Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: New York State Department of Social Services
DATE: March 13, 1991
Docket No. 89-109
Audit Control No. A-02-87-01032
Decision No. 1235
DECISION
The New York State Department of Social Services (New York) appealed
the
decision of the Health Care Financing Administration (HCFA)
disallowing
$8,162,625 in claims for federal funding under Title XIX
(Medicaid) of
the Social Security Act for the period January 1, 1985 through
December
31, 1985.
As authority for this disallowance, HCFA relied on Office of
Management
and Budget (OMB) Circular A-87 which contains cost principles
for
determining whether costs incurred by state governments are allowable
as
charges to federal programs. Attachment A, C.1.b. of that
circular
requires that allowable costs be "authorized or not prohibited
under
State or local laws or regulations." HCFA determined, on
the basis of
an audit by the Office of Inspector General (OIG), that New York
had
reimbursed outpatient mental health care providers for services
which
violated New York's own Medical Assistance Program regulations.
HCFA
contended that such reimbursement was not eligible for Title XIX
funding
because it was not authorized or was prohibited by State
regulations.
We uphold this disallowance on the grounds that HCFA could
reasonably
conclude that the costs of services which violated the standards
set
forth in New York's mental health outpatient regulations were
not
allowable under OMB Circular A-87. We base this finding on the
language
of New York's regulations which require a provider to comply with
the
regulations in order to be entitled to payment and on the fact that
New
York itself relies on these regulations in imposing overpayments
on
providers.
I. Background
The State of New York participates in the Medicaid program pursuant to
its
state plan as approved by the Secretary of DHHS under section
1902(a) of the
Act and pursuant to New York Social Services Law Section
363 et seq.
(McKinney 1983). The New York State Department of Social
Services (DSS)
is the single state agency under the state plan
responsible for supervision
of New York's Medicaid program, also known
as the Medical Assistance
Program. The Office of Mental Health (OMH) is
the program agency which
supervises the overall administration of the
outpatient mental health
services component of the Medical Assistance
Program. New York Exhibit
(Ex.) 4, at 1.
As the agencies responsible for the Medical Assistance Program's
mental
health outpatient services, DSS and OMH promulgated a set of
regulations
which establish comprehensive standards for program operation
and
reimbursement for outpatient mental health services. 1/ The
regulations
concern matters such as certification requirements, treatment
plan and
progress notes standards, definitions of programs and covered
services,
duration standards for services, fee schedules, staff
qualifications,
staffing requirements, admission standards, case record
standards,
utilization review standards, and physical premise
standards. Under the
regulations, the services must comply with these
standards in order to
be eligible for Medical Assistance Program
reimbursement. 2/
These regulations effectuate basic requirements of the Medicaid
program
that the state plan: "provide such methods and procedures relating
to
the . . . payment for . . . care and services . . . to
safeguard
against unnecessary utilization of such care and services and to
assure
that payments are consistent with efficiency, economy, and quality
of
care . . . ." (Section 1902(a)(30)(A) of the Act), and that the
state
plan provide for agreements with every provider of services under
which
the provider agrees "to keep such records as are necessary fully
to
disclose the extent of the services provided to individuals
receiving
assistance . . . ." (Section 1902(a)(27)(A) of the Act).
More particularly, a portion of these state regulations parallel
and
effectuate a set of HCFA manual provisions concerning outpatient
mental
health services. See State Medicaid Manual, Section 4221.
The manual
provisions set standards for (1) evaluating the patient for
program
participation; (2) developing an individual plan of care which
describes
the treatment regimen, the projected schedule for service delivery,
the
type of personnel that will be furnishing the services, and a
schedule
for reevaluating the patient and plan of care; (3) documenting
the
services for which Medicaid is billed including a description of
the
specific services rendered, the date and time, who rendered
the
services, the treatment setting, the amount of time, the relationship
of
the services to the plan of care, and descriptions of the
patient's
progress; and (4) periodic review of the plan of care.
These provisions were added to the State Medicaid Manual because ---
[p]roblems have sometimes arisen regarding outpatient
programs
which inappropriately billed Medicaid for chance,
momentary
social encounters between a therapist and a patient as if
they
were valid therapeutic sessions. There have also been
instances
of billing for services without sufficient documentation
to
establish that the services were clearly related to
the
patient's psychiatric condition. With the ongoing effort
to
encourage furnishing psychiatric treatment in the
least
restrictive setting possible, there is an increasing need
for
coverage guidelines specifically directed at
outpatient
programs. Section 4221.A.
Therefore, the purpose of these federal guidelines was to "help to
ensure
appropriate utilization with regard to outpatient
psychiatric
programs." Id.
OIG instituted an audit to ascertain whether providers were complying
with
the State regulations, and, hence, whether the State was properly
reimbursing
providers and claiming federal funding for such
reimbursements. The
audit covered services rendered in calendar year
1985 that were paid as of
July 7, 1986.
