Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: California Department of Health Services
DATE: June 3, 1991
Audit Control No. A-09-89-00165
Docket No. 90-223
Decision No. 1254
DECISION
The California Department of Health Services (California or
State)
appealed a disallowance by the Health Care Financing
Administration
(HCFA) of $11,183,898 in federal financial participation (FFP)
claimed
under Title XIX (Medicaid) of the Social Security Act (Act) for
the
period October 1, 1981 through September 30, 1985. The disallowance
was
based on an audit of California's records of accounts receivable
and
related records as of September 30, 1988. HCFA found that
California
had failed to refund the federal government its share of
amounts
identified by the State as excess or improper Medicaid payments
to
providers of hospital services.
California appealed the disallowance with regard to: (1)
overpayments
to providers who are now bankrupt; (2) overpayments that the
State is
barred by federal court order from collecting until the completion
of
the providers' administrative appeals; (3) overpayments that have
been
reduced by settlement, recalculation, or administrative appeal;
(4)
overpayments which have already been collected and credited to
HCFA;
and, (5) overpayments that the State is currently collecting on
an
installment basis. California essentially argued that HCFA should
be
precluded from recouping the federal share until the State has
recovered
the overpayment amounts from providers.
We uphold the disallowance. To the extent that
settlements,
recalculations, administrative appeal decisions, and collections
since
the audit were not reflected in the disallowance, HCFA should review
the
State's documentation as provided below and reduce the disallowance
as
appropriate.
General Background
Title XIX of the Act authorizes federal grants to states to aid
in
financing state programs which provide medical assistance and
related
services to needy individuals. 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 for 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 provides that amounts
paid
to a state shall be reduced to the extent of any overpayment which
the
Secretary determines was made to the state for any prior quarter
and
with respect to which adjustment has not already been made.
In numerous cases involving excess or improper payments by states
to
Medicaid providers, this Board has held that, under section
1903(d)(2),
HCFA may require adjustment of the grant award for the federal
share of
firmly established overpayments, even if a state has not yet
recovered
these amounts from the providers. The Board reasoned that
excess or
improper payments are not "medical assistance" within the meaning
of
sections 1903(a)(1) and 1905(a) of the Act. See, e.g.,
California
Department of Health Services, DAB No. 1015 (1989);
California
Department of Health Services, DAB No. 977 (1988); California
Dept. of
Health Services, DAB No. 619 (1985); Massachusetts Dept. of
Public
Welfare, DAB No. 262 (1982).
The Board found no basis for concluding that adjustment of the grant
award
should be limited to the federal share of those improper or excess
payments
which a state has already recouped from a provider. The
Board
considered arguments by states that the term "overpayment" in
section
1903(d)(2) is not clearly defined and is limited in the context of
the
Act by section 1903(d)(3) to include only amounts which the State
has
already recouped. 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.
The Board found that section 1903(d)(3) applies only to those
amounts
which would be allowable as "medical assistance furnished under
the
State plan." This would include recoveries from third parties, such
as
relatives or insurers, of amounts properly paid as medical
assistance.
The Board concluded that the section does not preclude treatment
as
overpayments of amounts unallowable as medical assistance. See,
e.g.,
Arkansas Dept. of Human Services, DAB No. 717 (1986); New York Dept.
of
Social Services, DAB No. 311 (1982).
The Board's prior holdings on overpayments issues have been upheld
in
three decisions by United States Courts of Appeals: Massachusetts
v.
Secretary, 749 F.2d 89 (1st Cir. 1984), cert. denied, 472 U.S.
1017
(1985); Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985); and
Missouri
Department of Social Services v. Bowen, 804 F.2d 1035 (8th Cir.
1986).
Case Background
The disallowance was based on an audit by the HHS Office of
Inspector
General Office of Audit (OIGOA) covering overpayments to providers
of
hospital services under Medicaid (called Medi-Cal in California)
that
had been identified by the California Department of Health Services
Rate
Development Branch. OIGOA determined that California had not
refunded
the federal share ($14,900,183) of $38,889,499 in overpayments for
the
period July 1, 1980 through September 30, 1985. HCFA's Ex. A.
In a
decision letter of October 19, 1990, HCFA disallowed $11,183,898 in
FFP
for the period October 1, 1981 through September 30, 1985. In
its
brief, HCFA reported that the reduction of the amount
disallowed
reflected the subtraction of fifteen months from the period of
the
disallowance. HCFA asserted that OIGOA confirmed that the
methodology
followed by the State auditors in identifying the overpayments
was
consistent with California's Medicaid State plan, and that the
amounts
assessed were adequately documented. HCFA also stated that
the
overpayment amounts were adjusted to reflect collections
received
through December 31, 1989. Agency Brief (Br.), pp. 1-2.
