GAB Decision 619
January 28, 1985
California Department of Health Services;
Teitz, Alexander G.; Settle, Norval D. Ballard, Judith A.
Docket No. 84-165
The California Department of Health Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $6,746,437 in federal financial participation (FFP) claimed under
Title XIX (Medicaid) of the Social Security Act (Act). The disallowance
was based on an audit report reviewing State procedures used to credit
the federal government for overpayments made by the State to providers
of services under the Medicaid program. HCFA adopted the audit report's
determination that the federal share of overpayments to Medicaid
providers was not being returned to HCFA until the State actually
recovered the amounts from the providers.
The major issue presented is whether section 1903(d)(2) of the Act
authorizes HCFA to demand that the State repay the FFP share of
identified overpayments to Medicaid providers, even though the State may
not have yet collected the overpayments from the providers. For the
reasons discussed below, we find that HCFA may adjust under section
1903(d)(2) for overpayments to providers prior to any State recovery
from the providers. Accordingly, we uphold the disallowance.
General Background
Title XIX of the Act provides for the payment of federal monies to
states to aid in financing state medical assistance programs. Any state
that wishes to participate in the Medicaid program must develop and
submit a plan that meets certain requirements set forth by the Secretary
of the Department of Health and Human Services (HHS). Realizing that
many states might have difficulty financing a Medicaid program even if
subsequently reimbursed by the federal government, Congress also
established a funding mechanism by which HHS advances funds to a state,
on a quarterly basis, equal to the federal share of the estimated cost
of the program. After review of the state's quarterly statement of
expenditures, the Secretary may adjust future payments to reflect any
overpayment or underpayment which was made to the state for any prior
quarter. Section 1903(d) of the Act.
(2) Specifically, section 1903(d)(2) of the Act states:
The Secretary shall then pay to the State . . . the amounts so
estimated, reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this section
to such state for any prior quarter and with respect to which adjustment
has not already been made under this subsection. . . .
The issue here arises because section 1903(d)(3) of the Act states:
The pro rate 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.
Case Background
The HHS Office of Inspector General, Office of Audit, issued a report
on its audit of certain aspects of the State's Medicaid program. (Audit
Report No. 40223-09) The purpose of the audit was to determine if the
federal share of overpayments made by the State to Medicaid providers
was being promptly returned to the Agency. The audit reviewed the State
procedures for the collection of overpayments, during the period July 1,
1978 through November 30, 1983. /1/
The auditors determined that the State had not credited the Medicaid
program for the $6,746,437 in FFP of the $16,696,912 identified as
unrecovered overpayments to providers. The audit report broke down the
$16,696,912 into the following categories:
$12,090,891 ($4,970,287 FFP) for overpayments to 15 providers who had
gone bankrupt.
$3,726,197 ($1,373,849 FFP) in overpayments received by 16 providers
who had entered into repayment agreements with the State to repay the
overpayments on an installment basis.
(3) $879,824 ($402,301 FFP) of overpayments written off as bad debts.
/2/
The audit report noted that in all instances the overpayments had
been firmly established, meaning that the overpayments were due from
only those providers that had either completed or waived the
administrative appeal process. Citing section 1903(d)(2) of the Act,
the audit report concluded that the State was required to return the
federal share of the overpayments.
HCFA adopted the audit report's determinations and found that all the
overpayments were established as being payments in excess of the
applicable upper limit requirements currently codified at 42 CFR
447.252(g), 447.271-272, and 447.304. /3/ Citing section 1903(d)(2) of
the Act as authority, HCFA disallowed $6,746,437 in FFP. /4/
(4) Analysis
The general question of whether HCFA has the authority to demand from
states the federal share of identified Medicaid overpayments to
providers prior to the actual recovery of the overpayments by the states
has been examined by the Board in a series of decisions. In these
decisions the Board has held that excess payments to providers do not
constitute "medical assistance" within the meaning of the Act, and
that,
therefore, HCFA is empowered by section 1903(d)(2) of the Act to collect
the federal share of excess payments, even if a state has not yet
recovered the excess amounts from the providers. Massachusetts
Department of Public Welfare, Decision No. 262, February 26, 1982;
Florida Department of Health and Rehabilitative Services, Decision No.
