Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: California Department of Health Services
DATE: February 19, 1993
Docket No. A-92-180
Audit Control No. A-09-86-60225
Decision No. 1391
DECISION
The California Department of Health Services (California) appealed
a
determination by the Health Care Financing Administration (HCFA)
made
pursuant to a remand ordered by the Board in California Dept. of
Health
Services, DAB No. 1240 (1991). That decision involved a
disallowance of
federal financial participation (FFP) claimed by California
under title
XIX of the Social Security Act for expenditures identified by
HCFA as
overpayments to Medicaid providers based on audits performed
by
California. 1/ This appeal concerns HCFA's disallowance of the
federal
share of overpayments totalling $474,124 made to two providers.
The
principal issue raised by this appeal is whether California must
return
to HCFA the federal share of overpayments which were reduced
by
California in settlements with the providers although California did
not
determine that its audit findings were incorrect. California
raised
this issue in the context of a remand; however, it essentially seeks
to
relitigate the holding in DAB No. 1240 and prior Board decisions
that
HCFA is entitled to rely on state audit findings absent a showing by
the
state that the findings were incorrect or otherwise unreliable. For
the
reasons discussed below, we affirm that holding and uphold that part
of
the disallowance which remains in dispute in this appeal.
Background
In the appeal decided by DAB No. 1240, California argued that it
had
reduced some of the overpayment amounts identified in its audits
and
that the $5,081,970 in FFP disallowed by HCFA should therefore
be
reduced by approximately $360,000. In DAB No. 1240, the
Board
determined that the reductions fell into several categories:
o Reductions equal to the difference between
two
statistical measures of the overpayment amount, the
mean
and lower precision levels. The Board reversed
the
disallowance in the amount of these reductions
subject
to verification by HCFA of the precise amount of
the
reductions.
o Reductions agreed to in settlements with
providers
which California entered into to avoid
administrative
hearing and handling costs which might otherwise
be
incurred in connection with a provider appeal.
The
Board upheld the disallowance of the
original
overpayment amounts because the reductions did
not
reflect a determination by California that its
audit
findings were incorrect. 2/
o Reductions agreed to in settlements with
providers
which California entered into based on its
assessment
that the provider was likely to prevail on
appeal. The
Board upheld the disallowance of the
original
overpayment amounts because this assessment
was
unsupported and the reductions did not reflect
a
determination by California that its audit findings
were
incorrect.
o Reductions agreed to in settlements with
providers
which California allegedly entered into based
on
additional evidence furnished by the provider,
a
reevaluation of the facts and applicable law, or a
court
or administrative decision. The Board upheld
the
disallowance of the original overpayment amounts
subject
to reduction by HCFA if California
subsequently
documented that it had in fact reduced the
overpayments
on these grounds.
Following its review of additional documentation provided by
California
pursuant to DAB No. 1240, HCFA issued a determination
accepting
reduction of the overpayment amounts at issue by $241,475 ($87,960
FFP).
HCFA also reinstated the disallowance of the difference between the
mean
and lower precision levels of the overpayments to six of eight
providers
on the grounds that the records in support of California's
calculations
of the lower precision level were incomplete and that California
failed
to explain its methodology. In addition, HCFA declined to reduce
all or
part of the disallowance of overpayments to seven of nine providers
on
the ground that the documentation provided by California on remand
did
not support these reductions. Letter from McDonough to Coy
dated
5/22/92. 3/
During the Board proceedings on this appeal, the parties entered into
a
stipulation which left as the only matters in dispute before the
Board
whether the overpayment amounts for ICN Pharmaceuticals, Inc. (ICN)
4/
and Semca Pharmacy (Semca) were properly reduced. Letter from
Cornforth
to Ford dated 11/25/92, enclosing Stipulation of the Parties.
Below, we
describe for each of these providers why California said it reduced
the
overpayment amount, the basis on which the Board upheld the
disallowance
of the original overpayment amount in DAB No. 1240, and the
additional
documentation subsequently provided by California to justify
its
reduction of the overpayment amount. We note that California
initially
maintained that its supporting documentation for these providers
was
confidential but subsequently provided for the record the
documentation
discussed here after having determined that disclosure of
this
documentation would not harm its future audit efforts. See
California's
response to Board questions dated 10/13/92, at 10.
