GAB Decision 262
February 26, 1982 Massachusetts Department of Public Welfare; Docket
No. 80-54-MA-HC Settle, Norval; Teitz, Alexander Garrett, Donald
The Massachusetts Department of Public Welfare appealed a decision by
the Health Care financing Administration, denying $5,115,610 in federal
financial participation (FFP) claimed under the Medicaid program. The
disallowance represented the federal share of excess payments to certain
nursing homes. The excess payments arose because the State paid each
nursing home at an interim rate of reimbursement higher than the final
rate established by the State. The State had not recovered the excess
payments from the providers, which were bankrupt or no longer
participating in the Medicaid program.
The State's major argument was that its method of reimbursement,
approved by the Agency, necessarily resulted in such excess payments
and, therefore, the Agency could adjust for the federal share in the
payments only if the State recovered them from the providers. For the
reasons stated below, we conclude that the Agency correctly determined
that the excess payments were not allowable Medicaid costs and,
therefore, FFP in the payments constitutes an overpayment to the State
to be adjusted under section 1903(d) of the Social Security Act. Since
the State has already adjusted for some of the excess payments, however,
we remand to the Agency for the purpose of recalculating the
disallowance.
Our decision is based on the written record and briefs.
General Background -- The State's Rate-Setting Methodology
Title XIX of the Social Security 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 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. (2) Congress gave the
states discretion, subject to the Secretary's approval, in formulating
an appropriate rate methodology to reimburse providers of Medicaid
services. Responsibility for determining the rate at which Medicaid
payments for nursing homes will be made in Massachusetts was delegated
in the State plan to the Massachusetts Rate Setting Commission (RSC).
Paralleling the federal government's method of reimbursing the states
under the Medicaid program, Massachusetts developed a system whereby the
providers of Medicaid services initially receive compensation at an
interim rate.
The RSC sets the interim rate of payment, based on the provider's
costs incurred during the previous year, adjusted for factors such as
inflation. The State then releases monthly payments for services
rendered during the current year at that rate. This method of
estimating ordinarily results in a rate which needs adjusting.
Therefore, the actual cost of the services is evaluated at a later date
based on a cost report for that year. The RSC audits the cost report
for the purpose of establishing a final rate for the reporting period.
This may lead to a final rate which is different from the interim rate
at which payments were actually made to a provider during the reporting
period. /1/
If the RSC determines that the provider's reasonable, necessary and
proper per diem cost of providing services is greater than the interim
rate, the provider will have been underpaid. If the provider's cost of
services is less than the interim rate, the provider will have been
overpaid. A difference between the interim rate and the final rate
necessitates a retroactive rate adjustment. The RSC files each
retroactive rate adjustment with the Secretary of State.
An office within the DPW, the Retroactive Nursing Home Unit (RNHU),
maintains a file for each provider. This file contains copies of all
rate adjustments filed with the Secretary of State by the RSC and
records showing the amount of underpayment or overpayment which each
adjustment produces. If the final rate is lower than the interim rate
and a retroactive rate adjustment is required, RNHU calculates the
amount attributable to the decrease and records that amount on an
Account Receivable Ledger Card. The sum of the amounts shown on a
provider's Account Receivable Ledger Card represents the total amount
that the RNHU will seek to recover from the provider. (3) If a provider
disputes the final rate determination, it may seek administrative review
of the final rate by the State office of hearing examiners.
Case Background
As a result of reviews by the Financial Branch of HCFA's Regional
Office, HCFA concluded that the State was not accounting in a timely
manner for unrecovered "overpayments" to providers which had received
payments at an interim rate higher than a final rate filed by the RSC.
The reviewers determined that these "overpayments" should have been
accounted for on the State's quarterly statements of expenditures,
within two quarters following the quarter in which found, in accordance
with 42 CFR 447.296. The results of the reviews were discussed with
State agency officials. The amounts disallowed were determined by
reviewers who examined the Account Receivable Ledger Cards, maintained
by the RNHU. Based on these State records, the Agency disallowed
$2,768,367 identified as the federal share of overpayments to bankrupt
providers and $2,347,243 identified as the federal share of overpayments
to providers no longer participating in the program.
The Agency cited as a basis for the disallowance the regulation at 42
CFR 447.296, as well as section 1903(d)(2) of the Act. Attached to the
disallowance letter was a schedule showing the amounts of the
overpayments allegedly made to each provider involved, identifying the
provider by number. The amounts were not shown as being related to any
specific quarter, although they were identified as overpayments not
recovered as of September 30, 1979.
On appeal to the Board, the State raised a number of substantive and
procedural arguments. For purposes of this decision, we have discussed
the substantive issues under these major headings:
I. Whether the excess payments are overpayments under the statute
regardless of recovery.
II. Whether the Agency's regulations are valid and require adjustment
for these excess payments.
III. Whether the Agency's approval of the State's reimbursement
methodology precludes the Agency from adjusting for these excess
payments.
IV. Whether the status of these providers as bankrupt or
non-participating providers precludes adjustment.
The issues which are primarily procedural are discussed in the
sections headed:
V. Whether the Agency had an adequate basis for its determination
that the excess payments constitute an overpayment. (4) IV. Whether the
Agency's disallowance letter was sufficient.
