New York State Department of Social Services, DAB No. 284 (1982)

GAB Decision 284

April 29, 1982 New York State Department of Social Services; Docket No.
81-161-NY-HC Garrett, Donald; Teitz, Alexander Settle, Norval


The New York State Department of Social Services appealed a decision
by the Health Care Financing Administration, disallowing $1,167,441 in
federal financial participation claimed under Title XIX of the Social
Security Act. The disallowance was based on an audit report which found
that the State had made Medicaid payments to long-term care providers
for costs which should have been paid by the medicaid recipients.

The State's major arguments were that the Agency could not adjust for
the federal share of the payments prior to the State's recovery of the
payments from the providers and that the audit in question was
insufficient as a basis for determining the amount of such payments.
For reasons stated below, we conclude that these payments represented
costs which were not allowable under applicable regulations and which
could be adjusted, under section 1903(d)(2) of the Act, prior to
recovery from the providers. However, sicne the Agency has not provided
the State with sufficient information concerning how the disallowed
amounts were determined, we remand the case to the Agency so that the
State can show where it has already recovered the payments and made a
corresponding adjustment of the federal share.

This decision is based on the parties' written submissions.

I. Program Background

Title XIX of the Act (Medicaid) authorizes grants to states for
medical assistance to certain persons who are "categoricaly needy." In
addition, medical assistance may be provided under Title XIX to
"medically needy" persons who would be eligible except for having higher
than allowable levels of income. A medically needy person receiving
medical care in a long-term care facility is required to pay the cost of
the care until the amount of remaining income is at or below the maximum
allowable level. Furthermore, those recipients with recurring sources
of income, such as veteran's benefits, are required to contribute their
excess income (generally all income over the amount designated for
personal and incidental needs) toward the cost of care. This excess
income is referred to as the net available monthly income (NAMI),
contributory income, or spend-down amount.

(2) Under the Act, states have primary responsibility for
administering the Medicaid program. In New York State, the program is
administered by the New York state Department of Social services. Local
administration in New York City is the responsibility of the New York
City Department of Social Services (NYCDSS), under the direction and
control of the State department. During the time period in question,
Medicaid claims from long-term care facilities (LTCFs) in the City were
processed by the Nursing Home Control Section of the Division of Medical
Payments, NYCDSS. This section was responsible for examining all LTCF
claims to verify that the billings were proper and that the correct
amount of contributory income, as budgeted, had been applied against the
claims. The Chelsea Welfare Center, NYCDSS, performed eligibility
reviews and was responsbile for notifying the Nursing Home Control
Section, as well as the LTCF and recipient, of that portion of the cost
of care, if any, for which the recipient was liable.

II. The Federal Audit

The HHS Audit Agency performed a review of Medicaid claims processed
by the NYCDSS for the period January 1, 1974 through March 31, 1979, "to
determine the amount of FFP improperly claimed . . . For spend-down
amounts related to medically needy recipients in long term care
facilities . . . " Audit Report ACN 02-1025, p. 2. The auditors found
that, in December 1972, the NYCDSS had implemented a procedure allowing
LTCFs to submit reclaims for expenditures which had not been previously
reimbursed, either because a recipient did not pay for medical expenses
which were the recipient's liability or because there were changes in
the amount of income available to the recipient. Under this procedure,
the NYCDSS would pay a flat rate of 98% of any reclaim, no matter what
the cause of the reclaim.

In order to determine whether reclaims submitted under the 98%
procedure were due to official budget changes rather than recipients'
nonpayment of NAMI amounts, the auditors --

. . . reviewed reclaims from 47 LTCF's for the period January 1, 1974
through November 30, 1978. These LTCF's were selected for review on the
basis of having been paid more than $10,000 per calendar year, during
the period of our review, for spend-down amounts under the 98-percent
reclaim provisions . . . .

Audit Report, p. 3.

The auditors found that Medicaid reimbursement had been improperly
made for uncollected excess income amounts, totalling $2,319,975
(federal share $1,159,988).According to the auditors, the Nursing Home
Control Section had originally applied the excess income amounts (3) to
reduce the amount of Medicaid reimbursement, but the LTCFs had
resubmitted the claims when unable to collect from the recipients (or
their representative payees) and had received payment under the 98%
reclaim provision.