ICN
California reduced to zero a $345,806 overpayment to ICN which had
been
identified by its auditors. In a letter to HCFA, counsel for
California
stated that the reduction was based on the following factors:
1. The basis of the audit findings was a determination by
state
auditors that the provider had billed the program and
received
reimbursement for drugs provided, but not prescribed by
a
licensed physician. There was a factual dispute
concerning
whether the drugs billed had been prescribed by a physician,
as
well as many other complicated legal and factual issues.
2. Because of the complicated nature of the case, there was
a
good deal of uncertainty concerning whether the Department
would
prevail as to the provider's appeal, and the costs to
the
federal government and the State for litigating the case
were
estimated as very substantial.
3. The provider had filed a separate lawsuit against
the
Department for $775,200 for money withheld and allegedly owed
on
claims (not included in the audit) for drug screen
testing
performed March 1979 through January 1980. The provider
may
have been able to establish entitlement to federally
funded
Medi-Cal reimbursement in an amount in excess of the amount
at
issue in the audit. The Department's reduction of the
audit
amount to zero was conditioned on the provider dropping
its
lawsuit with prejudice.
Letter from Cornforth to McGinity dated 1/5/89, at 2 (emphasis
in
original).
In DAB No. 1240, the Board upheld the disallowance of the federal share
of
the original overpayment amount, finding that California's reduction
of this
amount was made to avoid the administrative cost of a provider
appeal, as
well as because California determined that the provider was
likely to win
such an appeal.
Although DAB No. 1240 thus upheld the disallowance of the federal share
of
the original overpayment amount for ICN, California subsequently
submitted to
HCFA, as a basis for reconsideration of the disallowance,
copies of the
following: (1) ICN's second amended complaint for
$775,200; (2) a
letter from ICN's attorney to the administrative law
judge for ICN's audit
appeal regarding, among other things, which party
had the burden of proving
that the services rendered by ICN were
authorized by a licensed physician;
(3) a letter from California to the
provider offering to rescind its
overpayment demand if ICN dismissed its
complaint; and (4) a settlement
agreement in which California agreed to
dismiss with prejudice any actions
against ICN for overpayments and to
pay ICN $124,000 in exchange for ICN's
requesting dismissal of its
complaint with prejudice. California's response
to Board questions,
dated 10/13/92, Exhibit (Ex.) B.
HCFA reviewed these documents, but stated that they "did not address
the
DHS audit finding that medical services were provided without an
order
from a licensed practitioner." HCFA concluded that there was thus
no
support for reducing the disallowance. Letter from McDonough to
Coye
dated 5/22/92, at 2.
Semca
California reduced to $95,000 a $128,318 overpayment to Semca which
had
been identified by its auditors. 5/ In a letter to HCFA, counsel
for
California stated that the reduction was based on the following
factors:
1.) Of the total demanded, 22 percent ($28,000) is for
"No
Record of Prescriptions". The prescribers could submit
other
documentary evidence at the appeal level in the form of a
letter
or other medical records. 2.) Of the total demanded, 28
percent
($36,000) is for Code I restrictions not met. The
prescribers
also could submit other documentary evidence for this issue
at
the hearing. 3.) Of the total demanded, 26 percent ($33,000)
is
for excessive services. The prescriber also could submit
other
documentary evidence for this issue. 4.) Based on the
above
factors, the uncertainties of litigation, and the large
state
cost for resolving an appeal in a case such as this,
acceptance
of the $95,000 offered in settlement was determined
reasonable
and the most cost-effective means of resolving this
case.
Letter from Cornforth to McGinity dated 12/13/88, at 3.
In DAB No. 1240, the Board upheld the disallowance of the federal share
of
the original overpayment amount, finding that California's reduction
of this
amount was made to avoid the administrative costs of a provider
appeal, as
well as because California determined that the provider was
likely to win
such an appeal. Although California stated in this case
that the
provider was likely to win because documentary evidence could
be submitted by
the provider, leading to a reversal of the audit
findings, the Board found
that this appeared "to be pure speculation,
since there is no indication that
documentation was in fact available."
