DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State
Department of Social Services
Docket No. 88-44
Decision No. 982
DATE: September 1, 1988
DECISION
The New York State Department of Social Services (State) appealed
the
disallowance by the Health Care Financing Administration (HCFA,
Agency)
of $873,607 in federal financial participation (FFP) claimed under
Title
XIX (Medicaid) of the Social Security Act (Act). HCFA disallowed
the
State's claims for being filed beyond the time limits set forth in
the
Act.
The issue presented is whether the statutory two-year limit for
filing
claims does not bar payment of the State's claims here because
the
claims come within the exception in the statute for any
expenditure
involving "audit exceptions." For the reasons discussed
below we find
that the claims do not come within the "audit exception"
provision of
the statute, and sustain the disallowance.
Factual Background
The State developed a Shares Reclassification System (SRS) for
the
processing of its Medicaid claims, a method involving the review
and
comparison of State and federal computer-generated files. The
SRS
identified expenditures which were initially mischaracterized as
being
ineligible for federal funding. Once identified, an expenditure
was
reclassified as being federally eligible and a claim for FFP was
filed.
For the period June through December 1985, the State filed $38,983,835
in
Medicaid claims which related to expenditures reclassified by SRS.
The State,
however, determined that the SRS claims might have been
improperly calculated
and conducted a re-audit to verify the amount of
reclassified expenditures
being claimed.
As a result of this re-audit, the State reduced its net SRS claims
by
$8,797,618 to $30,186,217. HCFA accepted this reduction and paid
the
adjusted claims, with the exception of $873,607. This
amount
represented upward adjustments relating to expenditures, identified
by
the re-audit, that were incurred during the period July 1, 1983
through
December 5, 1983. The State had filed Medicaid claims for
these
expenditures on December 5, 1986. HCFA disallowed the $873,607
in
claims as being untimely, since the expenditures were incurred more
than
two years before the date of filing.
The Two-Year Filing Requirement
Section 1132(a) of the Act requires that a claim by a state for FFP
"with
respect to an expenditure made during any calendar quarter" must
be filed
within the two-year period which begins on the first day of the
calendar
quarter immediately following such quarter. This section also
provides
that no payment of FFP shall be made for expenditures not
claimed within this
period, except that payment will not be denied "with
respect to any
expenditure involving court-ordered retroactive payments
or audit exceptions,
or adjustments to prior year costs."
The implementing regulations, found at 45 C.F.R. Part 95, Subpart
A,
repeat the two-year filing requirement (45 C.F.R. 95.7) and also
list
the exceptions to the time limits, including "any claim resulting
from
an audit exception." 45 C.F.R. 95.19(b). An "audit
exception" is
defined as "a proposed adjustment by the responsible Federal
agency to
any expenditure claimed by a State by virtue of an audit." 45
C.F.R.
95.4.
Discussion
I. The SRS process was an audit.
The State has not disputed the Agency's position that the disallowed
costs
were claimed more than two years after the expenditures
representing those
costs were made. The State has argued, however, that
the SRS process
was an audit, and that its re-audit of the SRS claims
constituted an audit
exception within the meaning of the Act and the
regulations, thereby
exempting the claims at issue from the two-year
filing requirement.
The State devoted an entire section of its brief (pp. 10-12) to show
that
the SRS process came within the definition of an "audit." The
Agency
stated that the Board did not need to address this question,
although the
Agency did not accept this characterization of the SRS
process as an
audit. Agency's brief, p. 7. We ordinarily consider
first whether
the questioned process is an audit, before we proceed to
the next question,
namely, whether claims made for expenditures growing
out of the "audit"
constitute an "audit exception."
Neither the Act nor the regulations define an audit. The Board has
in
prior decisions stated that an audit is commonly understood to
involve
the formal inspection of accounting records. See Oklahoma
Department of
Human Services, DGAB No. 809 (1986). Under this
definition the process
used by New York is clearly an audit. The only
question before us then
is whether the process used for claiming the
expenditures is an "audit
exception."
