GAB Decision 693
September 25, 1985
Washington Department of Social and Health Services;
Ford, Cecilia Sparks; Settle, Norval D. (John) Ballard, Judith A.
Docket No. 84-240; Audit Control No. 10-40151
DECISION
The Washington Department of Social and Health Services (DSHS, State)
appealed the disallowance by the Health Care Financing Administration
(HCFA, Agency) of $4,355,512 in federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act).
The disallowance was based on an audit report reviewing the State's
procedures for returning the federal share of overpayments made to
Medicaid providers. The report determined that the State's policy was
to delay crediting the federal share of identified overpayments until
the overpayments were actually recovered from the providers.
The major issues presented are whether section 1903(d)(2) of the Act
authorizes HCFA to demand that the State repay to HCFA the federal share
of identified overpayments to Medicaid providers, even though the State
may not have collected the overpayments from the providers, and whether
there was a sufficient factual basis for the Agency to determine that
overpayments had occurred. For the reasons discussed below, we uphold
the general principle that HCFA may adjust under section 1903(d)(2) for
FFP claimed in overpayments, but find that, in this particular case, a
court judgment had the effect of retroactively modifying the State
Medicaid plan, thereby nullifying the factual basis for part of the
disallowance. We also find that further development is required
regarding whether two specific providers were overpaid. Accordingly, we
reverse the disallowance for the time period controlled by the court
judgment, and sustain the disallowance for the time period not covered
by the court judgment, except that we remand the disallowance for the
two providers.
General Background
Title XIX of the Act provides for the payment of federal monies to
states to aid in financing state medical assistance programs. Any state
that wishes to participate in the Medicaid program must develop and
submit a plan that meets(2) certain requirements set forth by the
Secretary of the Department of Health and Human Services (HHS).
Realizing that many states might have difficulty financing a Medicaid
program even if subsequently reimbursed by the federal government,
Congress also established a funding mechanism by which HHS advances
funds to a state, on a quarterly basis, equal to the federal share of
the estimated cost of the program. After review of the state's
quarterly statement of expenditures, the Secretary may adjust future
payments to reflect any overpayment or underpayment which was made to
the state for any prior quarter. Section 1903(d) of the Act.
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
underpayments which the Secretary determines was made under this section
to such state for any prior quarter and with respect to which adjustment
has not already been made under this subsection. . . .
The primary issue here arises because section 1903(d)(3) of the Act
states:
The pro rata share to which the United States is equitably entitled .
. . of the net amount recovered during any quarter by the State . . .
with respect to medical assistance furnished under the State plan shall
be considered an overpayment to be adjusted under this subsection.
Case Background
The HHS Office of Inspector General, Audit Agency, conducted an audit of
the State's Medicaid program and issued a report entitled "Review of
Procedures For Returning the Federal Share of Overpayments Made to
Long-Term Care Facilities under the Medicaid Program" (ACN 10-40151).
The purpose of the audit was to determine whether the State was
crediting HCFA for the federal share of overpayments identified through
preliminary settlements and audits of cost reports of long-term care
facilities. The audit covered the period January 1, 1978 through
December 31, 1982.
The auditors determined that, while the State identified overpayments,
it did not credit HCFA with the federal share. The auditors found the
State's policy was to withhold credit until the overpayments were
recovered from the providers. The auditors reported that, in the State
of Washington, overpayments to long-term care facilities occur when the
facilities are paid more than their actual allowable costs and/or
allowable reimbursement rate(s) as provided for in the approved State
plan. DSHS uses two primary methods--preliminary settlements and audits
-- to determine whether(3) overpayments were made. Overpayments are
initially identified by preliminary settlements based on the annual cost
reports submitted to DSHS by the facilities. Overpayment amounts are
established when the cost reports show that the amounts paid to the
facilities through the established reimbursement rates are greater than
the expenditures reported by the facilities. Overpayments are also
identified by audits of the cost reports. The audits, conducted by DSHS
auditors, identify overpayments when the amounts claimed for
reimbursement are unallowable under applicable State and federal
regulations. DSHS has an administrative review process to resolve
disagreements with the facilities over audit issues.
