GAB Decision 389
Docket No. 82-6
February 28, 1983
California Department of Health Services;
Ford, Cecilia; Settle, Norval Teitz, Alexander
The California Department of Health Services appealed a decision by
the Health Care Financing Administration disallowing $3,195,523 in
federal financial participation claimed by the State under Title XIX
(Medicaid) of the Social Security Act. The amount disallowed represents
the federal share of "duplicate" payments to providers under the
fee-for-service system for services rendered to Medicaid patients for
whom the State had also made premium payments prepaid health plans.
I. Procedural History
In its notice of appeal, the State requested that the Board stay this
case pending court review of the Board's decision in California
Department of Health Services, Decision No. 170, April 30, 1981. In
that decision, the Board upheld three disallowances which the State has
described as involving issues identical to those raised here. /1/ Since
the Agency did not object to a stay, the Board granted the request. On
July 27, 1982, the U.S. District Court for the Eastern District of
California entered a Judgment and Order, dismissing the State's
complaint seeking review of Board Decision No. 170. California v.
Settle, E.D. Cal., Civil Action No. S-81-468-PCW. The District Court
held that the decision was not subject to review because it was
committed to agency discretion by law, and that mandamus would not lie
to compel the agency to exercise its discretion. The State informed the
Board of the dismissal and of the State's intent to appeal that
dismissal. The Presiding Board Member then held a conference call with
the parties to discuss how this affected the case before the Board.The
Agency indicated in that call that it would not object to a further stay
if the State were willing meanwhile to return the federal funds
involved. The State subsequently (2) agreed to this and the Board
granted a further stay.
After the case had been stayed for approximately 11 months, and it
appeared, based on information from the State's representative, that
resolution of the related court case would take another eight months,
the Board issued an order directing the State to show cause why the
Board should not proceed to decision, upholding the disallowance here on
the grounds stated in Decision No. 170. The State responded by
requesting the Board to consider, in addition to the arguments the State
previously made in the cases leading to Decision No. 170, the arguments
the State presented to the U.S. Court of Appeals for the Ninth Circut on
appeal from Decision No. 170. California v. Settle, No. 82-4481. /2/
The Board gave the Agency an opportunity to reply, which the Agency did
by submitting a copy of its brief in the Court of Appeals case.
II. Summary of Decision No. 170
In the cases leading to Decision No. 170, as here, the State did not
deny that it had made duplicate payments in error and in violation of
applicable regulations. Rather, the State argued that the Board could
establish, through adjudication, that these errors were within a
reasonable tolerance level and, thus, allow federal financial
participation (FFP) in the payments.
In arguing that tolerance levels should apply, the State relied on
the fact that the Department of Health and Human Services (formerly HEW)
had adopted, by regulation, a policy that disallowances for eligibility
errors would be taken based on quality control samples only when those
samples showed that a state had an error rate in excess of a specified
tolerance level. The regulatory policy was not in effect for Medicaid
during the relevant time period and has never applied to claims
processing errors such as these duplicate payments. /3/ The State
contended, nonetheless, that the Board should read the Social Security
Act as permitting a reasonable tolerance for errors and should
adjudicate the issue of what a reasonable tolerance (3) was for the type
of errors involved here. In advocating that adjudication would be
appropriate here, the State cited such cases as SEC v. Chenery, 332 U.
S. 194 (1947) (Chenery II) for the proposition that in certain
situations an administrative agency must retain the power to deal with
problems on a case-by-case basis if the administrative process is to be
effective. While noting the possibility that the Chenery II rationale
might be inapplicable to the situation presented, the Board focused on
the fact that, under Chenery II and the other cases cited by the State,
the choice of whether to proceed by rulemaking or by adjudication was
within the informed discretion of the administrative agency.
Thus, the thrust of the Board's analysis was to state why the Board
thought adjudication of a tolerance level by the Board would be
inappropriate. The reasons are summarized as follows:
* Setting a tolerance level for these errors would require a
complicated, after-the-fact construction of an empirical data base
concerning claims processing errors and the feasibility of avoiding
them.
* The regulatory (or legislative) process is more suitable for
determining what a reasonable tolerance would be since this requires
expertise and experience in program operations, a comparison of various
states' performances, and an evaluation of the feasibility of reducing
errors in a cost-effective manner.