In addition, the auditors reviewed "contributory income reported for
59 selected recipients at three nursing homes for the period Setpember
1, 1977, to March 31, 1979. . . to determine whether the amounts
budgeted as excess income by the Chelsea Welfare Center were correct and
properly updated." Audit Report, p. 3. The auditors found that, in most
of these 59 cases, the records used by NYCDSS to verify the NAMI amounts
due from recipients were incorrect since they had not been properly
updated to reflect changes in recipients' available incomes. Moreover,
LTCFs sometimes reported and applied only those NAMI amounts which they
collected, rather than the total budgeted amounts. According to the
auditors, Medicaid reimbursement for these 59 recipients was overstated
by $14,905 (federal share $7,453), as a result.

Based on this audit, the Agency disallowed $1,167,441 ($1,159,988
plus $7,453) in federal financial participation (FFP) claimed by the
State.

III. The Issues

On appeal, the State made a number of arguments which, for purposes
of this decision, we have discussed under the following general issue
headings:

1) Whether these payments to providers for costs which were the
liability of the recipients were improper payments under the applicable
regulations;

2) Whether the Agency must wait to adjust for the federal share of
these payments until the State recovers them from the providers;

3) Whether the Agency explicitly or implicitly approved the NYCDSS'
98% reclaim procedure;

4) Whether the audit is sufficient as a basis for determining the
amounts to be disallowed.

IV. Discussion

1. Whether these payments to providers for costs which were the
liability of the recipients were imporoper payments under the applicable
regulations.

(4) The Agency based its decision on Medicaid regulations /1/ which
provided that a state agency --

must reduce its payment to an institution, for services provided to a
(medically needy) individual (in a medical institution or intermediate
care facility). . . by the amount that reamins after deducting the
amounts specified in paragraph (c) of this section, from the
individual's income.

42 CFR 435.832.(a)(1980).

and also provided that --

FFP is available in expenditures for services provided to recipients
who were eligible for Medicaid in the month in which the medical care or
services were provided except that, for recipients who established
eligibility for Medicaid by deducting incurred medical expenses from
income, FFP is not available for expenses that are the recipient's
liability. . . .

42 CFR 435.1002(b)(1980) (emphasis added).


The State argued, however, that the disallowed amounts were not
unallowable costs within the meaning of these regulatory sections
because the State had properly determined eligibility of the recipients,
conditioned on payment of excess income amounts. According to the
State:

While these costs may have initially been the liability of recipients
whose eligibility is established by deducting current medical expenses
(5) from income, within the meaning of 42 CFR 435.1002(b), the amounts
as reported by the federal auditors were not such cost expenses that are
the liability of recipients. They were instead claims made by providers
for amounts that should not have been claimed by providers.

Appellant's Brief, p. 3.

We are not persuaded by this argument. The regulations clearly deny
federal funding for costs of care which are the liability of the
recipient. The fact that the providers, knowing that the recipients
should pay for the costs, claimed them from the State did not transform
them into allowable costs. Moreover, the regulations specifically place
a burden on the State to reduce any payment to a provider by the amount
due from the recipient. Thus, the State cannot avoid the disallowance
by shifting blame to the providers.

We also are not persuaded by the State's assertion that the fault
lies with the Agency for not establishing any particular means of
administering spend-down or NAMI amounts of otherwise eligible
individuals. Notice of Appeal, p.2. The responsibility for
administering the program, in accordance with applicable regulations,
lies in the first instance with the State. See, e.g., 45 CFR Part 74,
Appendix C, Part I, A.2 (1974).

The State itself had a regulation which prohibited providers from
claiming for amounts which were due from recipients. 18 NYCRR 540.7
(a)(8), cited in Appellant's Brief, p. 2. Thus, the State was aware
that it was not liable for these costs and had to have policies to
prevent payment for them. The 98% reclaim procedure contravened this,
and, we note, in response to the draft audit report, the State agreed
that 98% reclaim procedure was "improper." Audit Report, Exhibit I, p.
2. The reclaim procedure virtually guaranteed payment of costs which
were the recipients' liability, and, as explained below, was justified
by NYCDSS on an unsound theory.