In its review of provider compliance with these regulations, the
OIG
grouped the overpayment violations into 13 categories. These
categories
were: (1) treatment plans which were not prepared, not signed
by
physician, not completed within prescribed time limits, or not
reviewed
quarterly or semi-annually; (2) progress notes which were not
entered or
which were inadequate; (3) providers who claimed for
uncertified
programs; (4) failure to document the duration of the patient's
visit;
(5) claims for services that were not rendered; (6) services which
were
not eligible for reimbursement; (7) reimbursement which exceeded
the
rate schedule for the type and duration of service rendered; (8)
failure
of documentation to support certain claims; (9) home and crisis
visits
which were improperly claimed; (10) inpatients who were
improperly
claimed as outpatients; (11) improper claims for off-site
services; (12)
excessive pre-admission visits; and (13) a claims processing
error.
OIG used the following audit methodology. The auditors identified a
set
of mental health outpatient claims totaling $57,353,630 in
federal
funding made by 310 providers on behalf of 117,002 clients.
From that
audit universe, the auditors selected, on a random basis, 210
clients
who received services at 111 providers. These providers
received
payment for 4,165 claims totalling $170,087, of which the federal
share
was $85,041. The auditors found that $29,295 of this amount
was
unallowable because of violations of the state regulations.
By
projecting the results of this review to the universe of payments
for
outpatient mental health services for which New York claimed
federal
funding, the OIG auditors identified $13,062,445 in claims as
being
unallowable. 3/ Subsequent to the issuance of the disallowance
and
filing of this appeal, the parties engaged in lengthy
settlement
negotiations concerning disputed findings in the sample
cases. As a
result of these negotiations, the parties entered into a
Stipulation of
Partial Settlement on June 20, 1990 which reduced the
disallowance by
$4,899,820 for a total of $8,162,625. 4/ Thus HCFA
ultimately concluded
that 14 percent of the federal funding at issue had been
claimed for
services which violated regulations.
II. Analysis
New York presented five arguments as to why this disallowance should
not
be upheld. New York argued:
o There are no statutory or regulatory provisions
which
authorize HCFA to conduct audits designed to enforce
state
regulations.
o HCFA's use of statistical sampling in calculating the
amount
of the disallowance was unreasonable since it precluded New
York
from recovering the alleged overpayments from providers.
o The overpayments were "uncollectable" under
section
1903(d)(2)(D) of the Act.
o The payments at issue were "authorized or not
prohibited"
under New York law.
o The disallowance was based on an audit which did not
conform
with federal audit standards.
Each of these arguments is considered below.
A. Pursuant to OMB Circular A-87, HCFA
may conduct an audit
to determine whether payments have been made in
violation of
state regulations and may disallow federal funding on the
basis
of such an audit.
New York argued that there are no statutory or regulatory provisions
which
expressly authorize the federal government to conduct audits
designed to
enforce state regulatory standards. New York asserted that
HCFA's
action is therefore ultra vires, and unreasonable as a matter of
law under
Service v. Dulles, 354 U.S. 363 (1957). 5/
We conclude that HCFA clearly had the authority to conduct this audit.
For
the programmatic and fiscal integrity of Title XIX and for the
protection of
Medicaid recipients, the federal government has a
legitimate interest in
ensuring that a state complies with its own
Medicaid program
regulations. This interest is particularly fundamental
where, as here,
the regulations effectuate basic program requirements in
the statute and the
State Medicaid Manual designed to ensure that Title
XIX funds are properly
spent. 6/
The terms of the Act and related federal regulations reflect the
federal
agency's interest. Pursuant to sections 1116(d) and
1903(d)(2)(A) of
the Act, the Secretary is authorized to determine if items
claimed by a
state pursuant to Title XIX should be disallowed under program
standards
and to recoup any overpayments of federal funds. The Medicaid
program
standards include the general principles for determining allowable
costs
set forth in OMB Circular A-87. 45 C.F.R. 74.171. That
circular
authorizes the federal grantor agency to make the determination
whether
the costs of a program comply with the cost principles. While
the cost
principle at issue here involves the application of state laws,
OMB
Circular A-87 still makes the federal grantor agency the final
arbiter
of whether the costs are "authorized or not prohibited" and this
role
necessarily encompasses the audit authority to consider and to
apply
state law. See also New York State Dept. of Social Services, DAB
No.
1112 (1989).
Further, the provisions found at 42 C.F.R. 430.32(a) and 430.33(a)(2)
make
it clear that the Secretary's audit authority encompasses the right
to review
a state's compliance with state as well as federal program
standards.