The HCFA auditors' review disclosed that $8,922,052 (FFP $4,355,512) of
overpayments made to long-term care facilities for the audit period had
not been recovered by the State as of September 22, 1983. The State had
not attempted to recover the overpayments primarily because of class
action suits (referred to as UNH II and III) by the facilities against
the State concerning the appropriateness of the State's method of
determining reimbursement for the facilities' services. These law suits
concerned the period January 1, 1978 through June 30, 1981. On April 3,
1984 and Agreed Final Judgment (Judgment) on the suits was entered.
Under the terms of the Judgment, the State's method of determining
reimbursement was struck down, requiring a recalculation of the
providers' rates and of any correlative amounts due from or owed to the
providers.
Analysis
I. Whether HCFA generally can adjust for overpayments prior to
recovery.
The general question of whether HCFA has the authority to demand from
states the federal share of identified Medicaid overpayments to
providers prior to the actual recovery of the overpayments by the states
has been examined by the Board in a series of decisions. In these
decisions, the Board has held that improper or excess payments to
providers do not constitute "medical assistance" within the meaning
of
the Act, and that, therefore, HCFA is empowered by section 1903(d)(2) of
the Act to adjust the federal share of these payments, even if a state
has not yet recovered the amounts from the providers. For a summary of
the Board's reasoning on this question, see, e.g., New York State
Department of Social Services, Decision No. 311, June 16, 1982, and
Washington Department of Social and Health Services, Decision No. 645,
April 30, 1985. A number of the Board's decisions on this issue have
been reviewed in court, with the district(4) courts splitting on the
question, but with two Courts of Appeals upholding the Board's
reasoning. /1/
The State incorporated by reference the arguments concerning section
1903(d) that it had made in its previous appeal decided by Board
Decision No. 645 and in its response to the Audit Report (State's Ex.
4).
Rather than repeating here the Board's analysis that led to the
rejection of those arguments in Decision No. 645, we incorporate that
analysis here by reference. We note, however, what we consider to be
the key factors in finding HCFA's interpretation of section 1903(d) to
be correct and the State's interpretation to be unreasonable:
(T)he specific subject of (d)(3) is not "recovery of overpayments"
as
the State alleged, but treatment of certain recoveries as overpayments.
The plain language of (d)(3) concerns amounts which would ordinarily not
be considered "overpayments" because they were "medical assistance
furnished under the State plan" and therefore, were allowable when made.
When such amounts(5) are recovered, (d)(3) describes the extent to which
the federal share is to "be considered an overpayment" for purposes
of
adjustment under (d)(2). Thus, (d)(3) does not constitute a limiting
definition of the term "overpayment" in (d)(2). Contrary to the State's
assertion, the Agency interpretation does not render (d)(3) superfluous,
ineffective, or insignificant, but, rather, gives effect to both
provisions and is supported by the statutory scheme as a whole.
Decision No. 311, pp. 5-6.
- and -
Whenever the Secretary determines that a state has claimed and
received FFP based on a payment to a provider which does not constitute
"medical assistance under the State plan" within the meaning of section
1903(a), the Secretary has in effect determined that the state has been
overpaid federal funds. Thus, the issue here is whether the amounts in
dispute were "medical assistance furnished under the State plan."
The State's argument focuses on whether the State made the payments
to the providers in accordance with the State plan, contending that the
plan permitted reimbursement at an interim rate. This line of reasoning
ignores the focal point of the Board's analysis in Massachusetts that
was upheld by the Court of Appeals. The amounts in question were found
to be in excess of what the providers were entitled to under the State
plan. 749 F.2d 89, at 94. As a result of reimbursing the providers an
excess amount, the State claimed FFP in a greater amount than it was
ultimately entitled to, i.e., FFP in the rate ultimately determined to
be the correct one under the State plan.
