Tennessee Department of Health and Environment, DAB No. 898 (1987) DEPARTMENTAL GRANT APPEALS BOARD Department of Health and Human Services SUBJECT: Tennessee Department DATE: September 11, 1987 of Health and Environment Docket No. 87-11 Decision No. 898 DECISION The Tennessee Department of Health and Environment (State) appealed the disallowance by the Health Care Financing Administration (HCFA) of $957,866 in federal financial participation (FFP) claimed under Title XIX (Medicaid) of the Social Security Act (Act). The disallowance was based on a determination that the State had not returned to HCFA the federal share of overpayments made by the State to providers of Medicaid services. HCFA adopted the findings by an audit firm which used statistical sampling to determine the amount of the overpayments. The major issue presented is whether HCFA is authorized to estimate provider overpayments through the use of a statistical sample. For the reasons described below, we find that HCFA is entitled to use statistical sampling to determine the amount of these overpayments. Accordingly, we affirm the disallowance in principle. HCFA has agreed, however, to provide the State the opportunity to show that, even though specific overpayments were listed in the sample as "outstanding," in fact they have been collected and the federal share returned to HCFA. Case Background On August 19, 1981, the State entered into a five-year contract with the Computer Science Corporation (CSC) for Medicaid fiscal agent services. Soon CSC experienced claim processing problems as a large backlog of claims developed. On May 11, 1982, the State entered into a contract with the accounting firm of Deloitte Haskins & Sells (DHS) to review CSC's performance as fiscal agent during the period January 1, 1982 through April 30, 1982. On July 19, 1982, DHS issued its review of CSC's performance. HCFA Ex. D. The DHS review detailed numerous failings in CSC's performance. Such problems as duplicate payments, payments in excess of amounts billed, and payments for excessive hospital stays were identified. The State then extended its contract with DHS to include a review of CSC's progress for the months of May and June 1982. One of DHS' tasks under this contract was "[e]stimating the dollar magnitude of erroneous payments." HCFA Ex. E, p. 1. DHS estimated that the dollar value of overpayments through June was probably in the range of $3,500,000 to $4,000,000. State Ex. A, Appendix B, p. 4. The State subsequently notified CSC that, as of September 30, 1982, it was terminating the CSC Medicaid Fiscal Agent contract. The State estimated that over 4,000,000 claims would have to be reprocessed because of CSC errors. HCFA Ex. G, p. 5. On November 3, 1985, HCFA entered into a contract with the Tennessee State Auditor's office to have that office report to HCFA on the feasibility of reprocessing claims initially processed by CSC and to determine the most cost effective method of recouping overpayments "without the reprocessing of claims." Id., p. 6. The Auditor's office employed DHS to perform this task. On April 30, 1986, DHS issued its report, entitled "Feasibility of Reprocessing Medicaid Claims Adjudicated During the Period January 1 through September 30, 1982." State Ex. A, Appendix A. The purposes of this review were to: -- determine what portion of the overpayment had been recovered subsequent to the 1982 report; -- develop, based on a new statistical sample, an estimate of the outstanding amount of overpayments for the period; -- estimate the cost of reprocessing the claims; and -- make a recommendation of the reasonableness of reprocessing claims for the period. Id., p. 3. DHS drew new statistical samples of claims processed during the period for the claim types and conditions evaluated in the original study. Employing a standard statistical sampling method, Cumulative Monetary Accounts Sampling, DHS estimated the amount of outstanding overpayments for the selected group of claims as $1,397,732 ($957,866 FFP) for the period January 1 through June 30, 1982. 1/ Id., pp. 10-27. DHS then estimated that the total cost of reprocessing the claims for the period January 1 through June 30, 1982 would be $5,241,286. Id., p. 30. Since the cost of reprocessing the claims would remain far in excess of the potential recovery of overpayments, DHS recommended that the claims not be reprocessed. Id., p. 31. On the basis of the DHS reports, HCFA issued a disallowance in the amount of $957,866, citing section 1903(d)(2) of the Act as the authority for the recovery of the federal share of the overpayments. That section provides for reduction of federal payments to a state "to the extent of any overpayment . . . which the Secretary determines was made . . . to such State for any prior quarter and with respect to which adjustment has not already been made. . . ." Analysis I. Can HCFA use statistical sampling to arrive at a disallowance of Medicaid overpayments? As noted above, HCFA adopted the findings of the 1986 DHS report in determining the disallowance amount. DHS had not examined all of the approximately four million claims disputed under the CSC contract, but rather had used statistical sampling to arrive at an estimate of the overpayments made during the period in question and still unrecovered. The State argued that HCFA is not authorized by statute to estimate overpayments through the use of sample claims. 