296, May 15, 1982; New York State Department of Social Services,
Decision No. 311, June 16, 1982; Illinois Department of Public Aid,
Decision No. 404, March 31, 1983; Pennsylvania Department of Public
Welfare, Decision No. 426, May 24, 1983; Missouri Department of Social
Services, Human Services, Decision No. 480, November 30, 1983; and New
York Department of Social Services, Decision No. 526, March 30, 1984.
Several of these decisions have been appealed to federal courts. Two
of the appeals are, we believe, especially relevant to the State's
position here. In Massachusetts v. Heckler, 576 F. Supp. 1565 (D. Mass
1984), Board Decision No. 262 was reversed on the grounds that HHS had
not established that payments to a provider at an interim rate higher
than a final rate constituted an overpayment for purposes of section
1903(d)(2). In Massachusetts v. Secretary, Case No. 84-1197, however,
the United States Court of Appeals for the First Circuit, on November
28, 1984, reversed the judgment of the District Court and upheld Board
Decision No. 262. On October 1, 1984, the United States District Court
for the Northern District of New York, in Perales v. Secretary, Case No.
83-CV-900, affirmed Board Decision No. 311. /5/
(5) I. What is the proper interpretation of section 1903(d)?
In the above appeals, states argued generally that HCFA was not
entitled to recoup the federal share of excess payments to providers
until the payments were recovered, and that section 1903(d)(3) limited
any federal interest to a pro rata share of the amount actually
recovered. Rejecting these arguments, the Board summarized its
reasoning as follows:
Section 1903(d)(3) does not by its terms relate back to all
overpayments contemplated by section 1903(d)(2).
Since section 1903(d)(3) refers to amounts recovered with respect to
"medical assistance furnished under the State plan," it reasonably
may
be viewed as referring only to state payments which are allowable
"medical assistance" costs, under section 1905(a) of the Act.
The legislative history supports the Agency's position that section
1903(d)(3) was designed the authorize the Secretary to adjust in
situations where a question might have existed as to a state's liability
to repay the federal share or the Agency's ability to recoup the share
by an offset to future claims.
Neither the Agency nor the courts have ever interpreted section
1903(d)(3) to prevent adjustment under section 1903(d)(2) of an amount
determined by the Secretary to be an overpayment, merely because the
state has not recovered the amount from a provider. /6/
Decision No. 311, Pp. 4-5; Decision No. 404, p. 12.
(6) Notwithstanding the above cases, the State has argued that the
Board and HCFA have misinterpreted section 1903(d) of the Act.
According to the State, the term "overpayment" in section 1903(d)(2)
refers only to excess payments by the Secretary to the State, and not to
payments by the State to providers; any excess payment by the State in
accordance with the State Medicaid plan is a payment for "medical
assistance" which must be recovered according to section 1903(d)(3); and
this interpretation is consistent with the cooperative federalism
partnership concept of the Medicaid program, the plain language of the
statute, and Congressional intent.
The Board's past decisions recognized, and the reviewing courts have
concurred, that the difficulty in interpreting section 1903(d) stems
from its apparent ambiguity because of the lack of a definition of
"overpayment." Nevertheless, in analyzing an argument similar to the
State's position above, the Board declared that--
the specific subject of (d)(3) is not "recovery of overpayments"
as
the State alleged, but treatment of certain recoveries as overpayments.
The plain language of (d)(3) concerns amounts which would ordinarily not
be considered "overpayments" because they were "medical assistance
furnished under the State plan" and therefore, were allowable when made.