Thus, we conclude that the payments in question were unallowable
under applicable federal and State regulations.

2. Whether the Agency must wait to adjust for the federal share of
these payments until the State recovers them from the providers.

Section 1903(d)(1) of the Social Security Act requires the Secretary,
prior to the beginning of each quarter, to "estimate" the amount of
federal funding that a state will be entitled to under Medicaid. (6)
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 to include amounts, previously paid to
a State, which have been determined to be unallowable, i.e., not
authorized by the statute. See Masschusetts Department of Public
Welfare, Decision No. 262, February 26, 1982, p. 5.

In the disallowance letter, the Agency cited section 1903(d)(2),
stating that, since the auditors had determined that an overpayment
existed, the Agency was required to proceed with a disallowance and the
State should make a decreasing adjustment on its quarterly expenditure
report. In response, the State argued that it was not required to
adjust for these payments, improperly claimed by the providers, until it
had recovered them from the providers. The State relied primarily on
section 1903(d)(3) of the Act. The section provides:

The pro rata share to which the United States is equitably entitled,
as determined by the Secretary, of the net amount recovered during any
quarter by the State or any political subdivision thereof with respect
to medical assistance furnished under the State plan shall be considered
an overpayment to be adjusted under this subsection.

(emphasis added)

The State argued, "Pursuant to this section no amount can be
recovered or disallowed by the Secretary until 'the net amount (has
been) recovered by the State. . . .'" Notice of Appeal, p. 2.

The State's reliance is misplaced. As this Boad has previously held,
section 1903(d)(3) is more limited in scope than section 1903 (d)(2) and
may reasonably be viewed as referring only to payments which are
allowable "medical assistance" costs. Massachusetts Department of
Public Welfare, Decision No. 262. February 26, 1982, see, also,
California Department of Health Services, Decision No. 244, December 31,
1981. As discussed above, we are not convinced by the State's attempt
to characterize these payments here as improper claims by the providers
rather than improper payment by the State for costs which were
unallowable. Whether one views the payments at issue here as payments
for ineligible individuals (because they had not met their spend-down
liabilities) or as payments forcosts which were not covered under the
program (because the costs were the responsibility of the recipients
under the statute), they are not costs of "medical assistance (7)
furnished under the State plan" within the meaning of section
1903(d)(3). See, also, section 1905(a) of the Act. /2/


Thus, section 1903(d)(3) does not apply here to preclude the Agency
from adjusting for these payments prior to recovery.

The State also argued, generally, that the "usual method" of
refunding FFP is to credit the amount recovered in the quarter in which
it is received by the State. In support of this, the State pointed to
practices regarding fraudulent providers' claims, recovered by fraud and
abuse procedures, and third party liability recoveries, made when
resources were discovered to be available after Medicaid payments had
been made. The State argued that the payments here should be treated in
the same fashion since the Social Security Act contemplates a
partnership between the states and federal government, requiring that
the entire risk of loss should not be placed on the State. The State
relied on a statement in a General Accounting Office report (HRD-80-77)
for the proposition that the Agency did not have a clear policy
regarding when and under what circumstances FFP in outstanding
overpayments to Medicaid providers would be denied.

The State's arguments fail to take into account the clear statutory
mandate to provide FFP only for allowable costs. Once the Secretary
determines that particular costs previously reimbursed to the State are
unallowable, the Secretary must adjust. As the Agency has pointed out,
without denial by the State, the Agency's consistent policy under its
disallowance procedures has been to adjust the federal share of any
disallowed amount whenever a disallowance determination has been upheld,
regardless of recovery of the disallowed amounts by the state involved.
See 45 CFR 201.14(e); State of Georgia v. Califano, 446 F. Supp. 404
(N.D. Ga. 1977).

