GAB Decision 244
December 31, 1981 California Department of Health Services; Docket No.
80-71-CA-HC Ford, Cecilia; Garrett, Donald Settle, Norval
The California Department of Health Services (Appellant) appealed a
determination by the Health Care Financing Administration (Respondent),
disallowing $18,006,058 in Federal financial participation (FFP) claimed
under Title XIX (Medicaid) of the Social Security Act. The Respondent
determined that the Appellant had made unallowable payments to various
providers participating in the Medicaid program.
The major issues presented are whether there can be an "overpayment"
to the Appellant within the meaning of Section 1903(d)(2) of the Social
Security Act, even though the Appellant has not recovered funds paid to
providers, and, if so, whether there is a factually and legally
supportable determination here that the disallowed amount does represent
such an overpayment. For reasons stated below, we agree with Respondent
that generally it may adjust under Section 1903(d)(2) for unallowable
payments to providers (including overpayments determined as part of the
"cost settlement" process) prior to Appellant's recovery from the
providers; we conclude, however, that the Respondent in this particular
case has not presented sufficient support for its determination that the
Appellant made unallowable payments in the disputed amount.
Our decision is based on the parties' submissions and on the
transcript of a hearing held in this case on September 12, 1981.
I. The Scope and Findings of the Federal Audit
The Respondent based its disallowance on an audit report prepared by
the Audit Agency of the Department of Health and Human Services (HHS,
then Department of Health, Education, and Welfare). /1/
The stated objective of the federal audit was "to evaluate the
State's procedures for recovering identified overpayments made to
hospitals and skilled nursing facilities" participating in the Medicaid
program (2) (called "Medi-Cal" in California). Federal Audit Report,
p.
2. The auditors described the scope of their review as follows:
We reviewed the procedures established at the State level and at MIO
(Blue Cross-South) for recovering amounts due from community hospitals
and skilled nursing facilities and the State's procedures for obtaining
recovery from county hospitals. Since appeals from providers were an
integral part of the overall system for recovering overpayments, we also
reviewed the State's appeal function.
Federal Audit Report, p. 3.
MIO was the State's fiscal intermediary for processing and paying
Medi-Cal claims from certain service providers.
The federal auditors determined, generally, that the Appellant's
policy was to defer adjustments of the federal share of any overpayment
made to a hospital or skilled nursing facility until the Appellant had
actually collected the overpaid amount from the provider. If the
Appellant lost the right to recover the overpayment from the provider
because the State statute of limitations had run or for some other
reason, the Appellant's policy, the auditors determined, was never to
adjust for the federal share. According to the auditors, federal policy
required adjustment of the federal share prior to recovery in both
instances.
Based on an examination of accounts receivable records, the federal
auditors recommended a financial adjustment of approximately $18 million
dollars of FFP related to three audit findings. Briefly, these findings
were that --
1) The Appellant did not adjust its claim for FFP in overpayments
identified through "cost settlement" audits of community and county
hospitals and skilled nursing homes where the providers had appealed the
audit determinations and the appeals were still pending ($16.1 million).
(This type of audit examines a provider's actual costs, as a basis for
establishing the final rate of payment to the provider for services
rendered.)
2) The Appellant did not adjust its claim for FFP in overpayments to
community hospitals and skilled nursing facilities where MIO had been
unable to collect the overpayments from the providers and had
transferred the accounts to the Appellant. These amounts were either
carried as "accounts receivable" on the Appellant's records ("delinquent
accounts" -- $5 million) or had been written off as being (3)
uncollectibile because the State statute of limitations had run, because
the provider had been declared bankrupt, or for some other reason
("discharged accounts" -- $5.4 million).
3) The Appellant did not adjust its claim for FFP in payments to five
hospitals which had been found to have increased their bed capacities
without proper authorization. Because of ongoing litigation on the
issue, the Appellant had deferred collection of the amount associated
with the increased bed capacity issue and of other overpayments to the
hospitals, identified by audit ($9.3 million).
The auditor's determined the amounts associated with these three
findings by examining the accounts receivable records of the Appellant
and the fiscal intermediary, MIO. (The total amount found was
$36,012,117; the FFP amount $18,006,058.)
