GAB Decision 717
January 8, 1986 Arkansas Department of Human Services;
Settle, (John) Norval D.; Teitz, Alexander G. Ballard, Judith A.
Docket No. 84-253; ACN 06-20156
This case is before the Board on remand from the U.S. District Court
for the Eastern District of Arkansas. Arkansas v. Heckler, No.
LR-C-83-467 (E.D. Ark., September 17, 1984). That court reversed Board
Decision No. 423, which had upheld a determination by the Health Care
Financing Administration disallowing payments made to 27 Medicaid
providers which HCFA found to be in excess of the amounts properly paid
under the Arkansas State plan for Medicaid. Essentially, the court held
that it was arbitrary to require the State to repay the federal share of
the alleged overpayments where the approved State plan established a
provider appeal process and appeals by the providers were still pending.
The court also determined that there were factual disputes requiring a
hearing.
During proceedings before the Board on remand, HCFA agreed to withdraw
the
disallowance of payments to five providers, and the State stipulated
to
certain facts and agreed that HCFA had properly adjusted the federal
share of
part of the excess payments made to three of the providers.
The Board held a
hearing, as directed by the court, and otherwise
developed the record to
reflect the current status of the providers'
appeals. /1/ None of those
appeals are still pending at the
administrative level although seven related
court cases are still
pending.
The State did not deny generally that the providers had
received
payments in excess of what the providers were entitled to under
the
State plan. Rather, the State advanced a number of reasons why, in
the
State's opinion, HCFA should be precluded from(2) disallowing
the
federal share of those excess payments. The State's arguments
raised
the following major issues:
* Does section 1903(d)(3) of the Social Security Act preclude HCFA
from
adjusting the federal share of excess payments which the State has
not
recovered from the providers?
* Is HCFA precluded from taking this disallowance because HCFA
approved
the State plan provision establishing a provider appeals
process?
* Does the partnership concept in the Medicaid program require that
HCFA
establish that the State was at fault in making the excess payments
to
the providers or in failing to recover them?
* Is HCFA precluded from taking this disallowance based on the theory
of
equitable estoppel because of HCFA's actions or inactions related
to
development and implementation of the State's system for
reimbursing
providers?
* Did HCFA improperly use 1977 cost data in calculating some of the
excess
payments?
* For the reasons stated below, we conclude that HCFA is not
precluded
from taking the disallowance on the basis of any of the
theories
advanced by the State here. In summary, those reasons are:
* The excess payments to the providers here are not "medical
assistance
furnished under the State plan" and, therefore, section 1903(d)(3)
does
not apply.
* The State plan provision establishing a provider appeal process is not
a
basis for preventing HCFA from adjusting the federal share of the
excess
payments here since no appeals are pending at the administrative
level and
since, with respect to many of the excess payments, the State
did not take
any action to recover from the providers.
* HCFA acted reasonably in requiring the State to repay the federal
share
of the excess payments even if the State was not at fault in
making, or
failing to recover, the excess payments, and the disallowance
does not
violate the partnership concept in the Medicaid program.
* None of HCFA's actions or inactions provide a basis for estopping
HCFA
from taking this disallowance since the State did not prove the
basic
elements necessary to estop a private party, let alone
establish
affirmative misconduct by HCFA.(3)
* Use of the 1977 cost data was proper, since it was consistent with
the
State plan reimbursement system, of which the providers had notice
prior
to the rate periods in question.
Below, we first set out the undisputed facts regarding what the State
plan
specifies about provider reimbursement, how that plan was developed
and
implemented, and what the federal auditors found. We then address
each
of the major issues listed above, resolving questions of fact where
necessary
to our determination and stating the basis for our conclusions
of law.
A major flaw in the State's arguments here was that they were too
general
and did not relate with sufficient detail to the specific excess
payments at
issue here. Thus, we have also included here a discussion
of the
specifics of some of the excess payments with the reasons why it
appears that
the State has not been able to recover them. Through this
discussion,
we reinforce the conclusion, reached in previous Board
decisions and upheld
in court, that HCFA is reasonable in placing the
burden for unrecovered
excess payments on the states, even though in
some instances the loss of
funds may have been unavoidable.
Background.
Title XIX of the Social Security Act (Act) establishes a program
of
medical assistance to the needy, including services in a skilled
nursing
facility (SNF) or intermediate care facility (ICF). In order to
receive
federal financial participation (FFP) under Title XIX, a state must
have
an approved state plan for Medicaid, meeting the requirements set out
at
section 1902 of the Act.
Section 1902(a)(13)(E), as added by section 249 of Public Law
92-603,
required that state plans provide for payment of SNF and ICF
services
"on a reasonable cost-related basis, as determined in accordance
with
methods and standards which shall be developed by the State on the
basis
of cost-finding methods approved and verified by the
Secretary."
Regulations implementing this requirement provided that states
had to
set reasonable cost-related rates no later than January 1, 1978.
The
regulations also established certain standards states had to meet
in
order to have their reimbursement systems approved.
Section 447.84 of 42 CFR (and its predecessor provision at 45
CFR
250.30(a)(3)(iii)(D)) provided that state plans had to specify
what
items of expense would be allowable costs to be used in
calculating
reimbursement rates. That section included the following
provision:
Purchases from related organizations: Costs applicable to
services,
facilities, and supplies furnished to a(4) provider by
organizations
related to the provider by common ownership or control shall
not exceed
the lower of the cost to the related organization or the price
of
comparable services, facilities or supplies purchased
elsewhere.
Providers shall be required to identify such related organizations
and
costs in the State's uniform cost report(s).
The purpose behind this provision was to control provider profits,
which
were restricted primarily to a return on owners' equity (with
the
further possibility, where class rates were used, of facilities
which
kept costs below the norm receiving an incentive payment). 41
Fed.
Reg. 27300, 27301 (July 1, 1976); see also State's Response
to
Intervenor's Brief, Docket No. 82-186, unnumbered pp. 2, 3. /2/
Federal
regulations also required that states establish systems for
auditing
provider costs, including desk reviews of cost reports submitted
by
providers and on-site audits of at least 15% of the providers each
year.
42 CFR 447.290 et seq.
Although the states had the option of adopting the
retrospective
reimbursement system used in the Medicare program, Arkansas
decided to
develop its own rate methodology. The State submitted
several proposed
plan amendments which were found to be unacceptable.
The version
submitted January 11, 1978, however, was approved and made
retroactive
to January 1, 1978. The State subsequently, in March 1978,
submitted
further amendments to the plan, which were also approved
retroactive to
January 1, 1978. Simply stated, the State's plan
established a
prospective rate-setting system under which providers were to
report
costs for each calendar year. These costs would then be used
to
establish a per diem rate to be paid for services provided in
the
State's fiscal year (July 1 to June 30) starting six months after
the
end of the reporting year. The State calculated the rates generally
by
taking the 80th percentile of allowable costs for each class of
facility
and adjusting by an inflation factor.(5)
The State's plan contained a provision on related-party transactions
which
used wording different from the federal regulation. As discussed
below,
the State said that it intended this provision to comply with the
federal
requirement; the providers alleged that a "prudent buyer
concept"
provision in the plan was to be an exception permitting a
provider to claim
more than the cost to the related organization.
