DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: California Department of Health Services
Docket No. 88-37
Audit Control No. A-09-86-50225
Decision No. 977
DATE: August 10, 1988
DECISION
The California Department of Health Services (California or
State)
appealed a disallowance by the Health Care Financing
Administration
(HCFA) of $5,081,970 in federal financial participation (FFP)
claimed
under Title XIX (Medicaid) of the Social Security Act (Act) for
the
period October 1, 1976 through September 30, 1985. The disallowance
was
based on an audit of California's records of accounts receivable
and
related records as of June 30, 1986. The auditors found
that,
generally, California did not refund the federal share of excess
or
improper Medicaid payments until after the State had recovered
the
amounts from the providers. Specifically, the auditors found a
total of
$13,951,875 in excess or improper payments to providers of
laboratory
and pharmacy services for which California had not refunded the
federal
share of $5,081,970.
We uphold the disallowance. To the extent that settlements,
reversals,
and collections since the audit were not reflected in the
disallowance,
HCFA has agreed to review the State's documentation and reduce
the
disallowance as appropriate.
General Background
Title XIX of the Act authorizes federal grants to states to aid
in
financing state programs which provide medical assistance and
related
services to needy individuals. 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 for 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.
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.
.
. .
In numerous cases involving excess or improper payments by states
to
Medicaid providers, this Board has held that, under section
1903(d)(2),
HCFA may require adjustment of the grant award for the federal
share of
firmly established overpayments, even if a state has not yet
recovered
these amounts from the providers. The Board reasoned that
excess or
improper payments are not "medical assistance" within the meaning
of
sections 1903(a)(1) and 1905(a) of the Act. See, e.g., California
Dept.
of Health Services, DGAB No. 619 (1985); Massachusetts Dept. of
Public
Welfare, DGAB No. 262 (1982).
The Board found no basis for concluding that adjustment of the grant
award
should be limited to the federal share of those improper or excess
payments
which a state has already recouped from a provider. The
Board
considered arguments by states that the term "overpayment" in
section
1903(d)(2) is not clearly defined and is limited in the context of
the
Act by section 1903(d)(3) to include only amounts which the State
has
already recouped. 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.
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.
See, e.g.,
Arkansas Dept. of Human Services, DGAB No. 717 (1986); New York
Dept. of
Social Services, DGAB No. 311 (1982).
The Board's prior holdings on overpayments issues have 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); and
Missouri
Department of Social Services v. Bowen, 804 F.2d 1035 (8th Cir.
1986).
Case Background
The disallowance was based on an audit by the HHS Office of the
Inspector
General (OIGOA) covering overpayments to providers of pharmacy
and laboratory
services established by State accounts receivable records
as of June 30,
1986. See State's Ex. C. HCFA described the audit
process in the
following terms:
The first step of the federal audit was to establish
that the
overpayment amounts reported by the State
had been correctly posted
as receivable accounts,
and to assure that any collection made
since the
initial postings had been appropriately identified
and
the total amount of overpayments reduced
accordingly. OIGOA then
proceeded to verify
that each [State] audit conformed to standard
State
protocols to ensure, for example, that sufficient
competent
evidence (bills, invoices, etc.) had been
examined by properly
supervised audit teams.
The audit findings were also examined for
mathematical accuracy, audit judgment, and, where
appropriate,
statistical reliability. Finally,
OIGOA assembled the data and
made adjustments for
intervening changes in the status of the
State's
accounts receivable.
HCFA's Brief, p. 3.
HCFA alleged, and California did not deny, that the auditors found
that
the State audit reports complied with government accounting
standards
and were generally accurate.
The auditors concluded that the State had failed to credit the
federal
government with the federal share ($5,081,970) in $13,951,875
of
overpayments to pharmacy and laboratory providers from October 1,
1976
through September 30, 1985. These figures were current as of
November
30, 1986. State's Ex. C, p. 3. HCFA adopted the OIGOA
findings.
In the briefs California submitted in this appeal, California divided
the
alleged overpayments into four categories: overpayments to bankrupt
or
insolvent providers, overpayments currently being collected under
installment
repayment agreements, overpayments to providers with
ongoing
administrative or judicial appeals, and overpayments which
were
settled, reversed or collected. Although HCFA did not agree on
the
precise amounts to be assigned to each category, HCFA did not object
to
the general characterization of the categories. We discuss each
of
these categories below.