VII. Whether an earlier disallowance is res judicata with respect to
part of the disallowance here.
VIII. Whether the Agency should have instituted a compliance action
here rather than a disallowance.
I. Whether the excess payments are overpayments under the statute,
regardless of recovery.
A. Substantive basis for adjusting for these excess payments
The State argued that there is no substantive provision in the
statute requiring the Secretary to recover an excess payment based on
the State's determination of a final reimbursement rate.
We disagree.Section 1903(a) of the Act, the basic provision governing
payment of FFP under Medicaid, requires the Secretary to pay each state
with an approved plan ". . . an amount equal to the Federal medical
assistance percentage of the total amount expended during the quarter as
medical assistance under the State plan . . . ." (Emphasis supplied)
Section 1905(a) of the Act defines "medical assistance" as "payment
of
part or all of the cost" of covered services. Other provisions of the
statute help define the limits of the allowable cost of such services.
/2/
(5) Here the State provided for a method of payment which used an
interim rate, subject to retroactive adjustment. As the State itself
indicated, an interim rate is virtually certain to be incorrect since it
is based on the adjusted cost of the preceding year. The final rate, on
the other hand, is related to the provider's actual cost of providing
services under the program. Since it is the final rate that corresponds
to what the State has determined to be the proper charge for the
services, and, therefore, to the amount of the "medical assistance under
the State plan," a substantive obligation exists under section 1903 for
the Secretary to allow FFP only in the amount of the final rate.
B. Requirement to adjust once overpayment determined
The State nevertheless argued that the Secretary, under "procedural"
provisions of section 1903(d), may recover the federal share of the
difference between the interim and final rates only to the extent that
the State has already recovered the difference from the providers.
The statutory language does not support this position either,
however. Section 1903(d)(1) requires the Secretary to "estimate" the
amount that the State will be entitled to under section 1903(a) prior to
the beginning of each quarter. Section 1903(d)(2) requires the
Secretary to pay the amount so estimated "reduced or increased to the
extent of any overpayment or underpayment which the Secretary determines
was made . . . for any prior quarter . . . ." The statute nowhere
defines "overpayment." However, the Agency has consistently interpreted
the term, together with the provision at section 1116(d) of the Act, to
include amounts previously paid to a state, which have been determined
to be unallowable. Section 1116(d) of the Act provides for
reconsideration by the Secretary of a disallowance, and a final
disallowance determination under this section has been interpreted as a
basis for an adjustment on the quarterly statement of expenditures under
section 1903(d)(2). See, 45 CFR 201.14 (1977). /3/ The State itself
recognized that an "overpayment" within the meaning of section
1903(d)(2) has occurred if the State "has failed to comply with the
substantive requirements found in other sections of Title XIX." State's
December 10, 1981 submission, p. 25. As discussed above, the statute
permits FFP only in payments properly made under the State plan. While
here the State plan permitted provisional payment to a provider at the
interim rate, it authorized final payment only at the final rate.
(6) When the final rate is lower than the interim rate (at which the
State claimed FFP), the Secretary properly may determine that an
overpayment to the State exists and adjust payments to the State
accordingly. Moreover, the overpayment adjustment is not limited under
section 1903(d)(2) to instances where the State has recovered the excess
amount from the providers.The section simply authorizes an adjustment
based on the Secretary's determination that an overpayment has occurred.
C. Effect of section 1903(d)(3)
The State argued, however, that section 1903(d)(2) should be
interpreted more narrowly based on the terms of section 1903(d)(3) and
its legislative history. Section 1903(d)(3) requires the Secretary to
consider as an "overpayment":
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 . . .
.
The State argued that this section modifies the conditions for
adjusting overpayments under section 1903(d)(2) by preventing adjustment
until the State has actually recovered the overpayment. The Agency
argued persuasively against this interpretation, and we agree for the
following reasons:
- Section 1903(d)(3) does not by its terms relate back to all
overpayments contemplated by section 1903(d)(2).
- Since 1903(d)(3) refers to amounts recovered with respect to
"medical assistance furnished under the State plan," it reasonably
may
be viewed as referring to State payments which are allowable "medical
assistance" costs. Such instances would include overpayments arising
from third party reimbursements as contemplated by section 1902(a)(25);
see, also, the second sentence of section 1903(d)(2). Excessive
payments to the State arising from an overestimate of provider rates, on
the other hand, would not qualify as "medical assistance."
- The extensive legislative history cited by the State primarily
supports the Agency's position that section 1903(d)(3) was designed to
authorize the Secretary to adjust in situations such as third party
reimbursements where a question might have existed as to the State's
liability to repay the federal share or the Agency's authority to recoup
the share by an offset to future claims. This interpretation gives full
effect to all of the statutory provisions at issue. If Congress had
wanted to (7) ensure the State's outcome, it could have done so with a
simple amendment to section 1903(d)(2) to limit adjustment of
overpayments to situations where a state had already recovered funds.