7/ These regulations specifically authorize DHHS to conduct
program
reviews and audits to ascertain whether a state has complied
with federal and
state program requirements. 8/ Section 430.33 of 42
C.F.R.
provides:
(a) Purpose. The Department's Office of Inspector General
(OIG)
periodically audits State operations in order to
determine
whether --
* * *
(2) Funds are being properly expended for the purposes
for
which they were appropriated under Federal and State law
and
regulations.
In such an audit, the OIG recommends findings on the allowability of
the
audited costs and the cognizant DHHS officials then make a
final
determination on these audit findings. 42 C.F.R. 430.33(b)(2) and
(3).
Therefore, under these regulations, we find that HCFA may
audit
providers' compliance with state regulations and take a
disallowance
pursuant to OMB Circular A-87.
B. The methodology HCFA used to calculate
this disallowance
was reasonable.
New York argued that HCFA's use of statistical sampling in calculating
the
disallowance was inherently unreasonable since New York could not
necessarily
duplicate HCFA's results and recover the alleged
overpayments from
providers. The methodology used by HCFA involved
identifying the
universe of federal funding for outpatient mental health
claims, looking at a
sample number of cases to establish what portion of
the claims was erroneous,
and then applying that factor against the
universe to arrive at a
disallowance figure. This methodology
identified a dollar amount but
not the name of every provider that
violated the regulations or the amount
each was overpaid.
New York contrasted HCFA's approach with its own system of
recovering
overpayments through provider-specific audits in which providers
are
entitled to a full range of due process protections,
including
administrative hearings and judicial review of DSS' decisions.
9/ 18
N.Y.C.R.R. Pts. 517, 518. Because New York would have to
undertake
individual audits of its providers, New York represented that it
would
have to spend almost two dollars in audit costs for every one dollar
it
recovered in order to replicate the result of HCFA's audit (New York
Ex.
5) and that this would contravene its duty under 42 C.F.R. 431.15
to
administer the program in an efficient manner. New York argued
that
HCFA's approach and continued reliance upon this type of audit will
have
a catastrophic fiscal impact on the State's Medicaid program.
We reject New York's argument that HCFA's audit approach
is
unreasonable. The Board has repeatedly upheld the use of
valid
statistical sampling results as evidence of the amount of
unallowable
costs. "Typically sampling is used when a claim for federal
funds is
based on the sum of numerous cost items (each subject to proof
of
allowability), because it is impossible, or at least costly
and
impractical, to examine each item . . . . If done in accordance
with
accepted rules . . . the extrapolated finding has a high degree
of
probability of being close to the finding which would have resulted
from
consideration of all the cost items." See California Dept. of
Social
Services, DAB No. 816 (1986); California Dept. of Social Services,
DAB
No. 524 (1984); Ohio Dept. of Public Welfare, DAB No. 226 (1981),
and
authorities cited therein. The circumstances in this case,
numerous
claims and questions concerning compliance with a discrete set
of
regulatory standards, are exactly the kind that are appropriate
for
statistical sampling.
Further, even though HCFA's disallowance of federal funding was based
on
an OIG audit using statistical sampling, New York had the option
from
the very outset to recover the disallowed funding from its
providers by
recouping the provider overpayments that gave rise to this
disallowance.
The OIG audit and HCFA's disallowance determination concluded
that the
State had reimbursed its providers for services that should not
have
been billed to the State's Medicaid program under the State's
own
regulations. Thus, the State was entitled to recoup from its
providers
not only the federal share of the overpayments (which was reflected
in
this disallowance) but also the State share. Although New York
argued
at length concerning the cost and difficulty associated with
recoupment
of the provider overpayments here, the State overlooked
significant
factors and made unsubstantiated assumptions. For
example:
o The State speculated about the financial
calamity which would
befall it if HCFA routinely
used this audit approach on the claims
of every one
of its Medicaid providers. However, the
disallowance
here involved a discrete category of
services for a discrete period
of time that the OIG
had singled out for audit.
o The State based its cost estimates for the
recovery of the
entire amount of the disallowance on
the cost of auditing every
single mental health
outpatient provider in the program. The
State,
however, did not address whether it could reduce the
administrative costs of recoupment by adopting more
efficient
methods, such as performing probe audits
to determine the providers
who had the most
violations and proceeding against only those
providers.
o HCFA here used the lower end of the
confidence interval for
projecting errors to the
universe of cases. Thus the actual level
of
violations is probably considerably higher than the
federal
disallowance reflects, so that the State
could recover the
disallowed amount without auditing
every provider.
o The State's administrative cost estimates do
not reflect the
preventive benefits which accrue
from audits of providers in
addition to the actual
recoupment of erroneously reimbursed claims.
