DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Tennessee Department of Health and Environment
Docket No. 87-11
Decision No. 898
DATE: September 11, 1987
DECISION
The Tennessee Department of Health and Environment (State) appealed
the
disallowance by the Health Care Financing Administration (HCFA)
of
$957,866 in federal financial participation (FFP) claimed under
Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance
was
based on a determination that the State had not returned to HCFA
the
federal share of overpayments made by the State to providers of
Medicaid
services. HCFA adopted the findings by an audit firm which
used
statistical sampling to determine the amount of the overpayments.
The major issue presented is whether HCFA is authorized to
estimate
provider overpayments through the use of a statistical sample.
For the
reasons described below, we find that HCFA is entitled to
use
statistical sampling to determine the amount of these
overpayments.
Accordingly, we affirm the disallowance in principle.
HCFA has agreed,
however, to provide the State the opportunity to show that,
even though
specific overpayments were listed in the sample as "outstanding,"
in
fact they have been collected and the federal share returned to HCFA.
Case Background
On August 19, 1981, the State entered into a five-year contract with
the
Computer Science Corporation (CSC) for Medicaid fiscal agent
services.
Soon CSC experienced claim processing problems as a large backlog
of
claims developed. On May 11, 1982, the State entered into a
contract
with the accounting firm of Deloitte Haskins & Sells (DHS) to
review
CSC's performance as fiscal agent during the period January 1,
1982
through April 30, 1982. On July 19, 1982, DHS issued its review
of
CSC's performance. HCFA Ex. D. The DHS review
detailed.numerous
failings in CSC's performance. Such problems as
duplicate payments,
payments in excess of amounts billed, and payments for
excessive
hospital stays were identified. The State then extended its
contract
with DHS to include a review of CSC's progress for the months of May
and
June 1982. One of DHS' tasks under this contract was "[e]stimating
the
dollar magnitude of erroneous payments." HCFA Ex. E, p. 1.
DHS
estimated that the dollar value of overpayments through June
was
probably in the range of $3,500,000 to $4,000,000. State Ex.
A,
Appendix B, p. 4. The State subsequently notified CSC that, as
of
September 30, 1982, it was terminating the CSC Medicaid Fiscal
Agent
contract. The State estimated that over 4,000,000 claims would
have to
be reprocessed because of CSC errors. HCFA Ex. G, p. 5.
On November 3, 1985, HCFA entered into a contract with the Tennessee
State
Auditor's office to have that office report to HCFA on the
feasibility of
reprocessing claims initially processed by CSC and to
determine the most cost
effective method of recouping overpayments
"without the reprocessing of
claims." Id., p. 6. The Auditor's office
employed DHS to perform this
task. On April 30, 1986, DHS issued its
report, entitled "Feasibility
of Reprocessing Medicaid Claims
Adjudicated During the Period January 1
through September 30, 1982."
State Ex. A, Appendix A. The purposes of
this review were to:
-- determine what portion of the
overpayment had been
recovered
subsequent
to the 1982 report;
-- develop, based on a new statistical
sample, an estimate of
the
outstanding amount
of overpayments for the period;
-- estimate the cost of reprocessing the claims; and
-- make a recommendation of the
reasonableness of
reprocessing
claims
for the period.
Id., p. 3.
DHS drew new statistical samples of claims processed during the period
for
the claim types and conditions evaluated in the original study.
Employing a
standard statistical sampling method, Cumulative Monetary
Accounts Sampling,
DHS estimated the amount of outstanding overpayments
for the selected group
of claims as $1,397,732 ($957,866 FFP) for the
period January 1 through June
30, 1982. 1/ Id., pp. 10-27. DHS then
estimated that the total
cost of reprocessing the claims for the period
January 1 through June 30,
1982 would be $5,241,286. Id., p. 30. Since
the cost of reprocessing
the claims would remain far in excess of the
potential recovery of
overpayments, DHS recommended that the claims not
be reprocessed. Id.,
p. 31.
On the basis of the DHS reports, HCFA issued a disallowance in
the
amount of $957,866, citing section 1903(d)(2) of the Act as
the
authority for the recovery of the federal share of the
overpayments.
That section provides for reduction of federal payments to a
state "to
the extent of any overpayment . . . which the Secretary determines
was
made . . . to such State for any prior quarter and with respect to
which
adjustment has not already been made. . . ."
Analysis
I. Can HCFA use statistical sampling to arrive at a
disallowance of
Medicaid overpayments?