- Neither the Agency nor the courts have ever interpreted section
1903(d)(3) so as to prevent adjustment of an overpayment under section
1903(d)(2), irrespective of state recovery from a provider. This
applies to overpayments resulting not only from excessive payments, but
also from payments made for services or care not covered by the program
or for persons ineligible for such care or services. HCFA pointed to
sixteen years of consistent application of the statute in its
regulations and fiscal procedures and argued that longstanding
interpretations of law, which were not disturbed by Congress when it
amended the law, are presumed to have the approval of Congress and to be
consistent with Congressional intent. /4/
When the relevant statutory provisions are read as a whole, we
believe that the Secretary has a substantive obligation to base Medicaid
payments to the State on the State's final rate and need not delay an
adjustment necessitated by an overestimate merely because the State has
not recovered the excess payments from the provider. /5/
II. Whether the Agency's regulations are valid and require
adjustment for these excess payments.
The Agency cited the following provision in support of its position
that the State should pay back the federal share of excess payments to
providers, regardless of recovery by the State:
The (State) agency must account for overpayments found in audits on
the quarterly statement of expenditures (8) no later than the second
quarter following the quarter in which the overpayment was found. (See
45 CFR 201.66 for accounting for overpayments.)
(42 CFR 447.296, formerly codified at 45 CFR 250.30(a)(3)(ii)(G))
This provision appears in the context of the regulations establishing
requirements for reimbursement of Medicaid providers, including that the
State must audit providers' cost reports to ensure that only allowable
provider costs are being considered in the rate-setting process. /6/ We
agree with HCFA that this provision, found as a result of a cost
settlement process, may constitute an overpayment to the State to be
adjusted, regardless of whether the State has recovered the amount from
the provider. The term "overpayments" in this regulation clearly
encompasses a differential between an interim and final rate determined
by a state's rate-setting process. The time specified for adjustment in
the provision is not contingent on recovery.
The State challenged the regulation, however, on two grounds: that
it was invalid as not reasonably related to the purposes of the statute
and that, in any event, the Agency had not interpreted the regulation
correctly. We discuss these two issues below.
A. Validity of regulation
The State argued that a regulation having the meaning attributed to
42 CFR 447.296 by HCFA would be invalid as plainly inconsistent with the
purpose of Title XIX. The State suggested that the effect of the
regulation is to impose strict liability on a state for losses sustained
under its reimbursement system and that the State, as a partner in the
Medicaid program, should not be expected to bear more than a fair share
of unavoidable losses. In this respect the State pointed to the limited
liability in certain instances of fiscal intermediaries and carriers
under the Medicare program. Finally, the (9) State argued that the
regulation serves as a disincentive for the State to adopt a retroactive
reimbursement system.
We are not persuaded by the State's arguments. With respect to the
State's first point, the adjustment for overpayments pursuant to the
regulation here is fully consistent with the statute. As we have
discussed at length, the statute does not make adjustment contingent on
State recovery. The State's position conflicts with statutory intent by
permitting the State to retain funds not covered by the program.
Moreover, although the Department considered requiring an immediate
adjustment for overpayments found in audits, it instead adopted a more
liberal rule incorporating a grace period of two quarters. 41 Fed.
Reg. 27304 (1976) The State has an automatic adjustment procedure
whereby it recovers most of its overpayments stemming from rate changes
within this time frame. The absence of exceptions for bankrupt or
non-participating providers in the regulation might be explained in part
because this extended time frame was provided for adjusting overpayments
generally.
Furthermore, a uniform rule may serve important program purposes by
encouraging the State to monitor more closely the financial viability of
its providers and to develop systems to recover overpayments before a
provider drops out of the program or becomes bankrupt. As the Agency
pointed out, the policy may also encourage states to be more precise and
conservative in setting interim rates. While the lack of exceptions may
indeed serve as a disincentive for the State in selecting this payment
option, the option as a whole may have fiscal advantages that
counterbalance this factor. Finally, the comparison with the Medicare
program is not convincing here. The Stae has the primary responsibility
under Medicaid for administering its program, and as a consequence might
reasonably be expected to assume responsibility for excessive payments
to providers, including those where collection has been delayed or even
barred.
B. Interpretation of the regulation
As an alternative argument, the State challenged the Agency
interpretation of the regulation, arguing that the phrase "account for"
should not be interpreted as imposing strict liability on the State, but
rather as merely imposing a duty on the State to use reasonable care in
promulgating the interim rate and in endeavoring to recover overpayments
from providers resulting from rate decreases. (10) The plain terms of
the regulation, however, require the State to account for the
overpayments on its quarterly statement of expenditures. /7/ This is
reinforced by the preamble to the original provision which specifies
that such overpayments must be "accounted for on the SRS OA-41 (now
HCFA-64) report." 41 Fed. Reg. 27304, July 1, 1976. Such a report is
intended for use in making accounting adjustments, not as a means for
the State to report on whether it is fulfilling a duty of using
"reasonable care."
Moreover, section 447.296 refers to 45 CFR 201.66 with respect to
accounting for overpayments. Section 201.66 deals with repayment of
federal funds by a state, permitting a state to make such repayment in
installments where certain conditions are met.
The cases cited by the State (State's December 10, 1981, submission,
p. 10) do not support the State's interpretation, for the simple reason
that they concerned Department of Agriculture regulations in a totally
different context and, therefore, are not relevant to the interpretation
of section 447.296.
III. Whether the Agency's approval of the State's reimbursement
methodology precludes the Agency from adjusting for these excess
payments.
