GAB Decision 296
May 14, 1982 Florida Department of Health and Rehabilitative Sevices;
Docket No. 81-90-FL-HC Settle, Norval; Teitz, Alexander Garrett,
Donald
The Florida Department of Health and Rehabilitative Services appealed
a decision by the Health Care Financing Administration, disallowing
$788,683 in federal financial paticipation claimed under the Medicaid
program. The disallowance represented the federal share of payments to
certain Medicaid providers, identified by the State as being in excess
of what the providers should have been paid. The State had not
recovered the excess payments from the providers, many of which were
bankrupt or no longer participating in the program.
The State's major substantive argument was taht the Agency could
adjust for the federal share of these payments only if the State
recovered the payments from the providers. For reasons stated below,
and explained more fully in our decision in Massachusetts Department of
Public Welfare, Decision No. 262, February 26, 1982, we conclude that
the Agency correctly determined that the excess payments were not
allowable Medicaid costs, and, therefore, federal financial
participation (FFP) in the payments constitutes an overpayment to the
State to be adjusted under section 1903(d) of the Social Security Act,
regardless of recovery. We base our conclusion, in part, on our finding
that the differences between the Florida and Massachusetts systems for
reimbursement of Medicaid providers are not material for purposes of
this decision. Accordingly, we uphold the disallowance.
This decision is based on the written record and briefs, including
briefs submitted in response to a Board invitation to the parties to
address what, if any, effect our Massachusetts decision had on this
case.
The State's Reimbursement System
Title XIX (Medicaid) of the Social Security Act (Act) provides for
FFP in state expenditures for medical assistance, provided to eligible
individuals in accordance with an approved state plan. Generally, a
provider of Medicaid services submits a claim to the state, which then
reimburses the provider at an established rate. Congress gave the
states discretion, subject to the Secretary's approval, to formulate
appropriate rate methodologies used to determine rates of reimbursement
for various providers.
(2)Florida's Long Term Care Reimbursement Plan, incorpoated into the
State plan for Medicaid effective October 1, 1977, established a system
of reimbursement of providers of long-term care. State's reply brief,
Appendix. This system is prospective in nature. Under the Plan,
providers submit cost reports, detailing their costs for a reporting
year. The State uses these cost reports as a basis for establishing
both prospective class ceiling rates and individual provider rates,
adjusted by an inflation factor, and applies these rates to a period
subsequent to th reporting year. /1/
Class ceilings are set at a level which the State determines to be
adequate to reimburse the allowable and reasonable cost of an
economically and efficiently operated facility. A prospective rate is
also set for each individual provider but is subject to various limits,
including the applicable class ceiling and an upper limit established by
federal law. Under the Plan, the prospectively determined individual
provider's rate will be adjusted under certain circumstances, including
where "information supplied by the provider is later found to be
incorrect through error or intentional misrepresentation." State's reply
brief, Appendix, p. 16. To participate in the program, providers must
accept, as payment in full, the amounts paid in accordance with the
Plan. p. 27.
Primary responsibility for auditing the providers is that of the
Florida Department of Health and Rehabilitative Services, although some
audits are performed by certified public accounting firms under contract
with that Department. Under the Plan, desk reviews of cost reports are
to be performed within six months after the reports are submitted, and
on-site audits are to be performed on a regular basis. All audits are
to be based on generally accepted accounting standards. Further, the
Plan provides:
The standards, desk reviews and on-site audits will be sufficient to
ensure that only expense items allowable under the Plan are included in
the cost report and are accurately determined, are allocable to the
program and are reasonable.
State's reply brief, Appendix, p. 4.
(3)The Plan also specifically provides:
Overpayments to individual providers found in audits or desk reviews
will be accounted for on DHEW (DHHS) required reports no later than the
second quarter following the quarter in which found.
State's reply brief, Appendix, p. 5.
When the State identifies excess payments to providers, through desk
reviews or on-site audits, it records these amounts in its accounting
system as "accounts receivable." Also listed as "accounts receivable"
are other amounts determined to have been erroneously paid to providers.
