California Department of Health Services, DAB No. 734 (1986)

GAB Decision 734

March 28, 1986

California Department of Health Services; 
Docket No. 85-211
Settle, Norval D.; Teitz, Alexander G.  Ballard Judith A.

The California Department of Health Services (State) appealed a
disallowance by the Health Care Financing Administration (Agency, HCFA)
of $6,850,879 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 the State's procedures for
crediting the federal Medicaid program for overpayments made to Medicaid
providers.  The report determined that the State's policy was to delay
crediting the federal share of established overpayments until the
overpayments were actually recovered 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, subject to
a possible reduction for amounts already returned to HCFA by the State.

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 amount 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 primary 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

The HHS Office of Inspector General, Office of Audit, issued a report on
its field audit of certain aspects of the State's Medicaid program.
(Audit Control No. 50235-09) The objective of the audit was to determine
if the federal share of identified overpayments paid to providers of
Medicaid services was being promptly returned to HCFA. The audit
reviewed the overpayments classified by the State as "accounts
receivable" as of June 30, 1984 and overpayments written off as bad
debts during the period July 1, 1983 through September 30, 1984.

The auditors determined that the State had not refunded the federal
share ($6,850,879 FFP) of $18,808,177 of overpayments made to hospitals
and other providers.  The audit report broke down the $18,808,177 into
the following categories:

   -- $18,624,655 ($6,784,031 FFP) for overpayments to 179 providers who
had been improperly reimbursed under federal law and regulations.

   -- $183,522 ($66,848 FFP) for unrecovered overpayments to 38
providers written off as bad debts. /1/

(3)

The audit report noted that in all instances the overpayments had been
firmly established, meaning that the overpayments were due from only
those providers who had either completed or waived the administrative
appeal process.  Citing section 1903(d)(2) of the Act and section 2555 B
of the State Medicaid Manual, /2/ the audit report concluded that the
State should return to the federal government $6,850,879 ($6,784,031 +
$66,848), net of any collections received after October 31, 1984.

 


Citing section 1903(d)(2) of the Act and section 2555 B of the State
Medicaid Manual, HCFA adopted the audit report's determinations and
disallowed $6,850,879 in FFP. /3/

(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 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 adjust the federal share of these payments, even if a state
has not yet recovered the amounts from the providers.  For a summary of
the Board's reasoning on this question, See, e.g., New York State
Department of Social Services, Decision No. 311, June 16, 1982, and
California Department of Health Services, Decision No. 619, January 28,
1985.  A number of the Board's decisions on this issue have been
reviewed in court;  the district courts have split on the question, but
two Courts of Appeals have upheld the Board's reasoning. /4/

(5)

Notwithstanding the above cases, the State contended that the
disallowance should be reversed because the payments to the providers
were allowable under its State plan.  The State argued that HCFA can
disallow only improper payments, and can not disallow improper
nonrecoveries of payments made to providers.  The State contended that,
if the audit report disclosed faults with the State's procedures for
recovering overpayments from providers, the proper recourse for HCFA
would have been a compliance proceeding against the State rather than a
disallowance.  The State also attacked the audit report's lack of detail
and HCFA's failure to cite authority for the disallowance.  The State
further contended that HCFA's action in taking a disallowance violated
the congressional intent of having the Medicaid program act as a
cooperative partnership between the states and the federal government.

We discuss these arguments in the same order as they were presented by
the State.

I.  Whether HCFA can demand the federal share of overpayments "properly"
paid to providers prior to their recovery by a state.

At the heart of the State's appeal is its contention that all the
questioned payments were "proper," i.e., in accord with its approved
Medicaid State plan, when the State paid them initially to the
providers.  As an example, the State explained that its State plan
provides for interim payments to hospitals with a year-end adjustment
based upon a state audit of the facility's cost report.  This cost
report may result in an adjustment due the State or the hospital.  If
the result is the former, it is treated as an overpayment by the State
and listed as such in the audit.  But, the State stressed, this does not
mean that the initial payment was improper under the State plan.
Therefore, according to the State, HCFA should be prohibited from
recouping the federal share of any such overpayment until, as provided
for in(6) section 1903(d)(3) of the Act, the State actually recovers the
overpayment from the provider.  The State quoted the following statement
from Solomon v. Califano, 464 F. Supp. 1203 (D. Md. 1979):

   If payment was incorrect, the Secretary of HEW may adjust future
payments to reflect the prior overpayment or underpayment which he
determines was made to the state for any prior quarter.  (emphasis added
by State)

   464 F. Supp. 1203, at 1204.

The State argued that this means a "disallowance presupposes a wrongful
payment in the first instance." State's Brief, p. 1.  The State sought
to distinguish its appeal from Massachusetts and Perales by asserting
that the facts in those cases did not appear to involve proper payments.
The State argued that any recovery or nonrecovery must be related back
to its underlying expenditure, the validity of which must be separately
established.  The State contended that neither HCFA nor its auditors
examined the initial expenditures that ultimately resulted in
overpayments.

