Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: New Jersey Department of Human Services
DATE: February 7, 1996
Docket Nos. A-90-181, A-90-182,
A-90-189, A-90-234, A-92-40,
A-93-42, A-94-124, A-95-109
Decision No. 1560
DECISION
The State of New Jersey Department of Human Services (New
Jersey) appealed determinations by the Health Care
Financing Administration (HCFA) disallowing $6,875,468 in
federal financial participation (FFP) claimed under title
XIX (Medicaid) of the Social Security Act (Act). 1/ HCFA
determined that New Jersey had failed to adjust for the
federal share of discovered provider overpayments as
required by section 1903(d)(2)(C) of the Act and 42
C.F.R. 433.316. States have 60 days from the date an
overpayment is "discovered" to attempt to recover that
overpayment before the federal share of the outstanding
overpayment amount must be credited to HCFA. In this
case, the issue presented is whether an overpayment is
discovered and subject to adjustment at the point New
Jersey issues to a provider a preliminary demand notice
which specifies an overpayment amount determined by a
rate recalculation based on an audit report.
New Jersey outlined the complex procedural history of
these consolidated cases in its Brief. New Jersey Br. at
1-4. Generally, these cases were involved in a lengthy,
but ultimately unsuccessful, mediation proceeding and
were returned to the Board's docket as active cases in
1994. In most of the cases, the original disallowed
amount was reduced by HCFA. These cases present a
threshold issue concerning when during New Jersey's
provider audit process New Jersey "discovers" overpayment
amounts so that New Jersey must refund the federal share
of the overpayment. The parties agreed that the Board
would first resolve this threshold issue. 2/ Thereafter,
HCFA will review documentation for any provider for which
New Jersey alleges the overpayment amount stated in the
record here has been reduced or is subject to the
exception at section 1903(d)(2)(D) for bankrupt or out of
business providers.
In New York State Department of Social Services, DAB No.
1536 (1995), the Board examined the question of whether
overpayments are discovered under section 1903(d)(2)(C)
at the draft audit stage. There, the Board determined
that in non-fraud and abuse cases, issuance of a draft
audit report constituted written notice from a state
official of a specified overpayment amount subject to
recovery. Accordingly, the Board concluded that in New
York, overpayments are "discovered" at the draft audit
report stage and must be refunded to HCFA within 60 days
of the issuance of the report. Since it appeared that
the result in DAB No. 1536 was dispositive of the
threshold issue in these cases, the Board provided the
parties with the opportunity to present arguments
concerning factors which might distinguish New Jersey's
provider auditing process from the process described and
considered in DAB No. 1536.
As explained more fully below, we conclude that the
provider audit process in New Jersey cannot be
distinguished from the process in New York for purposes
of determining the point at which provider overpayments
are discovered. As in New York, at the initial audit
stage in New Jersey, a state official informs the
provider of a dollar amount that has been overpaid and is
therefore subject to recovery by the state. These
initial audit amounts become final without further
proceedings in some circumstances. Further, New Jersey
may also begin to collect the overpayment by withholding
payments from the provider upon issuance of the initial
report. Accordingly, we conclude that the Act and
applicable regulations require that New Jersey adjust for
the federal share of overpayment amounts 60 days after it
first notifies a provider of an overpayment.
Below we explain the statutory and regulatory background,
describe New Jersey's provider audit process, summarize
our decision in DAB No. 1536, and explain why New
Jersey's audit process cannot be distinguished.
Statutory and Regulatory Background
Title XIX of the Act authorizes federal grants-in-aid to
states to help finance state Medicaid programs. A state
that wishes to participate in the Medicaid program must
develop and submit a plan that meets specific
requirements set forth in the Act or by the Secretary,
Department of Health and Human Services (HHS).
The Medicaid program provides for FFP in medical
assistance expenditures made in accordance with an
approved state plan. Section 1903(a)(1) of the Act
requires the Secretary of HHS to pay participating
states--
an amount equal to the Federal medical assistance
percentage . . . of the total amount expended . . .
as medical assistance under the State plan . . . .
Section 1903(d)(2)(A) authorizes the Secretary to make
quarterly advances and to adjust the federal share of
estimated Medicaid expenditures in amounts--
reduced or increased to the extent of any
overpayment or underpayment which the Secretary
determines was made under this section to such State
for any prior quarter and with respect to which
adjustment has not already been made under this
subsection.
In 1986, section 9512 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA), Public Law No. 99-
202, amended section 1903(d)(2)(C), as follows:
For purposes of this subsection, when an overpayment
is discovered, which was made by a State to a person
or other entity, the State shall have a period of 60
days in which to recover such overpayments before
adjustment is made in the Federal payment to such
State on account of such overpayment. Except as
otherwise provided in subparagraph (D), the
adjustment in the Federal payment shall be made at
the end of the sixty days, whether or not recovery
was made . . . .