Any
audits by the State concerning the services in question
would
publicize the rules on reimbursement and serve
as a disincentive
for future errors in claims from
providers. Moreover, although the
State
emphasized the difficulties of providing due process
protections to audited providers, it did not substantiate
the
likelihood of lengthy administrative hearings or
of judicial
appeals for the types of issues raised
here. The State and HCFA
were able to resolve
all of their disputes concerning sample cases
without any Board intervention.
o Audit costs for recovery of provider
overpayments are generally
reimbursable under the
program.
Thus, we do not agree with the State's assumptions concerning
the
"catastrophic" fiscal effect of this disallowance based on the
State's
alleged inability to recoup overpayments from its providers.
Nevertheless, even if New York were not able to recover the entire
amount
of disallowed funding from its providers, that clearly would not
make this
audit and disallowance unreasonable. This Board has
repeatedly held
that, under section 1903(d)(2), HCFA may require
adjustment of the grant
award for the federal share of firmly
established overpayments, even if a
state has not recovered these
amounts from the providers. 10/ In these
cases, states have repeatedly
argued that actual recovery of the overpayments
would be difficult,
impractical or impossible. 11/ States have argued,
as New York did
here, that placing the full burden of unrecoverable
Medicaid
overpayments on the state is inconsistent with the nature of
the
Medicaid program as a federal-state partnership, as discussed in
the
case of Harris v. McRae, 448 U.S. 297 (1980). The Board has
considered
these arguments and concluded that, in light of the fact that the
states
have primary responsibility for administering the program and
preventing
or recouping improper payment in the first instance, it is
consistent
with the partnership concept to place the risk of loss for
unrecoverable
payments on the states. New York, supra; Michigan,
supra;
Massachusetts, supra; Georgia, supra. The Board's prior holdings
on
overpayments issues have been upheld in three decisions by United
States
Courts of Appeals: Massachusetts v. Secretary, 749 F.2d 89 (1st
Cir.
1984), cert. denied, 472 U.S. 1017 (1985); Perales v. Heckler, 762
F.2d
226 (2d Cir. 1985); and Missouri Department of Social Services v.
Bowen,
804 F.2d 1035 (8th Cir. 1986).
The policy rationale supporting those prior cases applies here.
New
York may be reimbursed only for costs which represent
"medical
assistance" under the Medicaid program. New York is the
primary
administrator of the Medicaid program; it has the responsibility
of
designing appropriate and enforceable billing procedures and
of
educating and monitoring its providers to ensure that they are
complying
with those procedures; it has the responsibility to penalize them
when
they fail to comply and to recover excess and erroneous
payments.
Except as discussed below, however, the State's actual ability
to
recover these overpayments is irrelevant to the question of whether
the
State is entitled to federal funding.
In rebuttal to this line of cases, New York offered the
following
additional arguments: first, that these cases involved
overpayments
which were "firmly established;" second, that, since the
federal
government had assumed a direct role in auditing the providers, it
was
no longer "powerless" in regard to this process and this power should
be
exercised reasonably; and third, that this overpayment did not
fall
within the Board's prior definition of overpayment.
New York argued that Massachusetts, supra; New York, DAB No. 311,
supra,
and Ohio, supra, had no precedential value in this case because
the
Board had found that the overpayments were "firmly established" in
those
cases. New York argued that, since neither the providers nor the
claims
were identified in the audit process in this case, this overpayment
was
not "firmly established."
New York is correct that the Board has required that provider
overpayments
be "firmly established" prior to recoupment by HCFA.
However, the term has
been used to mean that the state audit process
establishing provider
overpayments was sufficiently reliable and final
to serve as a reasonable
basis for a disallowance where HCFA itself had
not made an independent
determination that the providers had been
overpaid. Ohio, supra at
12-13. The Board has not used the term to
mean that every dollar in a
disallowance must be linked to an overpaid
provider or recipient. Such
a construction would eliminate the use of
statistical sampling which the
Board has consistently upheld as an audit
technique.
New York tried to distinguish this line of cases on the grounds that
here
the federal government had assumed an active role in auditing the
State's
providers for compliance with state rules and was no longer
"powerless" in
its relationship with the providers as it was found to be
in
Massachusetts. New York argued that since HCFA assumed the power of
the
state it should have to exercise that power reasonably.
We cannot agree that HCFA has acted unreasonably in this audit.
First,
we note that HCFA was not assuming the State's role of ensuring
provider
compliance. Rather, HCFA was properly fulfilling its role to
ensure
that the costs claimed by the State were allowable and
its
responsibility to see that states administer this joint
federal/state
program in accordance with program requirements. This
responsibility
encompasses the authority to review providers' compliance with
program
requirements. 12/ But HCFA's action is not at all a usurpation
of the
State's responsibilities to prevent improper payment to providers in
the
first instance and to recover provider overpayments if necessary.