Discussion
I. Overpayments to bankrupt and insolvent providers
As the State acknowledged, the Board has found that HCFA may
require
return of the federal share of excess or improper payments prior to
a
state's recovery of the amounts due from providers, whether a
provider
is solvent or insolvent. Thus, states must account for the
federal
share of excess or improper payments even when the states may
never
recover the money because of provider bankruptcy. See, e.g.,
California
Department of Health Services, DAB No. 977 (1988); California
Department
of Health Services -- Accounts Receivable, DAB No. 334 (1982).
1/ The
Board reasoned that states administer the Medicaid program,
contract
directly with providers, and have the ability to ensure that the
program
contracts only with responsible providers. Also, since only the
state
dealt directly with the providers, it was the party able to
ensure
timely audit and collection of identified overpayment amounts.
Although it recognized this line of cases, California reserved the
right
to challenge the analysis if it chooses to seek judicial
review.
California also asserted that these losses should be shared by
the
federal government, just as it must share in other normal costs of
the
Medicaid program. The Board notes, however, that under this line
of
cases, excess or improper payments are not "medical assistance"
within
the meaning of the Act, and are thus not allowable costs of the
Medicaid
program. We conclude that the fact that some of these
overpayments were
made to now bankrupt providers does not provide a basis for
reversing
the disallowance. Consequently, based on the rationale in DAB
Nos. 977
and 334, which we incorporate here, we uphold this part of
the
disallowance.
II. Overpayment determinations being challenged
by providers and
subject to court order
As discussed above, HCFA may require adjustment of awards to account
for
firmly established overpayments by a state, even if the state has
not
yet recovered the overpayments from providers. The Board has also
held
that the mere fact that providers have challenged the
state
determinations of overpayments through an administrative appeals
process
does not preclude HCFA from adjusting the federal share. DAB
Nos. 334,
977. The Board has previously considered the use of state
overpayment
records as a basis for disallowance, and has held that where a
state
conducts audits as part of its provider reimbursement system,
in
accordance with established standards, HCFA may reasonably rely on
state
overpayment records when the following criteria have been met:
- HCFA provides sufficient detail
to identify the records
from which the disallowed amounts are
derived.
- The State is provided an opportunity to show that:
- adjustments have been made
to the state
findings;
- the records were not reliable for some reason;
- the state has already
recovered the amount
identified in the audit as an overpayment
and has
already adjusted the federal share; and,
- the state never claimed FFP
in the overpayments
in the first place.
DAB Nos. 334, 765, 977.
In DAB No. 977, the Board upheld HCFA's disallowance of overpayments
based
on state records even though California law precluded collection
of disputed
amounts prior to the completion of the administrative review
process. A
key element in that decision was a finding that the State
overpayment
determinations had a high degree of reliability. The Board
observed
that California did not dispute HCFA's findings that the State
audits had
been performed in accordance with governmental auditing
standards, and that
the federal auditors had examined the documentation
underlying the
audit. The Board also noted that the administrative
appeals at issue in
DAB No. 977 had been pending between 2 and 5 �
years, and that the State did
not deny that the appeals were all beyond
the first level of review.
Finally, the Board found that there was no
evidence that a California statute
barring collections of disputed funds
from providers until the completion of
all levels of administrative
review was based on an assessment that the
overpayment determinations
were unreliable, or that the law reflected federal
policy or served a
federal interest. Based on these factors, the Board
concluded that
California's audit findings had a high degree of reliability
and could
be used by HCFA as the basis of a disallowance. The mere
existence of
provider appeals did not render unreliable the State audit
findings upon
which the disallowance was based.
Similarly, California here did not take issue with OIGOA's and
HCFA's
statements that they examined California's determination of
overpayments
to ensure that the overpayments were not reimbursable under
federal
regulations, that the State's methodology was consistent with the
State
Medicaid plan, and that the amounts were adequately supported.
The
State also did not dispute HCFA's assertion that all of
the
administrative appeals and adjustments that were still unresolved at
the
time of the disallowance were from 2 to 6 years old.