The Board has examined and rejected this line of reasoning in several
decisions, including the State's prior appeal on this same issue,
Decision No. 619.  Although the State has framed its argument here in
somewhat different terms, we still consider Decision No. 619 applicable.
We quote from that decision:

   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 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 (7) 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).  (footnote omitted)$Tpp. 7-8.

It is undisputed that the providers received payments calculated at
rates higher than the rates finally determined to be the correct rates
under the State plan reimbursement method.  The disallowance includes
only overpayments found to be due from providers that had completed or
waived the administrative appeals process, and the State has presented
no reason why we should not consider these overpayments to be firmly
established.  The State would have HCFA wait until the State collected
the overpayments from the providers, with no guarantee that such a
collection would ever occur, before HCFA received the federal share of
the overpayment.  In view of our holding that payments received in
excess of what was authorized under the State plan do not constitute
"medical assistance furnished under the State plan," we do not think
that section 1903(d)(3) compels HCFA to wait until the overpayments are
collected before adjusting the federal share.

We are not persuaded by the State's arguments based on Solomon and
distinguishing Massachusetts and Perales.  The statement quoted from
Solomon is taken out of context and simply does not mean what the State
said it means.  A disallowance is appropriate whenever the Secretary
determines that a state has received excess federal funding.  While some
of the provider payments here may have been made initially at an interim
rate authorized under the State plan, the "correct" payment (i.  e., the
amount to which the provider is ultimately entitled and for which FFP is
available) is the amount finally determined by the State through its
cost settlement process.  If the initial payment was in excess of that
amount, the excess can no longer be considered allowable.  Moreover,
while Perales may have involved some payments which were improperly made
in the first instance, Massachusetts clearly involved payments made at
an interim rate, as authorized under the State plan.(8)

An additional point weights against the State's position.  The State in
its arguments failed to even acknowledge the explicit wording of section
2555 B of the State Medicaid Manual:  "Overpayments are not considered
payments made in accordance with a State plan. . . ." While the State
Medicaid Manual does not define the term "overpayments," in context, the
term clearly encompasses the type of excess provider payments at issue
here.

On the basis of the reasoning in the Board's prior decisions, we
therefore hold that HCFA may, under the provisions of section 1903(d)(
2), recover the federal share of overpayments, even though the State has
yet to collect the overpayments.

11.  Whether HCFA should have instituted a compliance action rather than
issuing a disallowance.

The State argued that, if HCFA determines that a state is making
improper payments, HCFA may pursue a disallowance of the funds
wrongfully paid.  If, however, the State continued, HCFA determines that
a state is not substantially complying with its State plan by not
collecting overpayments, HCFA must proceed with a compliance action
pursuant to section 1904 of the Act.  Section 1904 provides that, if the
HHS Secretary finds that a state has failed to comply substantially with
any of the provisions of section 1902 of the Act in its administration
of its State plan, the Secretary may cut off further payments to the
state until he is satisfied that there will no longer be any such
failure to comply.

The State noted that the disallowance notification and the audit report
declared that California was not complying with federal requirements and
that it needed to develop procedures consistent with federal law.
(emphasis by the State) The State concluded that its failure to comply
with these procedures would be, if anything, a matter of noncompliance
and not a disallowance.

The Board considered an identical argument in Massachusetts, supra.  In
that case Massachusetts argued that overpayments occurred as an
inevitable result of its retrospective reimbursement of providers, a
system that was institutionalized in its HCFA-approved State plan.
Massachusetts, like the State in this appeal, contended that the dispute
raised by HCFA's determination was not a disallowance, but rather a
question of program compliance required to be resolved pursuant to
section 1904.(9)

In rejecting Massachusetts' argument, the Board declared:

   In order for there to be a compliance question, there must be a
finding by the Secretary that a state has failed to comply substantially
with a provision of its State plan.  Even though the State was not
meeting one of the requirements of its State plan here, we conclude that
the Secretary could reasonably have found that there was no question of
substantial noncompliance by the State.  The Agency's determination
covered only a relatively small segment of the State's whole rate
methodology and reimbursement system, namely the recovery of excess
payments from those providers who had ceased participating in the
Medicaid program or had gone bankrupt.  Furthermore, there was no
finding that the ultimate program beneficiaries, the Medicaid
recipients, were in any way affected by the questioned State practice.
p. 21.