Section 1903(d)(2)(D), referenced in the section above,
was amended, as follows:
In any case where the State is unable to recover a
debt which represents an overpayment (or any part
thereof) made to a person or other entity on account
of such debt having been discharged in bankruptcy or
otherwise being uncollectible, no adjustment shall
be made in the Federal payment to such State on
account of such overpayment (or portion thereof).
Effective April 4, 1989, HCFA promulgated regulations at
42 C.F.R. Part 433, Subpart F, to implement the COBRA
provision. The basic requirements for refunds of
overpayments are set forth in 42 C.F.R. 433.312, as
follows:
(a) Basic rules. (1) Except as provided in
paragraph (b) of this section, the Medicaid agency
has 60 days from the date of discovery of an
overpayment to a provider to recover or seek to
recover the overpayment before the federal share
must be refunded to HCFA.
(2) The agency must refund the federal share of
overpayments at the end of the 60 day period
following discovery in accordance with the
requirements of this subpart, whether or not the
State has recovered the overpayment from the
provider.
"Discovery" is defined in 42 C.F.R. 433.304 as --
Identification by any State Medicaid agency official
or other State official, the federal government, or
the provider of an overpayment, and the
communication of that overpayment finding or the
initiation of a formal recoupment action without
notice as described in 433.316.
42 C.F.R. 433.316 sets forth the rules of discovery for
all types of overpayments, as follows:
(a) General rule. The date on which an overpayment
is discovered is the beginning date of the 60 day
calendar period allowed a State to recover or seek
to recover an overpayment before a refund of the federal share of an overpayment
must be made to
HCFA.
(b) Requirements for notification. Unless a State
official or fiscal agent of the State chooses to
initiate a formal recoupment action against a
provider without first giving written notification
of its intent, a State Medicaid agency official or
other official must notify the provider in writing
of any overpayment it discovers in accordance with
State agency policy and procedures and must take
reasonable actions to attempt to recover the
overpayment in accordance with State law and
procedures.
(c) Overpayments resulting from situations other
than fraud or abuse. An overpayment resulting from
a situation other than fraud or abuse is discovered
on the earliest of (1) the date on which any
Medicaid agency official or other State official
first notifies a provider in writing of an
overpayment and specifies a dollar amount that is
subject to recovery . . .
(d) Overpayments resulting from fraud or abuse. An
overpayment that results from fraud or abuse is
discovered on the date of the final written notice
of the State's overpayment determination that a
Medicaid agency official or other State official
sends the provider.
* * * *
(h) Effect of administrative or judicial appeals.
Any appeal rights extended to a provider do not
extend the date of discovery.
The regulations further provide that the state must
refund the federal share of overpayments that are subject
to recovery to HCFA through a credit on the state's
Quarterly Statement of Expenditures (QER) (Form HCFA-64)
and that the credit must be made whether or not the
overpayment has been recovered by the state from the
provider unless the provider has been determined to be
bankrupt or out of business in accordance with section 42
C.F.R. 433.318. 42 C.F.R. 433.320(a).
In addition, the regulations provide that if the amount
of an overpayment is adjusted downward after the state
has credited HCFA with the federal share, the state may
reclaim the amount of the downward adjustment on Form
HCFA-64. 42 C.F.R. 433.320(c). However, downward
adjustment to an overpayment amount previously credited
to HCFA is allowed only if it is properly based on the
approved state plan, federal law and regulations
governing Medicaid, and the appeals resolution processes
specified in state administrative policies and
procedures. 42 C.F.R. 433.320(c).
New Jersey's Provider Audit Process
New Jersey described its audit process as follows and
stated that this description is accurate for the time
period at issue. 3/
For nursing facilities, New Jersey uses a prospective per
diem rate system. Under its system, an audit adjustment
to any one cost center may or may not cause a change in
the provider's rate and thus an overpayment. As New
Jersey explained,
there are numerous cost centers with reasonable
limitation or screens . . . . [Q]uite often,
providers have expenditures above those screens.
And so, the fact that an Auditor is making an
adjustment [to a cost center] does not indicate that
there is an overpayment, unless the adjustment
brings the cost below the screen.
Tr. at 10-11.
For the first step of the audit process, auditors conduct
on-site reviews of provider cost reports. 4/ During the
on-site review, the providers have an opportunity to
respond to the auditors' proposed adjustments to
different cost centers. Tr. at 13. After the auditors
complete their field work, they send their report to the
Bureau of Administrative Control (BAC) which is part of
DMAHS. BAC then recalculates a provider's rate based on
the auditors' cost adjustments. Tr. at 17. If BAC
determines that a provider was overpaid after the audit
findings are used to recalculate the provider's rate, it
issues a preliminary notice of demand for repayment of
the overpayment along with the initial audit report. New
Jersey Ex. 12, at 67a and 69a. New Jersey stated that
the purpose of the preliminary notice is to "give the
provider the first clue that there might be some impact
[on the rate] of the adjustments that came through on the
field audit." Tr. at 11.
