DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Florida Department of Health and
Rehabilitative Services
Docket No. 87-133
Audit Control No. 04-60230
Decision No. 955
DATE: May 12, 1988
DECISION
The Florida Department of Health and Rehabilitative Services
(State)
appealed a determination by the Health Care Financing
Administration
(HCFA) disallowing $1,373,022 in federal financial
participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security
Act (Act).
HCFA based the disallowance on an audit of State records
identifying
Medicaid payments made on behalf of ineligible individual
recipients
(erroneous recipient payments) for the period prior to April 1,
1979 and
the period October 1, 1982 through March 31, 1983. (During
the
intervening period, erroneous recipient payments were subject to
special
disallowance provisions related to the Medicaid quality control
system.)
The auditors found that the State did not credit the federal
government
with a refund of FFP in erroneous recipient payments until the
State had
recouped the payments from the ineligible recipients. For the
reasons
discussed below, we uphold the disallowance in full.
I. Section 1903 of the Act did not authorize FFP in
payments to
ineligible recipients during
the disallowance period.
Title XIX of the Act authorizes federal grants to aid in financing
state
programs which provide medical assistance and related services to
needy
individuals, in accordance with a state plan. The Secretary of
Health
and Human Services (HHS) is required to pay a percentage of the
"total
amount expended as medical assistance under the State plan"
and
associated administrative costs. Section 1903(a)(1) of the
Act.
"Medical assistance" is defined in section 1905(a) of the Act
generally
as payment for covered services provided to individuals who
meet
specified eligibility requirements. The Secretary is authorized to
make
quarterly advances of the federal share of estimated
Medicaid
expenditures in amounts:
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.
. . .
Section 1903(d)(2).
In numerous cases involving erroneous payments by states to
Medicaid
providers, this Board has held that, under sections 1903(d)(2)
and
1903(a)(1), HCFA may require adjustment of the grant award for
the
federal share of improper or excess payments, even if a state has
not
yet recovered these amounts from the providers. See, e.g.,
Arkansas
Dept. of Human Services, DGAB No. 717 (1986); New York Dept.
of Social
Services, DGAB No. 311 (1982). The Board reasoned that the
statute does
not authorize FFP in payments made outside of the scope of a
Medicaid
state plan. See also Oklahoma Dept. of Human Services, DGAB
No. 417
(1983); California v. Settle, 708 F.2d 1380, 1383 (9th Cir.
1983).
The State argued that the term "overpayment" in section 1903(d)(2) is
not
clearly defined and is limited in the context of the Act
(specifically by
section 1903(d)(3)) to include only overpayments of FFP
in erroneous payments
which the State has already recouped. 1/ The
State asked us to
reconsider prior Board holdings on this issue, but
provided no new facts or
arguments which would cause us to do so. We
reject this argument and
affirm the Board's prior holdings on this
issue. See, e.g., Florida
Dept. of Health and Rehabilitative Services,
DGAB No. 296 (1982), aff'd
Florida v. Heckler, Civ. No. 82-0935 (N.D.
Fla. 1984); Arkansas Dept.
of Human Services, DGAB No. 717 (1986). We
incorporate here the
reasoning of these cases, and we note that the
Board's analysis of this issue
has been upheld in three decisions by
United States Courts of Appeals.
Massachusetts v. Secretary, 749 F.2d
89 (1st Cir. 1984), cert. denied,
472 U.S. 1017 (1985); Perales v.
Heckler, 762 F.2d 226 (2d Cir. 1985);
Missouri Department of Social
Services v. Bowen, 804 F.2d 1035 (8th Cir.
1986). 2/
The State sought to distinguish this case on both factual and
legal
grounds, based on the premise that erroneous recipient payments
were
different from the erroneous payments to providers (erroneous
provider
payments) considered in most of the cases cited above.
The factual distinctions raised by the State were uncontested:
erroneous
recipient payments are generally more difficult to recoup than
erroneous
provider payments, because ineligible recipients do not receive
ongoing
payments which can be adjusted, and because the State has no
formal
Medicaid collection procedures for erroneous recipient
payments.