The State plan, as approved by HCFA, also contained a
provision
establishing an administrative appeal process for providers
who
contested State rate determinations.
In order to ensure that the initial rates set under the new system
were
accurate, the State hired the accounting firm of Touche Ross
and
Company, which audited 100% of the providers' cost reports in 1978.
The
State also developed its own auditing staff to perform desk reviews
of
the cost reports and establish the rates and to later perform
on-site
audits, which were done on 15% of the facilities each year.
As part of the desk review process, the State used a guideline of $85
per
bed per month to determine the reasonableness of lease costs
reported by
providers, regardless of whether the parties to the lease
were related or
not. Four providers (Appletree, Morrilton, Riverview,
and Mitchell)
appealed from determinations based on use of this
guideline, or from later
determinations that related-party transactions
had been improperly reported,
and the last three received decisions in
their favor from the "Ad Hoc
Committee" set up pursuant to the State
plan provision establishing an appeal
process. The Commissioner of the
State department administering the
Medicaid program tried to reverse
these decisions, but was precluded by court
order from doing so. The
Commissioner also sought an opinion from the
State Attorney General on
the related-party provision in the State plan, who
determined that the
provision should be interpreted consistently with the
federal
requirement. Ultimately, the State also amended its State plan
to
provide for an appeal process under which a hearing officer
would
recommend a decision, which the Commissioner could then adopt
or
reverse. We discuss these events in greater detail below.
Having learned that the State was having difficulties with providers
in
the area of related-party transactions, HCFA asked HHS auditors
to
review the situation. These federal auditors reviewed provider
cost
reports and cost of ownership figures and found that 27 providers
had
been reimbursed at rates in excess of what they were entitled to
under
the State plan and had received excess payments totalling
$1,952,967.(
6)
HCFA then disallowed $1,419,515, the federal share of these
excess
payments, which the State had previously claimed on its
Medicaid
expenditure reports. HCFA conceded in the recent proceedings
before the
Board that $171,440 FFP had been incorrectly disallowed since,
under the
State definition of "related party" (found to be the
applicable
definition by this Board in Arkansas Department of Human
Services,
Decision No. 540, May 22, 1984), five of the provider
transactions
questioned by the auditors were not related-party
transactions. This
reduced the amount in dispute here to
$1,248,075.
In addition, when questioned at the hearing on its actions
regarding
Marshall Nursing Center the State admitted that HCFA had
properly
recouped its share of the $2,240 excess payment to that
provider. The
State also acknowledged that it had recouped part of the
excess payments
from two other providers (Autumn Hills and Zimmerman), so
that HCFA's
adjustments of those amounts were proper.
Analysis
Section 1903(d)(3) does not require HCFA to wait until the State
recovers
the excess payments.
When HCFA took this disallowance, it directed the State to adjust
the
federal share of the excess payments on the State's
quarterly
expenditure report. HCFA did this based on section 1903(d)(2)
of the
Social Security Act. Section 1903(d) governs payments to states
under
the Medicaid program, establishing a system through which states
receive
federal funds based on their estimated expenditures prior to
the
beginning of each calendar quarter. Section 1903(d)(2) provides
that,
after estimating a state's expenditures, 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. . . ."
This Board has previously held in a number of decisions that, when
HCFA
disallows Medicaid expenditures claimed by a state (and
that
determination, if appealed, is upheld by this Board), the Secretary
has
determined that the state has been overpaid and payment to the state
may
be adjusted under section 1903(d)(2). The Board has based
this
conclusion on HCFA regulations and longstanding HCFA policy.
See,
generally, 45 CFR Part 201; see also section 1903(d)(5) of the
Act
(providing that, where there is a final disallowance determination,
the
disallowed amount, plus interest, may be offset against
subsequent
payments made to the state). (7)
The states have not generally challenged HCFA's authority to offset
the
federal share of a disallowed amount against a payment to a state for
a
later quarter, but have argued that, where the disallowance is
taken
because a state has overpaid a Medicaid provider, HCFA cannot adjust
the
federal share until the state has recovered the overpayment from
the
provider. The states have based this argument primarily on section
1903
(d)(3). That section provides:
The pro rata share to which the United States is equitably
entitled,
as determined by the Secretary, of the net amount recovered during
any
quarter by the State or any political subdivision thereof with
respect
to medical assistance furnished under the State plan shall be
considered
an overpayment to be adjusted under this subsection.
The states argued that this constituted a limiting definition of the
term
"overpayment" in section 1903 (d)(2) and therefore HCFA could not
adjust for
provider overpayments which had not been recovered.
The Board rejected this argument. The Board pointed out that
section
1903 (d)(3) was not worded as a definition of "overpayment," but
was
intended to prescribe the circumstances under which "medical
assistance
furnished under the State plan" would be "considered an
overpayment."
The term "medical assistance" is defined in section 1905 (a) of
the Act,
which sets out what services and individuals can be covered under
a
state plan. Also, state plans establish methods of determining
what
providers can be paid for particular services. The Board reasoned
that,
if a provider has received improper payments (such as payments
for
services or individuals not covered under a state plan, or for
services
not in fact rendered) or excess payments (such as payments at a rate
in
excess of the rate established in accordance with the state plan),
those
payments do not constitute "medical assistance furnished under the
State
plan" and therefore section 1903 (d)(3) does not apply. (For a
summary
of the Board's reasons, see New York State Department of
Social
Services, Decision No. 311, June 16, 1982.)
This analysis has been upheld in two United States Court of
Appeals
decisions, Massachusetts v. Secretary, 749 F.2d 89 (1st Cir.
1984),
cert. denied, 105 S.Ct. 3478, and Perales v. Heckler, 762 F.2d (2d
Cir.
1985). See also Florida v. Heckler, Civ. No. 82-0935 (N.D. Fla.
1984).
Nonetheless, Arkansas pressed the same argument here, relying on
the
District Court decision in Missouri Department of Social Services
v.
Heckler, No. 84-4106-CV-C-5, W.D. Mo., Sept. 10, 1984, which
reversed
Board Decision Nos. 448 and 459,(8) based on the Massachusetts
district
court decision later overturned by the First Circuit. The
Missouri
decision has been appealed to the Eighth Circuit, but that court has
not
yet decided the case.
Arkansas presented no substantial reason why we should conclude that
our
previous decisions were wrong, but argued that we should follow
the
Missouri District Court decision since Arkansas is in the same
circuit
as Missouri. Arkansas cited no cases for the proposition that
the Board
is bound by the Missouri decision on this basis, and we know of
none.
/3/ Thus, given that our previous decisions have been upheld by
two
courts of appeals, we reaffirm here the result reached there:
section
1903 (d)(3) does not preclude HCFA from adjusting the federal share
of
amounts claimed by a state for payments to a provider which are
later
determined to be improper or in excess of what the provider is
entitled
to.