New Jersey submitted copies of the BAC form notices it
uses during its audit process. New Jersey Ex. 12. The
notice BAC sends to inform a provider of the results of
the on-site audit is entitled "Preliminary Notice of
Demand and Administrative Recovery Proceedings; Notice of
Proposed Filing of Certificate of Debt and Notice of
Proposed Withholding." The text of the notice states --
The [Medicaid agency] hereby advises you that as a
result of `per diem audit . . . ' at . . .
overpayments were made in the amount of . . . during
the reimbursement period . . . . In addition,
interest on the overpayment amounts to . . . so
that the total sum to be reimbursed is . . . . In
accordance with . . . demand is made upon you for
reimbursement of this amount. For your information
copies of the audit report, audit adjustment report,
rate recalculation schedules and recovery
worksheets, and interest calculations are attached.
You may pay the total amount due . . . by check
. . . .
If reimbursement is not made, you must request a
pre-hearing conference by contacting . . . no later
than twenty (20) days of receipt of this letter.
New Jersey Ex. 12, at 67a.
This notice goes on to advise the provider that: (1)
unless it responds within 20 days, the Medicaid Agency
will begin to immediately withhold 20% of future Medicaid
payments; (2) if there is a pre-hearing conference but
the matter is not resolved, a formal "Notice of Demand
and Administrative Recovery Proceedings" notice will be
issued informing the provider of its right to request an
administrative law judge (ALJ) hearing; (3) if no pre-
hearing conference is requested and no reimbursement
arrangements are made, DMAHS will enter a default
judgment for the entire amount due; and (4) DMAHS will
file a Certificate of Debt which does not affect the
provider's hearing rights. (New Jersey may use a harsher
version of the preliminary notice if circumstances at the
provider warrant this, for example, if it appears that
the facility is about to go out of business. Tr. at 25-
27; New Jersey Ex. 12, at 69a. In this notice, New
Jersey informs the provider it will immediately begin
withholding a percentage of the provider's future
Medicaid payments in order to protect its overpayment
claim.)
If the provider requests a pre-hearing conference in
response to the preliminary demand notice, BAC then
"completes the audit process by following up with the
provider for additional information." Bartol Affidavit,
New Jersey Ex. 11, 13. BAC meets with the provider and
reviews whatever materials the provider presents in
opposition to the audit findings. Tr. at 21. BAC may
also consult with the auditors and have them review the
provider's additional documentation. Tr. at 22-23.
Based on the discussions with and documentation submitted
by the provider, the overpayment may be then adjusted.
New Jersey represented that, in the majority of its
cases, the overpayment is adjusted after the preliminary
notice. Tr. at 43. BAC then issues its second notice
entitled "Notice of Demand and Administrative Recovery
Proceedings; Notice of Withholding." New Jersey Ex. 12,
at 71a. (This second notice is also issued when the
provider does not take any action to respond to the
preliminary notice.)
At the point of the second notice, BAC has completed its
work with the audit and any further issues are resolved
in an ALJ hearing process. The appeal to an ALJ is
followed by a final decision issued by the Director of
DMAHS. There is a further right to judicial review of
the Director's decision.
Analysis
At issue here is whether BAC's preliminary notice and
initial audit constitute "discovery" of an overpayment
within the meaning of section 1903(d)(2)(C) of the Act
and 42 C.F.R. 433.304.
New Jersey asserted that it has not discovered an
overpayment when BAC issues the preliminary notice and
initial audit report because the overpayment figure is
tentative and subject to revision based on the provider's
additional documentation. New Jersey asserted that --
providers generally are not affected by an auditor's
adjustments until [BAC] lets them know whether the
proposed adjustments impact on the rate. Then, upon
receipt of the preliminary notice, the provider produces records and documentation
. . . [and] may
also find calculation errors.
New Jersey Br. at 17.
New Jersey asserted that in its process, the preliminary
demand notice and accompanying initial audit report
usually must be reviewed and corrected before a reliable
overpayment amount is identified. New Jersey Br. at 19.
New Jersey relied on New York State Dept. of Social
Services, DAB No. 810 (1986), and argued that it is
required to adjust only for reliable overpayments. New
Jersey urged the Board to conclude that the BAC actions
and decisions after the initial audit were part of the
overpayment identification process. New Jersey asserted
that it is not obliged to credit HCFA with the federal
share of overpayment amounts until at least the issuance
of its second demand notice, and, under some
circumstances, not until the Medicaid agency has issued
its final decision after the ALJ fair hearing process. 5/
Tr. at 36-41; 51-54.
There was no dispute that New Jersey's audit resolution
process is lengthy. For example, HCFA pointed out that,
as of May 1995, New Jersey still considered six of the 14
overpayments listed in a 1990 disallowance as not yet
identified. 6/ Tr. at 49-50. New Jersey responded that
the overpayments at issue in this appeal were only a
fraction of all overpayments processed by BAC, and that
HCFA was unfairly focusing on a subset of the appealed
overpayments which had required extended review.