II. The claims derived from the SRS process do not come within
the
definition of an audit exception.
A. The federal government must accept the
proposed adjustment in
order to have an audit
exception.
In 45 C.F.R. 95.4, as noted above, there is a definition of
"audit
exception" as "a proposed adjustment by the responsible Federal
agency
to an expenditure claimed by a State by virtue of an audit." The
issue
presented then is whether the State-sponsored re-audit of the SRS
claims
falls within this definition.
We note at the outset that the fact that this was a State audit, not
an
Agency audit, is not determinative of this issue. The State cited
New
York State Department of Social Services, DGAB No. 521 (1984), p.
7,
where the Board said:
The regulation's definition of "audit exception"
could on its face
apply to an "audit" conducted by
the State, as well as one
conducted by an Inspector
General or by the General Accounting
Office.
The critical fact is not that there has been an audit, but whether
the
federal government accepted it. We went on to say:
However, the vital issue is not who does the audit,
but who accepts
it. The regulation requires a
proposed adjustment "by the
responsible Federal
agency."
The regulation makes it clear that a proposed
adjustment to claims
for prior year costs based on a
state audit is not enough to
constitute an "audit
exception." The federal government--the
responsible federal agency--must propose to make an adjustment
in
the claims for prior years. Only then does
the statute of
limitations not run on the time for
filing or amending such claims.
Id.
In this case HCFA, the responsible federal agency, denied that it made
any
proposed adjustment to expenditures claimed by the State that would
show that
it had somehow adopted or accepted the SRS re-audit. HCFA
asserted that
the filing of the claims at issue was a unilateral act on
the State's part
with no intervention from any federal agency. HCFA
contended that the
SRS re-audit was a routine situation, with the State
giving no reason why the
questioned claims could not have been
classified as eligible for FFP and
properly claimed within the two-year
limitation. (This last contention
is discussed in section E below.)
B. The Agency did not accept the proposed SRS
upward
adjustment by accepting the State's downward adjustment of
its
claims.
The State contended that the Agency had in essence made a
proposed
adjustment as a result of the SRS re-audit by accepting the
downward
adjustment of the State's claims. The State pointed out that
the Agency
readily adopted the re-audit's finding that the State had
originally
made an overstated claim of $8,797,618 FFP. The State
supplied various
documents (State's Exhibits 4, 5, and 6) which, the State
argued, showed
that the Agency had accepted the validity of the SRS audit
process.
Therefore, according to the State, the Agency should be required
to
adopt all the re-audit's findings.
The State questioned why, after accepting the downward adjustment in
the
State's claims, HCFA then disallowed the upward adjustment of
$873,607,
stemming from the same re-audit, on no substantive basis but solely
on
grounds of being untimely. The State suggested that the Agency here
was
employing the audit exception provision on a claim-specific basis,
i.e.,
that the Agency was selecting individual items from the audit
to
disallow. Thus, according to the State, the Agency's position
appeared
to be that acceptance of a given audit did not necessarily mean
that
each individual item contained in that audit would be exempt from
the
two-year filing requirement. The State argued that this
Agency
interpretation of section 1132(a), that a claim would only qualify as
an
audit exception when the responsible federal agency proposed to make
an
adjustment based upon that particular claim, lacked merit and
conflicted
with previous Board decisions, namely, Oklahoma Department of
Human
Services, DGAB No. 809 (1986), and Minnesota Department of
Human
Services, DGAB No. 911 (1987).
Contrary to the State's assertions, we find that the Agency's
acceptance
of the downward adjustment does not require it to accept an
upward
adjustment, though generated by the same audit, if that adjustment
has
not been timely filed. As the Agency has pointed out, its only
action
in the entire SRS process was its acceptance of the State's
decreasing
adjustments and payment of claims at the reduced amount. The
mere fact
that a state returns money to a federal agency which a state audit
has
identified as an overclaim does not mean that the federal agency
must
accept the entire audit and consider any claims for
underpayments
growing out of the same audit as coming within the definition
of "audit
exception."
The Board decisions cited by the State do not support its argument.
