DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: California Department of Health Services
Docket No. 86-97
Audit Control No. 60212-09
Decision No. 889
DATE: August 11, 1987
DECISION
The California Department of Health Services (State) appealed
a
disallowance by the Health Care Financing Administration (HCFA)
of
federal financial participation (FFP) claimed under Title XIX
(Medicaid)
of the Social Security Act (Act). The disallowance was based
on an
audit of the State's procedures for crediting the federal government
for
amounts found by State auditors to be overpayments to providers
of
Medicaid services. HCFA adopted the federal auditors'
determination
that the State was not returning the federal share of the
overpayments
made to county hospitals until the State had actually recovered
the
overpayments from the hospitals and that the federal share
of
outstanding overpayments for the period July 1, 1972 through June
30,
1982 was $44,234,290.
The major issues originally presented were whether section 1903(d)(2)
1/
of the Act authorizes HCFA to demand that the State adjust the
federal
share of overpayments found in State audits, even where the State
has
not yet recovered the overpayments from the providers and the
providers
have appealed the overpayment determinations. The disputes
between the
State and the providers have now been resolved, in effect
rendering moot
most of the issues the State raised. The key issue now
before the Board
is whether HCFA can compel the State to adjust its claims at
once, and,
if so, in what amount.
For the reasons discussed below, we hold that HCFA's determination
that
the State was overpaid FFP for the provider services in question is
well
supported in the record and, therefore, HCFA is not precluded
from
adjusting any amounts simply because the State may not have
recovered
from the providers. The record here shows that the State
received an
overpayment of FFP because it claimed federal funding in
excessive or
improper payments, to these providers for the periods in
question.
While the record shows that the specific State findings regarding
the
amounts of these payments have been modified, the record supports
a
conclusion that the State was overpaid at least $43,173,892 in FFP
for
the providers and time periods included in the federal audit,
absent
further information from the State establishing a lesser amount.
Thus,
if the State does not voluntarily establish the revised amounts
related
to these findings and adjust the federal share, HCFA may
reasonably
adjust on its own in the amount of $43,173,892.
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 certain requirements set forth by the Secretary
for the Department of
Health and Human Services (HHS). Realizing that
many states might have
difficulty financing a Medicaid program even if
subsequently reimbursed by
the federal government, Congress also
established a funding mechanism by
which HHS advances funds to a state,
on a quarterly basis, equal to the
federal share of the estimated cost
of the program. After review of the
state's quarterly statement of
expenditures, the Secretary may adjust future
payments to reflect any
overpayment or underpayment which was made to the
state for any prior
quarter. Section 1903(d) of the Act.
Specifically, section 1903(d)(2) of the Act states:
The Secretary shall then pay to the
State . . . the amounts so
estimated,
reduced or increased to the extent of any
overpayment
or underpayment which the
Secretary determines was made under
this
section to such state for any prior quarter and with
respect
to which adjustment has not
already been made under this
subsection.
. . .
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. A
number of
states had argued that such adjustment was precluded by
section
1903(d)(3) of the Act, which provides that the federal share
of
recoveries of "medical assistance furnished under the state
plan"
constitutes an overpayment to be adjusted under section 1903(d).
In
these decisions, the Board held that improper or excess payments
to
providers do not constitute "medical assistance" within the meaning
of
the Act, and that, therefore, HCFA may 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
New York State Department of Social Services, Board Decision No.
311
(1982), and California Department of Health Services, Board Decision
No.
619 (1985). A number of the Board's decisions on this issue have
been
reviewed in court; the district courts have split on the question,
but
three Courts of Appeals have upheld the Board's reasoning. 2/
Case Background
The HHS Office of Inspector General, Office of Audit (OIGOA), conducted
an
audit, covering the period July 1, 1972 through June 30, 1982, of the
State's
procedures for crediting overpayments to the federal government.
The audit
discovered $143,842,873, of which $44,234,290 was FFP, in
overpayments which
had not been recovered by the State from county
hospitals as of June 30,
1985. The county hospitals had all appealed the
overpayment findings by the
State auditors under the State's
administrative appeals process. At the
time of the OIGOA review in
August 1985, all of the hospitals' audits had
been on appeal for at
least 90 days. A majority of the appeals had been
three years in
process, while some appeals were in their seventh year.
In its disallowance determination HCFA adopted the OIGOA
findings,
adjusting for recoveries or changes made as a result of
provider
appeals. HCFA stated that all the overpayments had been
established as
being in excess of the applicable upper limits requirements,
currently
codified at 42 C.F.R. 447.253. 3/ Citing this federal
regulation and
section 1903(d)(2) of the Act, HCFA disallowed $44,234,290 in
FFP. 4/
There was some confusion in this appeal as to the amount in
controversy.
