not dispute the
reasonable assumption that in
most cases a recipient would dispose of
excess resources in order to become
Medicaid-eligible, rather than incur
substantial medical bills.
7/ Indeed, as we discuss below, HCFA itself
acknowledged this policy
rationale for the "lesser of" approach to
valuing excess resources errors
when it adopted use of this methodology
in July 1981. States' Ex.
17. Nevertheless, HCFA's present position
before the Board overlooks
this rationale.
As an example of the rationale for the "lesser of" methodology, suppose
an
individual had excess resources of $200 which remained undetected by
a state
while the individual received $800 worth of medical services.
If the state
had handled this case correctly, it would likely have saved
the program at
most $200 since most individuals would choose to spend
the $200 against
medical expenses or against other personal expenses in
order to retain their
eligibility. The States' position fairly reflects
the savings by
computing the error in the example described above as
only the amount of the
excess resources, not as the total payments made
by the program.
Indeed, as the States noted, the "lesser of" method may
even overstate the
program savings since individuals with excess
resources may choose not to
offset their resources against medical
expenses covered by the program but
rather against other personal
expenses. If the recipient spent the
excess resources on personal,
rather than medical, expenses, the correct
handling of the case would
have created no program savings since no medical
expenses covered by
Medicaid would have been paid for by the excess
resources. 8/
Thus, we conclude that HCFA's methodology overstates the magnitude
of
dollar losses to the Medicaid program which could have been
saved
through better management. HCFA did not deny that the amount of
loss
was more fairly calculated using the States' approach, and indeed
in
earlier correspondence admitted as much. See, e.g., States' Ex.
17.
This conclusion was also reached in the 1981 GAO report reviewing
the
issue. GAO concluded that:
HCFA's procedures for determining and
reporting MQC results
overstate both
true program losses due to ineligibility
and
potential savings available from
correcting certain eligibility
errors.
States' Ex. 53, p. 35..3. HCFA did not apply its policy
consistently
and uniformly during the period at issue.
HCFA's argument that the States were bound by its "total
payments"
methodology for FY 1981 is further weakened by HCFA's own
inconsistency
and apparent uncertainty in applying the methodology for this
period. 9/
Although there apparently was some informal HCFA policy (never
displayed
in the record here) before and during early FY 1981 which reflected
the
"total payments" approach (an approach criticized by GAO and
others;
see, e.g., States' Ex. 53, pp. 35- 36; States' Ex. 54, pp. 2-3),
the
record establishes that during the course of that fiscal year,
HCFA
specifically announced a change in its approach to adopt the "lesser
of"
method of the States. States' Ex. 17. In a July 1981
memorandum to
HCFA Regional Administrators, HCFA acknowledged the criticism
of its
earlier interpretation, conceding that the States' interpretation
was
"more equitable." Id. While the memorandum stated that the
change
would apply prospectively from the semi-annual review period
beginning
in April 1982, HCFA even proposed adjusting the error
rates
retroactively, using a "deflator" formula. Id.
HCFA's ultimate decision to apply the "total payments" approach for
FY
1981 was only made after the fiscal year was over, in April 1982,
when
HCFA issued a policy memorandum retracting the July 1981 change
in
policy (and thus reverting back to the pre-FY 1981 approach),
stating
that the Office of General Counsel had determined that the change to
a
"lesser of" methodology was not firmly grounded in the law, and
might
"invalidate" the error rate. States' Ex. 22. HCFA also
abandoned the
idea of applying a deflator formula to FY 1981. HCFA did
not, however,
retract the analysis of its July 1981 memorandum that the
"lesser of"
approach was more equitable.
HCFA's uncertainty in its approach to valuing excess resource errors
for
FY 1981 did not end here, however. Congress itself adopted the
"lesser
of" approach in September 1982 on a prospective basis in the Tax
Equity
and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No.
97-248,
section 133(a). After the enactment of TEFRA, HCFA informed two
states
that it was choosing to apply the TEFRA interpretation
retroactively.