II. The Respondent's Determination and the Issues on Appeal
The notice of disallowance, issued by the Director of Respondent's
Bureau of Program Operations on March 11, 1980, discussed the audit
findings described above and adopted the audit recommendation to
disallow $18,006,058 in FFP. Citing Section 1903(d)(2) of the Social
Security Act (the Act) /2/ and 42 C.F.R. 447.296, /3/ the Director
stated:
This adjustment must be made whether or not California has yet
recovered, or ever will recover, the amount of overpayments from the
providers. The HEW policy in this matter is consistent with the
language in the act and the regulation. States are required to adjust
the Federal share of any overpayments in full upon (4) completion of an
audit. They cannot wait until the appeal process is completed and
overpayments are collected before adjusting the Federal share of costs
claimed.
Notice of Disallowance, p. 2.
On appeal, Appellant made two major arguments. Appellant contended
that Section 1903(d)(2) must be read together with Section 1903(d)(3) of
the Act to provide that where, as here, payments are made for "medical
assistance furnished under the State's plan" they cannot be considered
an "overpayment" to the State to be adjusted under 1903(d)( 2) until
the
State recovers them.
Alternatively, Appellant argued that, even if the Respondent could
disallow for these overpayments prior to recovery by the Appellant, the
Federal Audit Report was limited in scope and did not provide a
sufficient factual and legal basis to support disallowance of the
amounts here. These issues are addressed separately below.
III. Whether There Can Be an Overpayment To Be Adjusted under
Section 1903(d)(2) Prior to Recovery of the Funds by the State
Section 1903(d)(2) (first sentence) of the Act provides that Title
XIX payments to the States, based on estimated quarterly expenditures,
shall be reduced "to the extent of any overpayment . . . which the
Secretary determines was made . . . for any prior quarter . . . ." /4/
Section 1903(d)(3) provides:
The pro rata share to which the United States is equitably entitled,
as determined by the Secretary, (5) of the net amount recovered during
any quarter by the State or any political subdivision thereof with
respect to medical assistance furnished under the State plan shall be
considered an overpayment to be adjusted under this subsection.
(Emphasis added.)
In support of its position that Subsection (3) prohibits the
adjustment of a State's quarterly statement of expenditures for the
overpayments here prior to recovery of the overpayments, Appellant
relied on the principle of statutory construction that the specific
rules over the general. Transcript (Tr.), pp. 100-105. According to
the Appellant, the payments in question here were payments "with respect
to medical assistance furnished under the State plan" because they were
payments to Medi-Cal providers for services to eligible recipients.
Unlike improper payments, such as payments for ineligible recipients,
the Appellant argued, the "cost settlement" overpayments here were
made
in accordance with State plan provisions. Since the State plan
authorizes the making of an interim payment to a Medi-Cal provider,
subject to adjustment when a final rate is determined, the Appellant
argued, a "cost settlement" overpayment to a provider cannot be
considered an "overpayment" for Subsection 1903(d)(2) purposes until
recovered.
The Respondent contended that, although the original payments to the
providers may have been made under the State plan, they were made only
on an interim basis and, once a final rate was established through the
cost settlement process, any excess paid under the interim rate became
unallowable under the State plan. /5/
We agree with Respondent. An overpayment to a provider, determined
by a difference between an interim payment to the provider and the final
payment to which the provider is ultimately entitled, is not medical
assistance furnished under the State plan. "Medical assistance" is
defined in Section 1905(a) of the Act as "payment of part or all of the
cost" of covered care and services. The interim rate does not determine
the appropriate cost of the services. The State plan may (6) provide
for such provisional payment, but it also establishes the limits of
final payment. Thus, the overpayment, while not improperly made
initially, cannot be considered to be medical assistance furnished under
the State plan. /6/
Subsection (d)(3) is more specific than (d)(2), but it simply does
not apply to costs which are not allowable "medical assistance" costs.
Therefore, Subsection (d)(3) does not preclude adjustment for such costs
prior to recovery.
The more general language of Subsection 1903(d)(2) has been
consistently read together with Section 1116(d) of the Act, which
provides for reconsideration of a determination that "an item or class
of items on account of which Federal financial participation is claimed
. . . shall be disallowed . . . ." Under this construction, a
determination that a State has claimed and received FFP in unallowable
costs is tantamount to a determination that the disallowed amount is an
overpayment to be adjusted under subsection 1903(d)(2). See, 45 CFR
201.10 et seq.; California Department of Health Services, Decision No.
159, March 31, 1981; Solomon v. Califano, 464 F. Supp. 1203, 1204 (D.
Md. 1979).