Moreover, the State's arguments fail to recognize legitimate
differences in the status of various overpayments. The Agency may
reasonably have different policies for when it will require a state to
adjust on its own for a third party liability recovery or for an
overpayment which the state has determined was made. See, e.g., 42 CFR
447.296 (1980). (8)$TIn particular, the third party liability situation
is distinguishable because Congress specifically provided for adjustment
of payments for which a third party was liable upon recovery from the
third party. Section 1903(d)(2) (second sentence); see, also,
1902(a)(25). With respect to overpayments determined through fraud and
abuse activities, the State relied on a recent regulation at 42 CFR
433.203, 46 Fed. Reg. 48001, September 30, 1981. This regulation
defines "recoveries" as "Medicaid funds a provider of services has been
paid in excess of amounts payable under title XIX of the Act, applicable
regulations and the State plan that are actually collected or diverted
by a State agency or Medicaid Fraud Control Unit, and which have been
reported to the Federal government." The State's reliance is misplaced,
however, since nothing in this regulation precludes the Agency from
auditing, determining that an improper payment was made, and disallowing
the federal share of excess payments which have not been recovered. In
context, the regulatory definition merely describes what constitute
fraud and abuse recoveries for purposes of determining whether a state
qualifies for an offset to a reduction in Medicaid funding, otherwise
required by Pub. L. 97-35 for fiscal years 1982 through 1984. Thus, it
does not provide an exception to the Agency's authority to adjust for
overpayments prior to recovery.

We also do not agree with the State that the Agency cannot require
the State to repay without some showing that the State purposely
deviated from the State plan and the federal guidelines. The Act
provides for federal funding requirements. Whether a state has
deliberately or inadvertently made an improper payment is irrelevant to
the question of whether FFP is available.

To the extent that this result is arguably inconsistent with the
concept of Medicaid as a "partnership" between federal and state
governments, as the State alleged, it is a result mandated by Title XIX
and the regulations, which provide funding only for allowable costs.

3. Whether the Agency explicitly or implicitly approved the NYCDSS'
98% reclaim procedure.

As mentioned above, the NYCDDS instituted the 98% reclaim procedure
in 1972. Although it is not clear why the NYCDDS used this procedure
for reclaims submitted because the LTCFs had not collected amounts due
from recipients, the Audit Report suggests the following:

The Department mistakenly believed that the LTCF's were entitled to
Federal reimbursement in the event that payment for incurred medical
costs could not be collected from responsible recipients. It contended
that, because the spend-down amounts became bad (9)debts, they would
ultimately be reflected as part of the cost of the LTCF's operations and
as program expenditures.

Audit Report, p. 12.

In its notice of appeal, the State contended that the State's
procedure was "tacitly approved" by the Agency. Notice of Appeal, p.
2. When asked to support this claim, the State argued tha the Agency
had had an opportunity to object at the time that claims for these
payments were made, but did not. Further, the State alleged:

The procedure of the City was overt, as is evidenced by the fact that
records were found at the time of the aduit. . . . HCFA was or should
have been aware of the New York State and New York City methodology to
determine spend-down and NAMI amounts. However, it was not until 1980
that any objection was made in this regard; more than seven years
passed before objection was made to any of the procedures. The fact
that monitoring by HCFA continued and payments were made could be argued
to be explicit approval of the procedures.

Appellant's Brief, p. 5.

The State's argument is somewhat confusing since it seems to mix
references to the 98% reclaim procedure with references to the State's
general procedures for determining recipients' liability. With respect
to the reclaim procedure, the State has not provided any evidence, nor
even alleged, that any specific Agency official had actual knowledge of
the system. Given the magnitude and complexity of the Medicaid program,
we are reluctant to infer knowledge on the part of the Agency merely
because the State kept records. While the Agency does have a monitoring
responsibility, the Agency may not always be aware of the State's
practices on an ongoing basis and must sometimes rely, as here, on
after-the-fact audits. The State has a duty to maintain accounting
records for this purpose. 45 CFR 205.60; 205.145 (1974-1981).
Moreover, it is clear from the Act and the regulations that payment of a
State's claim for FFP at the time it is submitted does not preclude a
later determination disallowing the claim. Sections 1903(d) and 1116(
d) of the Act; 45 CFR 201.12, 201.13 (1970-1981), and 45 CFR 201.15(c)
710) (1976-1981). Thus, the State cannot rely on the Agency's failure
to object to its claims at the time made.