A. Approval of the rate-setting method
The State argued that, since its rate-setting methodology was in
accordance with the statute and was approved by the Secretary, the
differential between the interim and final rates of reimbursement should
not be considered an overpayment. According to the State, (11) while
the interim rate is based on the State's best guess as to what the
provider's actual costs will be, the interim rate is "virtually certain
to be incorrect." (State's December 10, 1981 submission, p. 11) The
State maintained,
The certainty of error in the interim rate was known to the Secretary
when the retrospective rate system was approved. By approving the use
of a reimbursement methodology which was virtually certain to result, in
some cases, in overpayments to providers, together with the provision
that the State would seek to collect those overpayments, the Secretary
agreed to share the risk that the overpayments might not be recovered by
the State.
(State's December 10, 1981 submission, p. 13)
We disagree. While Congress gave the states some leeway in using
their own methodologies to determine rates of reimbursement for Medicaid
costs, including the possibility of using a retrospective system, the
State has pointed to nothing in the statute or its legislative history
to indicate that Congress intended to provide FFP in any payments which
exceeded the final rate ultimately determined by the State to be the
proper one. /8/
The purpose of the 1972 amendments on which the State relied in part
was to give the states maximum possible flexibility to develop
methodologies for cost-finding and reasonable cost-related
reimbursement, within the limits set by the Secretary. See, 41 Fed.
Reg. 27300, July 1, 1976. Flexibility in the manner of establishing
allowable costs cannot be translated, however, into an authorization to
pay FFP in costs beyond those established by the State as being
allowable. The State was permitted to use its own methodology here to
establish a reimbursement rate. As the State itself recognized,
however, the final rate, once established, represents the amount
properly payable under Medicaid on a reasonable cost related basis.
(12) B. Approval of the collection process
The State also argued that its regulations establishing a system for
collecting overpayments were expressly approved by the Agency's
predecessor, the Social and Rehabilitation Service. According to the
State, HCFA is therefore estopped from disallowing federal financial
participation for amounts which remain uncollected as a result of the
(State) Department's adherence to those regulations.
(State's April 28, 1980 submission, p. 4)
The State attempted to read too much into the Agency's approval of
the State's collection regulations. By its approval, the Agency merely
permitted the State to use a particular method of offsetting past
overpayments against future payments due to the providers. As the State
acknowledged here, the State system for collection has been interfered
with in the case of bankrupt and non-participating providers. (State's
December 24, 1980 brief, p. 33) The Agency could reasonably approve use
of the State's collection system for other providers and wait for
recovery by use of this system for adjustment of FFP, while requiring
adjustment without recovery where the State's method of collection has
broken down.
Thus, the State has shown nothing in the Agency approval of the State
methodology for determining the rate, or for collecting overpayments,
which could reasonably be relied on a basis for not adjusting for
improper payments to bankrupt or non-participating providers prior to
the State's recovery from the providers. We also note that the Agency
approval here must be considered in the context of the entire State
plan, which defined allowable costs of the program, and which, after
November 22, 1976, incorporated the regulatory provision specifying
adjustment for overpayments found as a result of an audit no later than
the second quarter following the quarter in which the overpayments were
found. The State's argument that this plan provision was merely a check
on a preprinted State plan amendment form used by the Agency lacks
merit. Many State plan provisions are incorporated in this manner and
are no less a part of the State plan than any other provision. (13)
IV.Whether the status of these providers as bankrupt or
non-participating providers precludes adjustment.
A. Providers in bankruptcy proceedings
The State argued that it is not liable for that part of the
disallowance attributable to overpayments made to providers which
subsequently went bankrupt. The State contended that any overpayments
made to providers which are in proceedings before a bankruptcy court
have been discharged by the Bankruptcy Act and are therefore
uncollectable by the State.
In response the Agency argued that while bankruptcy proceedings may
discharge a providerhs debts to the State, they do not discharge the
State's obligations to the Agency. According to the Agency, "There is
no provision in this country's bankruptcy laws which relieve one debtor
from its obligations when it is not bankrupt simply because one of its
own debtors has been discharged in bankruptcy." (Agency's October 22,
1981 submission, p. 10) In support of its position, the Agency referred
to a bankruptcy proceeding, In re Idak, before the United States
Bankruptcy Court, District of Massachusetts. In that proceeding,
involving several nursing homes, the State sought to restrain the
Secretary of HHS from reducing the State's entitlement to FFP for
payments which the State made to the debtors under the Medicaid program.
HHS, having reimbursed the State for a percentage of the total Medicaid
payments made to the debtor nursing homes, asserted a right to recoup
the full federal portion of any overpayments made by the State to the
nursing homes. The State argued that HHS was not entitled to the full
share of such overpayments to the debtors. The State also sought a
determination from the court that, to the extent any part of its claim
against the debtors for Medicaid overpayments was discharged, the State
obligation to HHS resulting from such overpayments would likewise be
discharged.
