GAB Decision 645
April 30, 1985
Washington Department of Social and Health Services;
Ballard, Judith A. Settle, Norval D. (John) Garrett, Donald F.
Docket No. 84-134
The Washington Department of Social and Health Services (State)
appealed the disallowance by the Health Care Financing Administration
(HCFA, Agency) of $1,625,746 in federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act).
The disallowance was based on an Agency financial management review of
the State's system for controlling accounts receivable in the operation
of its Medicaid program. The report determined that the State had not
made adjustments in FFP for overpayments the State made to providers of
Medicaid services. The major issue presented is whether section 1903(
d)(2) of the Act authorizes HCFA to demand that the State repay the
federal share of an identified overpayment to a Medicaid provider, even
though the State may not have yet collected the overpayment from the
provider. For the reasons discussed below, we find that HCFA may adjust
under section 1903(d)(2) for the FFP claimed in the overpayments here.
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 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. Case
Background From December 1982 to September 1983 HCFA conducted a
financial management review (State's Appeal File, Ex. 1) of the State's
Medicaid program with the purpose of evaluating the State's
effectiveness in identifying, recording, and returning the federal
portion of Medicaid overpayments. The review identified three different
categories of overpayments:
-- overpayments of $463,464 FFP to 69 nursing homes under the State's
retrospective long-term care reimbursement system for the service period
July 1, 1974 to December 31, 1977;
-- overpayments of $778,776 FFP to 40 providers in the period July
1974 to December 1982 discovered primarily by investigations of
fraudulent or abusive billings; and
-- overpayments of $383,506 identified as uncollectable debts from
nine providers for services rendered between July 1974 and December
1976. The review found that the State's policy was not to adjust FFP
until the provider actually remitted the amount at issue. According to
the review, this policy contradicted section 1903(d)(2) of the Act,
which requires adjustment of the federal share of the overpayments
without regard to whether or not the State has recovered the
overpayments from providers. The review concluded that there was no
alternative other than to proceed with a disallowance of $1,625,746 FFP,
but noted that that figure represented a particular point in time and
that adjustments might be made where the State has since recovered the
overpayments from some of the providers. In its response to the audit
review (State's Appeal File,(3) Ex. 2), the State disagreed with many of
the review's conclusions and questioned the accuracy of the disallowance
calculations. We address these contentions below. Analysis I. Whether
HCFA can adjust for overpayments prior to recovery.
A. Previous Board decisions. 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 improper or
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 these
payments, even if a state has not yet recovered the amounts from the
providers. Once a state makes a determination that an overpayment has
occurred, HCFA may collect its share if that determination is
sufficiently final so that the state could recover the amount 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, Decision No. 448, June 30, 1983; New Jersey Department
of Human Services, Decision No. 480, November 30, 1983; New York
Department of Social Services, Decision No. 526, March 30, 1984;
California Department of Health Services, Decision No. 619, January 28,
1985; Iowa Department of Human Services, Decision No. 629, March 18,
1985; and Ohio Department of Public Welfare, Decision No. 637, April 2,
1985. Several of these decisions have been appealed to federal courts.
Only one case has been considered by a circuit court. 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, 749 F. 2d 89 (1984), petition for cert. filed, 53 U.S.L.W.
3652 (U.S. Feb. 25, 1985) (No. 84-1363), however, the United States
Court of Appeals for the First Circuit reversed the judgment of the
District Court and upheld Board Decision No. 262. That court found
HCFA's interpretation of section 1903(d) reasonable and based(4) on
sound policy considerations. Of the district court decisions, the most
pertinent here is the October 1, 1984, decision by the United States
District Court for the Northern District of New York in Perales v.
Secretary, Case No. 83-CV-900, which affirmed Board Decision No. 311.
/1/
In the above appeals, states argued generally that HCFA was not entitled
to recoup the federal share of improper or 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. The Board's reasoning in rejecting these arguments may be
summarized 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.(5)
- The legislative history supports the Agency's position that section
1903(d)(3) was designed to 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.