Finally, New York argued that the facts in this case do not fall
within
the Board's prior definition of "overpayment." New York cites
the
language in New York, DAB No. 311, at 3, that an overpayment within
the
meaning of section 1903(d) of the Act is "any payment made to a
state
and later determined by the Secretary to be unallowable, that is, not
in
accordance with federal program requirements." 13/ New York
contended
that only State standards are at issue in this case and that
the
payments do not contravene a specific federal regulation or policy.
As discussed above, these payments violate the federal program
requirement
found in OMB A-87 Circular that payments be authorized or
not prohibited by
state regulation. This general cost principle is one
of the federal
Medicaid program requirements. Therefore, New York's
assumption that no
federal program requirement has been violated is
incorrect. Further, as
discussed above, these state regulations
implement basic Medicaid principles
concerning utilization of care,
economy, quality of care, and documentation
of services and a specific
set of federal policy guidelines designed to
prevent the types of abuses
in expenditure of Medicaid funds that were
evident in this audit.
C. Section 1903(d)(2)(D) of the Act does
not bar HCFA from
recouping these overpayments.
New York argued that section 1903(d)(2)(D) of the Act bars HCFA
from
recovering these overpayments. Section 1903(d)(2)(D) of the
Act
provides:
In any case where the State is unable to recover a debt
which
represents an overpayment (or any portion thereof) made to
a
person or other entity on account of such debt having
been
discharged in bankruptcy or otherwise being uncollectable,
no
adjustment shall be made in the federal payment to such State
on
account of such overpayment (or portion thereof).
New York asserted that all these overpayments should be
considered
"uncollectable" within the meaning of section 1903(d)(2)(D)
because of
the audit cost and administrative difficulty of recovering
such
overpayment.
Based on the plain language of the enacting statute, the Board
has
previously held that section 1903(d)(2)(D) applies to
overpayments
identified for quarters beginning on or after October 1,
1985.
Michigan, supra, at 7; California Dept. of Health Services, DAB No.
977
(1988), at 4; New York, supra, at 10. Therefore, to the extent
that
these overpayments occurred in quarters prior to October 1,
1985,
section 1903(d)(2)(D) is not relevant.
As to the portion occurring after that date, we reject New York's
broad
construction of section 1903(d)(2)(D). 14/ The language and
legislative
history of this provision indicates that Congress was trying to
protect
states in cases in which providers had filed for bankruptcy or gone
out
of business and thereby made the debt uncollectable. It does
not
support New York's position that Congress was attempting to
protect
states in a broad spectrum of situations in which a state might
insist
that it could not recover an overpayment.
While the language of the statute is susceptible to
multiple
interpretations, the positioning of the phrase "or otherwise
being
uncollectable" after the reference to discharge in bankruptcy
implies
that Congress meant to limit the concept of "uncollectable"
to
circumstances related to the solvency of the provider. Further,
the
broad reading the State gives the term "uncollectable" makes
Congress's
inclusion of bankrupt providers superfluous. Since it is
appropriate to
try to give effect to all parts of a statute, it is reasonable
to assume
that Congress intended to limit the protection of "uncollectable"
to
circumstances in which the State was unable to recoup the
overpayment
from the provider because of the condition of the provider.
This interpretation of the statute is also supported by its
legislative
history and is consistent with HCFA's implementation. The
legislative
history provides: "The provision would provide that a State
is not
liable for the Federal share of overpayments which cannot be
collected
from bankrupt or out-of-business providers." S. Rep. No. 146,
99th
Cong., 1st Sess. 314-15 (1985). Moreover, HCFA has
consistently
construed debts "otherwise being uncollectable" as debts of
providers
who are "out of business." The Preamble to Final Rule, 54
Fed. Reg.
5456 (February 3, 1989) provides: "A State would not be
liable for the
refund of the Federal share of an overpayment if the provider
is out of
business and the overpayment is not collectible under State law
and
administrative procedures." See also 42 C.F.R. 433.318; and the
Notice
of Proposed Rulemaking, 52 Fed. Reg. 48290 (December 21, 1987).
Here, the State was given credit for sample cases where it identified
the
providers as out-of-business. The State pointed to nothing in
the
language or legislative history of the statute which would support
a
reading that overpayments should also be considered uncollectable
simply
because the state finds it not cost effective to pursue them.
To
interpret the term "uncollectable" to include any instance where a
state
asserts that it would not be cost effective to collect
provider
overpayments would substantially undercut the general principle
that
federal funding is available only for authorized medical
assistance
under the state plan.
For the foregoing reasons, we reaffirm our previous holdings that
section
1903(d)(2)(D) is limited to cases in which providers have filed
for
bankruptcy or gone out of business and thereby made the
debt
uncollectable.
D. These costs were not authorized or were prohibited under
New
York law.