As the situation here is virtually identical to that in Massachusetts,
we hold that HCFA was not required to initiate a compliance proceeding,
but could issue a disallowance to recover the federal share of the
overpayments.

111.  Whether there is cited authority and sufficient factual detail for
a disallowance.

The State argued that HCFA failed to articulate authority for the
disallowance at issue.  The State claimed that the disallowance letter
and the audit report cited only section 1903(d) of the Act as the sole
authority for the disallowance.  The State attacked the audit report for
making no inquiry into the possibility that some of the accounts
receivable related to third-party liabilities and reimbursements.  The
State then listed a series of other possible situations involving the
accounts receivable that the auditors failed to examine.  The State
concluded that the auditors' failure to cite the State plan provision
violated by the questioned payments proscribes HCFA from taking a
disallowance.

We find no merit in the State's arguments. HCFA provided an affidavit
from one of the auditors, in which he detailed how the amount of the
disallowance was determined, based on the State's own audit reports.
The auditor declared that he had determined that each overpayment
adjustment identified by the State was based on federal regulations. He
further stated that he had personally reviewed all the State audit
reports compiled during the audit and had examined all the working
papers in a sample of the audit reports to verify(10) that there was
adequate support for the identified overpayments.

The question of the reliability of a disallowance based solely on state
records and findings has been previously examined by the Board.  In
California Department of Social Services, Decision No. 244, December 31,
1981, the Board reversed a disallowance because HCFA's basis for
determining the amount of overpayments was insufficiently supported by
the record.  The Board held:

   Where . . . a federal audit merely adopts the figures from State
records, assuming that overpayments for State purposes are necessarily
overpayments for federal purposes, and where the State has shown that
this assumption may not be warranted, the Respondent must provide more
specific evidence and authority to support its allegations.

   p. 10.

In this and other decisions, the Board has developed some standards for
use of state audits or other findings as a basis for disallowance.  The
Board has determined that HCFA may reasonably rely on state findings
provided:

   * The Agency provides sufficient detail as to the audits or other
sources from which the disallowed amounts are derived;  and

   * The State is provided the opportunity to show that

   -- adjustments have been made to the State findings;

   -- the findings are not reliable for some reason;

   -- the State has already recovered the amount identified as an
overpayment and has already adjusted the federal share;  and

   -- the State never claimed FFP in the overpayment in the first place.

   Ohio Department of Public Welfare, Decision No. 637, April 2, 1985,
p. 12.(11)

In evaluating whether the Agency has provided sufficient detail to
enable a state to respond, the Board generally will find that HCFA meets
its burden by identifying the names of the providers which allegedly
received overpayments, the respective amounts, and the relevant time
periods.  If HCFA does this, the burden shifts to the state to make the
showings listed above.  The Board must then analyze the record as a
whole to see whether there is a factually and legally supportable basis
on which to uphold the disallowance.

This analysis depends on various factors such as the nature of the
overpayments involved;  the nature of the state findings involved;  the
extent to which HCFA independently determined that the state had claimed
unallowable costs;  the issues raised by the state;  and the evidence
the state has provided in support of its positions.  In each case, the
Board will consider the particular circumstances in determining the
adequacy of the record before it.

For each individual overpayment amount here, HCFA's audit report
identified the provider, the relevant time periods, and why HCFA
considered the amount to be a firmly established overpayment.  Thus,
there is no question that HCFA met its burden to provide sufficient
detail about the overpayments so that the State was obliged to go
forward to show why HCFA's determinations should be reversed.

In response the State has not supplied the Board with any evidence or
documents as to how the audit determinations may be erroneous.  In its
own audit reports the State itself identified the payments as
overpayments.  The State asserted that the audit report ignored whether
or not providers had sought judicial review of the overpayment
determinations, but failed to supply the Board with evidence that any
had.  The State additionally refused HCFA's offer to allow the State to
examine the material reviewed by the auditors in drafting the audit
report.  Rather, the State has cited only "possibilities" as to how the
audit may be deficient.  Absent some minimal showing by the State that,
in fact, the audit was deficient, these "possibilities" are purely
speculative and cannot form a basis for overturning the disallowance.
Cf. Decision No. 334, supra, in which the State during the course of the
appeal submitted documentation which led HCFA to significantly reduce
the amount of the disallowance.

