Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Michigan Department
of
Social Services
Docket No.
90-108
Audit Control No. A-05-89-05419
Decision No. 1211
DATE: December 3, 1990
DECISION
The Michigan Department of Social Services (State) appealed a
disallowance
by the Health Care Financing Administration (HCFA) of
$37,351.81 1/ in funds
which the State claimed as provider survey and
certification costs under
Title XIX (Medicaid) of the Social Security
Act (Act). The disallowance
resulted from an audit of State activities
for fiscal year (FY) 1984
conducted by the State auditor and approved by
the Office of the Inspector
General (OIG) of the Department of Health
and Human Services. 2/
The audit found that the State had relied on estimates of staff
activities
in allocating the costs of provider surveys and certification
among State and
federal programs, rather than using the actual data on
FY 1984
activities. The State prepared the estimates, using records
from the
preceding year, to project its budget needs for FY 1984. The
auditors
found that the use of estimates rather than actual data
resulted in an
overcharge to the Medicaid program. HCFA disallowed the
alleged
overcharge amount, arguing that use of the actual data was
required.
The State argued on appeal that (1) its use of estimates had
been approved
previously; (2) the actual data was not available until
1987; and (3) it
should receive an additional amount from the Medicare
program if it is
required to reduce its Medicaid charges. State Brief
(Br.) at 2-5.
For the reasons discussed below, we uphold HCFA's disallowance in
full.
Background
The Medicaid program is a cooperative effort between the federal and
state
governments to provide health care for needy persons. States
that
choose to participate must survey hospitals and other facilities
to
determine whether they meet federal requirements to provide
services
under Medicaid. Section 1902(a)(33) of the Act. The same
State agency
that conducts Medicaid surveys also surveys certain facilities
to
ascertain whether they meet conditions required to participate in
the
Medicare program. Section 1864 of the Act. Each of these
programs
provides for federal reimbursement to the State for the costs of
survey
activities to the extent that each benefits. In addition, the
State
itself imposes licensing requirements and uses the same agency
to
perform its own licensure surveys, but no federal reimbursement
is
available for licensure activities that benefit the State. When
the
requirements are the same or similar, particular survey activities
may
benefit more than one program and the costs of such survey
activities
must be equitably allocated. See Wisconsin Dept. of Health
and Social
Services, DAB No. 1121 at 6 (1989)(Wisconsin II), and cases
cited
therein; HCFA Ex. C at C-1.
The State prepared its Medicaid budget estimate for FY 1984
by
extrapolating the likely allocation of survey costs from actual data
for
the first half of 1983. HCFA apparently accepted the budget based
on
this extrapolation. The State later based its claim for
federal
financial participation (FFP) for Medicaid expenditures for
survey
activities in FY 1984 on these budget estimates of
activities
benefitting Medicaid. The State did not compile its records
of actual
experience in FY 1984 to use in calculating its expenditures.
When the
auditors requested such data in 1987, the State was apparently able
to
provide the raw information, even though the data was not
compiled
earlier. The State used actual data to prepare its claim for
FY 1985,
rather than estimates based on FY 1984 data.
Federal Regulations Require Accounting of Actual Expenditures,
Not
Estimates, to Support State Claims for Reimbursement.
The State asked us to approve its use of estimated data in allocating
its
survey costs. However, the State is bound by federal regulations,
which
impose an affirmative obligation on states seeking FFP to account
for their
expenditures. At the time in question, 45 C.F.R.
201.5(a)(3)(1983)
provided that:
The State agency must . . . submit a quarterly statement
of
expenditures . . . . This is an accounting statement of
the
disposition of the Federal funds granted for past periods
and
provides the basis for making the adjustments necessary when
the
State's estimate for any prior quarter was greater or less
than
the amount the State actually expended in that quarter.
See also 42 C.F.R. 431.17(b)(2)(State must maintain
"[s]tatistical,
fiscal, and other records necessary for reporting and
accountability. .
. ."). The quarterly statement of expenditures
differs from the state
agency expenditure projection, used to budget expenses
for upcoming
quarters. 45 C.F.R. 201.5(a)(2). 3/ These budget
projections are meant
to represent "the State agency's estimate of the total
amount and the
Federal share" expected to be expended. Id. The
regulations thus
distinguish between projections which are necessarily
estimates and
reports of expenditures for which proper accounting must be
made.
This conclusion is also supported by Office of Management and
Budget
Circular No. A-87, Cost Principles for State and Local
Governments
(A-87), made applicable by regulation at 45 C.F.R.