Discussion
I. Excess or improper payments to bankrupt and insolvent providers
In the prior decisions discussed above, the Board found that HCFA
may
require return of the federal share in excess or improper payments
prior
to a state's recovery of the amounts due from providers, whether
the
provider is solvent or insolvent. Thus, states must account for
the
federal share of excess or improper payments even when the states
may
never recover the money because of provider bankruptcy or
insolvency.
E.g., Michigan Dept. of Social Services, DGAB No. 971
(1988);
Massachusetts Dept. of Public Welfare, DGAB No. 262
(1982). The Board
reasoned that states administer the Medicaid
program, contract directly
with providers, and have the ability to ensure
that the program
contracts only with responsible.providers. As the
First Circuit stated
in Massachusetts v. Secretary, 749 F.2d 89, 96 (1984),
in upholding the
Board on this point:
Since only Massachusetts [the appellant state] deals
directly with
the providers, and since the state is
empowered to perform on-site
audits of these
institutions, it is clearly the party best able to
minimize the risks resulting from dealing with insolvent
providers.
The fact that Massachusetts will in any
event bear a share of the
loss, and so already has
some incentive to minimize these risks,
diminishes
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.
Although California asserted that it generally disagreed with the
Board's
holdings on these issues, California recognized the line of
cases described
above, and reserved the right to challenge the analysis
if it chooses to seek
judicial review. Thus, we conclude that the fact
that some of these
overpayments were made to bankrupt and insolvent
providers does not provide a
basis for reversing the disallowance.
II. Excess or improper payments currently being collected
under
installment repayment agreements
California recognized the Board's line of cases holding generally
that
HCFA need not wait until states recover from providers, but argued
that
the Board had not considered particular reasons why states should
be
permitted to retain FFP when providers are repaying the disputed
funds
under an installment agreement. California argued that requiring
states
to refund FFP to the federal government immediately would
discourage
such agreements. California asserted that installment
agreements
benefit both the public and the Medicaid program, by
permitting
repayment in an orderly manner which prevents insolvency or
bankruptcy
for the provider. State's Brief, p. 7.
California's arguments do not affect HCFA's authority to require
immediate
adjustment of California's claims for the federal share of
excess or improper
payments. The arguments do not call into question
the interpretation of
the relevant statutory provisions discussed above,
but merely address one
policy consideration which HCFA might choose to
consider in exercising its
discretion in determining the timing of
adjustment of amounts under
installment repayment agreements. Moreover,
the federal interest in
promoting installment agreements is remote since
the federal government does
not contract directly with providers and, as
we discussed above, during this
time period was not necessarily required
to share in risks which states may
wish to assume by contracting with
providers who may not be sufficiently
responsible or financially secure
to pay their debts. It is also
unclear that requiring return of the
federal share would have the effect
California alleged. As California
itself conceded, installment
agreements are in states' interests and may
prevent financial losses to
states by preventing provider bankruptcy.
Thus, we conclude that HCFA may require California to adjust claims
for
federal funds to account for excess or improper payments, regardless
of
whether California is recovering funds under an installment agreement.
III. Determinations of excess or improper payments which are
being
challenged by providers
California argued that HCFA should not rely on State records for
these
overpayments since those amounts are not final since they are
not
collectable under State law. California alleged that this was
an
indication that State records were not reliable with respect to
amounts
due from four providers with pending administrative appeals
of
overpayment determinations and one provider with a pending
court
challenge of a final administrative determination. State's Ex. F,
p. 4.
California law precludes collection of disputed amounts
from
non-institutional providers, such as these, prior to the completion
of
the administrative review process. State's Ex. G, 22 Calif. Code
Regs.
51047 (1985). California asserted that State law also barred
collection
during the judicial review process except by offset against
current
payments to the provider, and that this effectively precluded
all
collection efforts in that case, since the provider involved was
no
longer participating in the Medicaid program or receiving any
current
payments. California argued that, because California state law
precluded
California from collecting from providers, the
overpayment
determinations were not sufficiently final for HCFA to rely upon
in
issuing a disallowance. State's Brief, p. 5.
The Board has considered the use of state overpayment audits and
other
records in numerous prior decisions. See, e.g., Ohio Dept. of
Public
Welfare, DGAB No. 637 (1985). The Board has held that HCFA
may
reasonably rely on state records when the following criteria have
been
met:
- HCFA provides sufficient detail
to identify the records from
which the disallowed
amounts are derived.