The State's listing of "possibilities" as to why HCFA's audit may be
flawed is refuted by the auditor's affidavit that all the overpayments
were related to specific State audit reports.  HCFA in its disallowance
determination does not have to cite each provider and explain how every
payment violated a specific State plan requirement.  Unless shown(12)
otherwise, HCFA should be entitled to rely on the State's own audit
findings that overpayments occurred.

IV.  Whether the disallowance violates congressional intent.

The State asserted that Congress limited federal recoupment of payments
made pursuant to a State plan to a share of the amount actually
recovered, and that HCFA's attempt to force the State to advance it
money against potential future recoveries defeats this congressional
intent.

In many appeals, including the previous California decision, the Board
has examined the compatibility of HCFA's position on overpayments with
the congressional intent of having the Medicaid program operate as an
example of cooperative federalism.  As we stated in one of those
decisions:

   (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 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 Court of Appeals in Massachusetts, supra, adopted a similar view:

   (The) weight of policy seems to us to fall on the side of the
Secretary's interpretation.  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 (13 ) 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.

The State presented no reason why we should not adopt this analysis
here, nor did the State point to any other reason why we should consider
HCFA's action inconsistent with congressional intent.

Conclusion

For the reasons stated above, we sustain the disallowance in the amount
of $6,850,879. /5/

        /1/ The auditors had originally determined that there were
additional bad debts totalling another $373,666 during the audited
period.  The documentation explaining and supporting the overpayment
determinations for the $373,666 had been destroyed by the State (federal
regulations permit the purging of supporting records after a certain
length of time).  Accordingly, the auditors recommended disallowance of
only the $183,522 for which there was documentation.  /2/ 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 was added to the State
Medicaid Manual in December 1982.         /3/ In its disallowance
decision HCFA also claimed that all the overpayments were established as
being in excess of the applicable upper limits requirements codified in
various subparts of 42 CFR Part 447.  While we do not think that the
record is sufficiently developed in this case to base the disallowance
on these provisions, we note that, at least with respect to hospital
overpayments, the allegations appears to have merit since, in another
case, the State admitted that its accounts receivable records reflected
overpayment determinations based on the "upper limits" provisions.
California Department of Health Services - Accounts Receivable, Decision
No. 334, June 30, 1982. We do not think it necessary here for HCFA to
cite the specific federal requirements on which the overpayment
determinations were based since, as we discuss below, the federal
auditors found that the State audits identified these requirements, and
the State has provided no evidence that either the federal or state
auditors were wrong.         /4/ In Massachusetts v. Heckler, 576 F.
Supp. 1565 (D. Mass 1984), the Board's decision in Massachusetts
Department of Public Welfare, Decision No. 262, February 26, 1982, 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), cert. denied, 105 S.Ct.  3478, 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 on sound policy considerations.  On October 1, 1984, the United
States District Court for the Northern District of New York affirmed
Board Decision No. 311 in Perales v. Secretary, Case No.  83-CV-900,
aff'd sub nom. Perales v. Heckler, 762 F. 2d 226 (2d Cir.  1985).  See,
also Florida v. Heckler, Civ. No. 82-0935, (N.D. Fla.  1984), which
affirmed the Board's decision in Florida Department of Health and
Rehabilitative Services, Decision No. 296, May 15, 1982, holding that
the State of Florida was liable for Medicaid overpayments made to
providers notwithstanding the providers bankruptcy;  and Department of
Social Services v. Heckler, Case No. 84-4106-CV-C-5 (W.D.  Mo. 1984)
(appeal pending), which reversed the Board's decision in Missouri
Department of Social Services, Decision No. 448, June 30, 1983.
Compare, Arkansas v. Heckler, Case No. LR C 83 467, Eastern District of
Arkansas, September 17, 1984.         /5/ In its July 1, 1985 response
to the audit report, the State asserted that the $18,807,177 listed as
overpayments should be adjusted to $11,877,703, with the corresponding
FFP at issue reduced from $6,850,879 to $4,326,453.  In its appeal
before the Board the State did not repeat this contention.  Without any
further elaboration by the State, the Board can only assume that the
State's revised figures represent overpayments actually recovered from
providers and returned to HCFA, and not errors in the auditors' original
calculations.  If the State can support its assertion with
documentation, HCFA should, as it has in prior appeals involving
overpayments before the Board, review its calculations in light of the
State's documents and adjust the disallowance accordingly.

MARCH 28, 1987