With respect to the State's methodology of determining spend-down and
NAMI amounts, the State has pointed to nothing which would constitute
approval by the Agency for the State to pay for amounts which were the
recipients' liability. The major audit finding was that the NYCDSS was
not following its own procedures and properly updating the budgeted
amounts. The audit also pointed out that when the NYCDSS started to
(10)use a fiscal agent for LTCF claims payment it had not instituted the
appropriate system of edits in the computerized claims processing
system.

In its reply brief, the State shifted its argument slightly, stating
that it was not attempting to assert estoppel against the Agency but was
rather asserting a reliance upon its own interpretation of Agency
policy, an interpretation "that was not challenged and which was perhaps
condoned by HCFA." p. 6. Although the State does not explicitly make
the point, the State appears to be referring to an interpretation by it
that the 98% reclaim procedure was permissible under the theory that
uncollected spend-down amounts became bad debts of the providers. An
Agency transmittal, originally cited by the Agency, clarified
specifically that a state's practice of paying providers' total
expenses, rather than expenses net of any spent-down amounts, on the
bad-debt theory, was improper under applicable requirements.
Respondent's Brief, Exhibit A, Regional Office Manual, Section 2554,
January 22, 1979. According to the State, the fact that this policy
"clarification" was not issued until after the audit period shows that
the State "acted in the vacuum of HCFA interpretation of its regulations
and policies." Reply Brief, p. 7. The State took the position that --

HCFA clearly had the duty to inform the State of any practices it
considered to be violative of its policy. Having failed to be
unequivocally state its policy and position, it abrogated its authority
to contradict a reasonable interpretation openly stated and maintained
by a governmental entity being charged with equal cooperative (direct)
administration of the Medicaid program.

Reply Brief, p. 6.

This argument has no merit in the context of this case. With respect
to the question of whether FFP was available in payments to providers
for costs which were the liability of the recipients, the Agency policy
was clear. Given this policy, we think the State had a duty to inquire
before instituting a procedure which resulted in payments which would
generally have been considered to be prohibited by the policy.
Moreover, the State has not really supported its position that the
bad-debt theory was a reasonable one. The usual Medicaid reimbursement
system uses providers' costs to establish rates of reimbursement, within
certain limits, and pays according to those rates. See 45 CFR 250.30
(1974-1978). The State's practice is not consistent with this method,
because it treats a certain type of cost in a special manner, and is
based on the mere presumption that the providers would ultimately pass
on the costs to the Medicaid program. (11)$TAs stated above, the State
has not shown that the Agency was aware that it was making payments for
costs which were the recipients' liability. We also note that, even if
the Agency had knowledge that NYCDSS had a reclaim procedure, this would
not necessarily have put the Agency on notice of improper payment, since
some of the reclaims were proper, because they were based on changes in
NAMI budgets.

4. Whether the audit is sufficient as a basis for determining the
amounts to be disallowed.

In response to the draft audit report, the State asked "to be given
an opportunity to review the auditor's workpapers and discuss with him
the methodology he had used in arriving at the recommended
disallowances." Audit Report, Exhibit, I, p. 1. The Agency has not
alleged, nor provided any evidence, that it ever responded to this
request. On appeal, the State contended:

We have not been presented with any description of the actual
auditing procedures used and therefore cannot accept the findings
offered without presentation of some explanation of the audit procedure
and some examination and verification of the actual workpapers utilized
by the auditors. The report presents only opinions offered by the
auditors with no factual verification to support any of the opinions
offered.

Appellant's Brief, pp. 6-7.

The State also argued that the audit was merely a review of State
procedures which should be treated as a management improvement report
and that the audit was not performed in accordance with generally
accepted accounting principles. In support of the latter argument, the
State pointed to the auditors' claim to have reviewed 21,000 reclaim
billings. This necessarily implied, the State argued, that a sampling
technique was used and, therefore, the audit was defective in that it
did not explain the sampling methodology.

The Board specifically asked the Agency to explain how the auditors
determined the amounts they identified as representing unallowable
costs, including an explanation of any statistical sampling method used.
Acknowledgment of Appeal, p. 3. In response, the Agency merely stated:

The methodology employed by the auditors is fully described on pages
2 through 3 of the audit. The analysis of the data is set forth on
pages 4 through 6. As noted therein, the disallowance was (12)based on
actual amounts that were improperly claimed. No sampling or projection
techniques were used.

