GAB Decision 417
Docket No. 82-126-OK-HC
April 29, 1983
Oklahoma Department of Human Services;
Ford, Cecilia; Teitz, Alexander Settle, Norval
The Oklahoma Department of Human Services (State) appealed a decision
by the Health Care Financing Administration (Agency or HCFA), denying
$398,875 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The State's claim
represented the federal share of payments the State previously had
identified as overpayments for the period July 1, 1964 through December
31, 1980 and had credited to the federal government on periodic
quarterly expenditure reports. The State alleged that the previous
credits were a mistake and presented its claim for $398,875.24 on a
quarterly expenditure report for the quarter ending March 31, 1981. /1/
That State contested the legal and factual basis for the disallowance
and alleged that the Agency has treated the State unfairly in relation
to other States. For the reasons stated below, we conclude that
sections 1903(a)(1) and 1905(a) of the Act present a sufficient legal
basis for the disallowance, that the Agency has presented an adequate
factual basis for the disallowance, and that the State has made no
substantial showing that it has been treated unfairly. Accordingly, we
uphold the disallowance in full.
Our decision is based on the written record, consisting of the appeal
file, the parties' initial briefs, and the State's reply brief.
(2) General Background -- The State's "Due Diligence" System
The issues presented in this case relate to the review system the
State used to determine responsibility for Medicaid payments to
ineligibles and to minimize such payments. This system, called the "due
diligence" system, was detailed in the Policy and Procedures Manual of
the State Department of Human Services. (Opening Brief for the State of
Oklahoma, hereafter referred to as "Appellant's Opening Brief," Exhibit
1)
Initial Medicaid eligibility determinations were made in county
offices. If a person was determined to be eligible for and received
Medicaid services, and subsequently the county found the person not to
be eligible for Medicaid, the matter then went to the central office
where determinations were made by a State Review Committee. The
Committee determined, among other things, whether the person appeared to
have been ineligble during some or all of the period he or she received
Medicaid services and, if the person did appear to have been ineligible,
whether the county office exercised "due diligence" in making the
initial eligbility determination and any periodic redetermination.
"Due diligence" would be found where the county office took all
appropriate steps to obtain and evaluate information bearing on
eligibility. The State Policy and Procedures Manual defined these steps
in detail. It addressed such factors as telling the client about
reporting responsibilities, interviewing, follow-up on facts that might
bear on eligibility, deadlines for making determinations and
redeterminations and for discontinuance or reduction of benefits, and
other matters.
"Due diligence" determinations affected the action the State would
take against the client to whom it appeared benefits had been
erroneously paid. If the State found the county used "due diligence,"
then the State would take legal steps to compel restitution. When it
was found that the client had committed fraud, even if the county did
not exercise "due diligence," legal steps were also taken to compel
restitution. On the other hand, if it was determined that "due
diligence" was not exercised by the county office and there was no
fraud, then the client would only be requested to repay voluntarily.
Beginning at least as early as 1964, the State followed a practice,
in cases where "due diligence" was not exercised (referred to hereafter
as "lack of due diligence" cases), of (3) crediting the federal
government on the State's next quarterly expenditure report for the full
federal share of any apparent erroneous payment. In about 1980, the
State concluded that there was no legal basis for these credits to the
federal government, and that the State had been mistaken in making these
credits. In 1981 the State filed the claim in question which, in
effect, requested reversal of the credits.
Was There A Statutory Basis for the Disallowance?
The State argued that there was no substantive statutory provision
underlying the Agency's requirement that all erroneous Medicaid payments
be refunded.
We disagree. Section 1903(a)(1) of the Act, the basic provision
governing payment of FFP under Medicaid, requires the Secretary to pay
each State with an approved plan"... an amount equal to the Federal
medical assistance percentage of the total amount expended during the
quarter as medical assistance under the State's platn...." (Emphasis
supplied.) Section 1905(a) of the Act defines "medical assistance"
as
"payment of part or all of the cost" of covered services to individuals
who meet certain specified conditions for eligibility. Since the
payments in question in this case were to ineligibles, the payments are
unallowable under these statutory provisions.