At the hearing held in this appeal, the $44,234,290 figure was
called
into question. HCFA's auditor acknowledged that the disallowance
amount
was overstated by approximately $100,000. Transcript (Tr.)
146. The
State further alleged that another $4.1 million,
representing
overpayments made to hospitals outside of Los Angeles County,
had been
collected and returned to HCFA; the State said this left
$39,891,682,
all related to from Los Angeles County hospitals, in
controversy. Tr.
142. HCFA's auditor admitted that it was
possible that the $4.1 million
had been returned, but stated that HCFA would
not remove that amount
from the disallowance until it could be
verified. Tr. 146-147. The
State also provided evidence that some audit
findings related to Los
Angeles County hospitals had been reversed or
modified as a result of
the first level of the State's appeal process.
Throughout the course of this appeal the State contended that a
settlement
agreement was imminent between the State and Los Angeles
County hospitals
that would resolve all the provider appeals at issue in
this
disallowance. The State argued that the settlement agreement
would, in
effect, resolve its appeal before this Board. HCFA, however,
insisted
that it would not accept the settlement at face value; rather,
HCFA would be
required to examine documentation supporting the legal
sufficiency of the
settlement before accepting any adjustments to
specific overpayment amounts
for particular hospitals. HCFA also noted
that the State had been
telling HCFA since December 1984 that a
settlement with the county hospitals
was imminent. Tr. 73. HCFA argued
that it should not delay its
collection of the overpayments reflected in
its disallowance any longer and
that the Board should not delay its
resolution of this appeal for such a
settlement to be realized.
Following the hearing held in this appeal, the State informed the
Board
that the settlement agreement had been adopted by the State and
the
county hospitals. The State declared that it would provide HCFA
with
all the documentation necessary for HCFA to review and evaluate
the
settlement. State's April 15, 1987 letter to the Board. As of
August
7, 1987, however, HCFA informed the Board that it had not yet received
a
final signed version of the settlement or any supporting documentation.
At first glance it may appear that this appeal may now be moot because
of
the successful completion of the settlement negotiations between the
State
and the hospitals. HCFA took the position, however, that it
cannot
accept the State's representations as to the effect of the
settlement without
examining documentation as to the settlement's
finality and its terms.
The State, inexplicably, has not yet supplied
any documentation relating to
the settlement. The State suggested that
it may adjust for the FFP
owing to HCFA as a result of the settlement on
its Quarterly Expenditure
Report (QER) submitted in October 1987. HCFA
is justly concerned, in
our opinion, that without the support of a Board
decision (which constitutes
the Department's final determination) there
is no basis for HCFA taking its
own adjustment of any FFP that is owed.
In addition, HCFA questioned whether
the State could properly offset
overpayments to the Los Angeles County
hospitals during the period
covered by this disallowance against possible
underpayments to the
hospitals for later periods.
Accordingly, notwithstanding the existence of a settlement, we
have
decided to proceed to decision at HCFA's request and in the absence
of
any reason from the State why we should not issue a decision.
Analysis
The issues which must be resolved on this record are: 1) may
HCFA
adjust for overpayment amounts even if the State has not yet
recovered
those amounts from the providers; 2) is there a basis in the record
for
determining that the State has been overpaid FFP; and
3) if so, what
amount of overpayment has been established?
The recovery issue
In suggesting that it would adjust the federal share of the
overpayments
established as a result of the settlement, the State did not
allege that
its duty to do so would be contingent on recovery of the
settlement
amounts from the providers. Since the State had previously
raised the
recovery issue, however, we briefly address here the State's
new
arguments about why Board and court decisions on this issue are
wrong.
The State's primary argument was that the authority to adjust
overpayments
in 1903(d)(2) of the Act was limited to situations where
the State's
estimated expenditures for any quarter were greater than
actual
expenditures. The State's argument was based primarily on its
view that
previous decisions rejecting this position had failed to
consider the
language of 1903(d)(2) which provides for adjustments for
overpayments made
"under this section." The State argued that "this
section" referred to
1903(d), which encompasses only the quarterly grant
award process described
on page 2 above.
This argument is flawed in two respects. First, the "section"
referred
to is all of section 1903, not just subsection (d). 5/ Section
1903
encompasses section 1903(a), which as the Board pointed out in
its
decisions, provides authority for FFP in payments to providers only
for
"medical assistance" under the state plan and federal requirements.