- The more general language of section 1903(d)(2) has been
consistently read together with section 1116(d) of the Act, so that a
determination that a state has claimed and received FFP in unallowable
costs is tantamount to a determination that the disallowed amount is an
overpayment to be adjusted under subsection 1903(d)(2). See, e.g., 45
CFR 201.10 et. seq.; Solomon v. Califano, 464 F. Supp. 1203, 1204 (D.
Md. 1979).
- 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 unallowable, merely because the state
has not recovered the amount from a provider. /2/
- Since the states deal directly with the providers, they are in the
best position to see that Medicaid funds are properly expended. B. The
State's arguments here. Notwithstanding the above cases, the State
argued in this appeal that the Board and HCFA have misinterpreted
section 1903(d) of the Act. According to the State, it is subsection (3)
of 1903(d), not subsection (2), that governs the recovery of
overpayments, with HCFA's recoupment limited to a pro rata share of the
amount actually recovered by the State from the providers. The State
contended that the disputed amounts were costs incurred for medical
services under the approved(6) State plan and thus were payments for
"medical assistance" which, under section 1903(d)(3) cannot be
considered "overpayments" until the State actually recovers them.
The
State further argued that HCFA's interpretation of section 1903(d)
violated the cooperative federalism/partnership concept of the Medicaid
program. The State also argued that HCFA should be estopped from taking
a disallowance here because it had approved the State plan's method of
payment to providers and its policies on the issue of overpayments have
been inconsistent. The State disputed HCFA's authority to define when a
final overpayment determination is made. Our past decisions recognized,
and the reviewing courts have concurred, that the difficulty in
interpreting section 1903(d) stems from the lack of a definition of
"overpayment." Considering the section, as a whole, however, HCFA's
reading makes more sense. 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 this
statement a "sound conclusion . . . amply supported by the statutory
language." Slip op., p. 14. In its brief the State cited the district
court decisions in Massachusetts and Arkansas to support its position.
Similar to the situation in Massachusetts (where the district court
decision has now been reversed), a significant portion of the
disallowance here arose from the State's method of reimbursing nursing
home providers of Medicaid services. The providers were paid at an
interim rate in accord with the approved State plan; a subsequent
determination established a lower rate. According to the State, the
Massachusetts district court opinion ruled that the payment at the
interim rate was a legitimate expenditure for which Massachusetts was
entitled to receive FFP and which did not become improper upon
determination of a lower final rate. (7)$%After the State had submitted
its brief in this appeal, the Court of Appeals for the First Circuit
issued its decision in Massachusetts reversing the district court.
While declaring section 1903(d) "less than crystal clear" and calling
the question "close," the court adopted the Secretary's interpretation
of 1903(d). 749 F. 2d 89, at 94. Essentially, the Court of Appeals
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., at 95-96. The State chose not to submit a reply brief or
seek to address the points raised by the Court of Appeals. 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. This line of reasoning ignores the
focal point of the Board's analysis in Massachusetts that was upheld by
the Court of Appeals. The amounts in question were found to be in
excess of what the providers were entitled to under the State plan. 749
F.2d 89, at 94. As a result of reimbursing the providers an excess
amount, the State 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). Similarly,
claims based on fraud or abusive billings and other excessive payments,
irrespective of their recoverability, are not "medical assistance."
The
State contended that HCFA's interpretation of section 1903(d) is
seriously at odds with the Congressional intent of making the Medicaid
program a cooperative federal-state partnership. The State cited the
Massachusetts district court opinion:
In our view, to place the full burden of unrecoverable Medicaid
payments on the states would be inconsistent(8) 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. The State reasoned that, where a state is
making full and appropriate efforts to recover overpayments, as it
claimed that it has done, the Federal Government should share in the
State's success and also participate in any losses. (State Response to
Review, State's Appeal File, Ex. 2, p. 12) 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:
(W)hile 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 instance 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. The District Court in Perales supported this
view for similar reasons, and concluded that:
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 responsibilities easier to bear.
Slip op., p. 21. The Court of Appeals said in Massachusetts:
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(9) in any event bear a share of the
loss, and so already has some incentive to minimize these risks,
diminishes 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.