Decision No. 645, p. 7.
The State did not present any new argument here to show that the Board's
analysis of section 1903(d) is incorrect.
II. Whether there was an adequate factual basis for HCFA's disallowance
in this particular case.
The State argued that the disallowance for overpayments alleged to have
occurred from January 1, 1978 through June 30, 1981, the period covered
by the UNH II and III Judgment, should be reversed for lack of factual
support. According to the State, those overpayments were identified
through cost settlements which were later invalidated in the UNH II and
III lawsuits. Under the Judgment, the State claimed, providers are
entitled to reimbursement for audited allowable costs for the period.
DSHS stated that the(6) original cost settlements did not include
reimbursement for audited allowable costs in excess of the prospective
reimbursement rates. The State reasoned that a disallowance of
overpayments based on records which are later found to be factually
inaccurate must be overturned.
As noted above, HCFA based the disallowance on its auditors' review of
State records. The question of the reliability of a disallowance based
solely on state records and findings has been previously examined by the
Board. In California Department of Social Services, Decision No. 244,
December 31, 1981, the Board reversed a disallowance because HCFA's
basis for determining the amount of overpayments was insufficiently
supported by the record. The Board held:
Where . . . a federal audit merely adopts the figures from State
records, assuming that overpayments for State purposes are necessarily
overpayments for federal purposes, and where the State has shown that
this assumption may not be warranted, the Respondent must provide more
specific evidence and authority to support its allegations.
p. 10.
In this and other decisions, the Board has developed some standards for
use of state audits or other findings as a basis for disallowance. The
Board has determined that HCFA may reasonably rely on state findings
provided:
* The Agency provides sufficient detail as to the audits or other
sources from which the disallowed amounts are derived; and
* The State is provided the opportunity to show that
-- adjustments have been made to the State findings;
-- the findings are not reliable for some reason;
-- the State has already recovered the amount identified as an
overpayment and has already adjusted the federal share; and
-- the State never claimed FFP in the overpayment in the first place.
Ohio Department of Public Welfare, Decision No. 637, April 2, 1985,
p. 12.
In evaluating whether the Agency has provided sufficient detail to
enable a state to respond, the Board generally will find that HCFA meets
its burden by identifying the names of the providers which allegedly
received overpayments, the (7) respective amounts, and the relevant time
periods. If HCFA does this, the burden shifts to the state to make the
showings listed above. The Board must then analyze the record as a
whole to see whether there is a factually and legally supportable basis
on which to uphold the disallowance.
This analysis depends on various factors such as the nature of the
overpayments involved; the nature of the state findings involved; the
extent to which HCFA independently determined that the state had claimed
unallowable costs; the issues raised by the state; and the evidence
the state has provided in support of its positions. In each case, the
Board will consider the particular circumstances in determining the
adequacy of the record before it.
For each individual overpayment amount here, HCFA's audit report
identified the provider, the relevant time periods, and why HCFA
considered the amount to be a firmly established overpayment. Thus,
there is no question that HCFA met its burden to provide sufficient
detail about the overpayments so that the State was obliged to go
forward to show why HCFA's determinations should be reversed.
At the outset we specifically note that the State is not claiming that
the whole disallowance lacks factual validity. The State is apparently
not contesting HCFA's use of State records as a factual basis for
disallowed overpayments in the period July 1, 1981 through December 31,
1982, not covered by the Judgment.
The State contended, however, that the Judgment required adjustments to
the audit findings for the period January 1, 1978 through June 30, 1981,
with any amounts determined to be due from a provider recalculated using
higher reimbursement rates. According to the State, this is being done
through an ongoing court-supervised recalculation of the disbursement
process, with each round of disbursements requiring a court order. The
State said that, based on the initial round of disbursement, the amount
of overpayments due from the providers, and the corresponding federal
share, will be greatly reduced. As previously stated, the State
estimated that the disallowance of FFP for the period covered by the
Judgment will be reduced by approximately $1,324,878.