When such amounts are recovered, (d)(3) describes the extent to which
the federal share is to "be considered an overpayment" for purposes
of
adjustment under (d)(2). Thus, (d)(3) does not constitute a limiting
definition of the term "overpayment" in (d)(2). Contrary to the State's
assertion, the Agency interpretation does not render (d)(3) superfluous,
ineffective, or insignificant, but, rather, gives effect to both
provisions and is supported by the statutory scheme as a whole.
Decision No. 311, pp. 5-6.
The Court in Perales, supra, called the above quotation a "sound
conclusion . . . amply supported by the statutory language." Slip op.,
p. 14.
In its brief, the State argued that the excess payments resulted from
the State's retrospective reimbursement system. Under this system the
State makes provisional payments to providers at interim rates basd on
the providers' previous year costs. At the end of the fiscal year, the
provider submits a cost statement. The State then determines a (7)
tentative settlement rate for the year. /7/ If the tentative settlement
rate is lower than the interim rate, the State recovers the difference
from the provider. The State declared that this reimbursement method
was accepted as part of its State plan by HCFA. The State then
contended that, as long as it is acting in accordance with its State
plan, HCFA is entitled to a refund only of the federal portion of excess
payments actually recovered by the State. According to the State, the
term "overpayment" as used in section 1903(d)(2) refers only to excess
payments by the Secretary to a state, and whether or not the federal
share of an excess payment to a provider is an "overpayment" depends
on
whether or not the excess payment was made in accordance with the
approved State plan.
The State noted that its reimbursement system was nearly identical to
Massachusetts' and that the district court in Massachusetts had rejected
HCFA's interpreation of Section 1903(d), citing Harris v. McRae, 448
U.S. 297 (1981):
In our view, to place the full burden of unrecoverable medicaid
payments on the states would be inconsistent with the general scheme of
the Medicaid program, which was intended to function as a partnership
between the states and the federal government.
576 F. Supp. 1565, at 1568.
We agree with the State that "overpayment" as used in section 1903(
d)(2) refers to excess payments of FFP made by the Secretary to a state.
But, whenever the Secretary determines that a state has claimed and
received FFP based on a payment to a provider which does not constitute
"medical assistance under the State plan" within the meaning of section
1903(a), the Secretary has in effect determined that the state has been
overpaid federal funds. Thus, the issue here is whether the amounts in
dispute were "medical assistance furnished under the State plan."
The State's argument focuses on whether the State made the payments
to the providers in accordance with the State plan, contending that the
plan permitted reimbursement at an interim rate. Therefore, according
to the State, the payments were authorized when they were made. This
line of (8) reasoning ignores the focal point of the Board's analysis in
Massachusetts, supra, that was upheld by the Court of Appeals. The
amounts in question here were found to be in excess of what the
providers were entitled to under the State plan. As a result of
reimbursing the providers an excess amount, the State then claimed FFP
in a greater amount than it was ultimately entitled to, i.e., FFP in the
rate ultimately determined to be the correct one under the State plan.
Since HCFA determined that the amounts were not "medical assistance
furnished under the State plan," this constituted a determination that
FFP in the amount was an overpayment subject to the provisions of
section 1903(d)(2). /8/
As to the issue of the compatibility of HCFA's position on
overpayments with the cooperative federalism foundation of the Medicaid
program, the Board has previously concluded:
(While) it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, the states have the primary responsibility
for administering the program, including the duty to take steps to
prevent improper payments in the first instances and to identify and
recover overpayments in a timely manner when they do occur. In some
instances the loss of funds might 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
think that the Agency is not unreasonable in requiring the states to
bear the burden of unrecovered overpayments.
Decision No. 311, p. 7.
(9) The District Court in Perales, in finding HCFA's interpretation
of 1903(d) reasonable, supported this view:
While plaintiff is entirely correct in its characterization of
Medicaid as a federal/state partnership, there is no basis to believe
that some of the partners' obligations are not to be borne alone . . .
precisely because the State is in the best position to detect and
prevent Medicaid fraud, it must be charged with the responsibility for
its prevention. To allow the state to shift the cost of its own errors,
however innocent they may be, could only lessen the efficiency of the
entire program. The partnership upon which plaintiff relies does not in
and of itself entitle the State to disclaim or abdicate its own
obligations in order to make its own reponsibilities easier to bear.