In a May 21, 1981 Order Partially Dismissing Proceeding, the court
ruled that it lacked jurisdiction to grant the relief requested by the
State against HHS. The court declared:
The dispute between the (State) and the United States is in essence
simply between an alleged creditor of the debtors and a third-party
which has no impact on the debtors or on the Chapter XI (bankruptcy)
proceeding. (p. 3)
While it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, Congress gave each state participating in
the Medicaid program the authority to administer the program within the
(14) state. The matter before us concerns the State's administration of
its Medicaid program. It is the State's responsibility to expeditiously
recover any overpayments that may have been made. The Agency has no
direct role in the recovery of such overpayments. The Agency is not
unreasonable, therefore, in requiring the State alone to bear the burden
which may result from delays in the collection of overpayments from
providers, notwithstanding the fact that the providers might at some
time declare bankruptcy.
We conclude, therefore, that the Agency is entitled to recover from
the State the overpayments made to those providers which may have had
their obligation to the State discharged in bankruptcy proceedings.
B. Providers no longer participating in the Medicaid program
Nearly half of the disallowance represents overpayments to providers
no longer participating in the Medicaid program. The State claimed that
there were several mistakes in the disallowance letter as to what amount
was due from specific providers: 21 of the providers had repaid the
overpayments to the State which then remitted the federal share to the
Agency; the State had sued six of the providers and had obtained at
least a partial recovery; and numerous discrepancies in repayment
obligations existed between the amounts shown on the disallowance letter
and the State's preliminary analysis. (State's January 8, 1982
submission, pp. 4-5)
The State has not provided the Board with any legal arguments,
however, as to why the Agency should be required to wait for repayment
once there was a determination that overpayments had occurred. The
State's method of collecting the amounts owed by a provider through
offset against future payments was a means of recovering overpayments
from providers who remained in the Medicaid program. Recovery from
providers who dropped out of the Medicaid program may be more difficult
as it requires a further action by the State, such as suing for
recovery, but that does not excuse the State from refunding the federal
share to the Agency. The Agency, through 42 CFR 447.296, gives the
State adequate time to recover these overpayments. It is the State's
responsibility to recover these costs and it must bear the consequences
for failing to do so.
We find, therefore, that the Agency is entitled to require the State
to repay the federal share of overpayments made to providers no longer
participating in the Medicaid program. We leave it to the State and
Agency, however, to adjust the disallowance if the State has repaid some
of the amounts. (15) V. Whether the Agency had an adequate basis for
its determination that the excess payments constitute an overpayment.
The State took the position with respect to the meaning of
"overpayment" in 1903(d)(2) that --
the retrospective rate decrease is simply not "an overpayment . . .
which the Secretary determines was made . . . to such State . . ." The
overpayment arose out of a determination made by the Rate Setting
Commission, not the Secretary, after the Commission reviewed the
provider's cost reports and found that the Interim Rate was too high.
The overpayment resulting from that determination was made, not to the
State, but to the providers.
(State's December 24, 1980 brief, Ex. A-7, p. 6)
We agree with the State that the RSC's determination of a final rate,
lower than an interim rate, is not a determination by the Secretary that
an overpayment has been made to the State. Moreover, an amount which
the State has determined to be an excess payment by the State to a
provider is not always an overpayment for federal purposes (e.g., if the
State never claimed FFP in the original payment).
However, what we are dealing with here is the Agency's determination
that the State, having been paid FFP at an interim rate, which the RSC
has now determined to be too high under the State plan, has received an
overpayment of Title XIX FFP to the extent of the difference in the two
rates. This is a determination that the costs are unallowable for FFP
and requires adjustment unless reversed by the Board upon
reconsideration.
In examining an Agency disallowance determination, the Board has
required that such a determination, to be upheld, must be factually and
legally supported by the record. Where the Agency determination is
based on State audits or records, the sufficiency of the Agency
determination may depend on the reliability of those State audits or
records.
The State questioned the basis for the Agency determination in
general, as well as pointing to three specific alleged defects:
- The State contended that the disallowance was insufficient in that
HCFA had failed to point to any substantive provision in the statute
which supported the disallowance, since section 1903 merely deals with
the procedure for adjustment once an overpayment determination has been
made. (16) - The State argued that the Agency should not have used the
State's Account Receivable Ledger Cards because those records included
adjustments which resulted in changes from one interim rate to another
or from an interim rate to a final rate which was still subject to
adjustment on appeal.
- The State challenged the accuracy of the Agency's figures, stating
that its analysis showed that the amounts disallowed were wrong.
Based on our examination of the record, however, we have determined
that there is an adequate basis for the disallowance, both factually and
legally. The Agency determination here was based on the State's own
records, resulting from a process which the State itself has described
as follows:
When a retroactive rate decrease takes effect, the Retroactive
Nursing Home Unit calculates the amount attributable to the decrease and
enters that amount on separate records, one for each provider, known as
the Account Receivable Ledger Cards. At any given time, the sum of the
amounts shown on a provider's Account Receivable Ledger Card represents
the total amount which the Retroactive Nursing Home Unit will seek to
recover from the provider.
(State's December 24, 1980 brief, p. 31)
The Agency auditors used these Account Receivable Ledger Cards in two
specified categories (bankrupt providers and providers no longer
participating in the program), identifying the particular providers and
using the amounts shown on the cards. The amounts clearly related to
rates which had been determined, in accordance with the methodology set
out in the State plan, to be in excess of the rates payable under the
State plan for the services provided. While the Agency did not
initially cite the substantive provisions rendering these costs
unallowable, they were implied from the context and clarified in the
Agency's response to the appeal.