The
underlying issue in both Oklahoma and Minnesota was whether the
reviews
conducted by a federal agency or employee were audits, not whether
a
state audit had been accepted by a federal agency.
The rationale of these prior Board decisions was that if the federal
audit
directed, or directly caused, the claims in question to be filed,
they came
within the audit exception provision because they had been or
must be
accepted by the responsible federal agency. The audit here was
a state
audit. It was neither originated nor carried out by a
federal
agency.
C. The statute requires the Agency to disallow untimely
claims
for underpayments.
The Board has previously categorically rejected the argument that it
was
inequitable for the Agency to recover overpayments without any
time
limitation, while denying claims for any underpayments beyond
the
two-year limit. See Illinois Department of Public Aid, DGAB No.
715
(1986), and South Carolina Department of Social Services, DGAB No.
612
(1984). In those decisions the Board noted that states are
given
considerable discretion in fashioning and administering their
formula
grant programs such as Medicaid, and that Congress gave the states
a
reasonable amount of time, two years, to submit their claims. The
Board
concluded that the consequences for not adhering to the deadlines
were
the states' responsibility. We find this position neither unfair
nor
inequitable. If the State had not submitted a downward adjustment,
but
rather the original figure of $38,983,835 in claimed FFP, it does
not
follow that HCFA would have reimbursed the State that amount.
HCFA
always had the prerogative to conduct its own review or audit of
any
claim submitted to it. Presumably HCFA, if it had undertaken such
a
review or audit, would have detected the misclassification of
the
$8,797,618 as Medicaid eligible.
By adjusting downward its claims by $8,797,618, the State was not
then
giving up something to which it had a legitimate claim. The
State
simply had no right to payment for non-Medicaid eligible
services. And
in accepting the downward adjustment, HCFA was not being
relieved of any
obligation for payment it owed the State.
The Agency has valid reasons for holding the State to the two-year
filing
requirement of Section 1132(a):
The purpose of this legislation was not on its face
to save federal
money by depriving the states of FFP
in valid claims for
expenditures. The purpose
was to prevent the states from coming in
many years
after expenditures were made and claiming FFP, or
transferring claims for FFP from one program to another,
without
any time limit. Such delayed claiming
made it difficult for the
Department of Health and
Human Services to plan its budget; claims
for
millions of dollars for expenditures in years long gone
could
turn up at any time. New York, supra, p.
8.
Since the claims at issue were admittedly filed more than two years
after
the quarter in which the expenditures occurred, and did not come
within the
"audit exception" provision, the disallowance must be upheld.
The fact that
the State returned money to HCFA based on an audit which
identified the
overpayment does not mean that HCFA accepted the audit or
any proposed
adjustments for amounts the State contends it underclaimed.
In a sense, therefore, the audit exception provision is a
claim-specific
one. The Agency can recover money from a state when the
state's audit
shows it had claimed erroneously, even though more than two
years had
elapsed since the expenditures were made. At the same time
the Agency
is required to interpose the timely claiming bar if the state
tried to
collect money, identified by the same audit, which the state was
no
longer entitled to claim. That is the requirement of section
1132(a),
and the Board is bound by it. 45 C.F.R. 16.14.
D. There is no support for the State's argument that the
Agency
adopted the re-audit.
We find no evidence in the record to support the State's assertion
that
the Agency adopted the re-audit. An examination of the exhibits
cited
by the State does not support the State's position. Exhibit 6, a
letter
from the State to the Agency, says nothing relevant to the issue
before
us, although the State claimed that this was evidence of an
earlier
understanding reached between the parties, of which Exhibits 4 and
5
provide a detailed explanation.
The State in its appeal file identified both Exhibits 4 and 5 as
memoranda
from HCFA's on-site audit staff to the State's Office of Audit
and Quality
Control. The only reference in Exhibit 4 to any agreement
on the SRS
process indicates that "[s]ince both parties are in agreement
with the
results of the review", the State "will initiate the
preparation of
decreasing adjustments reflecting the $46 million, FFP,
disallowed by the
review." Nothing here indicates that there was any
agreement on any
claims by the State for alleged underpayment. As a
matter of fact, the
Exhibit clearly contemplates further review by HCFA
of any outstanding
claims. Reviews are definitely contemplated for SRS
claims "submitted
after January 1, 1986," and the claims disallowed here
were submitted in
December 1986.