DAB No. 1240, at 11.
Although DAB No. 1240 thus upheld the disallowance of the
original
overpayment amount for Semca, California asked HCFA to reconsider
the
disallowance based on a newly submitted Department of Health
Services
memorandum, dated 2/10/86, 6/ which recommended that the
settlement
offer made by Semca be accepted. The reasons given in the
memorandum
are essentially the same as those stated in California
counsel's
12/13/88 letter quoted above. The memorandum concludes that
"[w]hile I
believe our case is strong and the original documentary evidence
in our
favor, Administrative Law Judges have been quick to accept
additional
documentary evidence from providers and overturn the States
exceptions."
California's response to Board questions, dated 10/13/92, Ex.
D.
HCFA reviewed this memorandum, but concluded that it "did not support
the
change in the DHS audit position" and that the disallowance should
not be
adjusted on this basis. Letter from McDonough to Coye dated
5/22/92, at
3.
Analysis
On appeal, California raised several arguments, none of which we
find
persuasive. These arguments are discussed separately below.
1. HCFA is not raising new grounds for the disallowance.
According to California, the additional documentation which it
submitted
following the issuance of DAB No. 1240 established that the
reduction of
the overpayment amount for each provider was taken on the
ground
originally stated by its counsel. California argued that since
HCFA did
not question the substantive basis for the reduction prior to
this
appeal, HCFA should be required to reduce the disallowance unless it
can
establish that California and not the provider would have won
the
provider appeal and, in the case of ICN, that the overpayment
amount
would not have been offset by any amounts owed to ICN as the result of
a
ruling against California in the related lawsuit.
Contrary to what California argued, however, HCFA did previously
question
the substantive basis on which California reduced the
overpayment amounts for
ICN and Semca, arguing that neither the
avoidance of the administrative costs
of a provider appeal nor the
likelihood of the provider's prevailing on
appeal justified a reduction.
See, e.g., Docket No. A-90-92, Respondent's
Brief dated 10/17/90, at
9-11. The Board specifically addressed these
arguments in concluding
that the disallowance of the original overpayment
amounts should be
sustained. Since HCFA relied on the same grounds in
rejecting the
additional documentation submitted by California after DAB No.
1240 was
issued, nothing further is required to make HCFA's case. In
any event,
the Board has previously held that, where HCFA seeks to
disallow
overpayments on the basis of a state audit, its initial burden of
proof
is met once it has identified the names of the providers which
allegedly
received overpayments, the respective amounts, and the relevant
time
periods. California Dept. of Health Services, DAB No. 734, at
11.
Since HCFA provided this information here, it clearly met this
burden.
In addition, California's argument reflects a misunderstanding of DAB
No.
1240. The Board there held that California should have an
opportunity
to provide additional documentation to HCFA to substantiate
that
reductions of overpayment amounts were made on certain grounds.
However,
these grounds were that California had reversed its audit
findings based on
additional evidence already submitted by the provider
or on a reevaluation of
the facts and applicable law, or that a court
order or administrative
decision required the reductions. The Board's
holding that California
would be entitled to reversal of the
disallowance amounts if California
documented that the reductions were
in fact taken on these grounds is
inapplicable here.
2. HCFA is entitled to rely on the overpayment amounts identified
by
California's auditors absent evidence that the expenditures in
question
were allowable as a matter of fact or law and the audit findings
thus
incorrect.
California did not dispute that, notwithstanding its reduction of
the
overpayments to ICN and Semca, its audit findings in each case
were
correct. However, California maintained that DAB No. 1240 did not
hold
that reductions of overpayments identified in a state audit
were
justified only if the state determined that its audit findings
were
incorrect. California argued that "[s]uch a standard would
be
impossible to meet in all but a few cases," and suggested that the
Board
intended a looser standard when it stated in DAB No. 1240 that a
state
must have determined that its audit findings were either incorrect
or
"unreliable in some other respect." DAB No. 1240 at 10.