Although the State questioned the Agency's reliance on the Account
Receivable Ledger Cards, the State has not provided any evidence which
would convince us that that reliance was misplaced. The State's
proposed corrections to the Agency's figures for certain providers are
based on recoveries made by the State from the providers subsequent to
the time the Agency examined the records. State's January 8, 1982
submission. As the Agency pointed out, however, the fact that records
may be subject to later adjustment does not render (17) them unreliable
at any particular point in time. So long as the Agency makes
appropriate revisions to the disallowance amounts, as it has indicated a
willingness to do here, the State is not prejudiced by use of such
records. Moreover, the Account Receivable figures were derived from
State audits which the State was required to perform in accordance with
generally accepted accounting principles.
The State has also failed to convince us that any excess payment
amount reflected in these records derived from a merely tentative rate
determination on the part of the State, which might be revised upon
subsequent review, or that the records improperly included amounts
derived from interim to interim rate decreases. Although the State
purported to have evidence that some of the rate decreases here were
still under appeal, the State did not submit such evidence as it stated
it would. The summary analysis of State documentation (submitted by the
State to the Agency at a late stage in the Board's proceedings) contains
a column for "Appeals" in which there are no entries. Moreover, we
think it unlikely that there are any pending administrative provider
appeals concerning the rate decreases in question here given the lapse
of time since the RSC rate determinations.
With respect to the question of whether interim to interim rate
adjustments were improperly included, we are also unpersuaded by the
State's argument. The Agency reviewers described these overpayments as
relating to time periods for which the RSC had determined final rates,
and the State has presented nothing to contradict this. It is
reasonable to assume that the Account Receivable figures represented net
overpayments, taking into account proper adjustments for all interim and
final rates, given the State's system of records kept by the RNHU.
Thus, there is no reason for us to believe that the amounts in
question did not represent the State's final determinations as to the
amounts owed by these providers. /9/
VI. Whether the Agency's disallowance leter was sufficient.
The State argued that the Agency's notification of disallowance did
not meet the requirements of 45 CFR 201.14(b), in that it failed to set
forth either the dates or time periods on which FFP is alleged to (19)
have been claimed or the dates on which it was paid. The State claimed
that it was prejudiced throughout the proceedings before the Board by
the Agency's failure to supply further information on which the
disallowance was based. The State cited the Agency's failure to
attribute the disallowed amounts to particular quarters as one
significant example of the notification's deficiency. The State claimed
that various communications from the Agency made it impossible to
ascertain the exact date of the review and the periods covered by
disallowance. The State further objected to the Agency's use of a 50%
rate for FFP in the disallowance letter as the standard throughout the
whole time period covered by the disallowance since the federal medical
assistance percentage (FMAP) changed several times during the time
period in question. The State said that the 50% rate ceased being
effective on October 1, 1977 when the rate was changed to 51.62%. The
State contended that the notification of disallowance thus did not
adequately set forth a claim for a disallowance and that the Board
should therefore dismiss the disallowance.
The State is mistaken in its initial argument that the notification
of disallowance had to comply with the requirements of 45 CFR 201.14.
The March 6, 1978 transfer to the Board of jurisdiction over
reconsideration of disallowances stated that all appeals of
disallowances after that date would be governed by the Board procedures
set forth at 45 CFR Part 16. The Board rules in effect when this
dispute arose state a notification must "set forth the reason for the
determination in sufficient detail to enable the grantee to respond . .
. ." 45 CFR 16.5(b)(1) (1979) The notification of disallowance issued by
the Agency identified the regulations and statutory provisions on which
the disallowance was based. The notification also contained a breakdown
of the disallowance for each provider, showing the provider's
identification number. We find that this was sufficient to meet the
requirements of 45 CFR 16.5(b)(1) and provided the State with adequate
information to respond to the disallowance. We also note, as the Agency
has pointed out, that all the information on which the disallowance was
formulated was gathered from the State's own records, particularly the
Account Receivable Ledger Cards.
As to the State's assertion that the Agency improperly used only the
50% FMAP to calculate the disallowance for the entire period in
question, we agree with the agency that the use of this one rate
actually benefited the State in the calculation of any possible
disallowance. For example, the Agency could have disallowed any FFP
claimed after October 1, 1977 at the 51.62% FMAP rate. It is within the
Agency's discretion not to disallow at the fullest possible amount if it
is administratively convenient to apply one consistent rate. Thus we
find that the State was not prejudiced by the Agency's use of the 50%
FMAP. (19) VII. Whether an earlier disallowance is res judicata with
respect to part of the disallowance here.
In its latest submission to the Board, the State raised as an
additional ground for reversing part of the disallowance before us --
That for the two year period 1971 and 1972, HCFA has already
disallowed the federal share of rate decreases as set forth in Exhibit D
of the State's december 24, 1980 submission. That disallowance is res
judicata as to the present disallowance: . . . .