The District Court decision in the Arkansas case on remand here does
not
require a different result. That court did not hold that HCFA
could
never adjust the federal share of a provider overpayment but
considered
the matter to be one of timing, noting that the providers
were
contesting the overpayment determinations using the appeal process
set
out in the state plan. We discuss next how the provider appeal
process
affects our decision here.
The provider appeal process does not provide a basis for reversing
the
disallowance.
The issues here.
As we understand it, one of the major factors in the reasoning of
the
District Court in the Arkansas case was that it was arbitrary to
require
the State to repay the federal share of an overpayment while a
provider
appeal was pending since the State plan provided a right of appeal
and
the State was precluded from recovering the overpayment from
the
provider prior to completion of the appeal process. The District
Court
described the State as being(9) "whipsawed" by HCFA's disallowance
on
the one hand and the required administrative appeal process on
the
other.
A Medicaid regulation (no longer in effect) permitted states to wait
until
completion of a provider appeal before accounting for the federal
share of
amounts identified in state audits as overpayments to nursing
homes. 42
CFR 447.296, as interpreted in Action Transmittal 77-85. In
Decision
No. 423, the Board determined that this regulation did not
apply where HCFA
had made its own audit findings. The Board did not
explain this
distinction (although it had been discussed in other Board
decisions cited in
Decision No. 423), and the court found this lack of
explanation to be
arbitrary. Essentially, the Board's reasoning was
that the purpose of
the regulation was to place a duty on states to
report to HCFA provider
overpayments found by state auditors (after a
grace period during which the
state could resolve its initial audit
findings), and, therefore, the
regulation was irrelevant to the question
of when HCFA could adjust amounts
it had independently determined a
state had been overpaid. When HCFA is
relying on a state finding that a
provider has been overpaid, there are
reasons for waiting until the
state has tested its preliminary findings
through state processes, but
the same considerations do not apply when HCFA
has used its own
processes.
As the Arkansas Court recognized, however, where a HCFA disallowance
is
based on a finding in a federal audit that a provider has
included
unallowable costs in its cost report, the State is put in a
difficult
position. The State cannot automatically recover from the
provider the
amount the federal auditors determined was overpaid to the
provider but
must give the provider an opportunity to show that the audit
findings
are incorrect or that the disallowed costs can be offset by
other
allowable costs.
In Decision No. 423, the Board focused on the fact that the State was
not
disputing the legal conclusion that costs in excess of the costs of
ownership
to the related party had been included in the rate
calculations contrary to
the State plan. The Board did not fully
consider the effect of the
related provider appeals, where providers
were contesting the audit
findings. Since no appeals are currently
pending at the administrative
level, however, new questions are
presented to us on remand.
As developed by the State during this proceeding, the State's
argument
regarding the appeals process has two components:
* that the State would not have received adverse administrative
decisions
on the related-party question if the appeal process
established in the State
plan were not defective and that HCFA(10) bore
equal responsibility for those
defects because HCFA approved the State
plan; and
* that court proceedings resulting from appeal by the providers
of
administrative decisions upholding disallowances of
related-party
overpayments were merely an extension of the State plan appeal
process
and should be treated no differently for purposes of determining
when
HCFA can adjust for the overpayments.
We discuss each of these arguments below. In addition, we
address
several points raised by the State which appeared to indicate that
there
might be a continuing dispute about the overpayment amounts.
HCFA's approval of the State plan.
HCFA stated, and the State did not deny, that nothing in
federal
regulations required the State to include in its State plan a
provider
appeal process, nor did federal regulations preclude this.
Thus, HCFA
argued, the decision to include a process and the determination
about
what that process should be were entirely within the State's
discretion.
The State pointed to HCFA's role in providing advice to the State
and to
the fact that HCFA had, in a letter dated July 30, 1980, advised
the
State to alter its process. The State argued that the State should
not
bear the entire burden caused because the unrevised process resulted
in
decisions in conflict with the State plan. To show what went wrong
with
the process, the State presented testimony from a State official who
was
a member of the Ad Hoc Committee which rendered some of the
decisions
referred to.
We first note that this argument applies to only three of the 22
nursing
homes whose reimbursement rates are still at issue here.
These
providers were the ones involved in the State cases which brought
the
issue to HCFA's attention. The State never actually took action
to
recover many of the excess payments discovered in the federal audit,
and
by the time it took action against many of the providers, the
appeal
process had been amended in the State plan and the disallowances
were
upheld at the administrative level, except for one case where
the
Arkansas Commissioner found that due process had not been afforded
the
provider (Gardner Nursing Center) and another where he reversed
the
disallowance as in conflict with a previous settlement with the
provider
(Ouachita Convalescent).
In any event, we do not think that approval of an appeal process in
the
State plan can be transformed into an obligation on the part of HCFA
to
participate in rates which the State admits were(11) in contravention
of
the State plan and federal regulations. Indeed, a HCFA
witness
testified and a State witness affirmed that, in approving the State
plan
appeal process, HCFA did not make any representation that FFP would
be
available in payments solely because a provider appeal was
successful.
The District Court decision did not address this issue, nor imply
that
HCFA must participate ultimately in the overpayments, but referred
to
the administrative appeal process as raising the question of when
HCFA
could recover the overpayments.
Moreover, we do not think that the appeal process established in the
State
plan initially was so defective on its face that HCFA had a duty
to
disapprove of it. While a provision for review by the Commissioner
(as
in the revised version) is a safeguard for the State agency, the
process
established initially had other advantages (such as greater
appearance of
independence). In any event, the testimony by the Ad Hoc
Committee
member and the written decisions issued by the Committee
indicate that the
results of the providers' appeals were attributable to
the way the
related-party provisions were drafted and implemented and to
the Committee's
belief that the lease costs were reasonable. If the
related-party
provision had been more clear, there might never have been
a problem.
Thus, we do not agree with the State that the fact that HCFA approved
a
provider appeal process which ultimately led to several
decisions
adverse to the State involving related-party transactions requires
HCFA
to participate in all provider overpayments involving
related-party
transactions.
The effect of court proceedings.
As indicated above, no provider appeals are currently pending at
the
administrative level, but seven appeals are pending in State courts
(six
in Circuit Court, one in Supreme Court). The State argued that
the
court cases were merely an extension of the State plan appeal
process
since the State Administrative Procedure Act provided a right to
appeal
to court from State agency action. The State also said that it
was
precluded from recouping the overpayments from the providers since
the
courts had stayed agency action pending the appeals and that,
therefore,
HCFA should not be permitted to adjust the federal share of
the
payments.
The District Court decision in this case found that the disallowance
was
arbitrary in light of HCFA's approval of the appeal process in the
State
plan and the regulatory provision at 42 CFR 447.296, interpreted
in
Action Transmittal 77-85, requiring the State to adjust for
overpayments
no later than the second quarter(12) following the quarter in
which
found as a result of a state's provider appeal process. /4/ Nothing
in
the court's decision implies that HCFA must wait to recover the
federal
share of an overpayment pending a provider's appeal to court.