Slip op., p. 21.
After the State had submitted its brief in this appeal, the First
Circuit Court of Appeals issued its decision in Massachusetts v.
Secretary, supra, reversing the District Court's ruling. While
declaring 1903(d) "less than crystal clear" and calling the question
"close", the court adopted the Secretary's interpretation of 1903(d).
Slip op., p. 14.
Essentially, the court found the Secretary's interpretation of the
statute as reasonable as that of Massachusetts, holding that "Congress
could scarcely have meant to reimburse a state for excessive cost of
services." Id. In upholding the Secretary's position, the Court declared
that it was appropriate to give deference to the reasonable and
statutorily permissible interpretation of the agency responsible for the
administration of the program. Id., p. 19.
The Court upheld the Secretary's interpretation also on public policy
grounds:
Since Medicaid is a joint program of the state and federal
governments for providing health care, it is appropriate to inquire
whether imposing that portion of the rate differential at issue on
Massachusetts or the Secretary will better conserve the limited pool of
resources available for that purpose. Since only Massachusetts deals
directly with the Providers, and since the state is empowered to perform
on-site audits of these institutions, it is clearly the party best able
to minimize the risks resulting from dealing with insolvent providers.
The fact that Massachusetts will in any event bear a share of the loss,
and so already has some incentive to minimize these risks, diminishes
(10) but does not destroy the force of this observation. Placing an
additional burden on the state will increase its incentive to take care,
whereas the Secretary remains powerless to reduce the risks no matter
what the costs imposed on her.
Slip op., p. 21.
The Court of Appeals' decision also answers another argument advanced
by the State. The State contended that section 1903(d) is ambiguous and
that Congress can impose conditions on grant of federal monies only if
it does so unambiguously. In support of this proposition, the State
cited Pennhurst State School v. Halderman, 451 U.S. 1 (1978). The First
Circuit declared:
We do not believe that Pennhurst requires that every arguably
ambiguous provision conditioning the receipt of federal funds by a State
be construed in the state's favor. . . . Pennhurst found the imposition
of new conditions on the receipt of federal funds repugnant to the
notion that by accepting the funds the state had thereby entered into a
contract with the federal government and was entitled to have its
bargain enforced as written. Pennhurst, 451 U.S. at 17. The present
case involves not the imposition of a new condition on the state but the
interpretation of the provisions governing the remedies available to the
federal government. No principle of contract law requires us to
construe such a provision consistently against a federal government
obligee. Slip op., pp. 17-18.
In light of the Board's past decisions and the First Circuit's
opinion, we are not persuaded that HCFA's interpretation of section
1903(d) is incorrect or that that interpretation violates the
partnership concept of the Medicaid program.
II. Is HCFA's interpretation of section 1903(d) consistent with other
sections of the Act and its own policies?
The State additionally alleged that HCFA's interpretation of section
1903(d) is inconsistent with another section of the Act, 1903(u).
Section 1903(u) generally allows HCFA to withhold payments to states in
instances where a state has made erroneous excess payments for medical
assistance under its State plan that exceed a specified ratio when
compared to the total expenditures for medical assistance under the
plan. Section 1903(u), however, also allows a state a certain level of
"erroneous excess payments" in eligibility matters. If this level
of
permissible erroneous excess payments is reached, HCFA will disallow FFP
and treat the payments as an overpayment under section 1903(d).
(11) The State questioned why section 1903(u) does not treat payments
violating eligibility standards in the State plan as an overpayment
until the payments exceed a certain percentage, while HCFA's
interpretation of section 1903(d) holds the State strictly liable for
excess payments made in accordance with the State plan. The State
considered this disparity of treatment unreasonable and absurd.