- The State is provided an opportunity to show that:
- adjustments have been made to the state findings;
- the records were not reliable for some reason;
- the State has already recovered the amount
identified as
an overpayment and has already adjusted its claims
to account
for the federal share; and
- the State never claimed FFP in the
overpayment in the
first place.
See Pennsylvania Dept. of Public Welfare, DGAB No. 765 (1986).
The Board developed this approach in the absence of any clear HCFA
policy
on when a state would be considered to have "identified" or
"found"
overpayments so that the state would be required to report the
overpayment
and credit the federal government with its share. See Ohio,
supra;
Pennsylvania, supra. The resolution of this issue does not
affect the
underlying obligation to account for overpayments; it affects
only the timing
of the accounting. The Board has said that, in
analyzing the issue, it
would consider the particular circumstances in
determining the adequacy of
the record to support a proposed
disallowance, including factors such as the
nature of the overpayments
involved, the extent to which HCFA independently
determined that the
state claimed unallowable costs, the issues raised by the
state, and the
evidence the state has provided in support of its
positions.
As we explain below, we find that HCFA may reasonably rely on the
State
audit findings for this disallowance. We find nothing in
the
circumstances here which impugns the reliability generally of the
State
audit process in making this type of overpayment determination or
the
reliability specifically of these determinations. While
California
itself could not collect from providers, California did not relate
the
collection policy reflected in State law to any negative assessment
of
the reliability of provider audits or to any federal policy or
federal
interest.
The Board has recognized in prior decisions that a state may be in
a
difficult position in defending a federal disallowance at the same
time
as it is litigating with a provider. See California Dept. of
Health
Services - - Accounts Receivable, DGAB No. 334 (1982). But the
Board
has rejected arguments that state-level audit findings are not
a
reliable basis for a federal disallowance merely because there
are
pending appeals, either administrative or judicial, by providers.
In
light of the fact that states have control over the
providers'
administrative appeal process, the Board found no reason why
federal
recovery of unallowable costs should be delayed indefinitely until
the
end of state administrative proceedings, absent other factors
which
might indicate that the findings were not reliable. Id. The
Board also
has found that the mere fact that a provider has appealed to court
a
state's final administrative decision does not render that
decision
unreliable (although the Board has also held that HCFA may
not
reasonably rely on a state's original overpayment when the
determination
has been overturned or modified by a court). See, e.g.,
Michigan Dept.
of Social Services, DGAB No. 971 (1988).
California relied primarily on the Board's holding in Pennsylvania
Dept.
of Public Welfare, DGAB No. 765 (1986) in which the Board found,
under
the limited circumstances there, that HCFA could not rely on
state-level
records of overpayments to long-term care facilities when there
were
pending administrative appeals and when Pennsylvania state law
precluded
collection prior to resolution of those appeals. The Board's
holding
was based on a finding that HCFA had failed to give states notice of
a
1981 change in its policy on the timing of accounting for
overpayments
to long-term care facilities, which had permitted states to
retain FFP
pending resolution of administrative appeals (the policy was
expressed
in 42 C.F.R. 447.296, as interpreted by Action Transmittal
AT-77-85).
The reasoning of Pennsylvania does not apply here because of
significant
factual differences in the two cases. The alleged
overpayments in this
case were to pharmacies and laboratories, while HCFA's
policy permitting
states to retain FFP pending resolution of administrative
appeals was
applicable only to long-term care facilities. Thus, unlike
in
Pennsylvania, California did not assert that it had relied on what
it
thought was federal policy on the issue to establish its own policies
on
administrative appeals and collection. In fact, as we discuss
below,
California had ample notice that it could not retain FFP throughout
the
appeal process for providers of services other than long-term care.
In
California Dept. of Health Services, DGAB No. 334 (1982), the
Board
examined California's particular appeal process and upheld
a
disallowance of overpayments to hospital providers even though
all
administrative appeals had not been completed.
Here, the federal auditors found that the State audits also had
been
performed in accordance with governmental auditing standards.
In
addition, HCFA alleged, and California did not deny, that the
federal
auditors examined the underlying documentation to verify each
State
audit. Under these circumstances, we find that the State audit
reports
have a high degree of reliability. As the Board noted in DGAB
No. 334,
when the State's auditors were required to use accepted
auditing
standards and methods, the audits resulting from such a process have
a
high degree of reliability.