The State
plan provision sets up an appeal process at the administrative
level;
appeal to court is by independent operation of the
State's
Administrative Procedure Act. The fact that the appeal to court
is, in
a sense, a "continuation" of the administrative appeal is
insignificant,
given that the State plan confers no right to appeal to court
and HCFA's
approval was limited to the State plan provision.
With respect to the regulation and action transmittal, we have
explained
above why we do not think that those provisions were intended to
apply
where the determination about an overpayment has been made by
HCFA
itself and HCFA is not relying on state audit findings. Even if
these
provisions did apply, however, the State is mistaken that they provide
a
basis for precluding HCFA's action here. Action Transmittal
77-85
specifies that its definition of when a provider overpayment
is
considered to be "found" is limited to exhaustion of appeals at
the
administrative level and does not extend to court appeals. In
every
instance here, the requiste two quarters following the
administrative
decision have expired.
We also disagree with the State's position that, as long as
the
"overpayments" are being litigated in court, the issue of whether
there
was an "overpayment" remains alive and has not finally been
determined.
With the possible exception of factual issues such as what were
the
actual costs of ownership and how are the rates correctly
calculated
(which we discuss below), the issues between the State and the
providers
are not the same as those before us. Here, the State conceded
the legal
point that the federal regulations and State plan preclude
reimbursement
for more than the costs of ownership and, therefore, the rates
paid here
were in excess of what was permitted. The legal issues before
the State
courts are not decisive on the question of whether the State
received
more FFP than what it was entitled to under the State (13) plan
(that
is, whether the State has been overpaid). Rather, the State courts
have
before them issues such as whether the State is precluded
from
recovering the excess payments from the provider because the rates
were
consistent with the commonly held interpretation of the State
plan
(which was not necessarily the correct one) or because the State
had
allowed the providers to charge higher costs in previous years.
We also note that there is a further policy reason for not requiring
HCFA
to wait until state court decisions have been reached: as
demonstrated
by the specific cases at issue here, state court processes
often take years,
and waiting could potentially cost the federal
government an enormous amount
of interest. (Providing a grace period to
the states, as HCFA once did
and has proposed to do again, is within
HCFA's discretion, but we do not
think it is required.)
Disputes about the overpayment amounts.
The District Court was also concerned that a forum had been established
in
which the providers could dispute whether they had received
overpayments and
that the providers were disputing the HCFA findings.
In focusing on the fact
that the State had admitted that providers had
claimed costs in excess of
what was permitted under the State plan and
federal regulations for
related-party transactions, our previous
decision did not adequately consider
whether the overpayment amounts had
been correctly determined.
Recognizing this, we specifically asked the
State on remand to identify any
inaccuracies in the federal audit
findings. The State then stipulated
that the cost of ownership figures
were accurate, noting that no evidence had
been produced by the
providers during their appeals to show that the figures
were inaccurate.
State's Report to Board, May 28, 1985. /5/
.
In the course of Board proceedings, the State did raise several
questions
about what the federal auditors did, however. The major issue
raised
was whether the auditors properly used 1977 cost data in
determining some of
the excess payment amounts. We discuss below why we
conclude that use
of the 1977 cost data was(14) proper. The State also
presented an
affidavit and testimony by one of the owners of the
Marshall Nursing Center,
who attested: "The Federal auditor never
reviewed with any nursing home
personnel, my accountant, or I, the final
cost of ownership figures
developed, or any resulting computation of
patient days, and overpayment of
the per diem rate." Appeal file, Docket
No. 83-253, Ex. V. At the
hearing, he qualified his statement by saying
that the auditors had spoken
with his partner but not with him. This
testimony was contradicted by
one of the federal auditors, who said he
had talked with the State
witness. The auditor's testimony was more
credible since he testified
from his workpapers about the precise dates
on which he spoke to the nursing
home owners and about the surrounding
circumstances and, on the whole,
appeared less confused than the State's
witness. In any event, the
State did not deny that the auditors
obtained the relevant figures from the
nursing homes, nor did the State
present any evidence that any of those
figures were inaccurate or that
the resulting calculations did not take into
account any offsetting
costs which should have been considered.
Finally, when the Board pointed out in its Order to Develop the
Record
that there appeared to be some discrepancies between the figures
given
by the State as the amounts the State sought to recover from
two
providers (Holland Nursing Center and Ouachita Convalescent) and
the
amounts found by the federal auditors to have been overpaid to
those
providers, the State alleged for the first time that its figures
should
be used because it had had the opportunity to substantiate the
figures
through the provider appeal process. The State did not present
any
evidence that supported its figures, nor even provide any
analysis
explaining the discrepancies. Thus, we decline to substitute
the
State's figures for those providers for the federal auditors'
figures,
particularly in light of the State's previous stipulation. /6/
(15)
Thus, we find that the federal audit findings regarding the differences
in
the amounts actually paid and the amounts that should have been paid
using
costs of ownership are factually accurate, notwithstanding the
provider
appeals.
In summary, we conclude that the State's arguments about the effect of
the
provider appeal process on the timing of HCFA's adjustment of the
federal
share of these excess payments have no continuing validity.
The partnership concept is not violated by this disallowance.
Previous Board and court decisions.
The State invoked the "partnership concept" in the Medicaid program,
as
discussed in the case of Harris v. McRae, 448 U.S. 297 (1980),
arguing
that, as long as the State can demonstrate that it followed
the
mechanisms and procedures set out in the State plan, approved by
HCFA,
there should be a sharing of any loss when the State cannot recover
an
excess payment from a provider.
The Board considered a similar argument in New York State Department
of
Social Services, Decision No. 311, June 16, 1982, affirmed in
the
Perales decision cited above. In Decision No. 311, we stated:
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.
At p. 7.
The issue was also addressed in the Massachusetts decision, with
respect
to which party should bear the loss when a provider has
declared
bankruptcy. The First Circuit said:
Since Medicaid is a joint program of the state and
federal
governments for providing health care, it is(16) 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 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 at 96.
The First Circuit distinguished the Harris decision on the basis that
it
required only that the federal government participate in
legitimate
state expenditures under an approved Medicaid plan,
concluding:
Harris thus attributes to Congress the intention that no state
should
be obliged by the Medicaid statute to pay for a service unless
the
Secretary pays her share, not that the Secretary must pay her share
of
every out-of-pocket state expense no matter how incurred.
749 F.2d at 95.
HCFA's involvement here.
Arkansas attempted to distinguish the Massachusetts decision on the
ground
that, in Arkansas, HCFA was actively involved in a day-to-day
role and could
mitigate its losses. We disagree with the State for
several
reasons. Both Massachusetts and Arkansas were operating under
the same
regulations, which place on the State the responsibility for
entering into
agreements with providers, reviewing cost reports,
determining rates, paying
providers, performing on-site audits,
profiling problem areas, and taking
steps to recover overpayments from
providers. The fact that HCFA had
the authority to itself examine the
providers' records, and did so here, does
not alter the fact that the
State is the party which administers the Medicaid
program in Arkansas,
as in Massachusetts. Moreover, we do not agree
with Arkansas that the
evidence here establishes that HCFA is so actively
involved in the
day-to-day operation of the(17) program that it should share
the burdens
equally. Rather, HCFA's role was primarily one of
monitoring whether
the State was complying with federal requirements.