In a March 1983 letter to the Governor of Delaware, the
Administrator of
HCFA acknowledged that HCFA's interpretation overstated
excess resource
errors, and assured him that, in view of TEFRA, HCFA would
not hold
Delaware liable for fiscal sanctions under HCFA's
pre-TEFRA
interpretation. States' Ex. 23. Similarly, HCFA
officials also stated
in a December 1982 letter to New Jersey program
officials that "in order
to be consistent HCFA intends to permit the new
method of treating
excess resources to also be applied retroactively."
States' Ex. 24.
HCFA, however, ultimately determined to apply TEFRA only on
a
prospective basis, and continued to maintain its present approach for
FY
1981.
In addition to vacillating considerably as to what its policy would
be
during this period, HCFA tacitly permitted inconsistent treatment of
its
policy among the states. Certain states had state plans during
this
period which permitted a "spend down" of excess resources, which
was
essentially a determination of partial or conditional eligibility
with
the requirement that recipients spend excess resources over a set
period
of time (during which time, the recipients could be eligible
for
Medicaid). Apparently, in 1980 HCFA determined that these
provisions
were contrary to the Act, and that it had incorrectly approved
state
plans with those provisions. State's Ex. 31. Therefore, after
1980,
HCFA required all states with those provisions to change them.
Some
states, however, took several years to effect this change in their
state
plan and retained the spend down provision in their plan for FY
1981.
For those states with this "incorrectly approved" provision remaining
in
their plan during FY 1981, HCFA permitted the error amounts to
be
calculated for recipients with excess resources in accordance with
the
state plan. Thus, these states could basically apply the
States'
present interpretation to calculate excess resource errors, while
other
states could not. This created inconsistency between states,
and
between different time periods for the same states, in the
computation
of excess resource errors. Furthermore, HCFA's apparent
flexibility in
calculating excess resource errors differently in those states
with
special plan provisions undercuts HCFA's position here that it has
no
choice but to apply its more stringent interpretation of the effect
of
the regulation.
In sum, we find that HCFA's view that states are bound to apply the
"total
payments" methodology for FY 1981 is also untenable in light of
HCFA's
vacillation and uncertainty in applying this methodology.
4. Subsequent legislation by Congress in TEFRA buttresses
the
conclusion that HCFA's position was
inconsistent with
Congressional intent and
program purposes.
We find it persuasive that in TEFRA, the only Congressional
pronouncement
regarding the valuation of excess resource errors for
purposes of MQC error
computation, Congress specifically adopted the
States' "lesser of"
methodology. In TEFRA, Congress set new quality
control goals,
including a three percent target error rate, and codified
a system of
prospective disallowances based on the MQC system into the
Act, at section
1903(u). HCFA refused to apply the TEFRA's treatment of
excess resource
cases retroactively, on the apparent basis that it was
precluded from doing
so by TEFRA. HCFA's Brief, p. 79.
However, we have been shown nothing in TEFRA which says HCFA could
not
apply the interpretation retroactively, and, indeed, a
retroactive
application would appear to be fully consistent with
Congressional
intent. TEFRA was the first comprehensive Congressional
enactment
concerning quality control and thus provided the only indication
of
Congressional intent about the valuation of excess resource
errors.
While it is possible that HCFA may have believed that Congress
was
explicitly departing from some intent to sanction a different
excess
resource methodology before FY 1983, the record provides no
indication
of such an intent and, indeed, there would have been no
programmatic
purpose in Congress choosing to treat this earlier period in a
different
manner. 10/ In addition, to compound this uncertainty, HCFA wrote
in
letters to state officials that it would be applying the
TEFRA
interpretation retroactively. In March 1983, the Administrator of
HCFA,
in a letter to the Governor of Delaware, acknowledged that
HCFA's
interpretation overstated excess resource errors, and assured him
that,
in view of TEFRA, HCFA would not hold Delaware liable for
fiscal
sanctions under HCFA's pre-TEFRA interpretation. States' Ex.
23.
Similarly, HCFA officials also stated in a letter to New Jersey
program
officials that "in order to be consistent HCFA intends to permit the
new
method of treating excess resources to also be applied
retroactively."
States' Ex. 24. Although these letters stated that HCFA
would apply the
new interpretation retroactively, HCFA ultimately determined
to apply
the new interpretation retroactively only for the purposes
of
calculating TEFRA disallowances starting in FY 1983.