As noted above, HCFA adopted the findings of the 1986 DHS report
in
determining the disallowance amount. DHS had not examined all of
the
approximately four million claims disputed under the CSC contract,
but
rather had used statistical sampling to arrive at an estimate of
the
overpayments made during the period in question and still
unrecovered.
The State argued that HCFA is not authorized by statute to
estimate
overpayments through the use of sample claims. 2/ The State
contended
that section 1903(d)(2) of the Act, the section cited by HCFA as
the
statutory authority for the recoupment of overpayments, does
not
expressly authorize the Secretary of the Department of Health and
Human
Services to use sampling in the estimation of any overpayment.
In
contrast, the State pointed out, Congress expressly authorized the
use
of sampling in section 1903(u) of the Act to determine target
error
rates with respect to Medicaid eligibility. Citing Russello v.
United
States, 464 U.S. 16 (1983), the State argued, "Where Congress
includes
particular language in one section of a statute but omits it in
another
section of the same act, it is generally presumed that Congress
acts
intentionally and purposely in the disparate inclusion or
exclusion."
State's Brief, p. 11. The State continued, "Had Congress
intended to
authorize the use of sampling as a means of identifying
overpayments
pursuant to section 1903(d), it would have expressly provided
so, just
as it did in subsection (u) of section 1903 for Medicaid
eligibility
quality control." Id.
The State also argued alternatively, in the event the Board should
hold
that HCFA has the statutory authority to use sampling to
determine
overpayments, that such authority, unless self-executing, must
be
effectuated through rules promulgated under the Administrative
Procedure
Act (APA), 5 U.S.C. 551 et seq. The State asserted that the
use of
sampling, to carry out the policy stated in section 1903(d) of the
Act
to increase or reduce Medicaid payments to states because
of
underpayments or overpayments to providers, is a substantive
rule
requiring notice and comment rulemaking. The State concluded that
the
Secretary's failure to promulgate such a rule renders the procedure
of
statistical sampling invalid under the APA.
At the outset we note that the State has not disputed the
Secretary's
authority, upheld in Board and court decisions, to recover the
federal
share of overpayments under section 1903(d)(2) of the Act. See,
e.g.,
California Department of Health Services, Decision No. 619 (1985),
and
Massachusetts v. Secretary, 749 F.2d 89 (1st Cir. 1984).
Section
1903(a)(1) provides that FFP will be available only for payments
for
medical assistance made in accordance with the State Medicaid plan.
The
DHS reports showed, and the State did not contest, that the
overpayments
at issue were clear violations of the State plan. The
record
unambiguously indicates that CSC's problems with processing the
claims
gave rise to unallowable expenditures, most notably for
duplicate
payments.
As it is undisputed, then, that unallowable payments were made,
the
question is how to determine the amount of those payments.
Approximately
four million claims for questionable expenditures were
disputed. In
order to arrive at an exact amount of the overpayments,
the State
apparently would have each individual claim examined. We find
this
patently impracticable and unreasonable. Given the magnitude of
the
disputed claims, the only logical cost-effective method to estimate
the
amount of the overpayments is through some type of statistical
sampling.
An examination of the legislative history of section 1116(d) of the
Act,
which establishes procedures when the Secretary issues a
disallowance
(one form of the determination of an overpayment under
section
1903(d)(2)), reveals that Congress contemplated the Secretary
using
various audit techniques in determining the amount of unallowable
costs.
See 1965 U.S. CODE CONG. & ADMIN. NEWS 2, at 2103. One
such commonly
accepted technique is statistical sampling.
In University of California -- General Purpose Equipment, Decision No.
118
(1980), the Board stated that statistical sampling has been accepted
as a
basis for determining adjudicative facts. As such, statistical
sampling
can be reliable evidence concerning an amount of unallowable
costs. The
Board thus saw the use of statistical sampling as an
evidentiary question,
not as an action requiring specific statutory
authority for a federal agency
to use it. In Ohio Department of Public
Welfare, Decision No. 226
(1981), the Board upheld HCFA's general use of
sampling to determine the
amount of a disallowance. Both the Board and
the courts have upheld the
use of statistical sampling evidence as a
basis for a disallowance, where
claim-by-claim review is not feasible.
See, e.g., Georgia v. Califano,
446 F. Supp. 404 (N.D. Ga. 1977), and
California Department of Social
Services, Decision No. 816 (1986).
We do not view the fact that Congress explicitly authorized
statistical
sampling under section 1903(u) of the Act as barring the
Secretary from
using sampling to determine disallowances under other sections
of the
Act. A reading of the legislative history for section 1903(u)
reveals
no indication that Congress attached any special significance to the
use
of statistical sampling there or intended 1903(u) to be the
exclusive
area where statistical sampling could be used. See 1982 U.S.
