GAB Decision 526
Docket No. 83-253
March 30, 1984
New York State Department of Social Services;
Ballard, Judith; Teitz, Alexander Settle, Norval
The New York State Department of Social Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $388,659 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 processing of Medicaid invoices
submitted by nursing homes. HCFA adopted the audit report's
determination that overpayments, made to providers which had
participated in the Medicaid program but which had subsequently closed,
had not been returned to HCFA.
The major issues presented are whether section 1903(d)(2) of the Act
authorizes HCFA to demand that the State repay the federal share of
identified overpayments made to Medicaid providers, even though the
State may not have yet recovered the overpayments from the providers;
and whether an overpayment can be established under the State's
prospective rate-setting system prior to the completion of all available
administrative and judicial review procedures. For the reasons
discussed below, we find that HCFA may adjust under section 1903(d)(2)
of the Act for overpayments to providers prior to the State's recovery
from the providers irrespective of the fact that under the State's
rate-setting system an overpayment may not be finalized until completion
of a review process.
There are no material issues of fact in dispute. We have determined,
therefore, to proceed to decision based on the written record.
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
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 (2) 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.
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. . . .
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 Audit Agency issued a report entitled "Operating Practices
and Control of Nursing Home Control Section, Division of Medical
Payments, New York City Human Resources Administration," Report No. NYC
15-17 (Audit Control No. 02-75509). The audit report examined the
functioning of the Nursing Home Control Section (NHCS) of the State's
Division of Medical Payments for the period January 1975 through March
1976. The NHCS is responsible for verifying and paying invoices
submitted by nursing homes for Medicaid services. As part of its
function, the NHCS prepares final payments to nursing homes which have
closed. Final payments are calculated on the basis of outstanding over
and underpayments made to the closed facilities. As of April 8, 1976,
the audit report dentified even closed nursing homes which still owed
the Division of Medical Payments $838,099 for past overpayments.
A more recent HCFA review disclosed an overpayment balance still
outstanding from three nursing homes in the amount of $388,659 FFP. In
disallowing this amount, HCFA cited section 1903(d)(2) of the Act and
declared:
The initial payments to providers were based upon historical costs
adjusted for inflation. However, once an adjusted final rate was
established through the cost settlement process, any excess payments
made under this (3) system became overpayments. Overpayments are
unallowable expenditures which must be credited to Title XIX.
Appeal File, Ex. I, p. 2.
Discussion
The State argued that, notwithstanding prior Board decisions on the
subject, HCFA did not have the authority to demand from the State the
federal share of any Medicaid overpayments to providers until the
amounts have been accurately established and recovered by the State.
The State further contended that, as the providers involved in this
appeal no longer participate in the State's medical assistance program,
it is likely that the overpayments would be uncollectible, resulting in
the State assuming the full burden of the overpayments. According to
the State, this would violate the cooperative federalism partnership of
the Medicaid program, in which the federal government and the states
were to share the costs. Alternatively, the State argued that its case
could be distinguished from the prior Board decisions because the State
employed a prospective rate-setting system in its payments to the
providers.
HCFA responded that all the arguments advanced by the State had been
examined by the Board in previous decisions. Citing these decisions,
HCFA contended that the Board should reject the State's arguments and
affirm the disallowance.
I. Is HCFA's interpretation of section 1903(d) of the Act, requiring
the adjustment of identified overpayments prior to actual recovery,
correct?
The question of HCFA's ability to recover from states overpayments to
providers prior to the states' actual recovery of the amounts from the
providers has been examined by the Board in a series of decisions, in
which the Board has held that excess payments to providers do not
consitute "medical assistance" within the meaning of the Act, and
that,
therefore, HCFA is empowered by section 1903(d)(2) of the Act to collect
the federal share of excess payments, even if a state has not yet
recovered the excess amounts from the providers. Massachusetts
Department of Public Welfare, Decision No. 262, February 26, 1982;
Florida Department of Health and Rehabilitative Services, Decision No.
296, May 15, 1982; New York State Department of Social Services,
Decision No. 311, June 16, 1982; Illinois Department of Public Aid,
Decision No. 404, March 31, 1983; Pennsylvania Department of Public
Welfare, Decision No. 426, May 24, 1983; Missouri Department of Social
Services, Decision No. 448, June 30, (4) 1983; and New Jersey
Department of Human Services, Decision No. 480, November 30, 1983. /1/
In the above appeals states generally argued that HCFA was not
entitled to recoup the federal share of excess payments to providers
until the payments were recovered, and that section 1903(d)(3) limited
any federal interest to a pro rata share of the amount actually
recovered. Rejecting these arguments, the Board summarized its
reasoning as follows:
Section 1903(d)(3) does not by its terms relate back to all
overpayments contemplated by section 1903(d)(2).
Since section 1903(d)(3) refers to amounts recovered with respect to
"medical assistance furnished under (5) the State plan," it reasonably
may be viewed as referring only to state payments which are allowable
"medical assistance" costs, under section 1905(a) of the Act.