Thus, we find that retroactive application of the TEFRA methodology,
while
not mandated by TEFRA, would have been more consistent with the
only
statement of Congressional intent concerning treatment of
excess
resources.
Conclusion
On the basis of the foregoing, we conclude that application of
HCFA's
"total payments" methodology to the appellant States under
the
circumstances here was both arbitrary and unreasonable. Accordingly,
we
remand the appeals to HCFA to determine the effect of this decision
on
the nine disallowances before the Board. If any disallowance
remains
after the proceedings on remand, HCFA may issue a revised
determination
which, if contested, may.be brought back to the Board within
thirty days
after the state receives the revised determination. 11/
________________________________
Cecilia
Sparks Ford,
________________________________ Donald
F.
Garrett,
________________________________ Norval
D.
(John) Settle Presiding Board Members
1. These appeals were originally consolidated with
twenty-two
appeals from quality control disallowances imposed by the Family
Support
Administration under the Aid to Families with Dependent Children
(AFDC)
program. The Board dismissed without prejudice the AFDC cases
because
of a two-year Congressional moratorium relating to disallowances
under
the AFDC quality control system. Quality Control
Disallowances--Ruling
on Effect of Legislation, August 11, 1986
(reconsideration denied,
November 1, 1986); see Consolidated Omnibus
Reconciliation Act of 1985
(COBRA), Pub. L. 99-272, section 12301.
2. Although HCFA initially disagreed that this was a
common issue,
the excess resources issue was extensively briefed by both
parties and
discussed at the hearing. HCFA at the hearing withdrew its
objection to
the Board's consideration of this issue at this time, and
acknowledged
that the parties could determine on remand the application to
individual
states of a decision on the excess resources issue.
Transcript (Tr.),
Vol. 2, p. 57.
3. The States argued that the Michel Amendment was
never enacted by
Congress and that the FY 1981 regulations were, thus,
invalid. At an
early stage of this appeal, the Board ruled that it does
not have
jurisdiction to address the issue of the validity of the
regulations,
since we are "bound by all applicable laws and regulations," 45
C.F.R.
16.14. On appeal of this issue to court, the United States
District
Court for the District of Columbia granted the Department's Motion
to
Dismiss on the grounds of lack of ripeness. Alabama v. Bowen, Civ.
Act.
No. 86-0841 (November 26, 1986).
4. At HCFA's closing argument at the conference,
HCFA's counsel
submitted with respect to the excess resources issue:
. . . we don't believe that the Michel
Amendment regulations
allow HCFA to do
this [i.e., value excess resource cases
according to the "lesser of" approach].
If this Board interpreted the
regulations as allowing HCFA to do
this,
then perhaps there would be clearly a different
result
[which] might be warranted.
Tr., Vol. 2, p. 119.
5. We note that 42 C.F.R. 431.802, which specifically
governs the
"disallowance of Federal financial participation for erroneous
State
payments," makes no reference to the valuation of excess resources
and
was not cited by HCFA in support of its position.
6. In its brief, HCFA responded to an argument by the
States that
HCFA was being inconsistent by rejecting the "lesser of"
methodology
with respect to excess resources, yet allowing for a spenddown of
excess
income. HCFA's Brief, pp. 81-88. The Social Security Act
provides, in
section 1902(a)(17), that a state plan shall "provide for
flexibility in
the application of [eligibility] standards with respect to
income by
taking into account...the costs...incurred for medical
care...." On
this basis, regulations specifically provide for the
spenddown of excess
income for those recipients covered by Medicaid under the
category of
the "medically needy." 42 C.F.R. 435.301(a)(1)(ii). HCFA
argued that
this special treatment of excess income was not inconsistent with
its
excess resources policy, because of the special statutory reference
to
income, and apparently argued that this statutory reference to
income
indeed supported the different treatment by HCFA of excess
resources.
See, e.g., HCFA's Brief, pp. 86-88.