State's Brief, p. 12. 3/ The State did not indicate,
however, how
these factual distinctions might form a basis for a legal
distinction
between erroneous provider payments and erroneous recipient
payments.
The mere fact that erroneous recipient payments are more difficult
to
recoup does not excuse a state from the general obligation to
account
for payments in which the federal government has not agreed
to
participate. 4/
We consider the legal distinctions asserted by the State in
subsequent
sections of this decision.
II. Quality control and TEFRA provisions do not provide
authority for
FFP in these payments.
Since we find above that, ordinarily, sections 1903(d)(2) and
1903(a)(1)
provide HCFA with authority to disallow FFP in unrecovered
erroneous
payments, we consider next whether there is an exception based on
the
policies inherent in the quality control disallowance systems
effective
during time periods other than the disallowance period. The
State noted
that these systems authorized FFP in some erroneous payments
through
"tolerance levels." These tolerance levels were established
percentage
rates of erroneous payments below which the Secretary would not
disallow
FFP. The State argued that tolerance levels should be applied
even when
no quality control disallowance system was in operation. As
we discuss
below, we find that the quality control provisions do not limit
HCFA's
ability to disallow FFP in erroneous recipient payments during
the
periods in this case.
Between April 1, 1979 and October 1, 1982, Medicaid payments on behalf
of
ineligible recipients were within the scope of the Medicaid quality
control
(MQC) disallowance system, established under the guidelines of a
provision
known as the Michel Amendment. Disallowances of FFP based
on
eligibility errors were provided for in that system. See 42
C.F.R.
431.800 et seq. Error rates were calculated using statistical
samples
analyzed by both the states and the federal government,
and
disallowances were authorized if a state failed to meet a target
error
rate based on a goal of a nationwide 4 percent tolerance level after
3
years. This tolerance level effectively authorized FFP in
erroneous
payments up to the tolerance level, recognizing that some errors
were an
unavoidable result of state plan administration. Similarly,
after March
31, 1983, erroneous recipient payments were within the scope of
a
quality control disallowance system established in the Tax Equity
and
Fiscal Responsibility Act (TEFRA), Pub. L. 97-248 (1982).
TEFRA
required the Secretary to disallow FFP in erroneous payments in
excess
of a 3 percent level. Section 133(a) of TEFRA. For a more
detailed
discussion of the history and nature of Medicaid quality
control
systems, see Consolidated Appeals of Medicaid Quality
Control
Disallowances, DGAB No. 948 (1988).
Although quality control reviews were performed, there was no authority
to
use these quality control reviews as the basis for disallowing
erroneous
recipient Medicaid payments during the disallowance periods.
The State argued
that the overall policy of permitting a tolerance for
erroneous recipient
payments should be applied even when no quality
control disallowance system
was operating. In particular, the State
focused on the six-month
interval between October 1, 1982 and March 31,
1983, asserting that "[i]t is
unreasonable to assume that Congress
intended that States with a permissible
error rate of 4 percent before
October 1, 1982, and 3 percent after April 1,
1983, would cut back their
error rate to 0 during the interim period."
State's Brief, p. 11.
This argument has some initial appeal. Yet, a careful review of
the
overall history of quality control programs provides no support for
the
State's position that HCFA was precluded from disallowing FFP in
the
full amount of individually identified erroneous payments during
periods
when no quality control disallowance program was operating.
Until 1979,
the Medicaid quality control program operated only to
provide
information for program management purposes; no disallowances
were
authorized based on that system, and there was no tolerance level
for
erroneous payments. 5/ The mere existence of a quality
control
monitoring system prior to 1979 does not provide a basis for FFP
in
erroneous payments. The State provided no evidence that
tolerance
levels for Medicaid were even proposed prior to 1979. Although
later
regulations and legislation permitted FFP in a tolerance
level
representing a small percentage of erroneous payments, these
provisions
were not made retroactive.
In TEFRA, Congress established a new quality control disallowance
system
at section 1903(u) of the Act, replacing the MQC disallowance system
as
of October 1, 1982. TEFRA, section 133. Quality control
monitoring
under the new standards was to begin immediately, but Congress
required
disallowances under the new system only after April 1, 1983.
Id. at (a)
and (b); section 1903(u)(1)(A) of the Act. The intervening
six-month
period was to allow time to study the existing quality control
system.