74.171(a). See 46
Fed. Reg. 9548 (1981). States receiving federal
funds assume "the
responsibility for seeing that federally-assisted program
funds have
been expended and accounted for consistent with underlying
agreements
and program objectives." A-87, Attachment (Att.) A, A.2.b.
(emphasis
added). The State therefore must support its claim for FFP by
showing
that its expenses reflected actual activity costs benefitting
Medicaid
that materialized and can be documented by actual data, not
simply
projections.
Furthermore, costs are allowable under A-87 only if they are
"necessary
and reasonable for proper and efficient administration" of the
program
involved and "allocable thereto." A-87, Att. A, C.1.a.; see
also
section 1903(a)(7) of the Act. The State can hardly claim a
necessary
expenditure of Medicaid funds when its actual data shows that its
claim
was based on an overestimate. Costs are allocable to a cost
objective
only "to the extent of benefits received." A-87, Att. A,
C.2.a. The
extent to which Medicaid benefitted from survey and
certification
activities is precisely what was overestimated. When the
activities of
a staff may benefit more than one program, A-87 requires
actual
documentation:
Salaries and wages of employees chargeable to more than
one
grant program or other cost objective will be supported
by
appropriate time distribution records. The method used
should
produce an equitable distribution of time and effort.
A-87, Att. B, B.10.b. (emphasis added). Adequate recordkeeping is
thus
required to apportion activity accurately in these situations. The
most
equitable distribution, at a minimum, would reflect the most
accurate
available information, rather than simply budget estimates.
HCFA's State Operations Manual (SOM) gives the states notice of
agency
interpretations and instructions for survey and
certification
operations. The SOM places responsibility squarely on the
State for
adequately documenting actual survey expenditures. Paragraph
470l
(1980) states that:
[t]he State agency must provide, through its accounting
and
statistical records, support for all expenditures incurred
in
connection with survey and certification . . . . [T]he
State's
accounting records and supporting documents must be such as
will
permit verification by Federal fiscal audit and
HCFA
administrative review of all charges . . . .
HCFA Ex. C at C-2. Similarly, in regard to surveys of long-term
care
facilities, the SOM states that the State "must maintain records
to
reflect the costs of these activities. Time records . . . shall be
used
to support the actual charges to either the Medicaid or
Medicare
program." Id., Paragraph 4542.3(1980); HCFA Ex. C at C-1.
The State was therefore required to base its claim for expenditures
on
actual data with proper supporting documentation. The State has
not
provided documentation to show that its claim accurately reflected
its
expenses for Medicaid or that the audit was in error in finding
an
overcharge based on the actual records. Instead, the State asked us
to
overlook the actual data by arguing that HCFA accepted its
estimates
before and that it did not have the actual data at the time it
submitted
its claim. We turn now to these State positions and conclude
that
neither has merit.
HCFA has not approved this use of estimated activity data.
The State apparently based its argument that HCFA had accepted its use
of
estimates on the assertion that the State previously had used the
same
methods of developing budget projections from preceding year data
and that
HCFA had approved the FY 1984 budget containing the activity
estimates.
State Br. at 2-3. No evidence was offered, however, of HCFA
approval or
authorization in the sense of any documented prior consent.
Cf. A-87, Att. A,
B.1. Nor does the State provide any other proof of
HCFA approval beyond
the unsubstantiated assertion that the State's "use
of estimated or budgeted
activity was merely a continuation of a
methodology that had been recognized
and approved" by HCFA. State Br.
at 3.
HCFA's acceptance of estimates in a budget, for this or prior years,
does
not presume acceptance of the same allocation for actual
expenditures.
No evidence was presented here that such estimates were
accepted in prior
claims for expenditures, as opposed to budget
projections. In its
brief, HCFA insisted that while "it is possible
that HCFA accepted the use of
[estimated activity] data for budgeting
purposes, HCFA never accepted the use
of this data for billing
purposes." HCFA Br. at 5. The State
declined to reply to HCFA's brief,
so this statement is uncontradicted.
In any case, even if evidence had shown that earlier claims based
on
estimated activity data went unchallenged, HCFA would not be
foreclosed
from insisting that FY 1984 expenditures reflect documentation of
actual
data. The State's position amounts to an attempt to estop the
federal
government from enforcing a requirement because it allegedly failed
to
enforce it on some prior occasion. The State did not even allege
any
definite misrepresentation by any HCFA employee on which it relied
to
its detriment, which would be the minimum standard to estop a
private
party. The State also ignored the issue of whether estoppel
could ever
lie against the federal government, especially absent any
affirmative
misconduct by any HCFA official. See discussion in Butler
County
Children's Center, Inc., DAB No. 1106 at 7-8 (1989). 4/ We thus
reject
the State's reliance on its bald assertion, strongly disputed by
HCFA,
that HCFA approved its methodology for these purposes in the past.