California
contended that, while the audit findings for ICN had no
"specific
weaknesses," the findings were unreliable since they would not
clearly
lead to a decision in California's favor in a provider appeal due to
the
factual and legal complexity of the case. California's submission
dated
12/17/92, at 3. California also contended that it had a
"substantial
basis" for believing that, if Semca appealed the audit findings,
it
would submit missing documentation based on which the original
audit
findings "were likely to be overturned . . . on appeal" by at least
the
amount of California's reduction of the overpayment. Id. at
5;
California's submission dated 1/21/93, at 2. California contended
that
the audit findings with respect to Semca were thus unreliable as
well.
California misconstrues the standard applied in DAB No. 1240.
That
standard is grounded in the well-established rule that a grantee has
the
burden of documenting the allowability of costs for which it
claims
federal funding. This burden is heavier where, as here, there is
a
state audit finding of unallowable costs which is based on a
correctly
performed audit, since such a finding gives rise to a presumption
that
the state's claims are unallowable. Thus, in order to meet its
burden
of documentation in this situation, a state must show that its
audit
findings were incorrect. In DAB No. 1278, the Board indicated
that
California could make this showing if it established that it reduced
the
overpayments based on additional documentation furnished by the
provider
in support of its claim, on a reevaluation of the facts and
applicable
law, or on a court or an administrative decision requiring payment
of
the costs. California did not contend that it reduced the
overpayments
to Semca and ICN on any of these grounds, however.
Contrary to California's contention, moreover, the reference in DAB
No.
1240 to a determination that the audit findings were "unreliable in
some
other respect" does not change the standard described above.
Instead,
it refers to a situation where the audit findings are questionable
for
reasons not directly pertaining to the costs identified as
unallowable,
such as the use of an inappropriate statistical measure of
the
overpayment (one of the matters previously in dispute in this case),
the
use of an audit which was not performed in accordance with
generally
accepted accounting principles, or the use of an audit which does
not
cover expenditures actually claimed for FFP. To characterize the
audit
findings here as "unreliable" in the sense argued by California
would
permit California to overcome the presumption that its audits
correctly
identified unallowable costs simply because a colorable issue could
be
raised by the provider in its appeal. 7/ This was clearly not what
was
intended in DAB No. 1240.
According to California, however, application of the "incorrect
audit
finding" standard would place a state in an untenable position
by
requiring a state to show that there is no chance that it would
prevail
in a provider appeal. California maintained that this
ignored
"practical realities":
Even though hired by the State, ALJs are
very
independent and exercise their own interpretation of
the
facts and law. Therefore, there is always the risk
of
the ALJ ruling against the state on part or all of
the
State's audit findings. The State has the burden
of
proof as to its audit findings. It often settles a
case
not so much because its audit findings are
"incorrect,"
but because opposing counsel has made arguments
related
to the law and facts and it is determined that
an
independent ALJ would probably agree.
* * *
The standard . . . also heavily penalizes states
with
aggressive audit practices. . . . Many states
will
adopt extremely conservative audit policies in
which
audit exceptions are only taken for issues in
which
there is no possible dispute. Other states will,
at
great cost to the state and federal government,
continue
to pursue audit findings through the
entire
administrative appeal process even after a
determination
is made that the chance of success is very
small.
California's submission dated 12/17/92, at 1-2.
The Board recognized in DAB No. 1240, as well as in prior decisions,
that
California may have legitimate policy concerns; however, the Board
has
consistently declined to consider these concerns on the ground that
they are
"beyond the scope of the Board's review." See DAB No. 1240 at
8-9 and
decisions cited therein. The reason for the Board's position
is
clear. Section 1903(a) authorizes FFP in amounts "expended . . .
as
medical assistance under the State plan . . . ." In determining
that
California had made overpayments to providers, California's auditors
in
effect determined that California had paid the providers for
services
which did qualify as medical assistance. Accordingly, unless
the audit
findings were incorrect because there is a factual or legal basis
for
determining that the overpayment amounts represented
allowable
expenditures, there is simply no basis for California's claim for
the
federal share of the overpayment amounts, regardless of any
hardship
California suffers as a result of the denial of this claim.
3. The existence of a separate claim by the provider is not a basis
for
reducing the overpayment where California did not establish that
the
provider was likely to prevail.