S. Rep. No. 494, 97th Cong., 2d Sess. 38-40 (1982). TEFRA
did not
address how states would account for erroneous payments during
the
intervening period. TEFRA did not include a provision for
tolerance
levels, or other special treatment for erroneous recipient
payments
during that intervening period.
The State asserted that the tolerance level in TEFRA should be
applied
during the six-month period at issue, because the TEFRA
disallowance
system was made effective upon enactment. TEFRA, section
133(b). We
reject this argument for two reasons. First, there is
no indication in
TEFRA or in its legislative history that Congress intended
that states
would not have to account for errors at all during this
six-month
period. While TEFRA repealed the existing MQC disallowance
system, it
preserved the "limitations contained in section 1903" of the
Act.
TEFRA, section 133(c). The language of TEFRA suggests that
Congress
intended that states would be held accountable under the
ordinary
limitations of sections 1903(a)(1) and 1903(d)(2), in the same
manner as
they were during other periods when there were no quality
control
disallowance systems. 6/ Second, since disallowances under
TEFRA could
not be taken until periods after March 1, 1983, the disallowance
system
itself was not effective. Only the quality control
measurement
requirements were immediately effective.
Furthermore, we find that, at the time TEFRA was enacted, the policy
was
clear that the Department could disallow individually
identified
erroneous payments in the absence of any quality control
disallowance
system. Prior to 1979, the only disallowances based on
quality control
systems were under Title IV-A (Aid to Families with Dependent
Children
or AFDC) of the Act. As the Board summarized in Consolidated
Appeals,
the initial effort to disallow funds based on quality control
systems
was challenged successfully in court. See Maryland v. Mathews,
415 F.
Supp. 1206 (D.D.C. 1976). The Department revoked those AFDC
quality
control disallowance provisions, but asserted that, in the absence
of
those provisions, states would be held fiscally responsible
for
individually identified payments to ineligibles and overpayments.
42
Fed. Reg. 14717 (March 16, 1977). The Department reasoned that, in
the
absence of the quality control tolerance level provisions, there was
no
authorization for federal participation in improper payments.
Id.
The Department policy was addressed as early as 1979 in California
State
Dept. of Health, DGAB No. 55 (1979). That decision upheld
a
disallowance of individually identified erroneous Medicaid
payments,
finding that the Agency need not apply a tolerance level during a
period
when no quality control disallowance system was operating. See
also
California Dept. of Health Services, DGAB No. 170 (1981),
aff'd
California v. Settle, supra.
In sum, we find no support, either in the history of quality
control
disallowance systems or in TEFRA, for the State's argument that
the
policies inherent in the quality control disallowance systems
require
HCFA to fund erroneous recipient payments during periods in which
no
quality control disallowance system was in effect.
III. HCFA's policy did not violate the Administrative Procedure
Act or
other notice requirements.
The State argued that HCFA's general policy, that HCFA could disallow
FFP
in erroneous recipient payments when there was no quality
control
disallowance system, constituted a rulemaking under the
Administrative
Procedure Act (APA), and was invalid because HCFA did not
provide notice
and an opportunity for comment. The APA established
procedural
requirements for administrative rulemaking. 5 U.S.C. 551 et
seq. The
State alleged that the following statement in the disallowance
letter
constituted a rule of general applicability which should have
been
issued in accordance with APA procedures:
Section 1903(d) of the Social Security
Act, requires an
adjustment to a State's
grant award for any overpayments claimed
for FFP. This requirement includes both collected
and
uncollected overpayments.
We find that the APA requirements do not apply, since this statement
is
not a "rule" within the scope of the APA. It is merely a restatement
of
the plain meaning of the Act. Even if HCFA's policy were to
be
considered an interpretation of the statute in these
particular
circumstances, it would constitute only an interpretative rule or
a
general statement of policy. These are exempt from the notice
and
comment requirements of the APA under 5 U.S.C. 553(b).