Respondent's Brief, p. 4.

The audit report is somewhat unclear concerning the methodology,
however, While it states that the auditors reviewed the 21,000 reclaims,
it refers at one point to "our test of reclaims." Audit Report, p. 4.

On the other hand, the audit report does indicate that 100% review
would not have been as impossible as the State believed it was.
According to the auditors, the providers were required, under the
reclaim procedure, to submit affidavits with their reclaims, and these
specified the reasons for the reclaims, including failure to collect
from the recipients. Thus, mere examination of the affidavits could
have revealed unallowable claims. The audit report also states that it
was done "in conformity with standards for governmental auditing." Audit
Report, p. 3. In view of these factors, and the Agnecy's specific
denial that sampling techniques were used, we are not convinced by the
State's unsupported statements that the audit report violated generally
accepted accounting principles. Moreover, we do not think that the
audit is insufficient as a basis for disallowance merely because it
contained management recommendations concerning State procedures. A
compliance-type audit or review may be a basis for a disallowance if it
also contains reliable factual findings concerning unallowable costs.

Nevertheless, we do think that the State had a right to receive more
specific information concerning the reclaims found by the auditors to be
improper. While the audit report contains a general description and
breakdown of the costs disallowed, it does not name the 47 LTCFs
reviewed, nor the recipients related to the reclaims. The Agency has
not explained its failure to provide this information to the State. The
significance of this is that it is likely that the State has already
recovered some of the improper payments from the providers and adjusted
for the federal share. At the time of the audit, the State had already
collected and repaid some of the amounts identified by the auditors as
improper reclaims. Audit Report, p. 13. Thus, we agree with the State
that it should be provided sufficient information and have an
opportunity to show that subsequent recoveries and corresponding
adjustments of FFP have been made, to avoid a duplicate repayment to the
Agency.

The remedy for this failure by the Agency is not a reversal of the
disallowance since the audit report did clearly identify unallowable
costs and the question of recoveries goes merely to the quantum of
unallowable costs which continue to be charged to federal funds. (13)$
TAccordingly, we uphold the disallowance in principle but remand to the
Agency for further proceedings consistent with our opinion.

Conclusion

For the reasons stated above, we sustain the disallowance but remand
to the Agency to recompute the amount. The Agency should provide the
State with sufficient information concerning the providers and
recipients involved and give the State a reasonable opportunity to show
whether it has already recovered, and adjusted the federal share of, and
disallowed payments. We suggest that the Agency promptly provide this
information with a deadline for State review and response. /1/ The
quoted versions of these regulations resulted from a
recodification in 1978 which redesignated and clarified, without
substantive change, previously published Medicaid regulations. 43 FR
45204, September 29, 1978. Section 435.832 was derived from 42 CFR
448.3(b)(7) and (8), originally published at 45 CFR 248.3 (b)(4) and
(5), 39 Fed. Reg. 9516, March 11, 1974, amended at 39 Fed. Reg. 36590,
October 11, 1974 and 42 Fed. Reg. 2686, January 13, 1977, and
redesignated at 42 Fed. Reg. 52827, September 30, 1977. Section 435.832
was amended at 45 Fed. Reg. 24886, April 11, 1980. Section 435.1002 (b)
was derived from 42 CFR 448.4(b)(5), originally published at 45 CFR
248.4(b)(5), 39 Fed. Reg. 9517, March 11, 1974, and redesignated at 42
Fed. Reg. 52827, September 30, 1977. Although the previous versions
were not as clear, the later versions were cited by the Agency, and the
State has not argued that there are substantial differences which would
require a different result. /2/ As the Agency pointed out, the
State itself acknowledged that " . . . the State plan does not include
medical assistance furnished to recipients who have not met their
'spend-down or NAMI amounts,' . . ." Appellant's Brief, p. 3. Although
the State objected that the Agency took this statement out of context,
the State has cited nothing which would lead us to believe that the
State plan, includes coverage of medical costs which are the recipients'
liability.

OCTOBER 22, 1983