(State's January 8, 1982 submission, p. 3) /10/
Exhibit D, to which the State refers, is a letter from the Acting
Administrator of the Social and Rehabilitation Service (SRS) to the
State, upholding a disallowance of FFP in amounts found to represent
unrecovered payments to providers in excess of the allowable
reimbursement rates. This decision, dated February 22, 1977, was the
result of a reconsideration by the Acting Administrator under 45 CFR
201.14, of a disallowance by the Regional Commissioner, SRS. The Acting
Administrator recognized that, subsequent to the audit which identified
the excess payments, the State had instituted its collection system and
had recovered some of the excess payments. Therefore, the Acting
Administrator requested the Regional Commissioner to determine the
amount to be recovered and to deduct the proper amount from the State's
grant award. (p. 3) The decision noted that, as of March 23, 1976, a
balance of $202,371 in FFP had not yet been recovered and credited to
the federal government.
We agree with the State that this decision would be res judicata with
respect to the issue of whether any excess payments covered by the
Acting Administrator's decision were allowable. The Acting
Administrator determined, however, that they were not allowable. The
State as part of its argument on another point appeared to rely (20) on
a statement by the Regional Commissioner, made during the
reconsideration proceedings for this earlier disallowance, to the effect
that, since the State had instituted collection procedures, the
disallowance should be withdrawn. (State's December 24, 1980 brief, Ex.
D-11) The record shows, however, that the Acting Administrator did not
adopt this position, but upheld the disallowance.
The critical issue, therefore, is whether the State has repaid the
federal share of the identified unallowable payments, in accordance with
the Acting Administrator's decision. If so, and if the State could show
that some of the amounts here duplicated those amounts for which there
has already been an adjustment of FFP, the disallowance here should be
reduced accordingly. We consider this, therefore, part of the question
of the correct quantum of the disallowance. There is no reason to
assume that the Agency will not make the proper adjustment if the State
can show that there was, in fact, some duplication of the amounts
covered by the Acting Administrator's decision and that the State made
the corresponding adjustment of FFP. Since the State has not yet made
such a showing, we do not consider this a reason for overturning any
part of the disallowance. However, the Agency should consider any
documentation submitted by the State on this point, and, if the parties
cannot agree on this matter, the State may further appeal it to the
Board.
VIII. Whether the Agency should have instituted a compliance action
here rather than a disallowance.
The State argued that the dispute raised by the Agency's
determination was not a disallowance, but rather a question of program
compliance required to be resolved pursuant to section 1904 of the Act.
The State contended that the Board was therefore not the appropriate
forum to review this determination as, while the Board has jurisdiction
over disallowances arising under section 1116(d), the Board does not
have jurisdiction over section 1904 compliance matters.
Both parties submitted extensive briefing on this subject. The Board
Chair considered the merits of these arguments when he issued his
September 18, 1981 Ruling on Jurisdiction. That Ruling, while declaring
that the distinctions between compliance and disallowance issues are
often not clear-cut and that the same set of facts could arguably call
for either of the procedures, nevertheless held that the facts presented
in this case could reasonably be interpreted as a disallowance. The
Chair found that there was no determination that the State's rate
methodology to providers involved a substantial noncompliance with the
provisions of the Social Security Act requiring a hearing under section
1904. Rather, the Chair found that the Agency had determined that
specific payments to certain providers were unallowable costs and that
this determination thus met the criteria for a "disallowance." (21)
Recently, in New Jersey Department of Human Services, Decision No. 259,
February 25, 1982, the Board examined the compliance/disallowance
question in detail, and we refer the parties to that Decision for an
extended discussion of the issues. The Board there reviewed the
statutory distinctions between these Agency procedures and the court
treatment of the issue, including several recent decisions by the Third
Circuit Court of Appeals, in which the State of New Jersey sought
appellate review of several Board decisions. The Third Circuit stated
that a court of appeals, in determining whether it is an appropriate
forum for review of an action by the HHS Secretary, should not be bound
by the label the Secretary puts on his action, but rather should
"conduct an independent evaluation of the underlying substance of the
dispute." State of New Jersey v. Department of Health and Human
Services, Nos. 80-2809, 81-1400, 81-1445, 81-2147, and 81-2240 (3rd Cir.
Dec. 28, 1981, slip op. at 18) In light of the Board's Neww Jersey
decision, we have re-examined what is "the underlying substance of the
dispute" here and continue to believe that the Agency could within its
discretion take a "disallowance," thereby making the Board the
appropriate forum for review of the Agency's action.
In order for there to be a compliance question, there must be a
finding by the Secretary that a state has failed to comply substantially
with a provision of its State plan. Even though the State was not
meeting one of the requirements of its state plan here, we conclude that
the Secretary could reasonably have found that there was no question of
substantial noncompliance by the State. The Agency's determination
covered only a relatively small segment of the State's whole rate
methodology and reimbursement system, namely the recovery of excess
payments from those providers who had ceased participating in the
Medicaid program or had gone bankrupt. Furthermore, there was no
finding that the ultimate program beneficiaries, the Medicaid
recipients, were in any way affected by the questioned State practice.
Further, we do not believe that the State has been prejudiced here by
Board review of the Agency's action because the State has been given a
full opportunity to present its legal arguments. With respect to the
adequacy of the Board's procedures even in a compliance context, the
court in New Jersey v. Department of Health and Human Services, No.