The Federal Review
The Agency regional office staff conducted a financial management
review, beginning in July 1979, which included examination of the
State's methods of identifying overpayments to "institutional" providers
(nursing homes and hospitals). Agency Record, Tab N, "Review of Title
XIX Overpayments and Cash Clearing Accounts Accounting Procedures for
the State of Florida." The reviewers' findings which are relevant here
relate to amounts identified as overpayments in two categories:
overpayments determined to be uncollectible and overpayments determined
through bulk reprocessing of providers' claims.
1. Uncollectible Overpayments
The reviewers found that, when a provider had been reimbursed at a
rate based on a cost report which was later found, through a desk review
or an on-site audit, to be incorrect, the State would calculate how much
the provider was paid in excess of what it should have been paid and
enter that amount in accounts receivable. Although the State had a
system for collecting these payments from providers, generally by means
of an offset against subsequent provider claims, the reviewers found
that the State was not always able to collect the payments from the
providers, some of which had filed in bankruptcy or were no longer
participating in the program. For these, or other reasons, the State
might determine that the accounts were uncollectible and use a procedure
which it had for "writing off" the accounts. The reviewers identified
certain accounts which had been outstanding for more than six months and
which the State had determined were uncollectible.
The Agency requested the State to adjust for the federal share of
these excess payments on its quarterly statement of Medicaid
expenditures. When the State failed to do so, the Agency disallowed
(4)$498,837 in FFP based on the reviewers' findings, updated to reflect
recoveries the State had made after the review. /2/
2. Bulk Reprocessing Overpayments
Between January 1, 1978 and May 31, 1979, the State and its fiscal
agent encountered problems in implementing a Medicaid Management
Information System for processing Medicaid claims. As a result of
program edit errors, errors in reimbursement logic, and general claims
processing errors, the State made about $5 million in erroneous payments
to providers. To correct for these errors, the State and its fiscal
agent instituted a bulk reprocessing of all claims paid during the
problem period, reviewing the claims, reprocessing them, and comparing
corrected amounts to payments previously made. This reprocessing
revealed that payments had been made which were duplicative, were in
excess of maximum rates, or were erroneous for other reasons.
The reviewers found that, while the State had collected most of these
erroneous payments from the providers, and adjusted the federal share,
the State had been unable to recover some of the payments because the
providers had filed petitions in bankruptcy. The Agency disallowed
$289,846, the federal share of payments made to three of these providers
and identified through the bulk reprocessing as being erroneous.
The Issues
On appeal, the State did not challenge the Agency's findings
concerning the nature of the payments disallowed here. Nor did the
State contest the accuracy of the Agency's determination of the amounts
involved. Indeed, the Agency specifically identified each amount by
provider, giving the provider's number and the period in which the
payment was made.
The State did raise a number of substantive issues, primarily related
to the Agency's authority to adjust for amounts which the State had not
recovered from the providers. In addition, the State contended that
this case involved a compliance issue and, therefore, (5) the Board had
no jurisdication to consider it as a disallowance. Below, we discuss
the State's arguments under the following general issue headings:
1) Whether the Agency is precluded from adjusting for these excess
payments prior to recovery of the payments from the providers.
2) Whether the fact that Florida has a prospective reimbursement
system distinguishes these excess payments.
3) Whether the Agency is precluded from disallowing payments where
providers are bankrupt.
4) Whether desk reviews constitute audits for purposes of determining
when the State must account for overpayments under applicable
regulations.
5) Whether the Agency policy concerning overpayments has been a
consistent one, of which the State had notice.
6) Whether a disallowance was approprite here or a compliance
proceeding was required.
Discussion
1. Whether the Agency is preculded from adjusting for these excess
payments prior to recovery of the payments from the providers.
Section 1903(d)(1) of the Act requires the Secretary to estimate the
amount of Medicaid funding to which a state will be entitled, prior to
the beginning of each quarter. Section 1903(d)(2) requires the
Secretary to pay the amount so estimated, "reduced or increased to the
extent of any overpayment or underpayment which the Secretary determines
was made . . . for any prior quarter . . . ." As we discussed more fully
in our decision in Massachusetts, cited at page 1 above, the Agency has
consistently interpreted the term "overpayment" in section 1903(d)(2)
to
include any payments made to a state and later determined by the
Secretary to be unallowable, that is, not in accordance with federal
program requirements.