CODE CONG.
& ADMIN. NEWS 2, at 815 and 1219.
Indeed, viewed in the context of the pre-existing quality control
program
(which provided by regulation for a sampling method to be used
in
establishing disallowances for certain types of state errors), the
enactment
of section 1903(u) in effect ratified the Secretary's
interpretation that use
of sampling was within the authority to
determine overpayments granted in
section 1903(d)(2).
We do not consider Russello to be applicable here. That case
involved
an interpretation of the Racketeer Influenced and Corrupt
Organization
(RICO) chapter of the Organized Crime Control Act of 1970.
Unlike RICO,
which was enacted by Congress in a single piece of legislation,
the Act,
with its Medicaid provisions, has developed through a series of
acts
passed by different Congresses. As such, it does not have the
internal
consistency of a single piece of legislation. We therefore do
not find
that because statistical sampling is mentioned only at section
1903(u)
of the Act the Secretary is precluded from using it under other
sections
of the Act.
Once again, given the explicit Congressional authority in
section
1903(d)(2) to the Secretary to adjust for overpayments and the
millions
of disputed claims in this case, we consider it a question
of
reasonableness and cost-effectiveness that the Secretary be allowed
to
use statistical sampling. The Board has also recognized the
reliability
of statistical sampling: "In simple terms, valid
statistical sampling
will produce a result which has a high degree of
probability of being at
least as good as a full-scale review."
California Department of Social
Services, Decision No. 816 (1986), p. 5.
As to the State's alternate argument that the Secretary's use
of
statistical sampling should be considered a "rule" within the context
of
the APA, we note that the procedures for notice and comment
rulemaking
set forth in the APA do not apply to "interpretative rules,
general
statements of policy, or rules of agency organization, procedure,
or
practice." 5 U.S.C. 553 (b)(3)(A). The State relied on W.C. v.
Bowen,
807 F.2d 1502 (9th Cir. 1987), where the court detailed two factors
in
determining whether a rule is substantive or interpretative. First,
if
the rule effects a change in existing law or policy or
affects
individual rights and obligations, the rule is substantive; if the
rule
is only indicative of an agency's interpretation of existing law
or
policy, it is interpretative. Second, if the rule is
promulgated
pursuant to statutory direction or under statutory authority, it
is a
substantive rule; if the agency does not exercise delegated
legislative
power to promulgate the rule, it is an interpretative rule.
In W.C. v.
Bowen, the court found that a procedure for reviewing the
decisions of
administrative law judges in disability claims under Title II of
the
Act, the Bellmon Review Program, changed existing policy and was
issued
pursuant to statutory direction. The court therefore found it
was a
substantive rule requiring notice and comment rulemaking.
Contrary to the State's arguments, we find that the criteria set forth
in
W.C. v. Bowen support a conclusion that HCFA's use of statistical
sampling is
not a rule requiring notice and comment rulemaking. The
Secretary's use
of sampling as an audit technique is not a change in
existing law or policy
and does not affect individual rights or
obligations. Nor was
statistical sampling developed as a result of
statutory direction or
authority. Statistical sampling, a generally
accepted audit technique,
is but one of the procedural methods used by
the Secretary to determine
disallowances under the Act.
Moreover, this is not a situation where lack of actual or
constructive
notice to the State precludes application of the use of sampling
under
the APA. 5 U.S.C. 552(a)(1). The State is not adversely affected
by the
mere use of a sampling audit technique. The sampling is simply a
means
of establishing the amount of payments violating state plan
provisions.
Given the problems with CSC's claims processing, HCFA could
have
required the State to document allowability of its payments during
this
period on a claim-by-claim basis. Use of a valid statistical
sampling
technique instead to measure the extent of unallowable payments is
a
cost-effective, less burdensome means which benefits the State as
well
as HCFA.
II. Is the State foreclosed from challenging specific findings in
the
DHS reports?
While we find that HCFA may use statistical sampling to estimate
a
disallowance, we also hold that the State must be given an
opportunity
to contest specific audit findings. The State did not
challenge the
validity and reliability of the statistical sampling used in
the DHS
audit. 3/ The State did, however, argue that HCFA failed to
consider
the $4,493,947 in overpayments actually recovered by the State,
noted on
page 6 of the 1986 DHS report, for a set-off against the
estimated
overpayments. The State contended that its records indicate
that the
outstanding "negative balance" in its accounts receivable for the
period
in question is only $72,875.59. State Ex. B, Appendix C.