The State's responsibility.
In any event, we do not think that the fact that the State had a
system
for performing desk reviews of cost reports and on-site audits
of
providers at a rate of 15% per year, in accordance with
HCFA
regulations, automatically exonerates the State from any
responsibility
for these excess payments. As HCFA pointed out, the
regulations
establish minimum standards; if these measures are
inadequate to
prevent excess payments, the State has the duty to take
additional
steps. /7/
The State presented testimony that auditors performing desk reviews
were
limited in what they could do to prevent the excess payments
here
because they had less than three months after receiving the
providers'
cost reports to review the reports and establish the new rates,
and
because the reporting form was inadequate. The State itself set up
its
system to require rate-setting within such a limited time
period,
however, and could have devoted more audit resources to the task if
this
was necessary. The State said the form was a problem because,
although
it contained a space for identifying related-party transactions, it
did
not contain space for reporting costs of ownership. (The State
blamed
HCFA for the inadequacy of the form; we discuss this allegation
in the
next section.) The State also said that many providers did not
identify
related-party transactions on the form. There is
uncontradicted
testimony in the record, however, that nursing home owners
were required
to file ownership information with the State; that the desk
reviewers
could have easily obtained access to this information; and
that the
federal auditors had been able to develop provider profiles
identifying
the related-party transactions. See, e. g., TR I, pp.
207-208. The
State presented information to show that the federal
auditors missed at
least one related-party transaction which the State had
later identified
and argued that it was impossible to identify every such
transaction and
to obtain(18) 100% compliance. /8/ We recognize that
there is some
merit to this argument, but that does not persuade us to alter
our
conclusion that the State is in a better position than HCFA to
prevent
excess payments in the first instance.
We also disagree with the State that mere compliance with the
15%
on-site audit requirement exonerates the State here. The State
was
required in the first year of the new reimbursement system to audit
100%
of the cost reports and hired Touche Ross to do this. The
federal
auditors found that one of the problems in the State's implementation
of
the system was that State officials advised the Touche Ross auditors
to
apply the "prudent buyer concept" to related-party leases, rather
than
advising them to allow no charges in excess of the actual costs
of
ownership of the related party. The State pointed out that the
document
on which the federal auditors relied for this finding (a series
of
questions from the Touche Ross auditors and the State responses to
those
questions) did contain some responses which referred to the correct
rule
that the costs of ownership should be used if lower than the price
of
comparable services purchases elsewhere. But the document is at
best
ambiguous on the point and the fact that the Touche Ross auditors
did
not disallow any provider costs on the basis of the
related-party
provision (although these transactions were not uncommon in the
State)
supports a finding at the very least that the State did not
provide
clear guidance to the Touche Ross auditors in this area. This
is
significant because, as discussed below, some of the administrative
and
court decisions precluding the State from recovering the excess
payments
relied in part on the fact that the State had audited the providers
in
previous years and not disallowed such payments.
The State has the responsibility to ensure that its own
auditors
understand the State plan provisions and, also, if it appears that
in
application the requirements are not clear, to inform the providers
of
the correct interpretation. Yet, an examination of (19)
the
administrative and court opinions shows that at least some
State
auditors had failed to disallow excess costs for
related-party
transactions. Moreover, there is no evidence that
providers were
specifically informed of the correct meaning of the provision
prior to
July 3, 1980, when the State Attorney General's decision was sent
out to
providers.
Finally, we do not think that the record supports the conclusion that
the
State made reasonable efforts to recover the excess payments once
they were
identified in the federal audit. The record shows that the
State did
not take any disallowance action against the providers for a
substantial
amount of the excess payments and that some of the State
disallowances that
were taken were not issued until as late as December
1983, although the State
was notified of the final federal audit report
in April 1982. /9/
In response to the Board's inquiries about why the State had never
taken
any action at all to recover some of the excess payments, the
State
argued that it was excused from its inaction because of the 15%
audit
requirement. This argument has no merit whatsoever. The
federal
auditors had already identified the excess payments. The State
then had
a duty to act on this information and cannot reasonably blame
its
failure to recover the payments on the 15% requirement.
Thus, while we do not find that the State acted in "bad faith," we do
not
think that record supports the State's assertions that it was
without fault
in how it implemented and enforced the system, nor that
HCFA is otherwise
required by the partnership concept in the Medicaid
program to participate in
payments which are contrary to federal
requirements and the State
plan.(20)
The State has not established that HCFA should be estopped.
The legal standard.
As the District Court noted in this case, the State's estoppel
argument
was integrally related to its other arguments concerning HCFA's role
in
the approval and implementation of the State's reimbursement
system.
While the District Court said that, since HCFA's action was
arbitrary,
HCFA should be "estopped," the District Court did not address
the
applicability of the formal defense of equitable estoppel, which
the
State continued to press on remand. In light of the limited nature
of
the District Court's statement, and the fact that no provider
appeals
are currently pending under the State plan appeal process, we do
not
think that we are bound by the District Court's statement on this
issue.
In order for the State to prevail on its estoppel claim, the State
was
required to establish that all of the essential elements of estoppel
are
present and that the particular circumstances of this case warrant
the
conclusion that an agency of the Federal Government can be estopped.
The essential elements of estoppel are:
(1) The party to be estopped must know the facts;
(2) he must intend that his conduct shall be acted on or must so
act
that the party asserting the estoppel has the right to believe it is
so
intended;
(3) the latter must be ignorant of the true facts;
(4) he must reasonably rely on the former's conduct to his injury.
United States v. Georgia Pacific, 421 F.2d 92, 96 (9th Cir. 1970)
The party asserting estoppel has the burden of showing that all of
these
elements are present.
While there have been federal district court and court of
appeals
decisions applying estoppel against the government in
particular
circumstances, the Supreme Court has never permitted an
application of
estoppel, as such, although it has declined to say a situation
could
never arise where estoppel would be appropriate. Heckler v.
Community
Health Services of Crawford County, 467 U.S. , 104 S.C.(21)
2218, 2224
(1984); Schweiker v. Hansen, 450 U.S. 785 (1981). The
Supreme Court
has said that, if there were ever to be estoppel against the
government,
it would have to be based on "affirmative misconduct." INS v.
Hibi, 414
U.S. 5, 8 (1973). The Court has never defined "affirmative
misconduct"
or outlined its essentials. But from the cases it appears
to require
something more than negligently giving wrong advice. See,
e.g., Hansen,
450 U.S. at 790.
In its initial brief on remand, the State relied on the Court of
Appeals
decision in the Crawford County case for the proposition that
HCFA's
inactions related to the development and implementation of the
State's
reimbursement system constituted a basis for applying estoppel
against
HCFA. When the Board pointed out at the hearing that this
decision had
been overturned in the Supreme Court, the State alleged that
actions of
a HCFA employee, during that time that he was on detail to the
State
under the Intergovernmental Personnel Act, constituted
"affirmative
misconduct."