Although the State conceded that section 1903(a)(1) might present a
substantive basis for the disallowance, the State alleged two flaws in
what it termed the "simplistic" contention that FFP in connection
with
every erroneous payment must be disallowed on grounds that no such
payment is "an... amount expended... as medical assistance under the
State plan within the meaning of section 1903(a)(1)."
First, the State argued that the Oklahoma State Plan and implementing
Policy and Procedures Manual authorized payment for services in "lack of
due diligence" cases. The State reasoned that since the Agency approved
the Plan and Manual and nothing in the Plan or Manual implied that the
payments would not be subject to federal matching, FFP should be
allowed.
The Board is not persuaded by this argument. While there may have
been nothing in the State Plan or Manual prohibiting FFP for payments to
ineligibles in cases where the State did not exercise due diligence, the
State has pointed to nothing in the State Plan or Manual authorizing FFP
for such payments. While the State did submit excerpts from its manual,
it cited no provisions of any relevance whatsoever to this argument.
Furthermore, even with all other considerations aside, following the
State's logic one could as reasonably reach the opposite (4) conclusion
that FFP should not be allowed under the State plan. Moreover, the
State has pointed out nothing in section 1903(a) or its legislative
history which would indicate that Congress intended to provide FFP for
erroneous payments to ineligibles.
Second, the State argued that the Agency's reading of section 1903(
a)(1) is contradicted by section 1903(u) of the Act, which was recently
added by the Tax Equity and Fiscal Responsibility Act of 1982, Public
Law 97-248, September 3, 1982. Section 1903(u) provided that, beginning
in the third quarter of fiscal year 1983, if a State's rate of
"erroneous excess payments for medical assistance" exceeds 3%, then
FFP
will not be paid "with respect to so much of such erroneous excess
payments as exceeds such allowable error rate." The State argued that
Congress would not have needed to provide separately for the denial of
FFP when errors exceeded 3% if 1903(a)(1) already had mandated the
denial of FFP for all erroneous payments. The State noted that section
1903(u) (1)(D)(i)(I) included in the definition of "erroneous excess
payments for medical assistance" any "payments under the State plan
with
respect to ineligible individuals and families." The State concluded, in
essence, two things from the effect of 1903(u): first, that the
payments in question were "medical assistance under the State plan"
within the meaning of 1903(a)(1); and second, that the Secretary
previously had discretion under 1903(a)(1) to allow FFP with respect to
some reasonable level of erroneous payments.
With regard to the first point, we do not agree that the definition
at section 1903(u)(1)(D)(i)(I) implies that Congress considered
erroneous payments to be "medical assistance under the State plan."
If
this were the correct reading, it would mean that, absent any express
limit on FFP in such payments, section 1903(a)(1) would mandate FFP in
all such payments, not merely in such payments up to a tolerance
established at the Secretary's discretion as the State suggested. This
is clearly inconsistent with the section 1905(a) definition of "medical
assistance" as including only payments for eligible individuals. We do
not think that use of the terms "for medical assistance" and "under
the
State plan" in section 1903(u)(1)(D)(i)(I) is intended to do more than
to identify the errors referred to as errors occurring in the Medicaid
program.
(5) The State's second point raises a more complex issue, but
nonetheless also is not persuasive. At heart, the State is arguing that
section 1903(u) raises a necessary inference that the Secretary, prior
thereto, had discretion under 1903(a)(1) to establish a tolerance for
errors which would accommodate the errors here. As explained below, the
Secretary did, indeed, have some discretion to establish a tolerance
level (although deriving from section 1102 of the Act, to provide for
efficient administration of the Act, and not from substantive program
provisions in section 1903). However, merely because the Secretary
might have had authority to establish a tolerance for the kinds of
errors involved here, does not mean that the State must recover; the
Secretary has chosen not to exercise the discretion (except, perhaps, in
a narrow area discussed below). Furthermore, the State has made no
showing that the Secretary has capriciously refused to exercise his
discretion in these circumstances, where the State itself identified the
errors, where the entire universe of errors was identified, where the
errors were avoidable in nature, and where there is no issue, as is
typically the case with tolerance levels, of extrapolating from a sample
of errors to a much larger universe. Such a showing would be required
for the State to prevail whether the Secretary's discretion derived from
section 1102 or 1903(a)(1).