2/ The State contended that section 1903(d)(2) of the Act, the section cited by HCFA as the statutory authority for the recoupment of overpayments, does not expressly authorize the Secretary of the Department of Health and Human Services to use sampling in the estimation of any overpayment. In contrast, the State pointed out, Congress expressly authorized the use of sampling in section 1903(u) of the Act to determine target error rates with respect to Medicaid eligibility. Citing Russello v. United States, 464 U.S. 16 (1983), the State argued, "Where Congress includes particular language in one section of a statute but omits it in another section of the same act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." State's Brief, p. 11. The State continued, "Had Congress intended to authorize the use of sampling as a means of identifying overpayments pursuant to section 1903(d), it would have expressly provided so, just as it did in subsection (u) of section 1903 for Medicaid eligibility quality control." Id. The State also argued alternatively, in the event the Board should hold that HCFA has the statutory authority to use sampling to determine overpayments, that such authority, unless self-executing, must be effectuated through rules promulgated under the Administrative Procedure Act (APA), 5 U.S.C. 551 et seq. The State asserted that the use of sampling, to carry out the policy stated in section 1903(d) of the Act to increase or reduce Medicaid payments to states because of underpayments or overpayments to providers, is a substantive rule requiring notice and comment rulemaking. The State concluded that the Secretary's failure to promulgate such a rule renders the procedure of statistical sampling invalid under the APA. At the outset we note that the State has not disputed the Secretary's authority, upheld in Board and court decisions, to recover the federal share of overpayments under section 1903(d)(2) of the Act. See, e.g., California Department of Health Services, Decision No. 619 (1985), and Massachusetts v. Secretary, 749 F.2d 89 (1st Cir. 1984). Section 1903(a)(1) provides that FFP will be available only for payments for medical assistance made in accordance with the State Medicaid plan. The DHS reports showed, and the State did not contest, that the overpayments at issue were clear violations of the State plan. The record unambiguously indicates that CSC's problems with processing the claims gave rise to unallowable expenditures, most notably for duplicate payments. As it is undisputed, then, that unallowable payments were made, the question is how to determine the amount of those payments. Approximately four million claims for questionable expenditures were disputed. In order to arrive at an exact amount of the overpayments, the State apparently would have each individual claim examined. We find this patently impracticable and unreasonable. Given the magnitude of the disputed claims, the only logical cost-effective method to estimate the amount of the overpayments is through some type of statistical sampling. An examination of the legislative history of section 1116(d) of the Act, which establishes procedures when the Secretary issues a disallowance (one form of the determination of an overpayment under section 1903(d)(2)), reveals that Congress contemplated the Secretary using various audit techniques in determining the amount of unallowable costs. See 1965 U.S. CODE CONG. & ADMIN. NEWS 2, at 2103. One such commonly accepted technique is statistical sampling. In University of California -- General Purpose Equipment, Decision No. 118 (1980), the Board stated that statistical sampling has been accepted as a basis for determining adjudicative facts. As such, statistical sampling can be reliable evidence concerning an amount of unallowable costs. The Board thus saw the use of statistical sampling as an evidentiary question, not as an action requiring specific statutory authority for a federal agency to use it. In Ohio Department of Public Welfare, Decision No. 226 (1981), the Board upheld HCFA's general use of sampling to determine the amount of a disallowance. Both the Board and the courts have upheld the use of statistical sampling evidence as a basis for a disallowance, where claim-by-claim review is not feasible. See, e.g., Georgia v. Califano, 446 F. Supp. 404 (N.D. Ga. 1977), and California Department of Social Services, Decision No. 816 (1986). We do not view the fact that Congress explicitly authorized statistical sampling under section 1903(u) of the Act as barring the Secretary from using sampling to determine disallowances under other sections of the Act. A reading of the legislative history for section 1903(u) reveals no indication that Congress attached any special significance to the use of statistical sampling there or intended 1903(u) to be the exclusive area where statistical sampling could be used. See 1982 U.S. CODE CONG. & ADMIN. NEWS 2, at 815 and 1219. Indeed, viewed in the context of the pre-existing quality control program (which provided by regulation for a sampling