Supplemental Br. at 2-3.
HCFA asserted that, based on the plain meaning of the
applicable statutory and regulatory provisions, New
Jersey was obliged to credit the federal share 60 days
from the preliminary notice of demand. HCFA considered
egregious the length of time that the overpayment amounts
at issue had been pending. HCFA asserted that "this
process takes way too long and . . . HCFA should not be
required to wait years to be credited for these
overpayments." Tr. at 51. HCFA argued that New Jersey's
audit procedures were nearly identical to New York's and
that DAB No. 1536 was "conclusive precedent" for this
case. HCFA Supplemental Br. at 2.
Below we summarize DAB No. 1536 and then explain why this
case is cannot be distinguished.
I. DAB No. 1536 concluded that issuance of a draft
audit report by a state official which notifies a
provider that a certain amount of money is owed to
the state constitutes discovery of non-fraud or
abuse overpayments.
Under New York's auditing process, the New York Audit and
Quality Control Medical Facilities Audit Unit (A&QC)
performed audits at institutional care providers, such as
hospitals and nursing homes. If an overpayment was
identified, a draft audit was issued by A&QC to the
provider explaining the details of the review, including
a specific overpayment amount. The provider was then
given 30 days to submit a response to the draft audit
report, which A&QC took into consideration before issuing
a final audit report. After the final audit report was
issued, the provider was given a choice of either making
direct payments within 60 days to the State's Office of
Fiscal Management or having a portion of its future
billings withheld until the full amount of the
overpayment was recovered.
New York maintained that HCFA improperly used the date of
issuance of a draft audit report as the date of
discovery. New York argued that the amounts identified
by draft audits were not sufficiently certain and were
thus not subject to recovery until the issuance of a
final audit report. New York read the phrase, "subject
to recovery," in 42 C.F.R. 433.316(c)(1), as meaning
when a state, under state law, may legally begin recovery
of the overpayment from the provider. New York contended
that under its law, it could begin recovery only after it
issued the final audit report.
In DAB No. 1536, we agreed with HCFA that the regulatory
changes effected pursuant to COBRA clearly contemplate
that the date a draft audit report is issued may be
considered the date of discovery for overpayments
resulting from situations other than fraud or abuse. For
the reasons summarized below, the Board concluded that
the plain language of the regulation as well as its
context and history supported HCFA's position.
o The regulation specifically provides that an
overpayment under these circumstances is
discovered on the date on which any Medicaid
agency or other state official "first notifies a
provider in writing of an overpayment and
specifies a dollar amount that is subject to
recovery." 42 C.F.R. 433.316(c)(1) (Emphasis
added). The use of the phrase "first notifies"
indicates that there need not be a final
determination of an overpayment or a final
overpayment amount; instead all that is required
is that an overpayment in a specific amount be
identified.
o The words "subject to recovery" simply indicate
that the amount specified is the amount of the
overpayment referred to and recognizes the fact
that not all audit findings necessarily lead to
or require recoveries. That the notice must
specify a dollar amount "subject to recovery"
cannot be reasonably read in context as meaning
that the State must have an unconditional legal
right to recover that amount at that time. To
interpret the phrase this way would contradict
the statutory provision that requires a state to
adjust the federal share of discovered
overpayments at the end of the 60-day period
following discovery, whether or not the funds
have been recovered or whether or not any
administrative or judicial appeals are complete.
Section 1903(d)(2)(C) of the Act; 42 C.F.R.
433.312(a)(2); and 42 C.F.R. 433.316(h). Thus,
a state's legal recovery process does not
determine the time of "discovery."
o A reading of the regulation as a whole supports
the view that the amount indicated in the initial
notice may be a tentative amount which could be
subsequently reduced or increased. The
regulation specifically provides that states may
reclaim overpayment amounts previously refunded
to HCFA if it is later determined through the
state audit and appeals resolution process that
these payments were allowable. Also, the
regulation specifically states that the 60-day
period is not extended because of any appeal
rights extended to the provider. 42 C.F.R.
433.316(h). Thus, HCFA recognized in the
regulations that although the state process of
recovery of an overpayment may extend longer than
the 60-day period, the statute nevertheless
requires that the federal share must be credited
to HCFA at the conclusion of the 60-day period.
o The fact that discovery is defined differently
for overpayments resulting from fraud and abuse
than for overpayments in non-fraud and abuse
cases supports HCFA's position that, in the
latter cases, issuance of a draft audit report
identifying overpayments may constitute
discovery. In fraud and abuse cases, discovery
is "the date of the final written notice of the
State's overpayment determination" sent to the
provider by the State. 42 C.F.R. 433.316(d).