Section 1903(u) must be read in light of the history of the quality
control regulations, through which the Secretary established a policy
for disallowing errors determined by estimating from quality control
samples when those errors were in excess of a prescribed tolerance
level, but allowing FFP in errors up to that tolerance. Such a policy
was not inconsistent with the Act, and, therefore, was within the
Secretary's authority under section 1102 of the Act, to promulgate
regulations providing for the efficient administration of the Act.
Maryland v. Mathews, 415 F. Supp. 1206 (D.D.C. 1976). As we held in
California Department of Health Services, Decision No. 389, February 28,
1983, the fact that such a regulation is consistent with section
1903(a)(1) of the Act does not mean that that section requires FFP up to
reasonable tolerance.
In California, we also concluded that section 1903(u) should not be
read as meaning that, prior to passage of that section, FFP was required
in all errors. Rather, we read section 1903(u) as a limitation on the
Secretary's discretion under section 1102 of the Act to permit FFP in
errors. In effect, section 1903(u) establishes by statute what a
reasonable tolerance is and the circumstances under which the Secretary
may waive disallowances for errors in excess of the tolerance.
(6) It also provides specific statutory authority for the Secretary
to require states to report error rates, to use estimates based on
statistical samples, and to adjust advance payments to states under
section 1903(a)(1) of the Act in light of "any expected erroneous excess
payments."
Thus, we conclude that, while the Secretary had the authority to
permit FFP in errors up to a tolerance, the Act did not require exercise
of that authority, and, indeed, Congress has now limited that authority.
A further question arises, however, since it is arguable that, where
the Secretary has exercised authority to permit FFP up to an established
tolerance level, erroneous payments should be disallowed only when in
excess of that tolerance level. During most of the time period in
question here, no such tolerance level was in effect for Medicaid.
Beginning in 1979, however, the State was subject to disallowance for
eligibility determination errors identified through Medicaid Quality
Control sampling techniques, where those errors were in excess of an
established tolerance level. 44 Fed. Reg. 12585, March 7, 1979. In the
AFDC program, States were not required to adjust for individually
identified errors on an ongoing basis while tolerance levels were in
effect. Cf., Action Transmital AT-77-30 (APA), March 16, 1977. The
State did not explicitly argue that the same policy applied in Medicaid,
so we do not here reach the issue of whether FFP should be allowed in
the portion of the State's errors attributable to the period tolerance
levels were in effect for Medicaid. Moreover, a number of factors not
addressed by the State (such as the State's error rate) would have to be
considered before FFP could be allowed based on that argument.
Nevertheless, nothing in this decision precludes the State from raising
the question with the Agency.
We conclude that the State has presented no substantial basis for the
Board to reverse the Agency's reading of the Act and that 1903(a)( 1)
and 1905(a) provide ample statutory authority for denying FFP in all
erroneous "lack of due diligence" payments.
Was There a Regulatory Basis for the Disallowance?
The State argued that there was no rule in effect during the years
1964 through 1980 which required the State to refund FFP for all
erroneous payments and that without such a rule there was no basis for
the disallowance.
(7) We disagree. The statutory basis alone is adequate to support
the disallowance. The State has not cited and the Board knows of no
principle of law which states that a clear statutory requirement may not
be invoked absent an implementing regulation. Moreover, at least since
1978, there have been regulations setting forth the requirements for
Medicaid eligibility. See generally, 42 CFR Part 435 (1978). Prior to
that, eligibility requirements were contained in the Handbook of Public
Assistance, Supplement D at section 4000 (1966). Any individual who did
not meet these requirements should not have received Medicaid benefits.
Further, the Board notes that there is neither a statutory nor
regulatory basis to support the State's attempt to receive FFP for
erroneous payments to ineligible recipients of Medicaid benefits.
Finally, even if there was some ambiguity in the requirement imposed on
the State, the fact that the State met the requirement by refunding the
federal share of all erroneous payments would militate against any claim
of inadequate notice through rulemaking.
Was There Any Factual Basis for the Disallowance?
The State argued that the Agency presented no independent evidence
that the payments in question were erroneous and that the Agency could
not rely solely on the State's determinations because they were
unreliable.