Furthermore, as we discussed earlier in this decision, we find that
HCFA
policy was clear that states would be accountable for any
identified
erroneous payments, in the absence of any tolerance levels,
whether or
not the State had recouped the erroneous payments. As the
Board noted
in Georgia Dept. of Medical Assistance, DGAB No. 798 (1986),
HCFA's
policy had been expressed by the general public assistance
grant
requirements of 45 C.F.R. 201.5(a)(3), which require states to report
on
quarterly statements of expenditures all acknowledged or
identified
"expenditures not properly subject to federal financial
participation."
This regulation, published in 1970, was a codification of
provisions
which previously appeared in the Handbook of Public
Assistance
Administration. 35 Fed. Reg. 12180 (July 29, 1970). 7/
Shortly
afterwards, 45 C.F.R. 248.10(d) codified the statutory principle
in
section 1903(a)(1) of the Act, stating that FFP is available only
in
"payments for medical care and services provided under the State plan
to
any financially eligible individual . . . ." [emphasis
added]
(redesignated in 1977 as 42 C.F.R. 448.4(b) and recodified in 1978 as
42
C.F.R. 435.1002(b)). 36 Fed. Reg. 3860 (Feb. 27, 1971); 42 Fed.
Reg.
52827(Sept. 30, 1977); 43 Fed. Reg. 45176 (Sept. 29, 1978).
For these same reasons, we find no violation of the Freedom of
Information
Act (FOIA) requirements for publication in the Federal
Register. 5
U.S.C. 552(a)(1)(D),(E). Under FOIA, a person may not be
adversely
affected by "statements of general policy or interpretations
of general
applicability" which are not published in the Federal
Register, unless the
person had actual and timely notice of the terms of
the policy or
interpretation. 5 U.S.C. 552(a)(1). As we discuss above,
HCFA's policy
was expressed in the regulations cited above (which were
published in the
Federal Register) and the State had notice of that
policy. Nor is there any
violation of provisions in the Act authorizing
the Secretary to publish rules
necessary to administer programs under
the Act.
IV. The disallowance was not arbitrary and capricious or
otherwise
defective.
The State argued that the disallowance was arbitrary and capricious.
The
State's argument that the disallowance was arbitrary and capricious
centered
on the wording of several internal Agency documents. The State
alleged
that these documents showed that the Agency provided only
"meager and
inconsistent instructions to the regional office" as a legal
basis for the
disallowance. State's Brief, pp. 8-10. 8/
A November 3, 1983 memorandum from the Director of the Office of
Program
Administration to the Associate Regional Administrator stated:
"For
those periods when an MQC disallowance system is not in effect,
we
[HCFA] are required to recover the Federal share of
all
eligibility-related recipient overpayments whether the State
collects
them or not." State's Ex. 5, p. 2. The memorandum,
summarizing the
treatment of different periods of time, later says, for the
periods at
issue here, "No MQC disallowance system is in effect and you can
take
eligibility-related overpayment disallowances." Id., p. 3.
The State
argued that this memorandum did not clearly express a policy to
take
disallowances during those time periods. Although the first
quoted
statement clearly indicated that disallowances were required, the
State
argued that the second quoted statement indicated only that the
Agency
was "able to" take disallowances, not that it actually would or
should
take disallowances under these circumstances. The State also referred
to
two items of correspondence, from the Director of the Bureau of
Program
Operations and from the Supervisor of the Grants section, one
indicating
that disallowances were "required," another stating that the
Agency
"must" take disallowances, and the third saying that HCFA/Grants
Section
had the "OK" to take disallowances in these periods. State's Exs. 2,
4.
These documents do not persuade us that the disallowance here
was
arbitrary and capricious. These documents are all consistent with
the
long-standing disallowance policy that states were accountable
for
individually identified erroneous recipient payments when no
quality
control disallowance system was in effect. The documents
merely
summarize that policy. Although we agree that the documents are
not
clear concerning whether disallowances are required or merely within
the
discretion of the regional office, that issue is not relevant here.
9/
Whether or not it was a requirement, the Regional Administrator
had
authority to impose the disallowance, and the disallowance
was
consistent with the overall policy expressed in these documents,
the
requirements of sections 1903(a)(1) and 1903(d)(2) of the Act, and
prior
Departmental issuances.