The legislative history supports the Agency's position that section
1903(d)(3) was designed to authorize the Secretary to adjust in
situations where a question might have existed as to a state's liability
to repay the federal share or the Agency's ability to recoup the share
by an offset to future claims.
Neither the Agency nor the courts /2/ have ever interpreted section
1903(d)(3) to prevent adjustment under section 1903(d)(2) of an amount
determined by the Secretary to be an overpayment, merely because the
state has not recovered the amount from a provider.
New York, supra, pp. 4-5; Illinois, supra, p. 12.
The State disputed the Board's line of reasoning, arguing that the
language of section 1903(d)(3) is clear in meaning that an overpayment
does not exist until there is an actual recovery of funds by the State.
The State averred that section 1903(d)(3) deals with the specific
subject of the recovery of overpayments and should not, therefore, be
controlled by the general provisions of section 1903(d)(2).
HCFA replied that the amounts paid to the State cannot be considered
"medical assistance" furnished under the State plan since they were
excessive, and hence unallowable when made; therefore section 1903(d)(
3) is inapplicable. HCFA referred to New York, supra:
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.
(footnote omitted) When such amounts 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 (6) Agency interpretation does
not render (d)(3) superfluous . . . . but rather, gives effect to both
provisions and is supported by the statutory scheme as a whole.
pp. 5-6.
While the State has argued that administrative tribunals such as the
Board are not strictly bound by the judicial doctrine of stare decisis,
we agree with HCFA that the State has failed to provide any substantive
grounds for refuting the Board's earlier decisions. Accordingly, for
the reasons set forth above and in the cited Board decisions, we find
that HCFA is entitled, under section 1903(d)(2) of the Act, to recover
the federal share of identified overpayments prior to the State's actual
recovery of the funds.
II. Is the cooperative spirit of the Medicaid program subverted by
requiring states to assume the full burden for overpayments which may be
unrecoverable?
The State alleged that HCFA's position on the question of
overpayments subverted the spirit of the Medicaid program. The State
declared that Congress designed the Medicaid program as a system of
medical assistance in which the federal government and the participating
states share equal financial responsibilities. This congressional
intent, the State argued, has been recognized by the courts where the
Medicaid program has been termed "a cooperative arrangement between the
States and the Federal Government" (Hathaway v. Mathews, 546 F.2d 227,
228-229 (7th Cir. 1976)), and a "system of 'cooperative federalism'"
(Harris v. McRae, 448 U.S. 297, 308 (1979)). In this particular appeal,
the three nursing homes which received the overpayments no longer
participate in the State's medical assistance program. Therefore,
according to the State, the possibility of recovering the overpayment is
greatly reduced, with the likelihood that the amounts will be
uncollectible. The State argued that, under HCFA's policy, this would
result in the State assuming the full financial burden for the
overpayments determined to be uncollectible, a result inconsistent with
the congressional intent that Medicaid costs be shared between the
federal government and the states.
As HCFA pointed out in its brief, the Board addressed the issue of
the compatibility of HCFA's position on overpayments with the
cooperative federalism foundation of the Medicaid program in New York,
supra:
(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 (7) 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.
p. 7.
The Board reaffirmed that position in Illinois, supra, p. 13, and New
Jersey, supra, pp. 5-6. The State has not pursuaded us that this
position should be reversed, even though the State may not be able to
recover the overpayments from the providers. Ordinarily, if the
providers were still participating in the State's medical assistance
program, the State could recover the overpayments through periodic
adjustments. As the providers here are no longer in the State's medical
assistance program, no such adjustments are possible. It has not been
established, however, that the overpayments are definitely
uncollectible. Other avenues, such as legal action, are still available
to the State. The potential difficulty of such additional action does
not excuse the State from refunding the federal share to HCFA. The
State has the responsibility to recover overpayments, and it must bear
the burden for failing to do so. Furthermore, even in situations where
a state was permanently prohibited from recovering an overpayment by a
provider's bankruptcy, the Board still held that the State bore the
responsibility for the repayment of the full amount of the overpayment.
Florida, supra, p. 9.
We conclude, therefore, that the partnership concept of the Medicaid
program is not violated by requiring the State alone to assume the full
burden for the overpayments.
III. Does the State's use of a prospective rate-setting system preclude
HCFA from recovering overpayments?
The State asserted that its appeal could be distinguished from the
prior Board decisions on overpayments because of the rate-setting
methodology it employed in its medical assistance program. The State
explained that under its State plan, approved by HCFA, rates for
providers are established prospectively through the use of fiscal and
statistical data relating to a provider's past cost history. According
to the State, the initial rate established under this system, unlike an
interim rate in a retrospective system, is a final rate, and, therefore,
payments to a provider under this rate are, by definition, allowable
under the State plan. The State declared that under its system --
an overpayment cannot be identified merely by references to the fact
that a certified final rate has been revised downward as the result of a
subsequent audit of the data (8) based upon which the rate was
determined. An overpayment cannot be clearly established unless the
affected provider decides not to challenge the downward revision of its
rate or the revised rate becomes final following the completion of all
available administrative and judicial review procedures. Only under
these circumstances can an overpayment be firmly established through a
comparison of the earlier established rate and the revised rate.