The records necessary to calculate actual activity distribution
were
available.
As we have discussed above, the State had the responsibility of
creating
and maintaining records adequate to document the actual distribution
of
activity among the federal and state programs. Therefore, the
State's
argument that it lacked the necessary data at the time its claim
was
prepared would fail in any event. But beyond that, ample
evidence
suggests that the records did exist and were available to the State,
had
it chosen to use them.
The audit report found that the "actual certification staff hours data
was
available." HCFA Ex. B at B-5. The State had not compiled the
data
but provided it in 1987 for the audit. Id. The State offered
only the
conclusory statement that use of actual data was not "feasible"
before
the audit, because it "was not available until 1987. It was
not
compiled before March, 1987." State Br. at 3. HCFA argued
that the
data must have been compiled from records created during FY 1984,
and
therefore was in existence earlier, even if not yet compiled into
final
form. HCFA Br. at 5. The State offered no reason why the
same
compilation done in 1987 could not have been done earlier and used
in
preparing its claim for FFP.
The State's practice in the preceding and succeeding years bolsters
the
assumption that the data could have been accessed in a timely
fashion.
The FY 1983 data, for at least six months of the year, was compiled
in
time to prepare the projections for FY 1984. State br. at 2-3.
The
State also used actual data from FY 1985 to prepare its claim for
that
year and offered no evidence of any change in its practices to
explain
why it could not have done the same the year before.
Disallowance
Letter at 2. If records were kept in both FY 1983 and FY
1985 that
permitted prompt calculation of actual activity data, and records
were
preserved for FY 1984 that sufficed to make such calculations during
the
audit, such records were very likely available in FY 1984.
The State's reliance on our prior Michigan decision is misplaced.
In its notice of appeal, the State referred to a Board decision
addressing
the methodology used by the State to allocate survey costs
between Medicare
and Medicaid during FYs 1977-1982, Michigan Dept. of
Social Services, DAB No.
872 (1987). Although the allocation of survey
costs was involved in
both disallowances, the focus of the earlier case
differs completely from the
present dispute.
In Michigan, the State had used a system called
participative
responsibility distribution (PRD) to allocate survey
costs. The PRD
system involved grouping payroll hours by facility type,
sorting
facilities by program(s) for which they were surveyed, and
applying
percentages contained in a 1972 agreement with HCFA to arrive
at
estimated time requirements for particular types of facilities
and
surveys. However, the State erroneously omitted from these
calculations
facilities which were surveyed only for State licensing
purposes,
resulting in overstating the percentage of survey time devoted to
the
federal program needs. The State did not contest the error and
revised
the PRD system to correct it beginning in FY 1984. The dispute
arose
over HCFA's attempt to divide the federal share of the costs
between
Medicaid and Medicare differently among various types of facilities
for
the prior years using a hybrid of the original and corrected
PRD
systems. The Board found HCFA's method inconsistent and lacking
in
logic and therefore overturned the disallowance.
None of this justifies the State's reliance on estimates for the hours
of
survey activity when the actual data appears to have been
readily
available. The State conceded that "the issue is not exactly
the same."
Notice of Appeal. More analogous issues have come before the
Board in
other cases. In Indiana Dept. of Public Welfare, DAB No.
958
(1988)(Indiana), state survey activities also had to be allocated
among
the state, Medicaid, and Medicare. An audit revealed that
employees had
been instructed to distribute their hours among the programs
based on a
predetermined percentage rather than their actual
experience. The Board
said that HCFA properly went beyond the coding
records to make its own
calculations to allocate survey activities, where the
records could not
be taken "as being a true record of time spent on the
various programs."
Id. at 7. In the present case, the State did not
even rely on
contemporaneous records, however flawed, but merely put forward
budget
estimates as the basis for allocating costs. See also,
Wisconsin
II(time records kept based on instructions from superiors rather
than
actual experience unacceptable); Wisconsin Dept. of Health and
Social
Services, DAB No. 534 (1984)(Wisconsin I)(allocations based on
estimates
of time by surveyors' supervisors unacceptable).
We have dealt with similar issues in other federal programs, governed
by
the same accounting principles. We rejected the use of "budgeted
cost
estimates instead of actual expenditures" in a case involving
allocation
of administrative costs between Titles IV-A and XX of the
Act.