Even if the reference cited by the State was limited to the process
in
(d), however, we would conclude that Congress authorized the
Secretary
to adjust for amounts of FFP a state had received in excess of
its
actual allowable expenditures. As we noted in our past decisions,
the
longstanding interpretation of this provision is that a final
federal
disallowance determination under section 1116(d) of the Act
constitutes
a determination of an "overpayment" of FFP within the meaning
of
1903(d)(2).
Moreover, we reject the State's argument that its position is supported
by
the enactment in 1985 of a provision (now section 1903(d)(2)(C) of
the Act)
requiring states to adjust for provider overpayments within 60
days of
identification of the overpayment, but permitting states to
retain FFP in
such overpayments if made to providers who went bankrupt
or if otherwise
uncollectible. If 1903(d)(3) had meant that states did
not have to pay
back the federal share of any amounts they had not
recovered from providers,
Congress would not have found it necessary to
provide explicit authority for
states to retain the federal share of
uncollectible overpayments.
The overpayment determination
A large part of the dispute related to the fact that HCFA did not
here
independently audit the provider records and determine that
the
providers had received excess or improper payments, but had relied
on
State findings. The State indeed stated: "The statute
authorizes the
secretary to increase or decrease a state's quarterly grant on
the basis
of a determination, made by the Secretary, that an overpayment
has
occurred." State's Reply Brief, p. 2 (footnote omitted). The
Secretary
ordinarily makes such a determination through the disallowance
process.
Here, HCFA was relying on State determinations. The fact that
HCFA may
not have itself examined provider records does not preclude
a
disallowance, however; during the disallowance process the State did
not
deny that it had claimed and received FFP in payments to these
providers
for these time periods which were, at least in part, greater than
what
the providers were entitled to. The State challenged the timing
of
HCFA's action and the reliability of the specific amounts HCFA had
used.
Nevertheless, we find that the existence of some overpayment of FFP
to
the State is well supported in the record.
The State argued that the regulation at 45 C.F.R 201.5--which requires
a
State to adjust its QER when it has "acknowledged" an
overpayment--did
not apply because the State had not "acknowledged" the
overpayments
cited by the federal auditors until the provider appeal process
was
completed.
The record shows that the provider appeals have now been
concluded,
however. Further, the State has now acknowledged that the
final State
determinations mean that an adjustment of FFP is required
(although it
does not acknowledge that the amounts used by the federal
auditors are
correct). Certainly, this is a sufficient basis for a
federal
determination that the State has received an overpayment of FFP for
the
providers and time periods in question.
The amount
Contrary to what the State argued, HCFA did not here simply take
the
amounts found by the initial State audits to be overpayments by
the
State to the providers and disallow that full amount. The record
shows
that HCFA carefully examined the State's records to identify the
amounts
relating to violations of federal requirements, and to adjust
for
subsequent revisions to those amounts because of a provider appeal or
a
recovery. The difficulty with HCFA's figures is primarily one which
is
inherent in this type of case: HCFA identifies the status of
the
overpayments at a specific point in time and subsequently the
State
makes further adjustments or recoveries. As we have noted
previously,
this puts HCFA in a difficult position in establishing a
correct
disallowance amount. Recognizing this, however, we must
nonetheless
consider what the record here shows regarding subsequent
adjustments.
Basically, these are in four categories: 1) $100,000 which
HCFA
conceded it erroneously included in the disallowance amount;
2)
recoveries and appeal adjustments for providers other than Los
Angeles
County hospitals amounting to approximately $4.1 million; 3)
adjustments
to audit findings regarding Los Angeles County hospitals as a
result of
the first level of appeal which were not reflected on the
accounts
receivable records; and 4) preliminary figures regarding results of
the
settlement process between the State and Los Angeles County.
HCFA presumably would not expect us to uphold the disallowance related
to
the $100,000 error HCFA conceded. With respect to the
adjustments
attributable to recoveries and appeal decisions, HCFA simply
declined to
consider how they affected the disallowance amount until it had
verified
the State's figures, even though the State provided
documentation
specifically identifying those adjustments. HCFA
presented no
persuasive reason why the State's adjustments are not as
reliable as the
State's original determinations, and we would ordinarily
require HCFA to
adopt those adjustments absent any findings by HCFA that they
were
erroneous. 6/
On the present state of the record, however, we do not think that HCFA
is
required to make individual adjustments by examining revisions to
amounts
used in the federal audit. State's Hearing Exhibit 2 shows
the
preliminary results of the negotiations between the State and
Los
Angeles County as they relate to the providers and periods included
in
the federal audit. While this exhibit shows that the
overpayment
amounts used for some of those providers and periods by the
federal
auditors were reduced as a result of the negotiations, it also
shows
other amounts greater than the amounts included in the
federal
disallowance. If the State refuses to produce information on
the final
settlement amount relating to these providers and time periods,
HCFA may
reasonably infer that the total federal share of the overpayments is
at
least $43,173,892, the amount given on State's Hearing Exhibit 2.