* There is no way of determining with mathematical precision the
exact point at which a tolerance level should be set, and, while the
concept of "reasonableness" may lead to identifying a range within
which
errors could be tolerated, the choice of a specific figure within that
range involves a policy judgment.
Because we analyzed the issue this way, we thought it unnecessary to
reach the issue whether the State was correct that the concept of "cost"
in the Act necessarily includes the cost of errors within a reasonable
tolerance level.
III. The State's Arguments to the Court of Appeals
The core of the State's argument on appeal is that, since the Board
did not conclude that the State was wrong in asserting that the Act, as
interpreted in the regulations establishing tolerance levels for errors,
provided FFP in errors up to a reasonable tolerance, (4) the Board
cannot refuse to establish what that tolerance is. In other words,
given that some tolerance must apply to these errors and that the Agency
has not established that tolerance by regulation, the Board must
adjudicate the issue as a prerequisite to upholding the disallowance.
According to the State, the Department may have discretion to proceed by
regulation or by adjudication to establish a tolerance level, but it
cannot refuse to do so at all. This argument requires that we reach the
issue of whether the statute requires that FFP be paid in erroneous
payments within a reasonable tolerance level.
IV. Analysis
A. The Act has not been interpreted to require that a tolerance
level be applied prior to any disallowance for errors.
As we noted in Decision No. 170 at page 9, it does not necessarily
follow from the fact that the Department has promulgated regulations
allowing a reasonable tolerance for certain types of errors identified
through quality control samples that the Department has interpreted the
statute to require FFP for all unavoidable errors. Indeed, we now
conclude that the statute does not require such a result, for the
following reasons:
* The State has pointed to nothing in the wording of the statute or
its legislative history which supports the State's interpretation. The
State plan and regulations provide that no FFP is available in duplicate
payments, and there is no specific provision defining unavoidable errors
as part of the cost of "medical assistance." If we were to adopt the
State's interpretation of the phrase "amounts expended... as medical
assistance" in section 1903(a)(1) of the Act as necessarily including
the cost of unavoidable errors, it would mean that the Secretary could
never disallow for erroneous payments without first establishing whether
the payments were within a reasonable tolerance for unavoidable errors.
We do not think that Congress intended such a result, particularly given
the difficulty of determining what a reasonable tolerance is.
* The tolerance level regulations were not promulgated as an
interpretation of section 1903(a)(1) of the Act but rather were
promulgated under section 1102 of the Act. That section permits the
Secretary to "make such rules and regulations, not inconsistent with
(the Act), as may be necessary to the efficient administration of the
functions with which (the Secretary) is charged" under the Act. At
most, therefore, the regulations are an interpretation by the Secretary
that the policies embodied in the regulation are not inconsistent with
the Act.
(5) * The case of Maryland v. Mathews, 415 F.Supp. 1206 (D.D.C.
1976), relied upon by the State, merely held that the Secretary could
exercise this authority to promulgate a regulation permitting a
reasonable tolerance for errors determined pursuant to the quality
control system. /4/ A holding that such a regulation is not
inconsistent with the Act does not necessarily mean that the statute
must be interpreted to require application of tolerances.
* The regulations relied on established a policy for when the
Department would take disallowances for eligibility errors based on
error rates determined through quality control samples and extrapolated
to the entire universe of a state's caseload. The rationale for
permitting a tolerance in this situation does not necessarily apply
where errors are individually identified, as they are here.
* The fact that the Department (in the preamble to one of the early
regulations) and the District Court in the Maryland case recognized the
practical impossibility of running an error-free program does not mean
that Congress intended that the federal government participate in
errors. Moreover, these statements must be taken in context. Both the
preamole and the Court were referring to errors made in the process of
determining eligibility for the Aid to Families with Dependent Children
Program, a process which involves complex information gathering and
calculation of various figures relating to income or resources. The
errors here are claims processing errors, which the Department has
indicated are more readily avoided.See 43 Fed. Reg. 29314, July 7, 1978.
* The Department has stated that its policy for disallowing errors
that the identified on a case-by-case basis (rather than being
identified through extrapolation from a quality control sample) is to
disallow for all such individually identified errors.The State has had
notice of this policy at least since 1975, when the Department issued
the notice revoking the regulations which were struck down in the
Maryland case. See 42 Fed. Reg. 14717, March 16, 177; Action
Transmittal AT-77-30 (APA), March 16, 1977.