As a basis for this argument the State cited Board decisions in
California Department of Health Services, Decision No. 244, December 31,
1981, and California Department of Health Services, Decision No. 159,
March 31, 1981. The State argued that those decisions stood for the
principle that where the Agency based a disallowance on State data and
where the State established that the data was somehow unreliable, the
Agency "must provide more specific evidence and authority to support its
allegations." California, Decision No. 244, supra, p. 10.
The State argued that its "lack of due diligence" determinations
were
not reliable in that there was no procedure for appealing a "lack of due
diligence" determination and, according to its calculations, at least
50% would have been reversed on appeal. The State arrived at the 50%
figure by calculating the reversal rate for "due diligence" and fraud
appeals (where there were some 12,183 appeals and 5,808 reversals) and
increasing the rate slightly to account for the fraud cases which, the
State (8) argued, tended to be less subject to reversal on appeal. The
State concluded "that a significant portion of the eligibility
determinations in 'lack of due diligence' cases would have been reversed
if put through the standard review process." (Appellant's Opening Brief
p. 4)
The State's argument is unconvincing. It is likely that the State
was more careful in making "lack of due diligence" determinations
because they were against the State's financial interest and not subject
to appeal. In "lack of due diligence" cases the State would immediately
credit the federal government with FFP attributable to the
determinations whereas the State would credit "due diligence"
determinations only later, presumably after final administrative appeal
and recoupment. Also, the State did not show that reversal of "due
diligence" and fraud cases was on the ground that the individuals were
in fact eligible, rather than on some other ground, such as that there
was "lack of due diligence" or no fraud involved in an erroneous
determination.
The Board concludes that the State has not shown its "lack of due
diligence" determinations to be unreliable. Accordingly, there is
nothing to bar the Agency from using those determinations as evidence
that the client payments in question were erroneous.
We further note that the State's reliance on California, Decision No.
244, and California, Decision No. 159, supra, for the proposition that
the Agency had the burden of establishing unallowable expenditures and
could not rely solely on State records is misplaced. As the Agency
correctly pointed out, in each of those cases the disallowances were
reversed because of the inadequacy of the records, not because the
Agency may never rely on State records.
In California, Decision No. 244, the Board reversed a disallowance
because it found the record to be inadequate to support a determination
that the State had claimed FFP for unallowable costs. There the Agency
based its disallowance on a federal audit which in turn was based on
State and fiscal intermediary accounts receivable records which recorded
overpayments. The Board determined that there was a "substantial
question" concerning use of these State audits because they did not
specifically identify and isolate the challenged costs which were
disallowed by the Agency.
Similarily, the Board's decision in California, Decision No. 159,
supra, does not support appellant's position. There, federal audit
findings were also based on State audits under circumstances where
neither the federal nor State audits separately identified the amounts
which were disallowed and neither related the disallowed costs to
specific audit findings.
(9) In both of these cases, the problem with the Agency merely
relying on the State audits without making an independent determination
that the costs were unallowable was that the record was insufficient as
a basis for the Board to determine whether the State had, in fact,
claimed the amount of FFP disallowed, for payments which violated
federal (rather than State only) requirements.
The case before us is distinguishable since we know the amount of FFP
claimed for these payments and that they were identified as payments to
persons ineligible under federal requirements. Moreover, this Board has
held that generally a state has the burden of documenting the
allowability of costs. California State Department of Health, Decision
No. 55, May 14 1978; See also, State of Georgia v. Califano, 446 F.
Supp. 404 (N.D. Ga. 1977). The State's claim here was all related to
payments previously identified by the State as payments to ineligibles;
the State surely has the burden of documenting that the individuals
were, in fact, eligible. Yet, the State provided no documentation to
show that any specific individual involved actually met eligibility
requirements.
Did the Agency Single Out Oklahoma to Pay FFP Under Circumstances in
Which No Other State Was Required to Pay FFP and Thereby Treat the State
Unfairly?