(7) Moreover, we are not convinced by the Appellant's argument that
adjustment for cost settlement overpayments prior to recovery by the
States contravenes Congressional intent to advance money to the States
to operate their programs. Although Congress did provide for advance
payment, based on States' estimates of their costs, Congress also
specifically provided for adjustments where the Secretary determines
that an overpayment was previously made. Congress did not limit this
general authority to situations where a State has recovered the funds in
question.
A further issue has been raised here, however, regarding the basis
for the Respondent's determination that these amounts, indeed, do
represent unallowable costs and therefore constitute an overpayment to
be adjusted. This issue is discussed below.
IV. Whether the Disallowance Appealed Is Factually and Legally
Supported by the Record
As stated above, the Respondent relied on the Federal Audit Report,
which in turn relied on accounts receivable records of the State and of
the fiscal intermediary, for determining the amount of overpayments to
be disallowed. Respondent contended that these records were sufficient
as a basis for disallowance since they were derived from State audits
and its experience was that such State audits were reliable. Since
Appellant itself identified these costs as "overpayments," Respondent
argued, Appellant bears a burden of establishing that they are allowable
costs.
The Appellant challenged use of the Federal Audit Report as a basis
for the disallowance determination, stating that the audit was limited
in scope to determining whether the State was complying with the proper
procedures for adjusting for overpayments to providers and did not
itself identify any overpayments. The Appellant further contended that
the disallowance letter issued by Respondent was legally deficient
because it did not cite to any provision of Federal law or regulations,
or of the State plan, which would support a determination that the
disallowed costs were unallowable. Citing the case of Solomon v.
Califano, 464 F. Supp. 1203 (D. Md. 1979), 45 CFR 16.91 (1979), and
"basic tenets of due process," the Appellant argued that the grounds
for
a disallowance must be clearly articulated. Appellant's Opening Brief,
p. 23.
In California Department of Health Services, Decision No. 159, March
31, 1981, the Board reversed a disallowance because the record was
inadequate to support the factual and legal determination that the
appellant there had claimed FFP in unallowable costs. We (8) conclude
that the record before us in the present case is similarly inadequate
for the following reasons:
- While the Respondent has shown that some of the amounts here may be
related to payments identified by reliable State audits as
"overpayments" to providers, there is a substantial question as to
whether all the accounts receivable figures were derived from reliable
audits. Respondent's witness at the hearing, one of the auditors who
performed the Federal Audit, testified that a study has been done which
showed that most State audits were performed in accordance with
generally accepted principles and were reliable. Tr., pp. 49-58. This
testimony was not related to the entire time period in dispute, however,
and was too vague to form the basis for a conclusion that all the
"overpayments" reflected in the accounts receivable records were derived
from such audits. Moreover, the Federal Audit Report itself indicates
that some of these overpayments were identified in MIO desk audits or in
audits performed by independent accountants rather than the State.
Federal Audit Report, p. 9. In addition, there is no formal finding in
the Federal Audit Report regarding the source of the accounts. There is
nothing in the Federal Audit Report to relate the accounts to any
specific audits and only minimal identification of the particular
providers involved. With respect to Audit Finding No. 3, involving over
$4.7 million in FFP, the Respondent's witness acknowledged that the
"finding" that the five hospitals had improperly increased their bed
capacities was not made as part of the State's regular audit processess
in the Medi-Cal program but was the result of a legislative review and
that such reviews are often headline-seeking devices. tr., p. 69.
- The Appellant alleged, and Respondent did not deny, that the
accounts receivable figures may also have included some "overpayments"
charged against a provider because the provider has failed to obtain
payment from a third party payor which was liable for the services
provided. /7/ Where third party liability is the (9) basis for an
"overpayment" finding by the State, there is a question as to whether
recovery by the State is a prerequisite to adjustment under Section
1903(d). See note above.
- The Appellant alleged that the accounts receivable figures included
some "overpayments" to providers in which the Appellant had not claimed
FFP since they related to services funded solely by the State. The
disallowance represents a straight 50% of the total "overpayments"
listed on the accounts receivable records, which would be incorrect if
some of the provider payments were State-only payments. At the hearing,
the Respondent offered to show in a post-hearing submission that the
State audits which created the accounts receivable did separate out the
payments subject to FFP from those which were not. Tr., p. 135. Even
if we provided the Respondent with the opportunity to make such a
showing, however, there would be a further question as to whether the
accounts receivable figures to which the 50% was applied reflected the
separation and included only payments reimbursed at the 50% rate.