The State argued that until its Commissioner of DSS made a
final
determination that these costs violated the regulations and that
an
overpayment should be imposed on the provider, the costs were
authorized
or not prohibited and did not violate OMB Circular A-87. New
York based
its argument on its regulatory scheme for adjudicating and
imposing
overpayment sanctions. It represented that under those
regulations, a
finding of a violation of the mental health outpatient
regulations did
not result in an overpayment until a decision was made by
the
Commissioner to impose a sanction. It maintained that the
Commissioner
had the discretion to allow payment even when the provider had
violated
these regulations and therefore the payments at issue were
authorized or
not prohibited. 18 N.Y.C.R.R. 515.3, 516.1, and
517.1(b).
We reject this argument for the following reasons:
o Under New York's outpatient mental health
regulations, a
provider must comply with the
standards set forth in the
regulations before it is
entitled to payment. See footnote 2.
Therefore, when the provider has not complied with the
regulations,
payments are plainly not authorized or
are prohibited under the
terms of the state
regulations.
o While the New York administrative
adjudication system does
appear to allow the
Commissioner discretion subsequently to decline
to
impose an overpayment sanction where a provider has not
complied
with state regulations, this discretion
does not change the
fundamental fact that, under the
terms of New York's outpatient
mental health
regulations, providers are not entitled to payment
if
they do not comply with these regulations.
15/
o New York admitted that the Commissioner had
no standards for
exercising discretion and excusing
compliance with the regulations.
New York
represented that standards were inappropriate
because
overpayments arise in "an infinite number of
factual and legal
contexts" and the discretion must
be exercised on "a case-by-case
basis." New
York Letter of January 11, 1991 at 6. However,
here
New York is abandoning its practice of
"case-by-case" determination
and is attempting to
rely on the Commission's discretion to
entirely
insulate its providers and itself from the state
regulatory violations identified by the federal auditors. Thus,
we
conclude that New York's reliance on the
Commissioner's discretion
as a wholesale bar to
HCFA's audit is inconsistent with New York's
own
practice and inappropriate here.
o Even if it were appropriate for HCFA to
recognize the
Commissioner's discretion by ignoring
violations in particular
cases, the admitted lack of
standards for exercising this
discretion makes it
impossible for HCFA to do so here. Further,
New York did not argue that any of the sample cases
presented
circumstances or considerations pursuant
to which the Commissioner
would have excused an
overpayment sanction.
o New York described a number of situations in
which it does not
customarily impose overpayment
sanctions. 16/ However, New York
did not argue
that any of specific considerations identified, such
as "technical violations," applied to the sample cases in
question
here or that the considerations identified
could reasonably be
applied in the context of this
audit and were consistent with its
purposes.
For the preceding reasons, we conclude that the State's
discretion
embodied in its regulations does not serve as a bar to the
audit
findings.
E. The audit did not violate federal audit standards.
New York argued that the disallowance should be reversed because the
OIG
auditors and HCFA failed to comply with Government Auditing Standards,
a
publication of the Comptroller General which sets standards for
OIG
audits. New York maintained that the OIG and HCFA had violated
these
standards because the providers did not have incentive to
vigorously
contest audit findings and because the audit did not "satisfy the
common
accountability interests" of both the state and federal
governments. As
discussed below, we find that the audit standards were
not violated. 17/
As to the first point, New York argued that because providers were
not
exposed to fiscal sanctions, they did not have the customary
incentive
to vigorously contest the audit findings. New York maintained
that
under these circumstances the providers may not have produced
all
available evidence supporting the allowability of the
disputed
expenditures and that the evidence on which the audit findings
were
based was therefore unreliable.
New York's position that the providers may have failed to
produce
evidence is speculative. Providers had considerable incentives
to
produce appropriate documentation for at least two reasons.
First,
providers presumably would have known that the State would review
the
OIG's sample cases and could base its own overpayment sanctions on
such
a review. Further, after the audit was adopted, New York worked
with
the providers to produce documentation to challenge HCFA's findings
in
the sample cases. New York Ex. 3.
New York also argued that the Government Auditing Standards requires
that
audits "be designed to satisfy the common accountability interest
of each
contributing government." New York charged that OIG and HCFA's
approach
in this audit "exacerbated the confrontational aspects of the
federal-State
relationship;" that HCFA gave no consideration to New
York's
interpretation of its own regulations, its limited auditing
resources and its
right to exercise discretion in the administration of
its program; and that
HCFA failed to allow New York adequate opportunity
to present its
position.
The results of this audit are a function of New York's
providers'
noncompliance with New York's own regulations. The
"common
accountability interests of each contributing government"
should
properly include requiring providers to comply with such
regulations.
Since one of the ultimate purposes of this audit was to achieve
that
goal, and since we have found that HCFA was entitled under the law
to
conduct this audit and impose this disallowance, we find that this
audit
did serve the interests of both governments.