The State argued that it was unfair to deny FFP to Oklahoma since "no
other State was making 'lack of due diligence' refunds where the
underlying ineligiblity findings were tentative in nature and there had
been no recoupment from the client." (Appellant's Opening Brief, p. 8)
The State argued that the Agency action therefore was "arbitrary,
capricious, and contrary to law." (Reply Brief for the State of
Oklahoma, p. 4)
There is no substantial basis in the record for the Board to
determine that HCFA singled out Oklahoma for treatment different from
the treatment of any other State. The State has made only vague
allegations that "apparently no other State" was required to refund
FFP
under similar circumstances and that Oklahoma had "canvassed" other
states. (Appellant's Opening Brief, pp. 5 and 8) The State actually has
done no more than make a conclusory and ambiguous allegation of unfair
treatment in relation to other states; in point of fact, the Agency was
faced with a clearly unacceptable situation in (10) the case of
Oklahoma, and there is no evidence in the record that anything as choate
and similar occurred in another state (and if it had, it appears fair to
say that the Agency would be compelled to take the action it has taken
here).
It is not clear to the Board on what basis the State characterized
its "lack of due diligence" findings as "tentative." The
State devised
the "due diligence" system of formal committee review and made the
"lack
of due diligence" findings final (no appeal), not tentative. If, as the
State alleged, the Agency did state that FFP credits to the federal
government were not necessary where the State findings were "tentative,"
the Board must conclude that the Agency was not referring to Oklahoma's
findings or was unaware of the final nature of a "lack of due diligence"
determination. /2/
It is clear from previous Board decisions that a State may be
required to refund the federal share of erroneous payments prior to
recoupment from the ineligible recipients. Massachusetts Department of
Public Welfare, Decision No. 262, February 26, 1982; New York State
Department of Social Services, Decision No. 284, April 29, 1982; Florida
Department of Health and Rehabilitative Services, Decision No. 296, May
13, 1982. The State developed the system, made the findings, and itself
relied on the findings against its own financial interest. The State
now, in effect, presents a new claim for FFP for clearly erroneous
payments arising out of its own "lack of diligence" in enforcing
Medicaid eligibility standards.
The Board concludes that the State has not shown that it was required
to pay FFP under circumstances in which no other State was required to
pay FFP or that the Agency's action was arbitrary, capricious, and
contrary to law.
Are Claims for Expenditures Incurred Prior to the State's Participation
in the Medicaid Program Eligible for FFP Under the Medicaid Program?
The State's claim includes a claim for FFP for expenditures for the
quarters ending September 30, 1964 through December 31, 1966. (Original
Brief of Respondent, Exhibit C) The Agency argued that the State was not
eligible to participate in Medicaid until January 1, 1966 and that
expenditures made prior to the State's eligibility for participation in
Medicaid (11) cannot be paid from Medicaid funds. The Agency cited
Exhibit D of its brief which indicated that the plan was effective
January 1, 1966. The State argued that Medicaid was simply an extension
of the Kerr-Mills Medical Assistance Program and pre-Medicaid matching
funds under that program are available from Title XIX Medicaid funds.
Section 1903(a) of the Act states that:
... the Secretary... shall pay (certain specified amounts) to each
State which has a plan approved under this Title, for each quarter,
beginning with the quarter commencing January 1, 1966....
The Board believes this section can be read in no other way but to
preclude FFP for expenditures incurred prior to January 1, 1966. The
State does not dispute that part of its claim was for expenditures
incurred prior to January 1, 1966. Therefore, the State could not, in
any event, receive FFP for those pre-January 1, 1966 expenditures.
Conclusion
Based on the foregoing, the Board upholds the Agency disallowance in
full. /1/ The $398,875.24 figure represents the amount identified by
the State as overpayments for the period in question ($411,164.16),
reduced by the State's estimate of the amount it had recouped from
ineligible recipients ($12,288.92). The State acknowledged that amounts
recouped were rightfully credited to the Agency. The Agency apparently
accepted the State's estimate and rounded the disallowance to $398,875.
/2/ The State did not argue that the Agency should be estopped to deny
payment here based on this alleged Agency advice, and indeed the State
made only one conclusory and oblique reference to this circumstance. We
likely would not find estoppel in any event, since there would appear to
have been no detrimental reliance on the part of the State; the State
apparently had already paid the money back to the Agency.
JULY 07, 1984