- Although Respondent's own policy permits a State to delay
adjustment of FFP for up to six months after an overpayment is "found"
as a result of a cost settlement audit, see note 3 above; Tr., pp.
33-35, the Federal Audit Report indicates that the disallowance included
"overpayment" amounts where the provider appeal had been pending less
than six months. Federal Audit Report, pp. 11-12. This may have
included amounts related to audit findings less than six months old, but
neither the auditors nor the Respondent discussed this question.
- With respect to Audit Finding No. 3, the Appellant, while reluctant
to make any statement which might jeopardize its litigation with the
hospitals, has shown that the increased bed capacity issue involves a
complex question of State law. If the Appellant does recover ultimately
from the hospitals, it is not clear that it will recover the total
amount paid to the hospitals during the relevant time period or merely
those costs associated with the increased capacity. /8/ As the Board
stated in Decision No. 159, cited above, (10) where a State is involved
in litigation with a provider we may consider that as a factor in
determining what burden we will place on the State to dispute the
Federal findings.
- The Federal Audit was limited to examining the Appellant's
procedures and reviewing the accounts receivable records. The Federal
auditors did not themselves examine the question of whether
overpayments, in fact, had been identified which represented costs
unallowable as charges to federal funds, nor specifically examine the
question of reliability of any audits from which the accounts receivable
figures may have been derived.
Considering all these factors together, we conclude that the record
is insufficient as a basis for upholding the disallowance of over $18
million in FFP, claimed over a 12-year period. In reaching this
conclusion, however, we do not adopt the State's position completely.
The Federal Audit here is not defective as a basis for disallowance
merely because the focus of the audit was on Appellant's compliance with
procedural requirements. A compliance-type audit may provide a
sufficient basis for disallowance if it also contains findings adequate
to support a determination that a grantee has charged unallowable costs
to federal funds. Moreover, a compliance-type audit may be sufficient
if a finding of noncompliance necessarily leads to the conclusion that
unallowable costs were incurred. In such circumstances, a burden may be
placed on a grantee to establish the amount of unallowable costs. Cf.,
Massachusetts Department of Public Welfare, Decision No. 155, March 20,
1981; Ohio Depatment of Public Welfare, Decision No. 226, October 30,
1981.
Where, as here, however, a federal audit merely adopts figures from
State records, assuming that overpayments for State purposes are
necessarily overpayments for federal purposes, and where the State has
shown that this assumption may not be warranted, the Respondent must
provide more specific evidence and authority to support its allegations.
We do not hold here that Respondent may never base a disallowance on
findings adopted from a State audit. However, Respondent should not
adopt State audits where there are indications that the State audits are
not reliable. California Department of Benefit Payments, Decision No.
71, December 14, 1979; see, also, Federal Management Circular 73-2.
Also, a deficient disallowance letter does not necessarily lead to
reversal of the disallowance, so long as the defects are cured during
the course of the appeal and the appellant has an adequate opportunity
to respond to any issues raised by the respondent. New York Department
(11) of Social Services, Decision No. 151, February 26, 1981. Here,
however, while Respondent ultimately cited some authority for
determining that the disallowed amounts related to unallowable costs,
Respondent has never provided us with a sufficient analysis of the
relationship of those authorities to the time periods and amounts
involved here. /9/
V. The Effect of Our Decision
Our decision here is not based on a legal conclusion that Respondent
misapplied the law nor a factual finding that Appellant did not make
unallowable overpayments. Therefore, our decision does not preclude
Respondent from disallowing amounts which may have been included in the
accounts receivable figures here, so long as Respondent identifies a
sufficient factual and legal basis for doing so.
Conclusion
For reasons stated above, we agree with Respondent that Subsection
1903(d)(3) does not preclude adjustment for unallowable costs, including
overpayments which represent the difference between an interim and final
rate of reimbursement to a provider, since such costs are not "medical
assistance furnished under the State plan." We further conclude that the
disallowance here should be reversed because there is not sufficient
support in the record for a determination that the disallowed amount
actually represents costs which were unallowable under applicable
federal requirements. Nothing in this decision precludes the Respondent
from making a new determination. /1/ "Review of Settlements of Medicaid
Overpayments Made by the State of California to Hospitals and
Skilled Nursing Facilities for the Period March 1966 through May 1978,"
Audit Control No. 90204-09, May 29, 1979 (Federal Audit Report).