In Exhibit 5 there is even clearer evidence that there was no
blanket
approval of the SRS audit process. This memorandum states that
the
Regional Office and the State's Office of Audit and Quality
Control
"have reconciled Shares Reclassification System claims to be reviewed
in
the near future," and a meeting will be arranged "to
initiate
statistical sampling of the various universes involved." There
is
nothing here which indicates in any way that the Agency had agreed
to
accept the SRS audit claims without further review; no sampling would
be
necessary if it had. In fact, the memorandum goes on to say that
while
funds which had been deferred would be paid in full, the State
is
reminded that "previous audit experience has indicated that certain
of
these costs are of questionable allowability." (Emphasis
added) No
words could possibly show any clearer that the SRS claims
would not be
accepted without review by the Agency. This being so, we
conclude that
the claims were not derived from a proposed adjustment accepted
by the
federal agency, and do not come within the definition of an
"audit
exception."
The State seemed to imply that the agreement by the Agency to pay
the
State's SRS claims, subject to later review of the
substantive
allowability of the claims, was somehow inconsistent with the
Agency's
disallowance of the claims on the ground of late filing. The
Agency's
answer was that the Agency could not properly enter into any
agreement
not to apply claiming deadlines, since payment of claims not
timely
filed was expressly prohibited by statute. A better answer, we
believe,
is that if there was no agreement on substantive allowability,
the
Agency did not accept the results of the audit; therefore the
claims
based on this audit did not by definition come within the term
"audit
exception" and were untimely.
E. The delay in filing the disallowed claims was the fault
of
the State.
In New York, supra, we stated that the exceptions in the timely
claims
statute were intended to cover only "extreme situations." p.
8. We
went on to say:
[The exceptions] were not intended to cover a
routine situation
where a state simply did not get
around to getting its data
together in time to file
a claim within the statutory requirements.
The
exceptions are to take care of those cases where it would
be
patently unfair to a state to outlaw its claim
merely because of
the passage of time.
The State explained its SRS audit process in considerable detail in
its
brief. pp. 6-10. Generally speaking, the claims generated by
SRS were
Medicaid claims for recipients who had originally been
erroneously
classified as eligible only for State-funded Home Relief.
The State
then retroactively filed Medicaid claims when it was determined
that the
recipients were in fact categorically.eligible for Medicaid.
The brief
outlined three types of cases: where the recipients were
eligible for
Medicaid because they were eligible for SSI or were "SSI
related"; where
the recipients were Medicaid eligible because they were
entitled to
Title II disability benefits; and where a case shifted to a
category
eligible for federal participation.
There is nothing to indicate that these situations were at all unusual
in
New York. The fact that the total claims based on SRS amounted to
over
38 million dollars indicates the extent of the problem. Nowhere in
the
record is there anything to show why the State could not have
uncovered the
erroneous classifications promptly, or at least within two
years after the
State made the expenditures.
It is clear, on the State's own representations, that the re-audit
(on
which the disallowed claims are based) had to be conducted because
of
the fault of the State. In its brief (p. 13, n. 7) the State
stated
that "[t]he audit was flawed in several ways." None of the
reasons
given can be blamed on the Agency, and none are due to any
"extreme
situations."
In New York we gave (at p. 9) an example of where the "audit
exception"
provision of the statute would apply. We referred to a
hypothetical
audit which showed clearly "that due to no fault of the state,
an error
was made in claiming." Obviously that is not the case before
us.
.Conclusion
For the reasons discussed above, we find that the disallowed claims do
not
qualify as coming within an "audit exception" to the two-year
filing
requirement. Accordingly, we sustain the disallowance of
$873,607.
________________________________ Donald F. Garrett
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
Presiding
Board