While New York argued that HCFA did not give appropriate deference to
New
York's interpretation of its regulations, New York did not seek
review of any
sample cases before this Board. The fact that, after
extensive
negotiations with HCFA on the sample cases, New York did not
seek such review
indicates that it had no further challenges to how HCFA
had applied specific
regulations in individual cases.
As to the question of response time, OIG's practice is to give a party
30
days to comment on an audit. In this case it gave New York 60 days
but
refused to grant New York's request for five months. As we said in
our
August 18, 1989 Ruling on Motion for Remand, while OIG could have
been more
lenient in allowing New York more time to respond to a complex
audit, New
York could have been more diligent in presenting its
comments. It did
not fully respond for almost a year after it obtained
copies of the auditors'
workpapers. In any case, New York has been able
to present its comments
in the course of the negotiations with HCFA
which were conducted as part of
this case and had ample opportunity to
present any additional comments to the
Board. Therefore, New York has
not demonstrated that the lack of what
New York considers adequate
response time at the beginning of the audit
process caused any ultimate
prejudice.
III. Conclusion
For the foregoing reasons, we uphold this disallowance.
Judith A. Ballard
Norval D. (John) Settle
Donald F. Garrett Presiding Board Member
.1. Part 505 of
Title 18 of the New York State
Official Compilation of Codes, Rules and
Regulations (N.Y.C.R.R.) was
promulgated by DSS; Parts 579 and 585 of
Title 14 of the N.Y.C.R.R. were
promulgated by OMH.
2. Title 18 N.Y.C.R.R. 505.25(d) provides "Standards
which shall be
met by programs in order to bill under the Medical Assistance
Program.
(1) All programs shall meet the standards set forth by 14
N.Y.C.R.R.
Parts 579 and 585." Title 18 N.Y.C.R.R. 505.25(h)(1)
provides "State
reimbursement shall be available for expenditures made
in accordance
with the provisions of this section . . ." Title 14
N.Y.C.R.R. 579.5(a)
sets forth "standards for reimbursement".
3. In calculating the disallowance amount, HCFA used
the lower limit
of the 95 percent confidence interval, thus assuming the
burden of any
sampling error.
4. The terms of the Stipulation of Partial Settlement
filed by the
parties in this case on June 25, 1990 reflect that the parties
had
resolved "any and all issues" relating to the "case specific findings
of
the OIG auditors; alleged overpayments received by out-of
business
providers; alleged overpayments which have already been refunded to
the
federal government as a result of State audit initiatives; and
that
portion of the disallowance relating to so-called
'satellite'
facilities."
5. In Service, the federal agency had affirmatively
violated its own
regulations and procedures in firing employees. The
Supreme Court ruled
that the agency was bound by its own procedures and
therefore the
dismissals were invalid. Since New York has not shown how
HCFA violated
any of its own regulations or other standards in taking
this
disallowance, this case is not relevant here.
6. HCFA argued that these other federal program
requirements could
be an independent basis for this disallowance.
However, since OMB
Circular A-87, Attachment A, C.1.b. authorizes this
disallowance in
entirety, it is not necessary for us to determine which, if
any, of the
costs at issue violated federal requirements other than the
cost
principle at issue.
7. In the context of federal application of state
regulations, New
York correctly pointed out that, as the promulgating agency,
it is
entitled to deference in its interpretation of its own
regulations. The
Board has held that, where the law of the state
reasonably encompasses
the meaning the state attributes to it, the state's
interpretation is
entitled to deference absent substantial evidence that the
State's
interpretation is unsupportable. California Dept. of Social
Services,
DAB No. 393 (1983); Ohio Dept. of Human Services, DAB No. 725
(1986).
However, in this case, New York did not seek Board review of any of
the
individual sample cases on the grounds that HCFA, in evaluating
sample
cases, failed to give deference to the State's interpretation of
the
relevant regulation.
8. Such audits serve several important functions:
they determine
whether a state is administering its Title XIX program in
compliance
with program standards; they recover federal funding which has not
been
expended lawfully; and they increase a state's incentive to improve
its
administration of its program.
9. The exhibits included two New York audits of its
providers. HCFA
Ex. 2. The audits appear to demonstrate that New
York uses a method
similar to HCFA's in auditing its providers. New
York reviews
individual claims, finds categories of errors (for example,
duplicate
billing, missing documentation, group sessions billed as
individual
sessions). It then applies the errors it found to the
universe of the
provider's claims for a given period and arrives at an
overpayment
figure.
10. The Board has found that payments to providers of
medical
services which violate program standards, including the cost
principles
set forth in OMB Circular A-87, are not payments for
"medical
assistance" under 1903(a)(1) and 1905(a) of the Act and
constitute
overpayments under section 1903(d)(2). Under 1903(d)(2), the
Secretary
is entitled to recoup the overpayment without regard to whether
the
state has recouped it from the provider(s). See Massachusetts Dept.
of
Public Welfare, DAB No. 262 (1982); New York State Dept. of
Social
Services, DAB No. 311 (1982); Ohio Dept. of Public Welfare, DAB No.