749 F. 2d 89, at 96. 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. The State additionally
alleged that HCFA should be estopped from enforcing its interpretation
of section 1903(d) because it had approved the State plan's provision
for reimbursement of providers and because HCFA's policies on this
subject have been inconsistent. The State cited the district court's
opinion in Arkansas, which said that HCFA's interpretation --
places the State in the vulnerable position of being whipsawed by the
Secretary on one side and by the administrative process of the federally
approved State Plan on the other. Insofar as the Secretary has acted
arbitrarily it must be "estopped."
Slip op., p. 6. As noted above, however, the State's perception of
what payments were authorized when its State plan was approved is
incorrect. The State plan may permit the State to make payments at an
interim rate, but it also establishes the final rate amount. The State
has pointed to nothing in the State plan provisions or applicable
regulations which authorizes the State to retain FFP in an amount
greater than the final rate. In support of its position that HCFA has
been inconsistent in its policy on excess payments, the State submitted
a 1984 memorandum from an HHS official (Chief of the State Fraud Branch,
Office of the Inspector General) relating to Medicaid fraud. State's
Appeal File, Ex. 5. 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 orginal) 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)(10) 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. 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 2555.2 B of the State
Medicaid Manual. /3/
A party asserting an estoppel against the government must first
demonstrate that all the traditional elements of an estoppel are
present. Heckler v. Community Health Services of Crawford County, Inc.,
-- U.S. -- , 104 S. Ct. 2218 (1984). The State has failed to
demonstrate those elements here, and we do not find that the Secretary
can be estopped from issuing a disallowance here. The State, for
example, could not possibly have relied to its detriment on the
memorandum when the period of the disallowance here predates the
memorandum. Irrespective of its assertion that legitimate expenditures
do not become overpayments for FFP adjustment prior to collection, the
State further argued that numerous payments to providers listed in the
audit and disallowance cannot be considered overpayments for FFP
purposes until both administrative and judicial remedies are exhausted.
The State asserted that providers whose claims are challenged are
entitled to full due process requirements, and that HCFA's determination
of the existence of overpayments for certain providers was premature.
The State declared that a substantial number of the providers subject to
the disallowance are currently involved in proceedings which include
interim rates, department overpayment revisions, administrative and(11)
judicial reviews, and repayment agreements. (State's Appeal File, Exs.
2 and 6) The Board discussed this issue in Ohio, supra. There the
Board, held:
(T)he mere fact that some providers were appealing the audit findings
did not render those findings unreliable where the State considered the
findings to be sufficiently final so that the State could take action to
collect the excess payments from the providers. p. 13. In other cases
before the Board, providers' appeals had been going on for years, with
states not indicating when the process might be completed. Similarly in
this case, HCFA pointed out that seven of eight open appeals were
initiated prior to September 1980. HCFA's Brief, p. 15. Although the
State in its brief promised to supplement its appeal file with updated
computations and data concerning the providers in the appeal process (p.
3 and p. 9), the State failed to do so. Nor did the State present the
Board with any basis on which to conclude that the findings affecting
particular facilities were unreliable. The State did not argue, for
example, that its findings lacked sufficient finality so that the State
was barred under itys laws from collecting from providers because of the
pendency of an appeal. We can find no reason, therefore, to require HCFA
to wait indefinitely for its share of the overpayments in these
circumstances. Nor do we find that the State is ultimately prejudiced
by this conclusion. Should a provider prevail on appeal, i.e., prove
that the original determination was incorrect and that no overpayment
occurred, the State could timely file for an adjustment of FFP. In
other cases before the Board, HCFA has agreed to make such adjustments
upon a showing by a state. II. Whether the disallowance amount is
accurate. In addition to the legal arguments it made against the
disallowance, the State also attacked the accuracy of the disallowance
amount. The State claimed that in its response to HCFA's review it
noted several areas where the review was erroneous as to amounts due
from certain providers. The State noted the following problems with the
review:
-- no distinction was made for overpayments resulting from
third-party liability payments;
-- no distinction was made for overpayments resulting from payments
made to providers at interim rates which later proved to be greater than
the providers' actual costs;
-- payments were disallowed which were originally identified as
overpayments, but were subsequently found to have been correct; and(
12)
-- payments determined to have been overpayments prior to the
exhaustion of the providers' administrative appeals. When HCFA issued
its disallowance, it did not accept any of the suggested corrections to
the disallowance amount made by the State, but noted that the "amount in
question is constantly changing as payments are made and new debts are
added." In past cases involving overpayments where the parties have
disputed the accuracy of disallowance calculations, the Board, while
sustaining the authority of HCFA to adjust overpayments on the basis of
section 1903(d)(2), has directed HCFA to work with the State to
re-examine the documentation to resolve any discrepancies. See, e.g.,
Illinois Department of Public Aid, Decision No. 404. HCFA has agreed to
engage in a similar re-examination of the figures in this appeal. We
note, however, that in the preceding section of this decision we have
dealt with two areas of the State's concern. We found that the federal
share of the excess part of payments made to providers at interim rates
in accord with the State plan could nonetheless be overpayments subject
to disallowance. We also found that HCFA did not have to wait to the
completion of a provider's administrative appeal to make an overpayment
determination as long as the initial determination was sufficiently
final so that the State could take action to recover the overpayments
from the provider. If, as the State claims, certain payments originally
thought to be overpayments were later proven to be allowable, then HCFA
should adjust the disallowance. Similarly, if the State has already
repaid HCFA for some of the overpayments recovered from the providers
since the issuance of the review, HCFA should adjust the disallowance.