The State used these specific documents as a basis for arguing that it
had
no notice that the disallowance might be taken. In light of the
clear
statutory requirements and the long-standing disallowance policy
discussed
earlier, we find that the State had notice that the
disallowance might be
taken. The reasons for that policy were set out
in the regulations and
other issuances discussed above. The three
documents on which the State
focused were not inconsistent with this
long-standing disallowance policy and
should properly be read as brief
summaries of that policy.
Thus, we find that the disallowance was neither arbitrary nor
capricious,
and that the documents introduced by the State do not show
that the State
lacked notice that this disallowance might be taken.
Conclusion
We uphold the disallowance in the full amount of $1,373,022 of FFP.
We
find that HCFA may require states to adjust for FFP in
individually
identified payments to ineligible recipients during periods when
no
Medicaid quality control disallowance system was in effect,
regardless
of whether the states have themselves recouped the erroenous
payments
from the recipients.
________________________________ Donald
F.
Garrett
________________________________
Alexander
G. Teitz
________________________________ Judith
A.
Ballard Presiding Board Member
1. 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.
In prior Board cases, the Board found that section 1903(d)(3) applies
only
to those amounts which would be allowable as "medical assistance
furnished
under the State plan." This would include recoveries from
third
parties, such as relatives or insurers, of amounts properly paid
as medical
assistance. The Board concluded that the section does not
preclude
treatment as overpayments of amounts unallowable as medical
assistance.
2. The Consolidated Omnibus Budget Reconciliation Act
of 1985, Pub.
L. No. 99-272, section 9512(a)(3), gave states a 60- day period
to
recover overpayments and provided that states may retain FFP
for
uncollectible overpayments; this provision is effective only
for
overpayments identified for quarters beginning on or after October
1,
1985. Section 1903(d)(2)(D) of the Act.
3. The State alleged that the erroneous recipient
payments at issue
were actually made to recipients themselves. Although
HCFA did not
specifically contest this point, the audit report merely
referred to
them as "payments on behalf of ineligible recipients."
State's Brief,
p. 1; State's Exhibit (Ex.) 8, p. 1.
4. Placing the burden on the state is also justified
because the
state, which has primary responsibility for program
administration, is
better able than the federal government to minimize
erroneous payments
of all types and to identify and recover erroneous
payments in a timely
manner.
5. In any case, Medicaid quality control reviews did
not operate
continuously throughout the period. Some sort of quality
control
reviews began in the late 1960's, but were suspended in April 1973
so
that states could focus quality control resources on programs
under
Title IV-A of the Act (AFDC). Reviews were not resumed until June
1975.
40 Fed. Reg. 27222 (May 19, 1975); see From Quality Control to
Quality
Improvement in AFDC and Medicaid 46-48 (F. Kramer ed. 1988)
6. The fact that Congress expressly extended the
quality control
disallowance authority for programs under Title IV-A of the
Act sheds no
light on Congressional intent with respect to Medicaid.
The absence of
a similar extension in Medicaid does not indicate that there
was no
disallowance authority whatsoever, merely that there was no
special
authority to disallow based on an overall quality control review.
7. Since 42 C.F.R. 201.5(a)(3) gave notice of HCFA
policy, we do not
rely on an action transmittal, HCFA-AT-78-4, submitted by
HCFA. The
action transmittal specifically noted that states were
required to
adjust claims for FFP to exclude federal participation in
payments on
behalf of ineligible recipients which had been identified in
quality
control reviews (no quality control disallowance system was in effect
at
that time). Agency's Exhibit (Ex.) A. The State alleged that it had
no
record of receiving this action transmittal, and offered evidence
of
this point. Since 42 C.F.R. 201.5(a)(3) gave the State timely
notice,
receipt of the action transmittal is not dispositive.
8. The State also alleged, in a footnote, that it
had been
incorrectly advised by federal auditors and officials reviewing
Medicaid
quarterly reports. State's Reply Brief, pp. 9-10. Even
if the State
was given incorrect advice, the State did not allege that it
altered the
administration of its Medicaid program in reliance on that
advice.
Thus, there is no evidence that the State was affected to its
detriment.
9. Furthermore, even if disallowances were required,
there would
still be a discretionary judgment as to whether erroneous
payments had
been clearly