The State argued to the Court of Appeals that the Department policy
prior to issuing any regulations providing for disallowances based on
quality control samples was to allow FFP in all errors. The State based
this argument on certain statements in the preambles to the quality
control disallowance provisions to the effect that, for the first time,
the Department was excluding FFP in all erroneous payments. As we
explained more completely in California Department (6) of Social
Services, Decision No. 319, June 30, 1982, at pages 10-11, in analyzing
a similar argument the State made there, the State's reliance on these
statements is misplaced. These statements must be considered in
context, where they refer to two changes: first, the Department had
decided to deny FFP for payments not in accordance with a state plan
even if they met less stringent federal requirements, and, second, the
Department would base disallowances on quality control samples,
extrapolating to a state's entire caseload. Thus, these statements do
not support the proposition that, prior to this time, FFP was allowed in
all errors. Indeed, some of the statements were made in connection with
the revision of 45 CFR 233.10 to provide that FFP was not only not
available in payments not in accordance with federal requirements, but
also, state plan provisions were a prerequisite to FFP. This is the
very regulation which the Department has cited as a basis for
disallowing FFP in all individually identified errors.
We also are not convinced by the State's argument in its Reply Brief
in the Court of Appeals that subsequent legislative changes support the
State's interpretation of the Act. Reply Brief, pp. 10-14.Those changes
require the Department to take fiscal disallowances for certain
eligibility errors above a 3 percent (initially 4 percent) error rate
determined through quality control samples. We think that the
legislative purpose was to limit the Secretary's discretion to allow FFP
in errors above that rate, rather than to require the Secretary to allow
FFP in errors below the rate. Moreover, even if the changes constituted
an interpretation that a tolerance must be given for eligibility errors
when disallowing based on quality control samples, that interpretation
would not apply to disallowances for individually identified claims
processing errors, the type of errors we are concerned with here.
Thus, we conclude that the statute does not require FFP in all errors
up to a reasonable tolerance.
B. Since the statute does not require that a tolerance be permitted,
the disallowance must be upheld.
Having concluded that neither the statute nor the regulations require
that a tolerance be permitted before a disallowance can be taken for the
individually identified claims processing errors here, the question
arises whether the Board should in any event act to establish a
tolerance for these errors through adjudication. We think that this
action would be inappropriate, for the reasons stated in Decision No.
170 and summarized above.
(7) Moreover, the State did not deny that the payments were erroneous
under applicable regulations and the State plan. Thus, there is a
sufficient basis for the disallowance, and, in the absence of a
regulation permitting FFP up to a tolerance level or a legal conclusion
that such a tolerance is required, there is no basis for allowing FFP in
such payments as "medical assistance."
We note that the State argued in the alternative to the Court of
Appeals that the State's duplicate payments should be allowed as an
administrative cost necessary to the proper and efficient administration
of the State plan under section 1903(a)(7) of the Act. We declined to
reach this issue in Decision No. 170, as we do here, because the State
claimed the payments as medical assistance costs (for which there is a
higher rate of FFP generally), and the Agency has never ruled on the
question of whether they are allowable as administrative costs.
IV. Conclusion
For the reasons stated above and in Decision No. 170, we uphold the
disallowance of $3,195,523 in FFP claimed by the State for duplicate
payments. /1/ The decision covered disallowances for "duplicate"
payments made during the period January 1, 1971 through July 31,
1977. This new disallowance covers payments made from August 1, 1977
through June 30, 1980. /2/ In a subsequent telephone
conversation, the State brought it to the Board's attention that the
Court of Appeals had set oral argument for March 16, 1983, and that a
decision could be expected within two to three months of that. The
State did not specifically request a further stay, however, and, when
informed of the new development, the Agency indicated that it thought
the Board should proceed to decision nonetheless. /3/ For a
history of the relevant regulations, see Decision No. 170, pp. 4-6.
/4/ For a more complete discussion of the Maryland case, see Decision
No. 170, pages 3-4; California Department of Social Services, Decision
No. 319, June 30, 1982, pp. 9-10. In the latter case, we responded to
California's contention that the Board has misconstrued the Maryland
case.
SEPTEMBER 22, 1983