If HCFA had intended that only final audit
reports could be used as the basis for its
recovering overpayments in non-fraud and abuse
cases, it presumably would have used language
similar to what it used for the fraud and abuse
cases. Instead, the provisions on non-fraud and
abuse overpayments refer to when a state official
"first notifies" a provider.
o New York's objections to HCFA's using the
issuance date of a draft audit report as the date
of discovery were directly addressed and rejected
in the preamble to the final regulations which
stated:
Two States suggested that the date of discovery
should be redefined to conform with State audit
policies and procedures. They stated that
defining discovery as the date of a State's
first written notice to the provider is
contrary to proper audit procedures. One State
cited Departmental Grant Appeals Board Decision
810 as concluding that amounts cited in draft
audit reports are only an interim step in the
discovery process, and any amounts contained in
these reports are not properly subject to
recovery. Both States agreed that the date of
discovery should be defined as the date of the
final written notice to the provider of an
overpayment determination.
54 Fed. Reg. 5454, at 5457 (February 3, 1989) In
response to this comment, HCFA stated:
The statute contemplates that discovery be
based on documented actions which specify an
overpayment amount and indicate that the State
is beginning its recovery efforts. We believe
that the issuance of a draft audit report could
establish initial discovery if the State
notified a provider in writing of a specific
amount subject to recovery. If discovery does
occur through identification of an overpayment
in a draft audit report, the regulations allow
the State to reclaim the Federal share of the
overpayment that was refunded to the extent
that the State subsequently makes a downward
adjustment based on the approved State plan,
Federal Medicaid law and regulations, and the
appeals resolution process specified in State
administrative policies and procedures.
Id. at 5457.
o The preamble further reiterated the statutory and
regulatory provisions, stating:
. . . the changes made to section 1903(d)(2) by
section 9512 of COBRA do not require us to
consider whether the State is able to recover
the overpayment by the end of the 60 day
period, except for uncollectible amounts
[related to bankrupt or out of business
providers]. We recognize that the overpayment
debt collection process followed by the State
is sometimes prolonged and legally complicated.
However, the plain wording of sections
1903(d)(2)(C) and (D) does not permit the
Federal Government to delay the adjustment to
FFP by allowing the State a recovery period of
more than 60 days while the State awaits the
exhaustion of provider appeals or judicial
review or the execution of repayment plans.
Id. at 5455.
o New York also argued that HCFA could not rely on
the preamble, which was not part of the
regulatory language, "to impose a substantive
requirement on the State, i.e., to start recovery
of overpayments at the draft audit stage." DAB
No. 1536, at 13. The Board concluded that
contrary to New York's assertion, the preamble at
issue here does not impose a substantive
requirement on the states. Rather, the preamble
language provides nothing more than an
interpretation of the regulatory definition of
when an overpayment resulting from situations
other than fraud and abuse is discovered. Here,
the interpretation in the preamble is directly
supported by the language of the regulation.
o In DAB No. 810, the Board found that HCFA could
not recover overpayments based on a draft audit
because draft audits were not sufficiently
reliable. The Board stated, however, that HCFA
could resolve by regulation the controversy over
the use of state draft audit findings to identify
overpayments, but had up until that time failed
to issue a final regulation indicating at what
stage state determinations should be used. We
concluded that HCFA rectified the problems noted
in DAB No. 810 when it promulgated the
regulations at issue here; thus, that decision
simply is not controlling.
II. New Jersey's audit process cannot be
distinguished from New York's for purposes of
determining at what point overpayments are
discovered.
The general arguments advanced by New Jersey concerning
whether overpayment amounts were discovered and subject
to recovery at the first notice of demand and initial
audit stage were expressly resolved in HCFA's favor in
DAB No. 1536. Moreover, we find that the particular
points raised by New Jersey to distinguish its process
from New York's are unpersuasive. Below we set out New
Jersey's arguments and explain why we conclude they are
unpersuasive.
In its Supplemental Submission, New Jersey contrasted its
appeal from New York's in the following ways. New Jersey
noted (1) that it has a bifurcated audit process because
the field audit is performed by employees who are outside
DMAHS, while a division of DMAHS (BAC) calculates and
notifies the provider of the overpayment; (2) that the
overpayment figure in its preliminary notice of demand is
routinely adjusted because it is a preliminary finding;
(3) that the preliminary notice is the first time that a
provider is informed that the cost adjustments have
resulted in an overpayment; and (4) that, therefore, New
Jersey's appeal concerns not just the timing of the
discovery but the reliability of the audit finding which
is used by HCFA as the point of discovery.
New Jersey's arguments are unpersuasive for the following
reasons.
o Since BAC (which is part of DMAHS) calculates an
overpayment figure based on the initial audits
and sends the provider a "preliminary notice of
demand" communicating that figure, New Jersey has
placed itself within the plain language of HCFA's
definition of discovery: "identification by any
State Medicaid agency official . . . of an
overpayment, and the communication of that
overpayment finding . . . ." 42 C.F.R.