Below, we discuss the State's allegations concerning HCFA in general
and
then address the State's allegations concerning the detailed employee
in
particular, stating why we do not think that any of these
allegations
are supportable. Our general observation about the State's
estoppel
argument, however, is that the State failed to explain how
its
allegations, even if proven as fact, would establish the elements
of
estoppel outlined above and, in particular, to show how any
detriment
was a direct result of the actions or inactions the State
alleged.
Moreover, as we discuss below, most of the allegations were
not
substantiated by the evidence in the record.
HCFA's actions or inactions, in general.
Basically, the State said that, in implementing the reimbursement
system,
the State had relied on HCFA's expertise in the Medicaid
program. The
State alleged the following as failures in HCFA's conduct:
* HCFA approved the State plan provision on related-party
transactions
even though it was ambiguous;
* HCFA approved the State plan appeal process even though it
was
defective;
* HCFA approved the provider cost report form even though it did not
have
a space for identifying costs of ownership of the related party;(
22)
* HCFA established the mechanisms for desk reviews and on-site
audits
which were insufficient to ensure 100% compliance.
We do not think that these allegations support an estoppel defense for
the
following reasons:
* The State drafted the State plan provision on related-party
transactions
and, for its own reasons, chose language less clear than
the federal
regulation. The only testimony presented by the State by
someone
involved in the State plan development (that of a HCFA official)
shows that
HCFA was concerned with other aspects of the State plan,
which were
unsatisfactory. There is no evidence that the State asked
HCFA's advice
on the related-party provision. (HCFA commented on the
deletion of a
word from the provision but was assured by the State that
no change in
meaning was intended.) The purpose of HCFA's review of the
State plan was to
ensure that the system complied with federal
requirements. While not as
explicit as the federal regulation on
related-party transactions, the State
plan provision is sufficiently
clear (particularly when read in light of the
federal requirement) that
HCFA's action in approving it was reasonable. /10/
In any event, given
the purpose of HCFA's review, the State could reasonably
rely on the
approval only as showing that the provision complied with
federal(23)
requirements. That is not at issue, here, however. /11/ The
question is
whether the State complied with the provision in practice in
calculating
its reimbursement rates, and the State admitted that it did
not. The
State had the duty to make sure that its own auditors, the
providers,
understood how to apply the provision in specific instances.
* As we have discussed above, we do not think that the appeal
process
initially set out in the state plan was so defective that HCFA had
a
duty to disapprove it, particularly since there was no
federal
requirement that such a process be included in a State plan. In
any
event, only three of the providers at issue here won decisions from
the
Ad Hoc Committee. Moreover, there is no evidence that HCFA
ever
represented to the State that federal funding would be available
for
excess payments made to a provider solely on the basis that the
provider
had won an administrative appeal.
* There is uncontradicted testimony in the record that, while HCFA may
ask
a state to submit its cost report forms, HCFA(24) does not
specifically
review those forms for approvability. The State developed
the form and,
while it would have been helpful if HCFA had pointed out
that there was no
specific space for identifying actual costs of
ownership, this is not
necessarily a violation of the federal
requirement. We agree with the
State that the better reading of the
federal regulation on related-party
transactions (quoted at pages 4-5
above) is that the cost report should
identify the actual costs of
ownership of the related party, but, as HCFA
pointed out, this would not
necessarily require a space on the same sheet as
that which identifies
that a related-party transaction occurred; there
are other parts of the
cost report for identifying costs. Moreover,
even if HCFA did approve
the form, we do not see how the State could
reasonably rely on that
action as meaning that HCFA would participate in
rates which reflected
more than actual costs of ownership. We also note
that the State
auditors had a means of remedying this problem by obtaining
the cost of
ownership information where it was lacking.
* As noted above, the federal provisions on desk reviews and audits
were
intended as minimum standards. There is no evidence that HCFA
ever
represented to the State that these measures would ensure
100%
compliance with the rate-setting requirements or that HCFA
represented
it would participate in rates which did not meet federal
requirements so
long as the State met the audit requirements. Moreover,
there is
substantial evidence in the record that the State (in part
through
Touche Ross) audited the providers, yet failed to disallow
related-party
costs in excess of the actual costs of ownership, even though
the
auditors could have obtained the requisite information.
We also are not persuaded that estoppel should apply based on the
State's
arguments that HCFA should have done more when it became aware
that there
were problems with implementation of the related-party
provision. HCFA
did timely warn the State that federal funding would
not be available,
suggest a possible change in the appeal process, and
send in the federal
auditors. Even if HCFA should have done more,
however, we do not see
how the State could have reasonably relied on
HCFA's inaction to justify its
own inaction or to justify making
payments in excess of what the State plan
permitted. Moreover, once the
federal auditors had identified the
excess payments, the State should
have taken prompt action to recover them,
but did not in many instances,
and we do not see how the State's inaction in
this regard could be
attributable to HCFA's conduct. (25)$TThe actions
or inactions of the
detailed employee.
Undisputed evidence in the record establishes the following facts.
A
HCFA employee was detailed to the State under the
Intergovernmental
Personnel Act for the period December 1979 - December
1980. While on
detail, the employee was paid partly by the federal
government and
partly by the State government. Prior to being detailed
to the State,
this employee had not worked for the Medicaid program, but had
worked on
Medicare issues: specifically, he had been involved with
certification
standards for nursing homes. The original purpose of the
detail was so
that the employee could assist the State in the area of
certification of
nursing homes. After the employee had been on detail
for a short time,
however, the State asked to change the detail so that the
employee could
act as Director of the State's Office of Long Term Care
(OLTC), which
had responsibility for provider reimbursement, as well as
other
responsibilities. After the Ad Hoc Committee had issued
decisions
adverse to the State in the Morrilton Manor, Riverview, and
Mitchell
Nursing Home cases, and the State court had said that these
decision
could not be overturned by the State Commissioner, the detailed
employee
(in his capacity as Director, OLTC) issued memoranda authorizing
payment
to the nursing homes at the rates initially established. The
detailed
employee had also issued a memorandum to providers, informing them
of
the State Attorney General's opinion on the related-party provision.
The State argued generally that it considered the detailed employee to
be
a HCFA employee, even when on detail to the State, and that it had
relied on
this employee's expertise. The State either alleged or
implied the
following specific actions or inactions of the detailed
employee, as a basis
for estopping HCFA from taking this disallowance:
* The detailed employee advised the owner of the Marshall Nursing
Center
that its related-party transaction was proper and that the lease
charge
was reasonable.
* The detailed employee approved payment of the higher rates to
the
nursing homes receiving Ad Hoc Committee decisions in their favor.
* The detailed employee failed to fulfill his responsibilities
as
Director, OLTC.
We disagree with the State that the actions of this employee while
on
detail to the State constitute the actions of a federal employee,
simply
because the federal government paid part of his salary and
fringe
benefits. There is uncontradicted testimony by the employee(26)
and a
HCFA official that, while on detail, the employee had no authority
to
speak for HCFA, and the State presented no evidence to contradict
this
or to show that the employee held himself out as having such
authority.