Pennsylvania Dept. of Public Welfare, DAB No. 451 (1983). In so
doing,
we based our analysis on 45 C.F.R. 201.5, which also applies
here. As
discussed above, the regulation provides that the quarterly
statement of
expenditures is intended to serve as basis for adjusting any
advance
previously made on the basis of an estimate which proved too high or
too
low. We concluded that "a state is clearly entitled to be
reimbursed
only for its actual, as opposed to estimated, expenditures."
Id. In
New York State Dept. of Social Services, DAB No. 520 at 17-18
(1984), we
applied the same rule even when the total costs were correct, if
the
share to be assigned to the federal program involved (Title XX of
the
Act) was estimated. The use of estimates of activity distribution
from
which expenditure allocations are derived is thus no more
acceptable
than estimating total costs.
The State's claim of underpayment by Medicare is not properly before
us.
The State argued alternatively that, if the Medicaid disallowance
is
upheld on the basis of an overcharge, then Medicare was
undercharged.
Thus, the State sought to recover the net increase in
FFP. This
argument fails because (1) no legal authority permits the
requested
relief, and (2) no claim for additional Medicare funds is
properly
before us.
The audit report concluded that the actual data "showed no impact
on"
Medicare billings because the State could not recover funds beyond a
cap
limiting Medicare payment to the State. HCFA Ex. B at B-6.
The State
characterized this finding as misleading and calculated that
Medicare
was undercharged $60,924. The State then asserted that it is
entitled
to additional net FFP of $23,524 and asked that "the
Regional
Administrator be required to recognize" its claim to additional
Medicare
funds. State Br. at 5.
The State did not provide and we have not identified any legal
authority
permitting a purported Medicare claim to be used to reduce a
proper
Medicaid disallowance. We conclude that we have no basis to
grant such
relief. Our jurisdiction is limited to disputes specified by
regulation
at 45 C.F.R. Part 16 and does not extend to a claim of this kind
under
Medicare. See also, Indiana at 12, n.5.
Even if this matter were within our jurisdiction, it would not be
properly
before us as no final decision on it is in the record. If the
State
disputes the auditors' conclusions concerning Medicare, it should
follow
normal procedures for claiming Medicare funding and then appeal
any adverse
decision through the channels provided for such disputes.
See Wisconsin II at
1, n.2. All that is properly before us now is a
final decision
disallowing FFP under Medicaid and that is the only issue
which we can
address. .Conclusion
Based on the above analysis, we uphold the disallowance in full.
Norval D. (John) Settle
Alexander G. Teitz
Judith A. Ballard Presiding Board Member
1. The disallowance letter gave the amount as $37,400, but, in
its
brief, HCFA stated that the precise amount at issue is $37,351.81.
The
State did not dispute this.
2. The Michigan Auditor General prepared the original audit
report for
FY 1984 and 1985 that included the relevant finding. The
finding was
reviewed and approved by OIG in Audit Report No. A-05-89-05412
(October
11, 1989). The finding was repeated in OIG's Audit Report
No.
A-05-89-05419 (October 11, 1989) covering subsequent years, on the
basis
that billings for FY 1984 still had not been revised to reflect
the
overcharge. The disallowance was based on the latter audit
report. See
HCFA Br. at 3, Exhibits (Exs.) A and B; Disallowance
Letter. We use
"audit" interchangeably to refer to these three audit
reports reflecting
the overcharge finding.
3. During the relevant time period, these regulations were
made
applicable to the Medicaid program by 42 C.F.R. 430.0(b)(3)(1983).
In
1988, these provisions were adopted directly into the
Medicaid
regulations at 42 C.F.R. 430.30(c). The language was altered
to make
the distinction even more clear by specifying that an expenditure
report
"is the State's accounting of actual recorded expenditures.
The
disposition of Federal funds may not be reported on the basis
of
estimates." Changes in the language were expressly stated not to
be
substantive in nature and to be intended only to simplify and
clarify.
53 Fed. Reg. 36569, 36570 (1988). Both the current and
the
then-applicable version of these regulations plainly require
actual
expenditures to be documented, not estimated.
4. In the recent case of Office of Personnel Management v.
Richmond,
110 S. Ct. 2456 (1990), the Court deplored the fact that its dicta
on
affirmative misconduct had "spawned numerous claims for
equitable
estoppel in the lower courts." The Court them indicated that
it "would
leave for another day whether an estoppel claim could ever
succeed
against the Government." Id., pp.