Appeal Brief, p. 6.
The State argued that, since the three providers in question are
challenging the implementation of a revised rate, the alleged
overpayment may be reduced or found not to exist at all. The State
contended that in previous cases such as Massachusetts or New York,
supra, the overpayments were already established through either the use
of a retrospective rate-setting system or by court proceedings and
settlements. The State concluded that under its system an overpayment
could not be clearly established until the provider appeal process has
been completed and a revised reimbursement rate calculated.
HCFA responded that "(no) matter what method a state used to adjust
rates initially paid to a provider, payments determined to be excessive
do not constitute 'medical assistance' and must be returned." Agency
Brief, p. 11. Arguing that overpayments made under a prospective
reimbursement system should not be treated differently than those
arising under a retrospective reimbursement system, HCFA cited Florida
and New York, supra. HCFA noted that the State has not challenged the
accuracy of its audit findings regarding the existence of overpayments
and that the State is now defending those findings in judicial
proceedings:
It is inconsistent for the State to argue to the Federal government
that these figures are not "finalized" at the same time it is asserting
the validity of the audit findings in its own administrative proceedings
and in litigation. The mere fact that a rate revision determination has
been appealed does not make the overpayment so uncertain that a
resulting disallowance is not legally or factually unsupportable.
Agency Brief, p. 12.
Finally, HCFA stressed that the State would not be prejudiced if a
provider does ultimately establish that its initial rate was incorrect
because HCFA would be willing to review any subsequent findings and to
make any appropriate revisions if found necessary at a later date.
(9) In analyzing the parties' arguments, we find that HCFA has
accurately summarized the Board's holdings in the prior overpayment
cases. In Florida, the Board sustained the disallowance of overpayments
resulting from a prospective rate-setting system. In New York,
involving the same reimbursement methodology as the present appeal, the
Board held:
(Excess) payments arising from (a retrospective or prospective)
system have the same status: they are amounts paid to a provider in
excess of what the provider was ultimately entitled to under the state
plan. New York has presented nothing which would lead us to conclude
that this analysis does not also apply to excess payments made to a New
York provider because an initial rate was higher than the rate
ultimately determined to be proper under the State plan.
p. 6.
The Board similarly rejected an argument for a different treatment of
a prospective payment system in Pennsylvania, supra, p. 10. In
Missouri, supra, the Board rejected the proposition that HCFA was
precluded from taking a disallowance because the amounts involved were
in either an administrative appeals process or litigation. There
Missouri argued, as the State does here, that the overpayments were not
"final" until the appeals process is completed. The Board expressed
its
concern as to how long such an appeals process may take and stated:
We share HCFA's concern that such an appeals process might take years
to conclude. We think it unreasonable that HCFA should be required to
wait for an indeterminate amount of time for a provider appeal to wend
its way through the State's administrative and judicial process.
Whether a provider may prevail in this process is mere speculation.
p. 11.
We conclude, therefore, that the State's employment of a prospective,
rather than retrospective, rate-setting system is immaterial in light of
the fact that the State has identified these amounts as overpayments
made to providers, even though there is a possibility that the amount of
the overpayments may be adjusted later in an appeals process.
(10) Conclusion
For the reasons stated above, we sustain the disallowance in the full
amount of $388,659. /1/ Several of these decisions have been appealed
to United States District Courts. As of the date of this
decision, the Board is aware of two decisions on these appeals. On
January 5, 1984, the United States District Court for the Northern
District of Florida, Tallahassee Division, in Florida v. Heckler, Civ.
No. 82-0935, affirmed Board Decision No. 296, holding that the State of
Florida was liable for Medicaid overpayments made to providers
notwithstanding the providers' bankruptcy. On January 13, 1984, the
United States District Court, District of Massachusetts, in
Massachusetts v. Heckler, Civ. No. 82-1048-G, reversed Board Decision
No. 262, holding that HHS had not provided any evidence to establish
that payment to a provider at an interim rate higher than a final rate
constituted an overpayment for purposes of section 1903(d)(2). In so
deciding, the District Court disagreed with the Board's analysis that an
excess payment was not medical assistance under a State plan within the
meaning of 1903(d)(3) and found that payment at an interim rate, in
compliance with a State plan, was a legitimate expenditure which did not
suddenly become improper because it later turns out, through no fault of
the state, that the final rate is lower. We believe that the present
case can be distinguished from Massachusetts on New York's use of a
final, rather than interim, rate to reimburse the providers. New York's
findings that the prospective final rates in question here were too high
is essentially a finding that the rates reflected costs not properly
included in computing the rates, that is, not in accordance with State
plan requirements on allowable costs. Thus, the excess rates paid did
not comply with the State plan. We also note that HHS has indicated
that it intends to appeal the Massachusetts decision, and we would not
necessarily consider it controlling in any event. /2/ In the
recent Massachusetts decision, the court held that, where there is an
overpayment, there need be no recovery by a state before the overpayment
can be properly disallowed, but disagreed whether there was, in fact, an
overpayment when an interim rate was later found to be greater than a
final rate.
NOVEMBER 14, 1984