433.304.
o The fact that the field audit is performed by
non-BAC employees and the fact that the
preliminary notice is the first time a provider
is informed of an overpayment do not change the
fact that the notice meets HCFA's definition of
"discovery." Similarly, New Jersey's alleged
underlying motive for sending the preliminary
demand ("to get the provider's attention" Tr. at
12) does not take New Jersey's process out of the
plain language of the regulation. In addition,
the wording of the preliminary notice clearly
indicates that it is intended to do more than get
a provider's attention -- if not responded to the
notice can form the basis for a recovery action
without further notice.
o While New Jersey protested that the overpayment
identified in the preliminary notice of demand is
not reliable and is routinely subject to
adjustment, the overpayment process set forth in
the regulations contemplates such adjustments.
Under 42 C.F.R. 433.320(c), a state may reclaim
any amount it has previously credited to HCFA as long as the adjustment is based
on its state
plan, federal law and Medicaid regulations. 7/
o Further, it appears that New Jersey has misread
footnote 1 at page 8 of DAB No. 1536. New Jersey
Supplemental Submission at 4-5. In that
footnote, the Board noted that New York disputed
the timing of recovery, i.e., the threshold issue
raised here, and did not argue that any
particular overpayment amounts were incorrect.
This footnote was written to explain why the
decision did not address specific overpayments to
specific providers. However, while there were no
disputes as to amounts of individual provider
overpayments in DAB No. 1536, New York made the
same argument as New Jersey concerning its draft
audits, i.e., that the amounts identified were
not firmly established, and were subject to
change during the audit process, and therefore
were not properly treated as discovered for
purposes of adjusting for the federal share.
Therefore, DAB No. 1536 was not concerned solely
with the timing of recovery but also with the
reliability of the discovered overpayment
amounts.
o Even if the provider overpayments involved here
are not representative of the majority of New
Jersey's audit determinations, the magnitude of
the amounts involved in this case shows that
HCFA's concern over the length of time taken to
finalize these audits is justified. 8/ Further,
for many cases, given the years between New
Jersey's preliminary notice and the point at
which New Jersey considers the overpayment
discovered, HCFA's insistence on fixing discovery
at the time of the initial audit is reasonable.
New Jersey, not HCFA, is in control of its audit
processes. HCFA's only means of trying to ensure
that any state's audit process does not drag on
interminably is to require the federal share to
be credited at an early point, and, indeed, this
was the purpose behind the statutory provision.
o Finally, New Jersey itself considers the figure
set out in its preliminary notice of demand to be
sufficiently reliable that (1) New Jersey may
begin withholding a percent of a provider's
future payments based on the preliminary notice,
and (2) the amount in the preliminary notice
becomes the final determination if the provider
does not request a prehearing conference. 9/
New Jersey also argued that, unlike New York, it starts
withholding future Medicaid reimbursement from a provider
while the audit is being processed by BAC and immediately
reports those amounts on its QER. Thus, it argued that
its audit process does not delay credits to HCFA until
the end of the audit. New Jersey Supplemental Br. at 3-
4. While the record supports a finding that New Jersey
does recover some portion of an overpayment during the
audit process, its recovery and credit to HCFA of this
portion does not remove New Jersey's process from the
requirements of section 1903(d)(2)(C) and implementing
regulations. 10/ Under that section, HCFA is entitled to
be credited with the entire federal share of a discovered
overpayment within 60 days of its discovery. Crediting
HCFA only with actually recovered installments of a
discovered overpayment is contrary to the requirements of
section 1903(d)(2)(C). 11/
Finally, New Jersey argued that language in the preamble
of the rules HCFA adopted at 54 Fed. Reg. 5454 supports
its position that HCFA meant to rely on a state's notice
"that immediately precedes" its administrative and
judicial review processes, not its initial notice to the
provider. 12/ New Jersey Supplemental Br. at 5. New
Jersey's construction of this language is contrary to
other portions of the preamble in which HCFA expressly
stated that issuance of a draft audit report could
constitute discovery of the overpayment and noted that
any subsequent downward adjustments of the overpayment
resulting from a state's further audit process could be
reclaimed by the state. See DAB No. 1536, at 11-13.
Conclusion
For the reasons stated above, we uphold in full the
disallowances of FFP related to overpayments not timely
credited to HCFA, subject to reduction after further
review by HCFA as agreed by the parties. See Tr. 97-98.
Within 30 days of receipt of this decision, or such
longer time as HCFA may permit, New Jersey should
identify for further review by HCFA any overpayment
amount listed in HCFA's Ex. 1 or at issue in Docket No.