The State maintained that HCFA must delay adjusting any FFP until the
amounts due are calculated pursuant to the court-approved schedule. The
State cited a December 26, 1984 letter from HCFA's Associate Regional
Administrator for HCFA's commitment to share in any additional amounts
that might be owed to providers under the Judgment. (State's Ex. 1) HCFA
disagreed strongly with the State's interpretation of the Judgment.
According to HCFA, the Judgment did not overturn the preliminary cost
settlements and audit(8) overpayment amounts, but only the State's
reimbursement methodology. HCFA contended that the preliminary
settlement amounts reflected excess reimbursement beyond the scope of
the State plan and were as such overpayment, with the federal share to
be returned to HCFA. /2/
The Judgment, in part, declared:
(F)rom January 1, 1978 to June 30, 1981, the department's
reimbursement system failed relistically to take into account economic
conditions and trends; it did not reimburse the homes for all expense
items necessarily incurred to provide federally defined skilled nursing
home care; and the reimbursement system did not result in the setting
of rates at a level that could reasonably be expected to reimburse
economically and efficiently operated nursing homes in full for actual
allowable costs.
p. 2.
Because the Board questioned whether the Judgment in effect
retroactively modified the State plan, the Board issued an Order to
Develop the Record to the parties for their views on this issue. In
that Order, the Board reasoned:
If the Judgment did (retroactively modify the State plan), it would
appear that State overpayment determinations based on the unmodified
State plan no longer can be considered to be legally correct; even if
the Judgment does not invalidate the State audit findings concerning the
providers' allowable costs, it would appear to call into question the
method which was used by the auditors to calculate the resulting
reimbursement rates. Since a provider has been overpaid only to the
extent it has received a higher rate than what it was entitled to under
the State plan, the Judgment would appear to require recalculation of
the overpayment amounts, as well as the rates.
p. 2.(9)
In their responses to the Order, both parties agreed that the Judgment
did indeed have the effect of retroactively modifying the State plan
reimbursement methodology. The parties also agreed that the Judgment
required the State to recalculate reimbursement rates using different
criteria such as higher upper limit percentiles.
Based on the Board's reasoning in the Order and in Ohio, supra, we find
that, as the parties agree that the State plan was retroactively
modified by the Judgment, the State has adequately shown that the
findings on which HCFA based its disallowance are no longer valid.
Since the providers are now in the process of being awarded higher
reimbursement now in the process of being awarded higher reimbursement
rates as a result of the Judgment, it remains to be seen whether in fact
they were reimbursed at a higher rate than they were entitled to under
the State plan. We find, therefore, that there is no basis now for a
determination that overpayments occurred in the amounts HCFA disallowed
here. Accordingly, we reverse the disallowance. This does not mean,
however, that HCFA is precluded from issuing a future disallowance if,
after the reimbursement rates are ultimately recalculated and applied to
the amounts the providers actually received, the State is found to have
overpaid the providers and claimed FFP in the overpayments.
III. Whether the disallowance of payments made to Hollycrest Haven and
Camas Care Center is valid.
With regard to two specific providers, Hollycrest Home and Camas Care
Center, the State in its response to the Audit Report argued that HCFA's
denial of all FFP for the facilities was unwarranted. HCFA's auditors
had found that no audits had been conducted at Hollycrest Home for the
period January 1, 1978 through July 31, 1979 and that the facility had
submitted no cost reports. Hollycrest Home had received $212,643 in
payments from the State during this period. Camas Care Center did not
have audits performed for the period January 1, 1980 through April 30,
1981. For part of that period, Camas Care Center had submitted a cost
report, but furnished no financial records to audit. Camas Care Center
received $337,129 in payments from the State. Because the payment of
$579,772 to the facilities was not supported, HCFA included the federal
share of that amount in its calculation of unrecovered overpayments.