Moreover, it would be unreasonable for the State to rely solely on
this
employee's advice about reimbursement issues, given that this
employee
had no experience in that area. As a final general
observation, we note
that this employee was not involved at the point in time
when the State
initially developed and implemented its reimbursement system,
when the
key problems arose. With respect to the specific allegations,
we find
the following:
* The testimony by the owner of Marshall Nursing Center about
his
conversation with the detailed employee is not credible since the
owner
said he talked to the employee in his capacity as Director, OLTC,
and
also said that this occurred in early 1979, which was before
the
employee assumed that position (indeed, it was at the time the
employee
was working for the Medicare program). Moreover, even if
the
conversation did take place as the owner said it did, it would
not
establish estoppel. Under the State plan provision, the
related-party
arrangement itself is not improper. The key issue is to
what extent
will the lease charges be recognized as costs to the
provider. The
owner did not testify that the detailed employee said
that the entire
lease charges would be allowable, even if they exceeded the
costs of
ownership to the related party. Finally, we note that advice
to one
provider hardly constitutes a basis for precluding HCFA from
recovering
all of the excess payments.
* Although the record does show that the detailed employee acted
to
approve payment to the providers who won their administrative
appeals,
this action was required by State court order. It is wholly
incidental
that the detailed employee was the one who actually took the
mandated
action for the State agency. In any event, the State provided
no
adequate explanation of how this action could constitute a basis
for
estoppel. When the action occurred, the State had already
incorrectly
calculated the three providers' rates and was precluded by court
order
from reducing them.
* Although the position description for the Director, OLTC, shows that
the
Director has some responsibilities in the area of provider
reimbursement, we
do not see how the detailed employee's failure to take
more actions than what
he did take in this area amounts to inaction on
the part of HCFA sufficient
to give rise to estoppel. The
State's(27)witness who later assumed this
position testified that the
State's Commissioner had ultimate authority for
the administration of
the program within the State and, if the detailed
employee was not
performing properly, the Commissioner must share in that
responsibility.
Moreover, it cannot fairly be said that the detailed
employee's
failures, if any, in fulfilling the duties of the position of
Director,
OLTC, can be considered conduct by HCFA upon which HCFA intended
the
State to rely.
In summary, the State failed to establish that the basic elements
of
estoppel were present, much less to show affirmative misconduct
which
might provide a basis for applying estoppel against the
federal
government.
The federal auditors' use of 1977 cost data was proper.
The State alleged that the federal auditors had improperly used
calendar
year 1977 cost data in calculating the excess payments for State
fiscal
year (FY) 1979. The Board questioned the State as to how use of
this
cost data could be improper when it appeared to be required by the
State
plan reimbursement method. The State did not deny that its State
plan
called for use of calendar year 1977 costs in determining the FY
1979
rates. Instead, the State presented testimony by a State auditor
that
he thought it was unfair to examine 1977 cost reports based on
the
related-party provision, which did not go into effect until
January
1978. In a post-hearing brief, the State argued that use of the
1977
data was improper retroactive application of a requirement.
This argument has absolutely no merit whatsoever. The State plan
was
premised on use of historic cost data to establish prospective
rates.
The State plan provision was not applied to establish 1977 rates but
was
applied to establish FY 1979 rates. No retroactive application of
a
requirement is involved.
Moreover, it is not clear that the 1977 cost reports were submitted
prior
to approval of the related-party provision. One State witness
testified
that the cost reports for any calendar year were not due until
March of the
following year. In any event, this is not an instance of a
reporting
requirement being applied against a provider. The question is
whether
the State must repay the federal share of payments to the
providers which
exceeded the rates calculated in accordance with the
State plan. The
State knew that the rates for fiscal year 1979 had to
meet the related-party
requirements. Thus, the federal auditors
properly used the 1977 cost
data in determining what the rates should
have been for FY 1979.(28)$%
Analysis of specific provider overpayments
reinforces our conclusions.
As mentioned above, the State neglected in general to relate its
arguments
to the specific excess payments at issue here. Examination of
the
specifics points up many of the weaknesses in the State's position.
Moreover,
it reinforces in our minds the conclusion that trying to apply
the State's
proposed analysis and to determine in any specific instance
whether a state
failed to take proper actions in preventing an
overpayment or in attempting
to recover it would require a highly
judgmental and difficult process.
To illustrate this, we present in
this section some of the information
concerning specific provider
overpayments which the State produced in
response to the Board's
requests.
With respect to excess payments to three nursing homes (Star
City
Convalescent, Dumas Nursing Center, and Prescott Manor), the State
took
no action to disallow the related-party transactions and to recover
the
resulting excess payments from the providers. The State explained
this
as follows: "In each of these cases, a 1978 field audit neither
noted
or disallowed costs, and this lack of activity was considered
State
approval for further actions on the same lease." State's
submission
dated September 16, 1985, p. 5. In light of this, it would
be possible
to attribute the loss of a potential recovery to the State's
failure to
adequately apprise its auditors of the correct application of
the
related-party provision. On the other hand, an analysis of whether
the
State was at fault would also have to consider matters such as
whether
the State's inadequacies were because of lack of guidance from HCFA
and
whether the State could have in any event recouped, given the type
of
analysis which led to many of the providers winning their appeals
of
related-party disallowances. While we have concluded above that we
do
not think that HCFA's actions or inactions require participation
in
these costs under the partnership concept or an estoppel theory, it
is
much more difficult to evaluate what constitutes actual fault on
the
part of the State and the record does not provide definitive answers
in
that regard.
A similar analysis pertains to Gardner Nursing Center and to
Ouachita
Convalescent. The State did take disallowances against these
two
providers, but, in the Gardner case, the Commissioner reversed
the
hearing officer's decision (which found for the State) on the basis
that
the provider had not been given due process and, in the Ouachita
case,
the hearing officer reversed the State's disallowance because
it
contravened a settlement previously entered into between Ouachita
and
the State agency. It would appear that the State's own
actions
precluded the recovery from these providers, but all of the
various
factors that affected(29) the State's implementation and enforcement
of
the related-party provision would have to be analyzed in order
to
determine whether the State should be faulted for these actions.
With respect to four nursing homes (Geriatrics/Jonesboro,
Geriatrics/
Blythesville, Geriatrics/West Memphis, and Geriatrics/Forrest
City), the
State disallowed the related-party costs and the disallowance was
upheld
by a hearing officer under the State's revised appeal process.
However,
the common owner of the homes transferred them, and the State
courts
found that the State could not recover the excess payments from the
new
owner. Arguably, the State could have prevented this situation by
not
entering into a provider agreement with the provider unless it
contained
a provision protecting the State if the home was transferred
or,
possibly, by acting more quickly to recover the excess payments.
But,
again, determining if it was the State's fault that this occurred
would
be a highly judgmental process, requiring greater development of
the
specific facts and an analysis of all of the factors which created
the
situation.