The Agency relied on section 1903(d)(2) for its position that the
State should adjust for the amounts disallowed here. The Agency also
pointed to 42 CFR 447.296 (1978-1980) (formerly codified at 45 CFR
250.30(a)(3)(ii)(G)), which provides that states "must account for
overpayments found in audits . . . no later than the second quarter
following the quarter in which the overpayment was found."
(6) For its position that the term "overpayment" should be
interpreted more narrowly to include only amounts actuall recovered by a
state, the State relied on section 1903(d)(3). That section provides:
The pro rata share to which the United States is equitably entitled .
. . of the net amount recovered during any quarter by the State . . .
with respect to medical assistance furnished under the State plan shall
be considered an overpayment to be adjusted under this subsection.
The State argued that this section defind "overpayments" to be
adjusted, limiting the term to amounts which had been recovered by a
state. According to the State, this statutory definition is also
controlling as to the meaning of the term "overpayment" in 42 CFR
447.296.
As explained more fully in our Massachusetts dedision, the statutory
provisions, read as a whole, do not support the State's position.
Section 1903(d)(3) does no by its terms relate back to all overpayments
contemplated by section 1903(d)(2) and, therefore, does not define the
circumstances in which the Secretary may adjust. Rather, section 1903(
d)(3; provides that amounts recovered "with respect to medical
assistance furnished under the State plan . . . shall be considered" an
overpayment for adjustment purposes. This wording supports the Agency
position that section 1903(d)(3) was designed to authorize the Secretary
to adjust in those situations where amounts properly paid as medical
assistance have been returned to a state and some question otherwise
might have existed as to the state's liability to repay the federal
share or the Agency's authority to recoup that share by an offset to
future grant awards. See, also, California Department of Health
Services, Decision No. 244, December 31, 1981; New York State
Department of Social Services, Decision No. 284, April 29, 1982.
Since, as discussed below, the costs in question here were not
allowable as medical assistance under the State plan, section 1903(d)(
3) simply does not apply.
Moreover, given that section 1903(d)(3) does not constitute a
limiting definition of overpayments to be adjusted under (d)(2), we
certainly would not read it into 42 CFR 447.296 as a limitation. That
provision appears in the context of regulations establishing
requirements for reimbursement of Medicaid providers, including that
states must audit providers' cost reports to ensure that only allowable
provider costs are being considered in the rate-setting process. Where
this "cost settlement" process results in a (7) determination that
a
provider has been paid in excess of the rate to which it was entitled,
there is little doubt that section 447.296 was intended to apply, even
if the term "overpayment" is not specifically defined in the regulation.
/3/
2. Whether the fact that Florida has a prospective rate-setting
system distinguishes these excess payments.
In Massachusetts, we considered excess payments arising from the
Massachusetts rate-setting system, under which providers are paid at an
estimated rate (called an "interim rate") subject to retrospective
adjustment where actual costs for the rate period result in a different
final rate. We concluded that these excess payments were unallowable
and were not "medical assistance furnished under the State plan" within
the meaning of section 1903(d)(3) of the Act.
Florida aruged here that the Massachusetts case was distinguishable
since Florida uses a prospective rate-setting systems rather than a
retrospective system. According to the State,
A prospective reimbursement system, such as Florida's, by definition
contemplates that providers will, in some instances, receive estimated
payments greater than those to which they are ultimately determined to
be entitled. The prospective rate, which is established by utilizing
historical reported costs and adjusting such costs by an inflation
index, is adjusted only if it is determined by audit that the historical
cost report upon which the prospective rate was established was not
accurate.
This is in contract to a retrospective reimbursement system, which
contemplates an adjustment to every "interim" rate, as such rates
are
uniformly compared to the actual costs experienced by the facility for
the cost reporting year in question. In that states with retrospective
reimbursement systems routinely assess overpayment liabilitites against
providers, such states should be held to a higher standard of (8)
accountability to HCFA than those states whose reimbursement systems do
not regularly result in the assessment of overpayments.
State's Response to Invitation to Brief, pp. 1-2.
We are not persuaded by the State's argument. While the State is
correct that the systems differ in some respects, the State has pointed
to nothing which would lead us to conclude that the resulting excess
payments should be treated differently. The excess payments arising
from either system have the same status: they are amounts paid to a
provider in excess of what the provider was entitled to under the
applicable state plan.