637
(1985), and cases cited therein; New York State Dept. of
Social
Services, DAB No. 1112 (1989). This line of cases was modified
by the
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), Pub.
L.
99-272, section 9512(a)(3), which applies to overpayments identified
for
quarters beginning on or after October 1, 1985. A portion of
this
disallowance involves such overpayments. The application of
this
provision is discussed in a subsequent section of this decision.
11. See, e.g., Michigan Dept. of Public Welfare, DAB
No. 971 (1988),
involving bankrupt or out of business providers;
Massachusetts, supra,
involving bankrupt providers; Georgia Dept. of Medical
Assistance, DAB
No. 798 (1986), involving payments on behalf of ineligible
individuals;
Virginia Dept. of Medical Assistance Services, DAB No. 723
(1986),
involving nursing homes which had been sold and were no
longer
participating in the Medicaid program.
12. Both the Act and federal regulations contemplate
that HCFA will
have access to provider's documentation for services.
Section
1902(a)(27) of the Act provides that state plans must require
agreements
with providers in which the providers agree to "(A) . . . keep
records
as are necessary fully to disclose the extent of the services
provided
to individuals receiving assistance under the State plan, and (B)
to
furnish the . . . Secretary with such information, regarding
any
payments claimed by such person or institution for providing
services
under the State plan, as . . . the Secretary may from time to
time
request." See also 42 C.F.R. 431.107(b)(2).
13. The State also cited Perales v. Sullivan, 88 Civ.
8189 (S.D.N.Y.
1990) (New York Ex. 9). Perales concerned Medicaid
reimbursement for
state payments made on behalf of people who had not been
identified as
Medicaid eligible at the time the payments were made or at the
time
state claims for federal reimbursement were filed. The District
Court
rejected HCFA's argument that a state must comply with all
regulations
prior to claiming Medicaid reimbursement. Perales v. Sullivan,
supra at
22. Perales is not relevant here. Perales dealt with
whether a state
can subsequently assemble existing disability documentation
to meet
eligibility regulations, i.e. comply with the regulations after
filing a
claim. This case involves affirmative violations of
regulations which
cannot be subsequently rectified. For example, the
state regulations
require that services be delivered pursuant to a treatment
plan. If
there is no treatment plan for 1985 services, subsequent
creation of a
plan does not correct that fact that the 1985 services were not
in
conjunction with a plan.
Further, we find that the district court's consideration of
what
constitutes an "expenditure" as "medical assistance" is
distinguishable
on the facts from the Board's long established construction
of these
terms which has been adopted by several federal courts of
appeal. See
Massachusetts v. Secretary, supra; Perales v. Heckler,
supra; and
Missouri Department of Social Services v. Bowen, supra.
14. Cases which fell within HCFA's construction of
the term
"uncollectable" have been resolved by the parties. Pursuant to
the
Stipulation of Partial Settlement filed in this action on June 25,
1990,
New York and HCFA represented that they had settled all issues
relating
to "alleged overpayments received by out-of-business
providers"
represented in the sample cases.
15. In fact, the only exhibits concerning actual New
York fiscal
audits demonstrate that New York regards these regulations as
simply
precluding payment. HCFA Ex. 2.
16. For example, New York represented that it
conducts "compliance
audits" in addition to "fiscal audits." The
primary purpose of
compliance audits is to ascertain the extent to which the
provider
community is complying with a given set of regulations rather than
to
sanction providers. New York Ex. 10.
As to its fiscal audits, New York also represented that it did not
impose
overpayment sanctions for "technical violations" of the
regulations but
allowed payment when the provider had rendered services
in "substantial
compliance" with the regulations. New York Ex. 10. New
York
measures "substantial compliance" both in terms of assessing
individual case
records and in terms of a provider's overall
performance. For example,
where a statistical review reveals a provider
error rate of one percent or
less, New York does not project a
disallowance on the universe of that
provider's claims. Also, New York
conducts fiscal "probe audits" in
which it reviews a small sample of
claims from one provider. If the
provider is in substantial compliance,
the audit is discontinued and the
provider may not be fiscally
sanctioned for the errors identified in the
probe audit. New York Exs.
10 and 12.
17. We do not reach the question of what the
appropriate remedy
would be if we found that the standards had been
violated. New York
cited no authority for its contention that the
remedy should be reversal
of the disallowance. Previously, the Board
has held that when faulty
audit procedures have rendered audit results
unreliable the appropriate
remedy was remand to the federal agency for
further consideration of the
basis for the disallowance. See
Pennsylvania Dept. of Public Welfare,
DAB No. 848