Moreover, the administrative appeals have been pending between 2 and 5
1/2
years, and the State did not deny that the appeals are all beyond
the first
level of review. See HCFA's Brief, p. 11. In DGAB No. 334,
the
Board considered as a relevant factor that California could collect
disputed
funds from providers after the first level of appeal.
Although
California provided evidence that State law had been changed so that
the
State must now wait to collect until all levels of
administrative
appeals have been completed, we find that this, alone, does
not change
the outcome. A key element in DGAB No. 334 was the
reliability of the
State audit process; the fact that the State itself could
collect from
providers after the first level of appeal merely confirmed that
the
State itself considered its determination sufficiently final.
Without
any evidence that the change in State law was based on an
assessment
that the determinations were unreliable, nor any evidence that
the
change reflected federal policy or served a federal interest, the
Board
must conclude that HCFA may rely on these determinations for
a
disallowance.
We conclude that the mere existence of provider appeals does not
render
unreliable the State audit findings upon which the disallowance is
based
because of the high reliability of the audit process, because
the
disallowance was not inconsistent with HCFA's stated policy as
in
Pennsylvania, and because the original determinations have not
been
overturned or modified by reviewing courts.
IV. Settled, Reversed, and Collected Amounts
California asserted that State records were unreliable because some of
the
alleged overpayments have been reduced by agreement or decision
during the
administrative appeal process, and some other alleged
overpayments have been
collected and the federal government credited
with its share, after the
closing date of the audit review (June 30,
1986). California asked that
the Board remand to HCFA for further
review the amounts it identified in
these categories. HCFA agreed to
review and verify pertinent
documentation submitted by the State, and to
adjust the disallowance
accordingly, but asked that the Board sustain
the disallowance subject to
adjustment following this agreed-upon
review.
California objected to the Board sustaining the disallowance at
this
time. California expressed concern that HCFA might try to
immediately
recoup the amount in question from California and then delay
review of
California's documentation before returning whatever amount HCFA
deems
appropriate based on that documentation. Nothing in the record
suggests
that California's concern is justified; in prior cases, HCFA
has
reviewed documentation, submitted in a timely manner, of
activities
subsequent to the audit before taking action to adjust for the
federal
share.
In fact, the auditors apparently have already reviewed amounts
California
proposed for adjustment for events between June 30, 1986 and
March 30, 1987
(the period between the audit review and the final audit
report). The
final audit report states that some of the downward
adjustments proposed by
the State were examined based on State records
as of March 30, 1987.
The auditors found that the adjustments "were
composed primarily of amounts
written off as uncollectible." State's
Ex. C, p. 4. The auditors
concluded that the uncollectible amounts were
not reimbursable under federal
law. Id. California did not dispute the
auditors' finding that
the amounts had been written off as
uncollectible.
California asserted that this review was flawed, arguing that any
amount
reversed by agreement should not be considered as an
overpayment. In
this case, however, federal auditors made findings
concerning the
reasons California settled some alleged overpayments and
California did
not provide any evidence to rebut those findings. In
light of our
conclusion above that FFP is not available in overpayments
whether or
not a state has recovered (or is likely to recover) the disputed
funds
from providers, we find that the auditors' findings were
not
inconsistent with HCFA's policies or authority. Essentially,
the
auditors found that a large proportion of the amounts which the
State
claimed had been settled or reversed should have been
properly
categorized as amounts due from bankrupt or insolvent
providers. Thus,
HCFA may require adjustment of these amounts without
any reduction due
to the settlements.
Thus, we find no reason why we should not sustain the disallowance
subject
to HCFA's review of California's documentation of settled,
reversed, or
collected amounts. California should submit responsive
documentation
within 30 days of receipt of this decision, or such longer
period as HCFA
permits.
Conclusion
In sum, we uphold the disallowance subject to adjustment. We find
that
HCFA is not precluded from adjusting for these overpayments
simply
because the State may not have recovered excess or improper
payments
from the providers. Furthermore, we find that California did
not
establish that the records upon which the disallowance was based
were
unreliable. The mere fact that five providers have pending appeals
does
not render the State overpayment determinations unreliable in
the
circumstances of this case. To the extent that settlements,
reversals
and collections since the audit was conducted were not reflected in
the
disallowance, HCFA has agreed to review the State's documentation
and
reduce the disallowance as appropriate. If the parties are unable
to
agree on the.proper amount of such a reduction, the State may return
to
the Board for review of this limited issue.
________________________________ Judith A. Ballard
________________________________ Norval D. (John) Settle
________________________________ Cecilia Sparks
Ford