The Florida Plan specifically provides that the rate initially set
for an individual provider may be adjusted if the cost report is
inaccurate. A system of examining the costs is established by the Plan
to ensure that such inaccuracies will be discovered. Excess payments
identified as a result of such adjustments constitute improper payments
to the providers, and the Agency correctly determined that FFP in such
payments is not allowable.
Moreover, nothing in the statute or regulations indicates that those
states with systems which do not "regularly result in the assessment of
overpayments" are any less accountable for overpayments when they do
occur.
We also note that a substantial part of the disallowance here
($289,846) represents the federal share of erroneous payments identified
through the bulk reprocessing of claims. The State has not denied that
this reprocessing was necessitated by problems which caused errors such
as double payment of claims and payment in excess of maximum rates. The
State has pointed to nothing which would authorize FFP in such erroneous
payments.
3. Whether the Agency is preclluded from disallowing payments where
providers are bankrupt.
The State contended that it should not be required to repay FFP
relative to bankrupt providers where the State was barred from
recovering overpayments by operation of federal bankruptcy law. Since
the Medicaid program envisions a partnership between federal and state
governments designed to share the cost of medical services to needy
individuals, the State argued, the federal/state relationship is
distinguishable from the ordinary debtor/creditor/third party
relationship. It would be inequitable, in the State's view, to require
the State to bear the entire burden of loss here.
(9) We addressed the issue of the effect of bankruptcy proceedings on
provider overpayments in our Massachusetts decision (pp. 13-14) and
concluded that the Agency was entitled to recover overpayments made even
to those providers whose obligations to a state had been discharged in
bankruptcy proceedings. We stated there:
While it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, Congress gave each state participating in
the Medicaid program the authority to administer the program within the
state. The matter before us concerns the State's administration of its
Medicaid program. It is the State's responsibility to expeditiously
recover any overpayments that may have been made. The Agency has no
direct role in the recovery of such overpayments. The Agency is not
unreasonable, therefore, in requiring the State alone to bear the burden
which may result from delays in the collection of overpayments from
providers, notwithstanding the fact that the providers might at some
time declare bankruptcy.
Massachusetts, pp. 13-14.
In some instances, loss of funds because of bankruptcy may be
unavoidable.However, to sort out these cases would be difficult,
requiring a highly judgmental case-by-case analysis. Viewing the
program as a whole, therefore, we do not believe that the Agency is
required to participate in these clearly unallowable costs.
Furthermore, with respct to overpayments determined through Florida's
bulk reprocessing of claims, there is even more reason to hold the State
responsible. These overpayments were caused by the State, through its
fiscal agent, erring in the processing of claims.
4. Whether desk reviews constitute audits for purposes of determining
when the State must account for overpayments.
Some of the excess payments to providers disallowed here ($151,598)
were identified by the State through desk reviews of the providers' cost
reports. The State argued that such desk reviews do not constitute bona
fide audits as contemplated by 42 CFR 447.296. Since findings of desk
reviews may be superseded by findings of field audits, the State
contended, the State need not account for overpayments found in desk
reviews alone.
The Agency persuasively argued, however, that there is no valid basis
for distinguishing overpayments determined as a result of desk reviews
from overpayments determined as a result of field audits.
(10) While the term "audits" in 42 CFR 447.296 is somewhat ambiguous,
we think in context it clearly encompasses desk reviews. After
mentioning requirements for desk analysis and for onsite audits, the
regulations provide that "all audits" must meet generally accepted
auditing standards and that "(audits) of providers' cost reports,
financial records, and other pertinent documents must be adequate to
verify" that costs are allowable, allocable, and reasonable. The term
"onsite audits" is used to refer to audits of the financial and
statistical records of the providers, as opposed to examination of cost
reports. If only overpayments found as a result of this type of audit
were to be accounted for, the modifier "onsite" would have been used
in
section 447.296 as well. We think that the State understood this when
it included in its State plan a provision that overpayments found as a
result of desk reviews would be accounted for in the manner required by
the regulation. See provision quoted at p. 2 above.