According to the State, a reasonable and consistent approach would be to
treat excess payments in accordance with the State plan as overpayments
only after they are recovered and payments not in accordance with
eligibility standards as overpayments only when they exceed the
permissible error level.
What the State overlooked, and what HCFA pointed out, is that section
1903(u) applies only to Medicaid eligibility errors, that is, payments
for individuals ineligible for Medicaid services. 1903(u)(1)( D)(i). It
is not applicable to situations where overpayments have been made to
providers of Medicaid services.In the latter case, section 1903(d)(2)
governs the recovery of the overpayments.
Unlike the State, we do not consider this an inconsistency. Rather,
we believe, it reflects an intention of Congress that when it comes to
the treatment of individuals, a state should be allowed some leeway,
some permissible level of error without fear of punishment in the form
of a disallowance, to ensure that these individuals receive medical
care. No such provision was attached to 1903(d) and the recovery of FFP
for overpayment to providers.
The State also alleged another inconsistency on HCFA's part in its
treatment of Medicaid excess payments. It submitted a 1984 memorandum
from an HHS official relating to Medicaid fraud. The memorandum stated
that "existing HCFA policy is that state payments will not be reduced
due to the identification of an overpayment" by the Medicaid Fraud
Control Unit. The memorandum also stated, "Payments should not be
reduced based upon overpayments identified but not as yet recovered."
(emphasis in original) The State questioned why HCFA's rule on Medicaid
fraud is different from HCFA's position on section 1903(d).
In response, HCFA submitted an affidavit from the author of the
memorandum, in which the HHS official stated that the memorandum did not
accurately reflect HCFA's policy on the collection of overpayments.
(Affidavit of Arthur Friedman) Additionally, HCFA claimed that the
memorandum was informational in nature and did not represent a final
HCFA position and that the author of the memorandum lacked the authority
to make Medicaid policy. The State did not dispute this.
(12) The letter does not appear to have been intended as a HCFA
policy statement, as it was directed only to the State Medicaid Fraud
Control Units, and was not issued as part of HCFA's formal system of
guidance to the states. Furthermore, the letter appears to be in direct
contradiction to section 2555 B of the State Medicaid Manual.
Given HCFA's unrebutted assertions and the fact that the period at
issue here predates the memorandum, we do not believe that the
memorandum constitutes a policy that would preclude this disallowance.
III. Were the payments at issue in excess of the upper limits
requirements?
We also believe that the nature of the overpayments here undermines
the State's position. The audit report noted that the overpayments were
due only from those providers that had completed or waived the
administrative appeals process. The disallowance notification added
further that all the overpayments had been firmly established as
payments in excess of the upper limits requirements set forth in various
subsections of 42 CFR 447. The State did not deny either of these
statements.
Subsections 271 and 272 of 42 CFR 447 impose upper limits on what a
state may pay a provider for Medicaid services. FFP is available only
for those payments that do not exceed the upper limits. 42 CFR
447.304(c). These regulations (with the recodifications detailed in
footnote 3) were in effect throughout the period in question. The State
thus had notice of HCFA's policy on payments in excess of upper limits
requirements. Furthermore, there is no provision in section 447 stating
the repayment of excess payments could wait until the actual recovery of
the overpayments. In fact, in a notice of proposed rulemaking, 48 Fed.
Reg. 14664-14668, April 5, 1983, HCFA proposed an amendment to section
447 that "would revise current policy that requires medical assistance
grant awards to be reduced at the time overpayments are reported." The
proposed regulation, not yet published in final form, would set a time
limit before the overpayments would be offset against a grant award in
order to verify and resolve the debt.
While HCFA may thus now be in the process of revising its policy on
the time frame for the return of overpayments, it is clear to us that
during the period in question the State should have known from section
447 that payments in excess of the upper limits were unallowable and
that the federal share was subject to offset.