95-109 which New Jersey asserts has been reduced (by
either credit to HCFA or subsequent adjustment of the
amount of the overpayment) or which it asserts is subject
to the bankruptcy/uncollectible exception in section
1903(d)(2)(D). Where New Jersey asserts the
bankruptcy/uncollectible exception applies, it should
submit all documentation and argument necessary to
substantiate its position in light of the requirements of
42 C.F.R. 433.318.
HCFA agreed to review such cases to determine whether New
Jersey is entitled to adjust downward the overpayment
amounts. New Jersey may appeal HCFA's further determination of actual overpayment
amounts for
particular facilities or for a class of facilities
pursuant to 45 C.F.R. Part 16.
__________________________
Judith A. Ballard
___________________________
Donald F. Garrett
___________________________
Cecilia Sparks Ford
Presiding Board Member
APPENDIX A
Docket No. A-90-182 involves alleged overpayments for the
period March 1, 1983 through September 30, 1985. The
original disallowance, based on NJ-88-002-MAP, was issued
on September 26, 1988. New Jersey appealed that
disallowance to the Board. The Board issued New Jersey
Dept. of Human Services, DAB No. 1046 (1989), upholding a
portion of the disallowance and remanding the majority of
it to HCFA for further review. New Jersey subsequently
appealed HCFA's remand decision and the case was docketed
as No. A-90-182. The case was then referred to mediation
but returned to the Board's docket on November 21, 1994.
On January 13, 1995, HCFA issued a revised disallowance
totalling $442,748.
Docket No. A-90-181 involves alleged overpayments for the
period October 1, 1985 through September 30, 1987. The
original disallowance, based on NJ-90-006-MAP, was issued
on June 14, 1984. The Board docketed New Jersey's appeal
of this disallowance as Docket No. 89-148. HCFA withdrew
the disallowance in October 1989 and issued a subsequent
disallowance concerning this overpayment on July 23,
1990, based on NJ-90-006-MAP, in the amount of $939,053.
New Jersey appealed and the case was docketed as No. A-
90-181. The case was referred to mediation but returned
to the Board's docket on November 21, 1994. On January
13, 1995, HCFA issued a revised disallowance totalling
$601,142.
Docket No. 90-189 involves alleged overpayments for the
period October 1, 1987 through September 30, 1988. A
disallowance, based on NJ-90-008-MAP, in the amount of
$1,171,088 was issued on August 30, 1990. This case was
referred to mediation but returned to the Board's docket
on November 21, 1994.
Docket No. A-90-234 involves alleged overpayments for the
period October 1, 1988 through September 30, 1989. The
original disallowance, based on NJ-90-009-MAP, in the
amount of $952,311 was issued on October 26, 1990. New
Jersey appealed and the case was referred to mediation
but returned to the Board's docket on November 21, 1994.
On January 13, 1995, HCFA issued a revised disallowance
totalling $527,104.
Docket No. A-92-40 involves alleged overpayments for the
period October 1, 1989 through September 30, 1990. The
original disallowance, based on NJ-91-010-MAP, in the
amount of $1,009,257 was issued on November 1, 1991. New
Jersey appealed and the case was referred to mediation
but returned to the Board's docket on November 21, 1994.
On January 13, 1995, HCFA issued a revised disallowance
totalling $823,870.
Docket No. A-93-42 involves alleged overpayments for the
period October 1, 1990 through September 30, 1991. The
original disallowance, based on NJ-92-008-MAP, in the
amount of $946,884 was issued on November 5, 1992. New
Jersey appealed and the case was referred to mediation
but returned to the Board's docket on November 21, 1994.
On January 13, 1995, HCFA issued a revised disallowance
totalling $483,177.
Docket No. A-94-124 involves alleged overpayments for the
period October 1, 1991 through September 30, 1992. The
original disallowance, based on NJ-94-001-MAP, in the
amount of $591,690 was issued on March 30, 1994. New
Jersey appealed and the case was stayed pending
resolution of cases in mediation. On January 13, 1995,
HCFA issued a revised disallowance totalling $305,550.
Docket No. A-95-109 involves alleged overpayments for the
period October 1, 1992 through September 30, 1993. It is
based on NJ-95-002-MAP. The disallowed amount is
$464,631 in FFP. This case was consolidated with the
preceding cases for the purpose of resolving the common
questions of law.
1. Appendix A contains a list of the disallowances at
issue. During the course of these proceedings, the
disallowances have been reduced, generally as a result of
New Jersey's crediting HCFA with portions of the
disallowed FFP. For each disallowance, Appendix A
describes the time period at issue, the amount originally
at issue, the amount at issue as of January 1995 (some of
these amounts have been further reduced), and the
disallowance letter and HCFA review number associated
with the disallowance. The Appendix is based on a
summary of the cases presented by New Jersey which was
not disputed by HCFA. New Jersey Brief (Br.) at 1-4.
2. Originally, New Jersey asked for a hearing on the
factual issues presented by the individual provider
overpayments. At the time the parties agreed to address
the threshold issue first, New Jersey agreed to proceed
by informal conference. This conference was held by
telephone on September 18, 1995.