Moreover, as the Agency pointed out, there are policy reasons
supporting this interpretation. It is the State which is charged with
the responsibility of supervising the desk review procedure. If the
procedure is not trustworthy, it is up to the State to take measures to
improve its performance. Here, the State has pointed to nothing which
would lead us to question the validity of the desk review findings, and,
indeed, the State itself entered the overpayments as accounts receivable
based on the desk reviews. Also, application of the accounting
requirement to desk reviews is reasonable because it ensures that all
overpayments are reported and none are overlooked where there is no
subsequent audit. If there is a subsequent audit which requires a
further adjustment in favor of the provider, the Agency's practice is to
recognize it for purpoes of also adjusting the federal share in favor of
the State. See Agency Record, Tab L, p. 3.
5. Whether the Agency policy concerning overpayments has been a
consistent one of which the State had notice.
In Massachusetts, the Agency alleged that its interpretation of the
relationship of sections 1903(d)(2) an (d)(3) of the Act had been
consistently applied for sixteen years in its regulations and fiscal
procedures. We noted in our decision that Massachusetts did not dispute
this claim and that, in fact, the record showed that Massachusetts had
had notice of this interpretation at least as of February 22, 1977.
Massachusetts, p. 7, note 4. In its brief concerning the Massachusetts
decision, Florida took exception to the Board's reliance on "HCFA's
allegedly consistent application" of the (11) statute. State's Response
to Invitation to Brief, p. 2. Florida argued:
In the present case, the record shows that Florida first received
notice of HCFA's interpretation of the statute and accompanying
regulation on March 10, 1980. It is noteworthy that the statute had
been in existence for fourteen years prior to HCFA's determination that
Florida's overpayment accounting procedures were not in compliance with
Federal law. The State respectfully submits that HCFA's longstanding
interpretation has been, until 1980, that states were required to repay
only the federal share of overpayment amounts which the state collected.
Such longstanding interpretation should, accordingly, be applied to this
case.
State's Response to Invitation to Brief, p. 2.
In support of this position, the State did not cite to any Agency
policy statement setting out an interpretation that repayment was
contingent on collection. Instead, the State relied on excerpts of a
report issued by the United States General Accounting Office (HRD
80-77). Specifically, the State relied on the following statement in
that report:
Even though most of HEW's (HHS's) regulations and guidance concerning
the recovery of the Federal share of Medicaid overpayments support the
view that overpayments should be refunded immediately after being
identified, HEW's regulations and instructions are not entirely
consistent in this respect.Also, as a matter of practice, HEW is not
usually requiring the States to refund the Federal share of overpayment
recoveries until after collection is made -- and often a long time
elapses between the identification and recovery of overpayments.
State's Response to Invitation to Brief, Appendix, p. 22.
Based on this, the State argued that the Agency regulations
historically lacked consistency both facially and as applied.
For reasons stated below, we are not convinced that the State is
correct that the Agency has been inconsistent in either its
interpretation of, or its application of, overpayment policies. Nor are
we persuaded that, even if the Agency's actions in the past were in some
respects inconsistent with the position taken here, this inconsistency
would provide a basis for overturning the disallowance. (12)
As we pointed out in New York Department of Social Services, Decision
No. 284, April 29, 1982, pp. 7-8, any discussion of whether Agency
policy is consistent must recognize legitimate differences in various
kinds of Medicaid "overpayments," and reasons why the Agency might
wait
for recovery, allow a reasonable time for recovery, or require immediate
adjutment. The Stae has not pointed to any Agency interpretation of
policy statement which cannot be explained by such differences. With
respect to overpayments determined as a result of the cost settlement
process, the Agency, through 42 CFR 447.296, required the states to
account for such overpayments, but allowed the states a reasonable
amount of time to recover the overpayments. This makes sense since any
reimbursement system is bound to result in some overpayments,
particularly if the intial rate is based on an estimate or an unaudited
cost report. On the other hand, where the Agency itself determines,
through an audit or review, that FFP has been claimed by a state for
improper provider payments, the policy is to disallow the costs and to
require the State to adjust immeditely (or on an installment plan) when
the disallowance decision is final. See 45 CFR 201.14(e) (1977-1981);
45CFR 201.66 (1977-1981); State of Georgia v. Califano, 446 F. Supp.
404 (N.D.) Ga. 1977). The General Accounting Office (GAO) report
covered a broad range of overpayments, and we do not think it considered
these differences.