The State argued that it knew of no provision in federal regulations or
its State plan that required providers to refund all payments when a
cost report is not submitted. The State claimed that it demanded, in
accord with its State plan, repayment of all interim payments from the
two facilities because of their failure to file cost reports, but that
it was unreasonable for HCFA to conclude that all the payments
constituted overpayments. The State estimated that, even if the
providers had audit disallowances of 30 percent(10) of their interim
rates (ten times the average for all nursing homes, according to the
State), the FFP recoupment would be only $114,090.
The State explained that, under its prospective rate system, an
overpayment based on a provider's actual cost cannot be identified until
the cost report for the period is received. If a provider leaves the
program and does not file a final cost report, as was the case with
Hollycrest and Camas Care, the State will reconstruct a cost report for
a facility using other documents in the State's possession. The State
added that it had recently requested Hollycrest and Camas Care to submit
final cost reports by September 30, 1985. If the facilities do not
comply, the State will reconstruct cost reports for the providers.
HCFA responded that its position, as required by regulation and its
published guidelines, is that it has no alternative other than to
recover all interim payments for providers who do not submit cost
reports. /3/ HCFA stated, however, that, if cost reports can be
reconstructed from existing documentation from provider records, it will
accept the reports for settlement and overpayment purposes.
Given the State's intention to reconstruct cost reports if the
facilities themselves do not file them and HCFA's willingness to examine
reconstructed costs reports, the Board finds that this part of the
disallowance should be remanded to allow the parties the opportunity to
resolve the question of overpayments at the two facilities. The State
should reconstruct the costs reports as soon as possible and supply them
to HCFA. If HCFA, after reviewing the reports, determines that some or
all of the amounts at issue should still be disallowed, the State may
appeal that determination to the Board.
Conclusion
For the reasons stated above, we sustain the disallowance for the period
July 1, 1981 through December 31, 1982, and(11) reverse the disallowance
for the period January 1, 1978 through June 30, 1981. We remand for
further consideration the disallowances relating to Hollycrest and Camas
Care. /1/ In Massachusetts v. Heckler, 576 F. Supp. 1565 (D. Mass
1984), the Board's decision in Massachusetts Department of Public
Welfare, Decision No. 262, February 26, 1982, was reversed on the
grounds that HHS had not established that payments to a provider at an
interim rate higher than a final rate constituted an overpayment for
purposes of section 1903(d)(2). In Massachusetts v. Secretary, 749 F.
2d 89 (1984), cert. denied, 105 S.Ct. 3478, however, the United States
Court of Appeals for the First Circuit reversed the judgment of the
District Court and upheld Board Decision No. 262. That court found
HCFA's interpretation of section 1903(d) reasonable and based on sound
policy considerations. On October 1, 1984, the United States District
Court for the Northern District of New York affirmed Board Decision No.
311 in Perales v. Secretary, Case No. 83-CV-900, aff'd sub nom. Perales
v. Heckler, 762 F. 2d 226 (2d Cir. 1985). See, also Florida v.
Heckler, Civ. No. 82-0935, (N.D. Fla. 1984), which affirmed the Board's
decision in Florida Department of Health and rehabilitative Services,
Decision No. 296, May 15, 1982, holding that the State of Florida was
liable for Medicaid overpayments made to providers notwithstanding the
providers bankruptcy; and Department of Social Services v. Heckler,
Case No. 84-4106-CV-C-5 (W.D. Mo. 1984) (appeal pending), which reversed
the Board's decision in Missouri Department of Social Services, Decision
No. 448, June 30, 1983. Compare, Arkansas v. Heckler, Case No. LR C 83
467, Eastern District of Arkansas, September 17, 1984. /2/ Both
the State and HCFA cited various regulations in support of their
positions. We have reviewed these regulations and do not find them
relevant to our analysis of the effect of the Judgment on the
disallowance. Accordingly, we have omitted discussion of these
regulations. /3/ We note that the regulations and guidelines
cited by HCFA relate to the Medicare program and may not apply here.
Since it appears here that cost reports by the facilities or the State
will eventually be produced here, we do not reach the issue of whether
these requirements apply.
JANUARY 14, 1986