California asked that the holding in DAB No. 977 be reversed, and
asserted
that that decision abandoned Board precedent by permitting
recoupment where
state law precluded collection of disputed amounts
prior to the completion of
the administrative review process. We do not
agree. California
misconstrued the Board's discussion in that decision
of its holding in
Pennsylvania Department of Public Welfare, DAB No. 765
(1986), that HCFA
could not rely on state-level records of overpayments
to long-term care
facilities where there were pending administrative
appeals and state law
precluded collection prior to their resolution.
As noted in DAB No. 977, the
Pennsylvania decision was based on a
determination that HCFA failed to give
notice of a 1981 change in its
policies which had permitted states to retain
FFP pending resolution of
administrative appeals. The limited
circumstances which supported the
Board's decision in Pennsylvania, supra,
were not present in
California's earlier appeal, and are not present
here. The alleged
overpayments in this case were to hospitals, while
HCFA's policy
permitting states to retain FFP pending resolution of
administrative
appeals was applicable only to long-term care facilities.
Further, California did not allege the existence of any federal
policy
barring HCFA from recouping overpayments to hospitals on which it
might
have relied. As the Board observed in DAB No. 977, the State has
had
ample notice that it could not retain FFP throughout the appeal
process
for providers of services other than long-term care.
California also observed that, unlike in DAB No. 977 where it
was
prohibited by State law from recovering disputed payments
from
providers, it is here barred by federal court order in the
class-action
case Fountain Valley Community Hospital v. State Department of
Health
Services, No. CV 84-0896 (C.D. Cal. 1989), from collecting any
amount
determined to have been overpaid to a hospital provider until
the
provider has exhausted all administrative appeals. Declaration of
Elena
Ybarra, State Ex. C. It sought to distinguish this appeal from
the
Board's holding in DAB No. 977 on that basis.
In Fountain, the court ordered that California not reduce
interim
reimbursement rates or otherwise adversely affect reimbursement
or
payments to any plaintiff hospital "prior to the conclusion of the
final
settlement of the hospital's cost report affected by such
Medi-Cal
rules, including the completion of all administrative adjustments
and
appeals concerning the final settlement[.]" State Ex. A, Judgment,
p.
3. The court's decision was based on a determination that the State
was
constrained by the language of its regulations from applying
certain
reimbursement limits that were at issue in the suit (identified in
the
court's opinion as the "55% occupancy" limit and the "all-inclusive
rate
per discharge") until the time of final settlement. 2/ The
court's
order contains no finding that California's overpayment
determinations
were defective, and our review of the Fountain Valley order
and judgment
that California submitted reveals nothing which impugns the
reliability
of the State's audit process or overpayment determinations.
California also sought to distinguish this appeal from its appeal in
DAB
No. 977 on the grounds that the Fountain Valley court order was
based
not merely on state law, but on federal Medicaid law and
California's
approved State Medicaid plan. California asserted that the
court order
was based in part on an interpretation of the plan as
prohibiting
collection of provider overpayments until the completion of
all
administrative appeals, and maintained that HCFA should be
precluded
from recouping the federal share of these overpayments since it
approved
the State plan. The State presented a list of ten providers
included in
the federal disallowance, along with the fiscal year for which
an
overpayment determination was made, and stated that it was precluded
by
the court order from collecting any overpayment pending the
completion
of administrative appeals. Declaration of Elena Ybarra,
State Ex. C.
We find this argument unavailing. Even if the court order may be
read
as interpreting the State plan to bar the State's collection
of
overpayment amounts pending application of certain cost limits (the
"55%
occupancy" limit and the "all inclusive rate per discharge"), and
that
these limits may not be applied until final settlement, the State
did
not relate the court's determination to the disallowance at issue
here.
The State simply listed the providers included in the
federal
disallowance for which overpayments had been identified during
the
tentative or final settlement process and which were party to
the
litigation, and the cost years at issue (which ended between October
31,
1981 and June 30, 1985). The State presented no evidence that there
has
not been a final settlement for these providers, or that
the
overpayments at issue here are related only to application of
the
specific limits addressed in the court's opinion. 3/ (We note that
the
term final settlement means the State's "final" determination based
on
an audit of the provider's costs and does not ordinarily refer to
any
appeal or review process that may be available to a provider from
that
"final" determination.)
California did not allege the existence of any specific federal
provision
which precludes HCFA from collecting the federal share of
overpayments to
providers prior to recovery by states. HCFA's ability
to recoup such
overpayments is well-established under the decisions
discussed above.