The report may provide some support for finding that, in practice,
the Agency was not always strictly applying 42 CFR 447.296 to ensure
that states were making appropriate FFP adjustments for cost settlement
overpayments. To the extent that the Agency had any such practice, the
State can hardly complain since it would have favored the State. If
this disallowance can be viewed as a change in practice (perhaps in
response to the GAO report), it is a change to conform practice to
policy.
The State not only had constructive notice of 42 CFR 447.296 which
set out Agency policy, but had incorporated th provision in its State
plan, effective October 1, 1977. The State has not shown any basis for
interpreting that provision to apply only to recovered overpayments. In
fact, the State has pointed to no specific policy promulgated by the
Agency which would conflict with the position it has taken here.
In any event, this is not a question of potentially unfair
retroactive application of a policy since the policy merely requires the
present action of adjusting, regardless of recovery. The State can
hardly claim that it made excess payments to the providers relying on a
belief that it would not have to adjust for the excess payments unless
it recouped them from the providers.
(13) We also note that the underlying issue here is really the
allowability of FFP in these excess payments. While the states are
given discretion in choosing methods of establishing reimbursement
rates, they do not have authority to claim FFP in payments in excess of
those rates ultimately determined to be proper under the state plan.
6. Whether a disallowance was appropriate here or a compliance
proceeding was required.
In its appeal letter, the State asserted that the Board lacked
jurisdiction to adjudicate the Agency action taken here. The State
based its assertion on its belief that the action should be considered a
compliance issue, pursuant to section 1904 of the Act, rather than a
disallowance under section 1116(d) of the Act. According to the State,
this case involves the State's compliance with the "statutory and
regulatory obligation" to account for overpayments within certain time
limits, as incorporated into the State plan. Thus, the State concluded,
the issue presented was whether the State had failed substantially to
comply with a provision of the State plan, and the Agency should have
invoked the compliance procedure.
At a later stage in the case, the State chose not to pursue this
argument, recognizing the applicability of the Board's Ruling on
Jurisdiction in the Massachusetts case, but stated that it wished to
preserve the argument for purposes of appeal.
The Board Ruling in Massachusetts, while declaring that the
distinctions between compliance and disallowance are often not clear-cut
and that the same set of facts could arguably call for either of the
procedures, nevertheless held that the facts presented in that case
could reasonably be interpreted as a disallowance. In our Massachusetts
decision, we reexamined "the underlying substance of the dispute,"
in
light of decisions issued by the U.S. Court of Appeals for the Third
Circuit and the Board decision in New Jersey Department of Human
Services, Decision No. 259, February 25, 1982. We concluded that the
Agency action was not a finding that Massachusetts had failed
substantially to comply with the State plan. We pointed out that the
Agency's determination covered only a relatively small segment of the
State's whole rate methodology and reimbursement system and that there
was no finding that the ultimate beneficiaries of the program, the
Medicaid recipients, were in any way affected by the questioned State
practice. Massachusetts, p. 21.
We find no basis for distinguishing the instant case with respect to
Board jurisdiction. The State of Florida was adjusting for most
overpayments in a timely manner, since it had a systm for recovering
from the providers through an offset or an installment payment plan.
Agency Record, Tabs H and M. Thus, the Agency could reasonably have
concluded (14) that any failue of the State was not substantial. Since
the Aency here identified a certain class of items as unallowable, the
Agency action is a disallowance over which the Board has jurisdiction.
Conclusion
For the reasons stated above, and explained more fully in previous
Board decisions, we conclude that the Board does have jurisdiction here
and that the disallowance should be upheld. /1/ Florida's reimbursement
system is technically called a prospective class ceiling
rate-setting system, as opposed to a prospective class rate system. The
latter bases rates on the collective expense of a group or class of
providers rather than the actual costs of an individual provider.
Supplemental Response of the Health Care Financing Administration, pp.
2-3. /2/ The Agency's figures represent a determination made as
of June 1980. The State did not allege that it had made any additional
recoveries since that date. Of course, if the State can show that any
recoveries of amounts covered by this disallowance have been made, and
the federal share returned, the Agency should reduce the disallowance
accordingly. /3/ Note, however, that the Board does not reach
the issue, presented in other cases before the Board, of whether an
overpayment can be considered "found" as a result of a cost settlement
audit prior to completion of any appeal from the audit findings. That
issues has not been raised here, and the record shows that the Agency
did not disallow amounts determined to be the subject of appeals.
OCTOBER 22, 1983