method to be used in establishing disallowances for certain types of state errors), the enactment of section 1903(u) in effect ratified the Secretary's interpretation that use of sampling was within the authority to determine overpayments granted in section 1903(d)(2). We do not consider Russello to be applicable here. That case involved an interpretation of the Racketeer Influenced and Corrupt Organization (RICO) chapter of the Organized Crime Control Act of 1970. Unlike RICO, which was enacted by Congress in a single piece of legislation, the Act, with its Medicaid provisions, has developed through a series of acts passed by different Congresses. As such, it does not have the internal consistency of a single piece of legislation. We therefore do not find that because statistical sampling is mentioned only at section 1903(u) of the Act the Secretary is precluded from using it under other sections of the Act. Once again, given the explicit Congressional authority in section 1903(d)(2) to the Secretary to adjust for overpayments and the millions of disputed claims in this case, we consider it a question of reasonableness and cost-effectiveness that the Secretary be allowed to use statistical sampling. The Board has also recognized the reliability of statistical sampling: "In simple terms, valid statistical sampling will produce a result which has a high degree of probability of being at least as good as a full-scale review." California Department of Social Services, Decision No. 816 (1986), p. 5. As to the State's alternate argument that the Secretary's use of statistical sampling should be considered a "rule" within the context of the APA, we note that the procedures for notice and comment rulemaking set forth in the APA do not apply to "interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice." 5 U.S.C. 553 (b)(3)(A). The State relied on W.C. v. Bowen, 807 F.2d 1502 (9th Cir. 1987), where the court detailed two factors in determining whether a rule is substantive or interpretative. First, if the rule effects a change in existing law or policy or affects individual rights and obligations, the rule is substantive; if the rule is only indicative of an agency's interpretation of existing law or policy, it is interpretative. Second, if the rule is promulgated pursuant to statutory direction or under statutory authority, it is a substantive rule; if the agency does not exercise delegated legislative power to promulgate the rule, it is an interpretative rule. In W.C. v. Bowen, the court found that a procedure for reviewing the decisions of administrative law judges in disability claims under Title II of the Act, the Bellmon Review Program, changed existing policy and was issued pursuant to statutory direction. The court therefore found it was a substantive rule requiring notice and comment rulemaking. Contrary to the State's arguments, we find that the criteria set forth in W.C. v. Bowen support a conclusion that HCFA's use of statistical sampling is not a rule requiring notice and comment rulemaking. The Secretary's use of sampling as an audit technique is not a change in existing law or policy and does not affect individual rights or obligations. Nor was statistical sampling developed as a result of statutory direction or authority. Statistical sampling, a generally accepted audit technique, is but one of the procedural methods used by the Secretary to determine disallowances under the Act. Moreover, this is not a situation where lack of actual or constructive notice to the State precludes application of the use of sampling under the APA. 5 U.S.C. 552(a)(1). The State is not adversely affected by the mere use of a sampling audit technique. The sampling is simply a means of establishing the amount of payments violating state plan provisions. Given the problems with CSC's claims processing, HCFA could have required the State to document allowability of its payments during this period on a claim-by-claim basis. Use of a valid statistical sampling technique instead to measure the extent of unallowable payments is a cost-effective, less burdensome means which benefits the State as well as HCFA. II. Is the State foreclosed from challenging specific findings in the DHS reports? While we find that HCFA may use statistical sampling to estimate a disallowance, we also hold that the State must be given an opportunity to contest specific audit findings. The State did not challenge the validity and reliability of the statistical sampling used in the DHS audit. 