/2/ Appellant contended on appeal that the Director's citation to
Section 1903(d)(2) as a basis for disallowance was inconsistent with a
statement in the Federal Audit Report that Section 1903(d)(2) did not
apply to the overpayments here. The auditors were referring to the
second sentence of the section, however, and the Director quoted from
the first sentence, so we do not find any inconsistency. /3/
This provision was originally published at 45 C.F.R.
250.30(a)(3)(ii)(G), was redesignated as 42 C.F. R. 450(a)(3)(ii)(G) on
September 30, 1977, and was recodified as 42 C. F.R. 447.296 on
September 29, 1978, without substantial change. The relevant portion
requires that "overpayments found in audits" of nursing facility costs
be accounted for "no later than the second quarter following the quarter
in which found." /4/ The second sentence of Subsection (d)(2)
provides: Expenditures for which payments were made to the State under
subsection (a) shall be treated as an overpayment to the extent that the
State or local agency administering such plan has been reimbursed for
such expenditures by a third party pursuant to the provisions of its
plan in compliance with section 1902( a)(25). Section 1902(a)(25)
requires that a State plan provide that the State will "take all
reasonable measures to ascertain the legal liability of third parties to
pay for care and services" and will seek reimbursement to the extent of
any such legal liability. Generally, third party liability arises where
a Medicaid recipient is covered by some form of insurance or where
another person has injured a Medicaid recipient through tortious
conduct. /5/ At the hearing, Respondent appeared to be relating
Subsection 1903(d)(3) to the third party liability provision in the
second sentence of (d)(2), quoted in note 3 above. Tr., pp. 11-15.
While Subsection 1903(d)(3) was added to the Act in 1967 with the second
sentence of (d)(2), by its plain language Subsection (d)(3) has
potentially broader application, applying to any recovery of an amount
which is "medical assistance furnished under the State plan." Thus,
we
do not think it is necessarily limited to the third party liability
situation. /6/ There is a further issue here, discussed by the
parties, which we do not need to reach in the context of this case.
Appellant argued that there was no State determination of the final rate
until exhaustion of the provider appeal process. Respondent, on the
other hand, pointed to regulatory provisions related to reimbursement of
costs for nursing homes in the Medicaid program. These regulations
state that, following cost settlement audits, a State "must account for
overpayments found in audits on the quarterly statement of expenditures
no later than the second quarter following the quarter in which the
overpayment was found." The State argued that "found" in this
provision
meant "found as a result of recovery" or, alternatively, "found
as a
result of the provider appeal process." While either reading seems
strained in view of the usual meaning of an audit "finding," the
Respondent apparently took the position that an overpayment was not
finally "found" until exhaustion of the provider appeal process in
a
section of the Medical Assistance Manual, transmitted to the States as
AT-77-85. On the other hand, a statement in the preamble to the final
regulations at 41 Fed. Reg. 27304, July 1, 1976, indicates a different
interpretation of the term "found." It is not clear how the regulations
or manual provisions affect the time period here, or relate to payments
to providers other than nursing homes. In any event, we need not reach
the issue in view of our holding below. /7/ The Appellant
stated: Between the advent of the Medi-Cal program in 1966 and
approximately 1970, all Medi-Cal providers were required to bill third
party payors. Where the state thought a provider has failed to properly
bill third party payors prior to billing the state, it alleged an
overpayment against the provider. After about 1970, Medicare and
CHAMPUS continued to be billed directly by the skilled facilities and
hospitals which are the subject of this audit. Finally in about 1976
the state decreed that skilled nursing facilities (SNF) and hospitals
would also bill two major HMO's . . . . Appellant's Opening Brief, p. 2.
/8/ The Respondent attempted at one point during the course of our
proceedings to establish a basis for determining that the full amount
paid to the hospitals represented costs unallowable under Federal
requirements. This analysis, however, was based in part on the
misunderstanding that California was a State which had an agreement
under "Section 1122" of the Act, relating to reimbursement of providers'
capital expenditures. The Respondent subsequently acknowledged that
California was not a Section 1122 State. Respondent's Submission of
November 21, 1980. /9/ For example, the Respondent cited provisions on
reasonable cost reimbursement for providers. However, these
provisions went through numerous changes during the time period in
question here. In addition, earlier versions of some of these
provisions indicate that a State might be permitted to pay some
providers in excess of costs determined under applicable principles so
long as average payments to providers did not exceed prescribed limits.
See, e.g., 45 C.F.R. 250.30(b)(6) (1976).
OCTOBER 22, 1983