80-2438 (3rd Cir. Feb. 5, 1982), stated:
We find nothing in the Act or its legislative history that precludes
our treating the Grant Appeals Board's action on behalf of the Secretary
in this dispute as a "final determination" rendered after an
"opportunity for hearing" sufficient to satisfy the requirements of
(section 1904) and thereby vest jurisdiction in this Court under
(section 1116(a)(3)). Slip op. at 18 n. 13) (22) Although the Board did
not provide the State with an evidentiary hearing in this case, we
believe that the State had sufficient opportunity to present its legal
arguments on the issues. While the State did request a hearing to
clarify the dates and rates involved here, we believe that any such
information concerns only the question of the disallowance amount which
we have left to the parties to resolve and not the underlying
substantive legal issues. The quantum of unallowable costs would not in
any event have been at issue in a compliance proceeding.
Conclusion
For the reasons stated above, we sustain the disallowance. Since the
State may have already paid back the federal share of some of the excess
payments, however, the Agency should provide a reasonable opportunity to
the State to provide documentation of any such repayment. After
reviewing any documentation submitted by the State, the Agency should
recalculate the amount of the disallowance, notifying the State in
writing if the Agency disputes the State's figures concerning how much
has been repaid. The State may then appeal this determination to the
Board solely on the issue of how much has been repaid. Nothing in this
decision precludes the Agency from adjusting for the federal share of
any excess payments not claimed by the State to have been repaid, while
the Agency is reviewing the documentation. /1/ Although the State did
not use precisely this methodology for the entire period in
which these payments were made, previous systems also gave rise to a
need for adjustments, and to possible excess payments. The State has
pointed to nothing which would make our legal analysis less applicable
to these earlier excess payments. /2/ Section 1902(a)(30) requires that
a State plan provide "methods and procedures relating to . . .
the payment for, care and services available under the plan . . . and to
assure that payments . . . are not in excess of reasonable charges
consistent with efficiency, economy, and quality of care; . . . ."
Effective July 1, 1976, a State plan had to provide for payment of
nursing home 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." Section 1902(a)(13)(E). The State alleged that, since its
State plan amendment implementing section 1902(a)(13)(E) was not
effective until October 1, 1977, excess payments made prior to that date
could not be disallowed. However, as indicated in footnote 1 above, the
State has not shown any basis for distinguishing payments determined by
the State to be excess payments using other State plan methodologies,
set out under 1902(a)( 30), from the reasonable cost-related methodology
used after October 1, 1977. /3/ We also note that it is Agency
practice in disallowance letters to direct a state to make an FFP
adjustment if it does not contest the disallowance. /4/ The
State did not dispute the Agency's claim that it had this longstanding
interpretation and practice. In fact, the record shows that the State
had notice of this interpretation as least as of February 22, 1977.
State's December 24, 1980 brief, Ex. D-1. /5/ In our decision in
California Department of Health Services, Decision No. 244, December 31,
1981, we discussed the effect of section 1903(d)(3) on the issue of
whether a difference between an interim and final rate of reimbursement
can be considered an overpayment prior to recovery and reached the same
conclusion. However, we have not here relied solely on our analysis in
Decision No. 244 but have reexamined the issue in the context of this
case and Massachusetts' system of reimbursement. /6/ The State
argued that 42 CFR 447.296 was not adopted until July 6, 1976 and that,
therefore, excess payments made prior to that date could not be
disallowed. The State is correct that no regulation existed prior to
July 1, 1976 specifying when the State must account for excess payments
determined as a result of cost settlement audits. However, the State is
not correct concerning the absence of a substantive basis for the
disallowance prior to that date. Under the statute, these costs are
unallowable and, without the regulation, the Secretary may adjust for
the federal share of such excess payments as soon as he determines that
it constitutes an overpayment to the State. /7/ The quarterly
statement of expenditures is described in Department regulations as
follows: This is an accounting statement of the disposition of Federal
funds granted for past periods and provides the basis for making the
adjustments necessary when the State's estimate for any prior quarter
was greater or less than the amount the State actually expended in that
quarter. The statement of expenditures also shows the share of the
Federal Government in any recoupment, from whatever source, of
expenditures claimed in any prior period, and also in expenditures not
properly subject to Federal financial participation which are
acknowledged by the State agency or have been revealed in the course of
an audit. (45 CFR 201.5(a)(3)) /8/ While the Agency does pay the
State for claims for FFP for payments to providers based on an interim
rate which is merely an estimate, this payment is only tentative.
Payment of the estimate is consistent with the general Title XIX scheme
of advance payment to states based on estimates. Section 1903 of the
Act. Willingness to pay based on an estimate cannot be considered
tantamount to willingness to continue to bear the cost differential
between an estimated and final payment, however. As with other advances
based on estimates, we think the Agency properly sought an adjustment
here. /9/ We also that the State itself considered any rate
filed by the RSC with the Secretary of State to be a sufficient basis
for recovery from the provider. See, State's December 24, 1980 brief,
p. 31. /10/ The State requested an additional extension of time
to brief this and other issus, arguing that the State became aware of
the facts underlying these issues only after it had completed its more
detailed analysis of the records. The requested extension was denied
for a number of reasons, including that the State had had the duty to be
aware of sufficient facts to raise the issues prior to that submission.
Board's February 12, 1981 Ruling, p. 2. However, as we indicated in
our ruling denying the requested extension, we have considered all
issues raised by the State, based on the record before us.
OCTOBER 22, 1983