The State
declared that it intended to trace the overpayments reflected in
the
sampled claims, by claim and/or recipient, to determine if they
have
been recovered. State Ex. B, p. 2.
Contrary to the State's assertions, DHS did take into account some of
the
recoveries made by the State. It is possible, however, that
other
recoveries may be related to the sampled claims, but have not
been
sufficiently identified to correlate to specific claims. In a
telephone
conference, HCFA agreed to give the State the opportunity to
contest
individual sample claims by showing that the State had already
made
recoveries of some of the sampled overpayments which the auditors
did
not take into account.
We accordingly find that the State must be allowed to show that
specific
findings reflected in the DHS reports are incorrect. If HCFA
should
reject the evidence the State produces for specific claims, the
State
will be permitted to return to the Board to appeal those
negative
determinations by HCFA.
III. Can HCFA deny FFP for reprocessing the claims
originally
processed by CSC?
The State argued that it would be denied a full opportunity to contest
the
disallowance unless it was given the chance to reprocess the claims
at
issue. The State supplied a September 22, 1986 letter from
HCFA,
however, which stated that HCFA had already paid FFP for the
processing
of the claims, when CSC had done it, and that HCFA's policy was
that it
"will continue to pay for the operational processing of claims, but
once
and only once." State Ex. C, Appendix C, p. 2. The State
maintained
that this demonstrated inconsistency on HCFA's part as HCFA
had
previously stated that it would not approve a contract for fiscal
agent
services unless the contract contained a provision allowing the State
to
unilaterally reprocess claims if the State determined that
was
necessary. The State contended that that contract, approved by
HCFA,
gives the State, not HCFA, the authority to decide if and when
claims
will be reprocessed.
The administrative cost of reprocessing the claims is not directly
before
the Board as the State has not yet incurred or submitted that
cost to
HCFA. The issue before us is the propriety of HCFA's
disallowance of
the federal share of the overpayments to the providers,
$957,866. The
State did not indicate, outside of general allegations of
fairness, how
HCFA's refusal to supply FFP to reprocess the claims is a
basis for
overturning this disallowance.
The allegations of inconsistency on HCFA's part are unsupported. The
State
retains its authority to reprocess if it wishes; HCFA has simply
taken the
ostensibly reasonable and consistent position that no federal
funding will be
available for what is essentially a duplicative
activity.
We also reject the State's argument that, since HCFA based
the
disallowance on a sample, the State must reprocess "to determine
which,
if any, claims are at issue." State's Reply Brief, p. 4. The
State was
provided with a list of disallowed sampled items, has had a
full
opportunity to dispute the audit findings on the sample payment
errors,
and will have the opportunity to show that additional recoveries
should
have been applied to the sample items. The State would perhaps
need to
reprocess to identify and recoup overpayments not specifically
included
in the sample, but we doubt that, even with federal
participation, the
State would choose to expend approximately five million
dollars to
collect some one million dollars.
Conclusion
For the reasons stated above, we affirm the disallowance in principle.
As
indicated above, the State has the opportunity to show, within 30
days or
such other reasonable time period as HCFA may establish, that
specific
overpayments in the sampled claims have already been collected
and the
federal share returned to HCFA. If.HCFA should reject the
State's
documentation for certain claims, the State will be permitted to
appeal any
negative determinations by HCFA to this Board.
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
________________________________ Judith A. Ballard Presiding
Board
Member
1. While the DHS report's principal objective was
to ascertain the
cost of reprocessing claims for the nine-month period
January 1 to
September 30, 1982, the report estimated outstanding
overpayments only
for the period January 1 through June 30, 1982.
2. Initially the State also argued that the Board
should reverse the
disallowance because HCFA's disallowance decision failed
to contain, as
required by regulation, sufficient detail to provide the State
with an
adequate opportunity to respond. In the course of the appeal,
however,
HCFA provided the State with various documentation that resulted in
the
State terming the issue of the adequacy of the disallowance
decision
"moot." State's Reply Brief, p. 2.
3. The State did contest whether the 1986 DHS report,
on which HCFA
based its disallowance for outstanding overpayment, was, in
fact, an
"audit" that could be used as the basis of a disallowance.
According to
the State, the report was intended to be only a feasibility
study on the
economies of reprocessing certain claims and not a method
for
identifying the amount of outstanding overpayments. In response,
we
refer to the contract HCFA executed with the Tennessee State
Auditor's
office (State Ex. A, Appendix B), which variously described
the
contracted work as an "audit report" (p. 3) or an "audit survey" (p.
5).
The 1986 DHS review itself describes one of its purposes as to
determine
an estimate of outstanding overpayments. State Ex. A,
Appendix B, p.