As to the overpayments which the State claimed arose from third-party
liability payments, the State argued that in such instances section
1903(d)(3) applies and thus any FFP adjustment is limited to a pro rata
share of the amounts actually recovered. The State referred to the
Board's decision in Massachusetts:
The extensive legislative history cited by the State primarily
supports the Agency's position that section 1903(d)(3) was designed to
authorize the Secretary to adjust in situations such as third party
reimbursements . . .
p. 6 (emphasis supplied by State). The State then referred to page 12
of HCFA's review which states that a share of the medical vendor
overpayments arose from "retained duplicate payments made by Third Party
Liability payors."(13) Once again, we believe that the State has
misinterpreted what the Board has stressed is the key to understanding
its interpretation of section 1903(d). In order for section 1903(d)(3)
to apply, the payments in question must have been payments for medical
assistance not in excess of authorized limitations. In a situation
where an overpayment might arise from an authorized reimbursement to a
state from a third party, HCFA's recovery would be limited to a pro rata
share in accord with section 1903(d)(3) and the second sentence of
1903(d)(2). But here, the audit review notes, the third party
reimbursements were duplicate payments to the provider. The review
declared that this group of medical vendor overpayments "comprises
prosecuted fraud cases, findings of reviews by the Medicaid Fraud unit,
and reviews and audits by components of the (State)." p. 12. The State
has not provided us with any specific information concerning the amounts
involving third party reimbursements. Once a provider receives
reimbursement from a state for services and then receives reibmursement
from a third party for the same services, it would appear, unless the
state can show otherwise, that the provider has received a greater
amount than it was entitled to under the State plan as medical
assistance. We have no basis, therefore, for concluding that HCFA
should wait until recovery before adjusting the federal share.
Conclusion For the reasons stated above, we sustain the disallowance in
the amount of $1,625,746, subject to a reduction for any amounts the
State can document have already been returned to HCFA. /1/ 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 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, 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 rate-setting
system that may have generated the overpayments. Compare, Arkansas v.
Heckler, Case No. LR C 83 467, Eastern District of Arkansas, September
17, 1984 (discussed in footnote 2). The term "improper payments" is
sometimes used to distinguish payments violating federal requirements
(even when made) from "excess payments," representing the difference
between final reimbursement rates and interim rates, where payment at
the interim rate was authorized under the State plan. /2/ In the
Massachusetts district court decision (followed in Missouri, supra), 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. In Arkansas, the
court upheld the Secretary's authority to adjust for excess payments but
found the Board's distinction between overpayments found in a federal
audit and overpayments found in a state audit to be inadequately
explained. The court also disagreed with the Board concerning whether
the accuracy of the federal audit there was, in fact, contested, and
remanded the case for further factual development. /3/ Section 2555.2 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 2555.2 B, however, was not added to
the State Medicaid Manual until December 1981. It cannot, therefore, be
a basis for all of this disallowance.
JUNE 06, 1985