3/ The State did, however, argue that HCFA failed to consider the $4,493,947 in overpayments actually recovered by the State, noted on page 6 of the 1986 DHS report, for a set-off against the estimated overpayments. The State contended that its records indicate that the outstanding "negative balance" in its accounts receivable for the period in question is only $72,875.59. State Ex. B, Appendix C. The State declared that it intended to trace the overpayments reflected in the sampled claims, by claim and/or recipient, to determine if they have been recovered. State Ex. B, p. 2. Contrary to the State's assertions, DHS did take into account some of the recoveries made by the State. It is possible, however, that other recoveries may be related to the sampled claims, but have not been sufficiently identified to correlate to specific claims. In a telephone conference, HCFA agreed to give the State the opportunity to contest individual sample claims by showing that the State had already made recoveries of some of the sampled overpayments which the auditors did not take into account. We accordingly find that the State must be allowed to show that specific findings reflected in the DHS reports are incorrect. If HCFA should reject the evidence the State produces for specific claims, the State will be permitted to return to the Board to appeal those negative determinations by HCFA. III. Can HCFA deny FFP for reprocessing the claims originally processed by CSC? The State argued that it would be denied a full opportunity to contest the disallowance unless it was given the chance to reprocess the claims at issue. The State supplied a September 22, 1986 letter from HCFA, however, which stated that HCFA had already paid FFP for the processing of the claims, when CSC had done it, and that HCFA's policy was that it "will continue to pay for the operational processing of claims, but once and only once." State Ex. C, Appendix C, p. 2. The State maintained that this demonstrated inconsistency on HCFA's part as HCFA had previously stated that it would not approve a contract for fiscal agent services unless the contract contained a provision allowing the State to unilaterally reprocess claims if the State determined that was necessary. The State contended that that contract, approved by HCFA, gives the State, not HCFA, the authority to decide if and when claims will be reprocessed. The administrative cost of reprocessing the claims is not directly before the Board as the State has not yet incurred or submitted that cost to HCFA. The issue before us is the propriety of HCFA's disallowance of the federal share of the overpayments to the providers, $957,866. The State did not indicate, outside of general allegations of fairness, how HCFA's refusal to supply FFP to reprocess the claims is a basis for overturning this disallowance. The allegations of inconsistency on HCFA's part are unsupported. The State retains its authority to reprocess if it wishes; HCFA has simply taken the ostensibly reasonable and consistent position that no federal funding will be available for what is essentially a duplicative activity. We also reject the State's argument that, since HCFA based the disallowance on a sample, the State must reprocess "to determine which, if any, claims are at issue." State's Reply Brief, p. 4. The State was provided with a list of disallowed sampled items, has had a full opportunity to dispute the audit findings on the sample payment errors, and will have the opportunity to show that additional recoveries should have been applied to the sample items. The State would perhaps need to reprocess to identify and recoup overpayments not specifically included in the sample, but we doubt that, even with federal participation, the State would choose to expend approximately five million dollars to collect some one million dollars. Conclusion For the reasons stated above, we affirm the disallowance in principle. As indicated above, the State has the opportunity to show, within 30 days or such other reasonable time period as HCFA may establish, that specific overpayments in the sampled claims have already been collected and the federal share returned to HCFA. If HCFA should reject the State's documentation for certain claims, the State will be permitted to appeal any negative determinations by HCFA to this Board. ________________________________ Norval D. (John) Settle ________________________________ Alexander G. Teitz ________________________________ Judith A. Ballard Presiding Board Member 1. While the DHS report's principal objective was to ascertain the cost of reprocessing claims for the nine-month period January 1 to September 30, 1982, the report estimated outstanding overpayments only for the period January 1 through June 30, 1982. 2. Initially the State also argued that the Board should reverse the disallowance because HCFA's disallowance decision failed to contain, as required by regulation, sufficient detail to provide the State with an adequate opportunity to respond. In the course of the appeal, however, HCFA provided the State with various documentation that resulted in the State terming the issue of the adequacy of the disallowance decision "moot." State's Reply Brief, p. 2. 3. The State did contest whether the 1986 DHS report, on which HCFA based its disallowance for outstanding overpayment, was, in fact, an "audit" that could be used as the basis of a disallowance. According to the State, the report was intended to be only a feasibility study on the economies of reprocessing certain claims and not a method for identifying the amount of outstanding overpayments. In response, we refer to the contract HCFA executed with the Tennessee State Auditor's office (State Ex. A, Appendix B), which variously described the contracted work as an "audit report" (p. 3) or an "audit survey" (p. 5). The 1986 DHS review itself describes one of its purposes as to determine an estimate of outstanding overpayments. State Ex. A, Appendix B, p.