California also argued that the reduction of the overpayment to ICN
was
justified because ICN agreed to dismiss its lawsuit against
California
for unpaid claims in excess of the amount of the
overpayment. The Board
did not specifically address this argument in
DAB No. 1240; however, as
noted above, the Board found that the reduction of
an overpayment was
not justified based on California's unsupported assessment
that the
provider was likely to win an appeal of the audit
findings.
Accordingly, it would also be inappropriate to reduce an
overpayment
based on an unfounded expectation that the provider will prevail
in an
entirely separate claim against the state. Here, California's
counsel
stated that the "provider may have been able to establish entitlement
to
. . . reimbursement in an amount in excess of the amount at issue in
the
audit." Letter from Cornforth to McGinity dated 1/5/89, at 2
(emphasis
added). There is nothing in either this letter or the
material
submitted by California on remand which supports this
assertion.
Indeed, since it appears that the lawsuit involved the same type
of
claims as those identified by California's auditors as overpayments,
any
expectation by California that the provider would win the lawsuit
was
inconsistent with its belief that the original audit findings
were
correct. Accordingly, California's reduction based on the
dismissal of
ICN's lawsuit was not justified here.
California maintained, however, that the Board held in New Jersey Dept.
of
Human Services, DAB No. 683 (1985), that a separate claim by a
provider for
reimbursement is a valid basis for reducing the amount of
an overpayment by a
state to the same provider. In fact, that decision
did not reach that
issue; instead, the Board found that New Jersey
properly reduced the
overpayment amount to one of the providers in
question because New Jersey had
substantially revised its original audit
determination and there was no
showing that the settlement amount was
insufficient to cover the remaining
overpayment. Thus, the Board merely
noted but did not address New
Jersey's contention that the settlement
offer "was more than adequate to
cover any overpayments . . .
particularly since [the provider] had raised
valid claims for additional
payments covering the same period." DAB No.
683 at 12. In any event,
in the case before us, ICN did not establish
that it was entitled to
payments which could have been substituted for the
unallowable
overpayments. .Conclusion
For the foregoing reasons, we uphold the disallowance of FFP claimed
for
overpayments to ICN Pharmaceuticals, Inc. and Semca Pharmacy.
_____________________________ Judith
A.
Ballard
_____________________________ Norval
D.
(John) Settle
_____________________________ Cecilia
Sparks
Ford Presiding Board
Member
1. DAB No. 1240 in turn involved a remand from California
Department of
Health Services, DAB No. 977 (1988), in which the Board upheld
the
original disallowance based on these audits "subject to HCFA's review
of
California's documentation of settled, reversed or collected
amounts."
DAB No. 977 at 12.
2. The Board also noted that the potential costs which
California
sought to avoid constituted administrative costs and could not
properly
be considered as offsets to overpayments originally intended for
medical
services and claimed as medical assistance expenditures under
section
1903(a)(1) of the Act.
3. There were only nine different providers in all since some of
the
same providers fell into both of the categories noted above.
4. This provider is also referred to in the record as ICN
Pharmacy,
Inc.
5. Although California stated that the settlement amount was
$95,000,
the federal auditors found that California in fact reduced
the
overpayment only to $101,445. See California's response to
Board
questions, dated 10/13/92, Ex. A, Attachment 2, 2nd page. Thus,
HCFA
identified the amount in dispute as the federal share of
$26,873
($128,318 minus $101,445) rather than $33,318 ($128,318 minus
$95,000).
See HCFA's response to Board questions, dated 10/13/92, at 4.
6. The memorandum was from the Chief, Medical Review Section,
Audits
and Investigations, to the Deputy Director, Audits and
Investigations.
7. Contrary to California's contention, HCFA did not apply a
different
standard when it accepted the overpayment reduction for
another
provider. California pointed out that the additional
documentation
submitted for that provider stated that a particular issue
"could be
lost on appeal." See California's response to Board questions
dated
10/13/92, Ex. C, 2nd page. However, the same document indicated
that
there was some variance of opinion in the medical/laboratory
community
regarding the necessity of the services, that there had been
no
precedent-setting case on this issue, and that the issue had not
been
mentioned in Medi-Cal Bulletins until after the period in
question.
Thus, there was a basis in that case for determining that the
audit
findings were