We note that the amounts in question here were found
to be in excess of what
the providers were entitled to under the State
plan. Since such amounts
are not "medical assistance," this constituted
a determination that FFP in
these amounts was an overpayment subject to
the provisions of section
1903(d)(2). See, e.g., DAB No. 619. We
therefore conclude that
California did not relate the collection policy
reflected in State law as
interpreted by the Fountain Valley court to
any federal policy or federal
interest. Moreover, but for the Fountain
Valley order, State law would
provide for recovery by the State of
overpayment amounts based on the limits
at issue at tentative or final
settlement, irrespective of a provider's
appeal. Cal. Welf. & Inst.
Code sections 14105.15 and 14172.5, HCFA
Br., Exs. D and E.
Consequently, there is no basis here to determine that the
overpayment
amounts at issue are unreliable as a basis for adjustment of the
federal
share.
In conclusion, California did not challenge HCFA's assertion that
the
methodology applied by the State auditors in identifying
the
overpayments was consistent with California's Medicaid State plan
and
that the amounts assessed were adequately documented, and failed
to
relate the Fountain Valley court order to any negative assessment of
the
reliability of the audits, or to any federal policy or interest.
We
therefore conclude that HCFA may reasonably adjust for the federal
share
of overpayments to hospitals even though California is barred
from
recovering overpayments prior to the completion of the
administrative
review process. We do not find this case substantively
distinguishable
from DAB No. 977, and we decline to reverse that holding.
III. Overpayments reduced by settlement, appeal decision,
or
recalculation.
California asserted that some overpayments to providers have been
reduced
by settlement, recalculation, and administrative appeal since
the
disallowance was calculated. The State enclosed with its appeal
file
documentation of overpayment reductions, and contended that a
proposed
overpayment amount that has been reduced by stipulated
settlement or during
the audit appeal process is not an overpayment
under federal law. HCFA
did not dispute that overpayments may have been
reduced, but requested that,
pursuant to DAB No. 1015, the Board affirm
the disallowance subject to HCFA's
adjustment for justifiable,
documented reductions based on settlement,
recalculation, or
administrative appeal decisions. In reply, the State
asked that,
pursuant to DAB No. 1015, this part of the disallowance be
remanded for
HCFA to review the State's documentation and recalculate
the
disallowance if appropriate. California requested an opportunity
to
show why the original audit findings in cases involving reductions
were
unreliable prior to the Board's rendering a decision upholding
the
disallowance. The State asserted that many of its employees who
worked
on cases where overpayments were reduced are no longer available,
and
requested that it be given a minimum of 60 days to provide
necessary
documentation to HCFA.
In DAB No. 1015, the Board remanded that portion of the disallowance
which
California maintained had been affected by settlement agreements.
The Board
upheld the remainder subject to reduction to the extent that
the State could
show that overpayments had been collected and refunded
to HCFA, or that its
overpayment determinations had been reversed on
appeal. For the portion
of the disallowance upheld, the State was given
the option of returning to
the Board if it disagreed with HCFA's
recalculation of the disallowance
amount.
The remand in DAB No. 1015 involved a discrete portion of the
disallowance
being challenged. In this appeal, by contrast, the State
failed to
specify a dollar amount by which overpayment amounts have
allegedly been
reduced. Although the State's appeal file includes a
list of cases "in
which the final overpayment determination has been
made and the outstanding
overpayment is less than the amount relied upon
by HCFA in issuing its
disallowance," (State Ex. C) it appears that this
list includes both
settlements and administrative decisions. It is also
not clear from the
documentation supplied by the State that the
reductions of overpayments
through settlements provide a basis for a
corresponding reduction in this
disallowance.
Given these uncertainties, we see no reason why the disallowance
should
not be sustained subject to HCFA's review of California's
documentation
of settled, reversed, or collected amounts. In making
this
determination, we note that the mere fact that a dispute between a
state
and a provider has settled is not sufficient to call into question
the
state's initial audit determination, based on properly performed
audits,
as to the amount of reimbursement the provider has received in excess
of
what is permitted under state plan and federal requirements, and that
a
state may have reasons for settling a dispute other than a
reevaluation
of the merits of the audit findings. See, e.g., DAB No.
1015. A state
may not simply rely on a settlement agreement which was
entered into
without a determination that its audit findings were
incorrect.
California Department of Health Services, DAB No. 1240 (1991).