3. New Jersey described its process in its appeal
brief and accompanying Bartol Affidavit (Exhibit (Ex.)
11) as well as during the telephone conference
(Transcript (Tr.) at 9-28).
4. The auditors who perform the on-site reviews are
employees of the Office of Auditing in the Department of
Human Services, and are not part of the Department's
Division of Medical Assistance and Health Services
(DMAHS), the Medicaid single state agency.
5. New Jersey's position on when it considered an
overpayment "identified" appeared to shift during the
course of the proceeding. In its Reply Brief, New Jersey
seemed to indicate that, for cases which involved an ALJ
hearing, the overpayment was not identified until the
issuance of the decision of the Director of DMAHS. Reply
Brief at 5-6. As to non-ALJ hearing overpayments, New
Jersey considered them identified at the time it issues
its second demand notice. Id. However, in the telephone
conference, New Jersey seemed to indicate that, in most
cases, it considers the overpayment figure in its second
demand notice to be reliable and the overpayment
identified at that point even in cases in which the
provider requests an ALJ hearing. Tr. at 36-41; 51-54.
6. For this allegation, HCFA relied on page 8 of HCFA
Exhibit 1. That page lists overpayments at issue for the
time period October 1, 1988 to September 30, 1989. These
overpayments were identified by a HCFA review based on
preliminary notices of demand issued by New Jersey. For
fiscal year 1989, the HCFA review listed 14 overpayments
that it considered "identified" by the preliminary
notices which had not been credited to HCFA. According
to HCFA's records, as of May 30, 1995, New Jersey still
classified six of these overpayments as not yet
"identified."
7. In the course of this proceeding, HCFA confirmed
that such an adjustment can be made in the routine course
of reporting Medicaid expenditures and credits on Form
HCFA-64. HCFA represented that --
[t]he only documentation [for a downward adjustment
of an overpayment finding] required is something in
the case folder that indicates to the auditor that
the reduction indicated in Form HCFA-64 is based on
a rate recalculation or on a element of cost which
was incorrect in the initial audit report. . . .
This could be a memorandum from the rate-setting
unit. The [HCFA] auditor does not need to review
underlying audit workpapers or provider
documentation or backup documentation of any kind. .
. . The purpose of requiring some minimal
documentation is to ensure that the State is not
basing the downward adjustment on the provider's
ability to pay or some political decision.
HCFA Supplemental Br. at 13.
8. We note that New Jersey asserted that these cases
are the exception rather than the rule and New Jersey's
audit process actually moves expeditiously in the
majority of its cases. Accordingly, in the majority of
cases, there should be a considerably shorter time
between the preliminary notice of demand and the notice
of demand than the time which elapsed in these cases.
Therefore, fixing discovery of the overpayment at the
preliminary notice of demand should not work undue
hardship on New Jersey since it can recover from HCFA the
FFP in downward adjustments after it issues its notice of
demand.
9. New Jersey argued that the fact that the initial
overpayment amounts become final under some circumstances
should not be used in determining whether the initial
amounts were discovered. New Jersey asserted that this
treatment creates a disincentive for the states to
provide for audit finalization for non-cooperating
providers at an early stage. Supplemental Br. at 6. New
Jersey's argument involves policy considerations which
HCFA has resolved by defining initial or draft
overpayment findings as discovered overpayments. The
Board is bound by such applicable regulations. 45 C.F.R.
16.14.
10. New Jersey is entitled to withhold a portion of a
provider's future Medicaid payments as of its preliminary
notice of demand. New Jersey Ex. 12, at 69a. New Jersey
represented that it only exercises this option under
certain circumstances, such as if it appears that the
facility is about to go out of business. Tr. at 25-27.
However, it appears that as of its notice of demand,
which is issued after the preliminary notice of demand
and prehearing conference, New Jersey begins to withhold
20% of its monthly Medicaid payments to the provider.
New Jersey Ex. 12, at 72a.
11. We also note that New Jersey's right to recoup
overpayments as well as to assess interest on outstanding
amounts during its overpayment appeal process enables New
Jersey to mitigate the effect of crediting HCFA with
HCFA's share of the overpayment within 60 days of the
preliminary demand notice.
12. New Jersey relied on the following underscored
language at 54 Fed. Reg. 5455:
. . . the changes made to section 1903(d)(2) by
section 9512 of COBRA do not require us to consider
whether the State is able to recover the overpayment
by the end of the 60 day period, except for
uncollectible amounts [related to bankrupt or out of
business providers]. We recognize that the
overpayment debt collection process followed by the
State is sometimes prolonged and legally
complicated. However, the plain wording of sections
1903(d)(2)(C) and (D) does not permit the Federal
Government to delay the adjustment to FFP by
allowing the State a recovery period of more than 60
days while the State awaits the exhaustion of
provider appeals or judicial review or the execution
of repayment plans. Id. at 5455.