With respect to the seven providers whose appeals are still pending
in
court, we note that the appeals do not cover all of the
amounts
disallowed for those providers, so presumably, for some
unexplained
reason for the State took no action to recover all of the
excess
payments for those providers. In the case where the State
Circuit Court
has rendered a decision reversing the disallowance (and the
State agency
has appealed to the State Supreme Court), an analysis of the
Circuit
Court opinion indicates that the provider won for several
reasons,
including that the Court thought that the related-party provision
was
ambiguous and that an October 9, 1981 letter from the Director,
OLTC
(not the detailed employee) had acknowledged that the
commonly-held
interpretation was that the "prudent buyer concept" was an
exception in
the related-party provision. As noted above, we do not
agree that the
provision is ambiguous when it is read with the federal
provision, as
required by the State plan. This raises the further
difficult question,
under the State's proposed analysis, of whether a state
should be held
fully responsible for an excess payment when a state court
reaches what
may be an incorrect result. Moreover, the Director's
letter was a
factor in the opinion. If the difficulty was in the
"commonly-held
interpretation" of the provision, the question arises whether
the
difficulty was in the provision itself or in the way the State
applied
it.
In summary, examination of the specific overpayments here strengthens
our
conclusions in two areas: that the State's general arguments simply
do
not fit the facts in every instance(30) and that HCFA is reasonable
in
holding the State responsible for the federal share of excess
payments to
providers, without analyzing for each excess payment whether
the State was at
fault.
Conclusion
Arkansas claimed and received federal funding for payments to
providers
which were in excess of the payments to which the providers
were
entitled under the Arkansas State plan for Medicaid. These amounts
do
not constitute "medical assistance furnished under the State plan,"
and
thus were properly disallowed, notwithstanding the fact that
Arkansas
has not recovered all of the excess payments from the
providers. None
of the theories advanced by the State provides a
current basis for
precluding HCFA from adjusting the federal share of the
excess payments.
Accordingly, we uphold the disallowance, subject to a minor
adjustment
if the State can make the requisite showing referred to in
footnote 6 of
this decision. /1/ The Arkansas Nursing Home Association
requested and
received permission to participate in Board proceedings by
submitting a
brief and having a representative present at the
hearing. /2/ In
view of this,
we do not agree with the approach taken in some of the
State decisions on
related-party leases, which emphasized that the lease
charges at issue were
reasonable in amount. The pertinent point is
that, in the related-party
situation, the provider is in effect making
the lease payment to itself so
the provider is in effect making the
lease payment to itself so the provider
has incurred no real cost,
except to the extent of the costs of
ownership. /3/ We also
note
that the Missouri case involved payments made to providers under
a
retrospective reimbursement system at interim rates greater than
the
final rates established under the state plan. Part of the
court's
reasoning was that the state plan authorized payment at an interim
rate
so payment at the interim rate should not be considered an
overpayment.
Under the Arkansas state plan, as both the State and HCFA
interpret it,
no payment was authorized for a rate to the extent it was
calculated
using a figure greater than the costs of ownership in a
related-party
situation. /4/
This section of the regulations was deleted when
the reimbursement
requirements were revised in 1981. 46 Fed. Reg.
47964 (Sept. 30,
1981). HCFA later proposed a rule which would require
states to report
overpayments when they are first identified and then
make the appropriate
adjustment of the federal share within 12 months.
48 Fed. Reg. 14665 (Apr. 5,
1983). This proposal has never been
published in final form,
however. /5/ The State indicated
that
it thought the intervenor, Arkansas Nursing Home Association,
should
have the burden of contesting the figures if they were not correct.
The
intervenor requested only limited participation in Board
proceedings,
however, and when given an opportunity to show that it had
relevant
information to produce, declined to do
so. /6/ One point which
the
State clarified in response to the Board's order may have some
merit.
Apparently, the federal auditors included in the disallowance
for Gardner
Nursing Center certain amounts reported by Gardner for
"unpaid stockholders'
salaries." The State said in its response that it
determined these amounts
were allowable provider costs because the State
plan was ambiguous on whether
salaries had to be actually paid to be
allowable. Since HCFA did not
have an opportunity to respond to this
point, we do not reverse the
disallowance. However, our decision does
not preclude HCFA from making
an appropriate adjustment if the State can
support this point and establish
that no federal requirement was
violated by the
costs. /7/ A December 21, 1976
letter from the
Agency, deferring approval of the State's reimbursement
system, stressed
that the State needed to develop an effective audit
program. /8/ A
State witness
testified that, as he recalled, the State had
uncovered two additional
related-party situations; the State presented
written documentation of
only one of these: a Commissioner's decision
involving Golden Years of
Stuttgart (State's Hearing Ex. 11). The
decision indicates that the
State had already begun its audit of Golden
Years at the time the federal
audit was initiated, so it is possible
that the federal auditors deliberately
excluded it from their review;
in any event, we recognize that it may be
impossible to identify all
related-party
transactions. /9/ The State
alleged that a federal
auditor had asked the State Commissioner to delay
disallowance actions
against the providers until the federal audit was
concluded, but the
State offered no explanation of why it delayed its actions
after that.
It appears from statements made on State's Hearing Exhibit 1 that
the
reason the State did not act to recover some of the excess payments
was
that the lease payments had previously been allowed by State
auditors.
/10/ Subsection (b) of the State plan provision of
related-party
transactions indicates that a related-party can furnish
services or
supplies to the provider so long as the prudent buyer concept is
adhered
to. But this subsection merely permits the transaction.
Subsection (a)
is the governing provision on the extent to which costs will
be allowed
for related-party transactions, and it says that costs of services
and
supplies furnished by related parties "will be recognized, at the
cost
to the related organization." Moreover, the State plan
requires
providers to report costs in accordance with federal
requirements,
including the federal related-party provision. Thus, the
State
provision had to be read in light of the federal provision, which
made
its meaning clear. /11/
The intervenor nursing homes argued that
both HCFA and the State intended the
"prudent buyer concept" to be an
exception to the "lower of cost" rule (that
is, the lower of actual
costs of ownership or the price of comparable
facilities, services, or
supplies purchased elsewhere). In our previous
decision, we found that
this argument was irrelevant in view of the State's
admission concerning
the meaning of the State plan provision. Here, we
provided the
intervenor an opportunity to show how evidence on the intent of
the
State and HCFA relative to the State plan provision would be relevant
to
the dispute before us, and the intervenor declined to make such
a
showing. We note, however, that there is considerable evidence in
the
record about what the providers showed during their
administrative
appeals, yet there is no indication that the providers
presented any
evidence that the initial intent of the provision was what the
providers
said it was (although there was evidence that the "commonly
held
interpretation" of the provision was that the "prudent buyer
concept"
was an exception). With its brief in the previous appeal to us,
the
intervenor presented no documentary evidence that the drafters had
the
intent the intervenor said they did, other than the drafting history
of
the provision. We have studied that history and do not think
it
establishes what the provider said it does, since it is not
inconsistent
with the State's position about intent.
MARCH 28, 1987