Accordingly, California should submit documentation supporting the
claimed
reductions within 60 days of receipt of this decision, or such
longer time as
HCFA may permit. For each reduction, the State should
identify the
provider, amount of the initial overpayment, amount of the
reduction, and the
basis for the reduction. To the extent that
settlements,
recalculations, and administrative appeal decisions since
the audit was
conducted were not reflected in the disallowance, HCFA
should review the
State's documentation and reduce the disallowance as
appropriate. If
the parties are unable to agree on the propriety or
amount of any reduction,
the State may return to the Board for review
within 30 days of receipt of the
Agency's determination after review of
the State's documentation. See,
e.g., DAB No. 977.
IV. Overpayments which have already been collected
and refunded to
HCFA.
California stated that some of the overpayments to providers that
were
disallowed have been collected from providers and the federal
share
refunded to HCFA since the disallowance was calculated. The State
also
asserted that it cannot be ordered to refund amounts already
collected
and refunded to HCFA, which it argued amounts to being charged
twice.
HCFA proposed to take into account collections received after
December
31, 1989 in the final resolution of the audit, and stated
that
California will not be charged twice. Accordingly, we uphold
this
portion of the disallowance subject to adjustment by HCFA upon
its
review of collections received since the disallowance was
calculated.
As above, if the parties are unable to agree on the proper amount
of
such a reduction, the State may return to the Board for review of
this
limited issue. See, e.g., DAB No. 977.
V. Overpayments currently being collected under
an installment
agreement.
California noted that overpayments to one provider are being
recovered
pursuant to an installment agreement with the provider, and argued
that
states should not have to refund overpayments to HCFA until they
are
collected from the provider. As in DAB No. 977, California's
arguments
did not call into question HCFA's authority to recoup the federal
share
of overpayments prior to recovery by states, pursuant to
the
interpretation of the relevant statutory provisions discussed
above.
Accordingly, we conclude that HCFA may require California to
adjust
claims for federal funds to account for excess or improper
payments,
regardless of whether California is recovering funds under
an
installment agreement.
Conclusion
We uphold the disallowance subject to adjustment as appropriate based
on
settlement, reversal, recalculation, and to reflect collections by
the
State that have been refunded to HCFA. We find that HCFA is
not
precluded from recouping the federal share of excess or
improper
Medicaid payments because California has not collected the
overpayments
from providers, where the State's audit processes and
overpayment
determinations have not been shown to be unreliable. This
principle is
not altered by provider bankruptcy or insolvency.
Similarly, we find
that the federal court order preventing California from
collecting
overpayments from providers before completion of the
administrative
appeal process does not impugn the reliability of the
State's
overpayment determinations, and provides no basis for reversing
the
disallowance.
To the extent that settlements, recalculations, administrative
appeal
decisions, and collections since the audit was conducted were
not
reflected in the disallowance amount, California should
submit
documentation supporting the claimed reductions within 60 days
of
receipt of this decision, or such longer time as HCFA may permit.
For
each reduction, the State should identify the provider, amount of
the
initial overpayment, amount of the reduction, and the basis for
the
reduction. To the extent that settlements,
recalculations,
administrative appeal decisions, and collections since the
audit was
conducted were not reflected in the disallowance, HCFA should
review the
State's documentation and reduce the disallowance as
appropriate. If
the parties are unable to agree on the propriety or
amount of any
reduction, the State may return to the .Board for review within
30 days
of receipt of the Agency's determination after review of the
State's
documentation. See, e.g., DAB No. 977.
Judith A. Ballard
Norval D. (John) Settle
Cecilia Sparks Ford Presiding Board Member
1. Congress created an exception to the adjustment requirements
for
overpayments to bankrupt or out of business providers identified
for
quarters beginning on or after October 1, 1985. Consolidated
Omnibus
Budget Reconciliation Act of 1985 (COBRA), Pub. L. No. 99-272,
section
9512(a)(3), adding section 1903(d)(2)(D) of the Act. See 42
C.F.R.
433.318 (1989). The alleged overpayments at issue here were
for
quarters prior to October 1, 1985, so this exception does not apply.
2. The court expanded the notion of final settlement as including
the
completion of all administrative adjustments and appeals.
3. The court does not explain the apparent determination in
its
judgment that final settlement includes the completion of
the
administrative appeals process. California presented no rationale
for
why that portion of the court order should affect
California's
obligation to refund the federal share of the overpayment
amounts at
issue here, especially where it appears that the State's own law
clearly
provided that the State could begin collections of overpayments
to
institutional providers 60 days after issuance of "the first
statement
of accountability or demand for repayment after issuance of the
audit"
report establishing the overpayment. Cal. Welf. & Inst. Code
section
14172.5, HCFA Br., Ex.