Moreover, we do not think that HCFA is required to offset this amount
for
the federal share of underpayments to other providers or for other
time
periods. As HCFA pointed out, this would subvert the
claiming
process. When the State is in effect submitting claims for
new
expenditures, these must be identified on a QER so that HCFA can
examine
the claims for allowability and timeliness. Thus, we conclude
that HCFA
can reasonably require the State to account separately for
the
overpayments to the providers and for the time periods identified in
the
federal audit.
Conclusion
For the reasons stated above, we uphold the disallowance in the amount
of
$43,173,892. If the State does not voluntarily adjust the total
amount
of the federal share of the finally determined overpayments for
the providers
and time periods in question on its next QER and provide
documentation
supporting its amount, HCFA may recover the $43,173,892
through a downward
adjustment to the State's grant award. Moreover,
nothing in this
decision precludes HCFA from taking a further
disallowance if the State
cannot document that any adjustments it made
to the original overpayment
determinations were proper.
________________________________ Judith A. Ballard
________________________________ Norval D. (John) Settle
________________________________ Cecilia Sparks Ford Presiding
Board
Member
1. Subsequent to this disallowance, section 1903 was
amended by Pub.
L. 99-272 so that the portion of section 1903(d)(2) relevant
here is now
codified as section 1903(d)(2)(A).
2. In Massachusetts v. Heckler, 576 F. Supp. 1565 (D.
Mass. 1984),
the Board's decision in Massachusetts Department of Public
Welfare,
Board Decision No. 262 (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
(1st Cir.
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 the Board's decision. 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 the Board's decision
in
New York in Perales v. Secretary, Case No. 83-CV-900, aff'd sub
nom.
Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985). The United
States
Court of Appeals for the Eighth Circuit in Department of Social
Services
v. Bowen, 804 F.2d 1035 (8th Cir. 1986), reversed a District
Court
decision and upheld the Board's decision in Missouri Department
of
Social Services, Board Decision No. 448 (1983).
3. In the course of the appeal HCFA admitted that
its
characterization of all of the overpayments as being violations of
the
upper limit requirements was incorrect. HCFA stated a re-review of
the
State's audit reports revealed that approximately 75% of the
identified
overpayments were upper limit violations, with the remainder of
the
overpayments in violation of other federal reimbursement
requirements.
HCFA Brief, p. 10, fn 5. Since the State did not contest
the fact that
some payments violating federal requirements had occurred and
based its
appeal on the issues of the timeliness of the federal recovery and
the
reliability of the State's audits for determining the final
overpayment
amounts, we conclude that the State was not in any way prejudiced
by
HCFA's misstatement in the disallowance decision.
4. HCFA additionally cited section 2555 B of the
State Medicaid
Manual as a basis for the disallowance. Section 2555 B
states:
Overpayments are not considered payments made in
accordance with a
State plan, and therefore, no FFP
is available for such payments.
The Federal share of
any overpayment must be returned to HCFA in
the same
quarter in which the overpayment is identified, and
is
neither contingent upon nor subsequent to, the
State's recovery of
any portion of the
overpayment.
Section 2555 B, however, was not added to the State Medicaid Manual
until
December 1982. The Board has previously held that HCFA could not
use
this section as a basis for demanding the return of the federal
share of
overpayments that occurred prior to that date. California
Department of
Health Services, Board Decision No. 619 (1985), p. 3, fn.
4.
5. For convenience sake, the Board has referred to
subsections and
paragraphs of section 1903 as "sections" but, in context, the
meaning of
the term in the Act is clear.
6. HCFA declined to accept the State's figure of a
$4.1 million
adjustment for providers other than the Los Angeles County
hospitals on
the basis that it had not yet verified the figures presented by
the
State. At the hearing, a HCFA witness stated that the State has
been
known to make errors in recoveries by using the wrong provider
number
and recovering from the wrong provider. The mere fact that the State
may
occasionally collect from the wrong provider is insufficient as a
basis
for questioning the State's figures here, however. Collection
from the
wrong provider and adjustment of the federal share of that amount
would
appropriately compensate the federal government, even if the funds
were
derived from the wrong