(13) Conclusion
For the reasons stated above, we sustain the disallowance in the
amount of $6,746,437. In other cases before the Board HCFA has agreed
to a reduction for any amounts a state can document that the state has
returned to HCFA as a result of repayment agreements with the providers.
It appears that here the State may have already returned to HCFA amounts
received from providers repaying overpayments on an installment basis.
If so, the disallowance should be adjusted accordingly. /1/ The summary
sheets accompanying the audit report identified providers by
number, with the balance due from distinct time periods. Some of these
overdue balances arose from time periods as far back as 1966. The State
did not dispute the accuracy of the calculations and figures used in the
audit report. /2/ The audit report stated that the actual amount
of "bad debt" overpayments for the period covered by the audit was
some
$8.9 million, but that documentation explaining and supporting the
overpayment determinations was available for only $879,824 of the
overpayments. /3/ These provisions were revised and renumbered
from former sections 447.250-447.316 in 1981. (46 Fed. Reg. 47964 et
seq., September 30, 1981). Although the revisions changed the method
for Medicaid reimbursement, the prohibitions against exceeding upper
limits, based upon the new method, remained unchanged. Prior to October
1, 1978, the applicable upper limits provisions were codified at 42 CFR
450.30(a). No substantive changes were made in the 1978 recodification.
See, 43 Fed. Reg. 45176, 45258-45262 (September 29, 1978). /4/
HCFA additionally cited section 2555 B of the State Medicaid Manual as a
basis for the disallowance. Section 2555 B states: Overpayments are
not considered payments made in accordance with a State plan, and
therefore, no FFP is available for such payments. The Federal share of
any overpayment must be returned to HCFA in the same quarter in which
the overpayment is identified, and is neither contingent upon, nor
subsequent to, the State's recovery of any portion of the overpayment.
Section 2555 B, however, was not added to the State Medicaid Manual
until December 1982. It cannot, therefore, be a basis for all of this
disallowance. /5/ District courts have reviewed other Board decisions
on the issue of recovery of overpayments. On January 5, 1984,
the United States District Court for the Northern District of Florida,
Tallahassee Division, in Florida v. Heckler, Civ. No. 82-0935, affirmed
Board Decision No. 296, holding that the State of Florida was liable for
Medicaid overpayments made to providers notwithstanding the providers'
bankruptcy. On September 27, 1984, the United States District Court for
the Western District of Missouri, Central Division, in Department of
Social Services v. Heckler, Case No. 84-4106-CV-C-5 (appeal pending),
reversed Board Decision No. 448. The results of the district court
decisions appear to hinge on the type of rate-setting mechanism and
excess provider payment involved. The Court of Appeals decision in
Massachusetts, however, allows recovery of the federal share of the
excess payments irrespective of the ratesetting system that may have
generated the overpayments. Compare, Arkansas v. Heckler, Case No. LR C
83 467, Eastern District of Arkansas, Western Division, September 17,
1984. /6/ In the Massachusetts District Court decision, the
court held that, where there is an overpayment, there need be no
recovery by a state before the overpayment can be properly disallowed,
but disagreed whether there was, in fact, an overpayment when an interim
rate was later found to be greater than a final rate. /7/ The tentative
settlement rate may ultimately be adjusted as a result of an audit and
may also be appealed. As previously stated, the overpayments at issue
concerned only those providers who had completed or waived the
administrative appeals process. /8/ The State alleged that
HCFA's interpretation resulted in section 1903(d)(3) meaning the same
thing as the second sentence of section 1903(d)(2), with the only type
of payment which is "with respect to medical assistance" and "under
the
State plan" being a payment to a provider for which a third party is
liable. This argument apparently related to a statement in the audit
report. HCFA has elsewhere interpreted 1903( d)(3) to have broader
application than the second sentence of 1903(d)( 2). For example,
section 1903(d)(3) would apply to the recovery of the federal share of
payments made to a physician who had decided not to charge a state for
his services and returned Medicaid funds previously paid.
MARCH 19, 1985