While we do not accept per se the States' argument that HCFA's
excess
resources methodology should be rejected on the ground that it
is
inconsistent with the treatment of excess income, we also do not
find
availing HCFA's apparent argument that the provision in
section
1902(a)(17) somehow justifies this disparate treatment. Since
income
constitutes by its nature a continuous stream of money to the
recipient,
excess income would never be "spent down" in the absence of some
special
legal requirement. Excess resources, by contrast, naturally would
be
offset or consumed by accumulated medical or other expenses if
the
recipient had not received Medicaid payments that obviated the need
to
spend the excess resources. This may explain why Congress
felt
obligated to create a special requirement for income, and helps
to
demonstrate for us why excess resources indeed are more
appropriately
treated by a spenddown arrangement.
7. In 1978 and 1981 reports on the MQC system, the
General
Accounting Office (GAO) criticized HCFA's treatment of excess
resource
cases:
These [excess resource] requirements
result in a high incidence
of technical
and temporary ineligibility which is reflected
in
Ohio's error rate--technical because
an eligibility requirement
is often
exceeded only by a nominal amount, and temporary
because
once realized and adjusted by
the recipient (by disposing of
excess
resources), the discrepancy does not result in
the
recipient losing his or her Medicaid
eligibility.
An example of such an error is the $25
monthly personal allowance
for
institutionalized recipients. Recipients can keep
this
amount to purchase personal items
(clothes, notions, cigarettes,
etc.). Frequently, the recipient does not spend this
allowance
and it is accumulated and
maintained by the institution.
Within
13 months, the recipient's
personal allowance can exceed the $300
liquid asset limit for Medicaid causing technical
ineligibility
for further
benefits. Spending the excess amount
restores
Medicaid eligibility.
States' Ex. 54, p. 3 (1978 report); see also States' Ex. 53, pp.
35-36
(1981 report) (affirming this analysis in study of national MQC
system).
8. Also, as the States argued, the Agency's
methodology would
inflate the effect of excess resource errors in the MQC
system through a
multiple counting effect. States' Reply Brief, pp. 67-
71. The States
argued that excess resource errors should only be
counted until the
month in which the individual incurs sufficient medical
expenses under
the program to offset the amount of the excess
resources. The Agency,
on the other hand, would continue counting
excess resource errors in any
month in which the individual retained excess
resources, even though
medical services received by the individual under the
program may have
long since exceeded the amount of the excess
resources. The recently
issued report on the AFDC and Medicaid quality
control systems by the
National Academy of Sciences endorsed the States'
approach here with
respect to this "multiple counting effect," recommending
that "the
excess resource error be assigned only to the first month of
eligibility
(or further until resources are spent down), so that this
multiple
counting is avoided." States' Ex. 106, ch. 7, p. 44.
9. This Board has previously refused to apply an
agency's
interpretation of its regulations where the regulations were
ambiguous
on the specific issue in question, the grantee's own interpretation
of
the regulations was clearly reasonable, and the grantee lacked
actual
notice of any contrary Agency interpretation. Hawaii Dept. of
Social
Services and Housing, DGAB No. 779 (1986).
10. HCFA argued that applying the excess resources
interpretation
retroactively would be comparable to applying retroactively
the three
percent tolerance level mandated in TEFRA instead of the four
percent
level required in the regulations and the Michel Amendment. The
excess
resources provisions, however, addressed an interpretive policy
which,
as we discuss above, had not been previously mandated by statute
or
regulation. The tolerance levels were clearly addressed in both
the
Michel Amendment and the regulations at 42 C.F.R. 431.802.
11. When the parties' counsel informed the Board that
they had no
written comments on this decision in its proposed form, each
suggested
that the Board clarify a concern with regard to the remand.
Both
suggested clarifications were agreed to orally by the other
counsel.
HCFA's and the States' agreed upon clarifications, respectively, are
as
follows:
o HCFA is not precluded from adjusting 1978 base
period data on the
same basis as any
adjustment to FY 1981 data required by
this
decision.
o HCFA will calculate the amount of the excess
resource error as
the "lesser of" the
excess resources or the Medicaid
payment.
If, however, the excess
resource has been offset by Medicaid
payments made to the case in months prior to the QC review
month,
the case will not be treated as
an error case. See note 8,
above.