GAB Decision 404
Docket No. 82-121-IL-HC
March 31, 1983
Illinois Department of Public Aid;
Ford, Cecilia; Garrett, Donald Settle, Norval
The Illinois Department of Public Aid (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $4,824,026 in federal financial participation (FFP) claimed under
Title XIX (Medicaid) of the Social Security Act (Act). The disallowance
was based on an audit report reviewing the State's accounts receivable
records. HCFA adopted the audit report's determination that
overpayments to providers participating in the Medicaid program were not
being returned to HCFA until the State collected the amounts from the
providers. HCFA directed the State to make a decreasing adjustment of
$4,824,026, the federal share of the overpayments as of June 30, 1980,
on the State's next quarterly expenditure report.
The major issues presented are whether section 1903(d)(2) of the Act
authorizes HCFA to demand that the State repay the FFP share of
identified overpayments made to Medicaid providers, even though the
State may not have yet recovered the overpayments from the providers;
and whether HCFA can rely on the State's accounts receivable records as
a basis for the disallowance. For the reasons stated below, we find
that HCFA may adjust under section 1903(d)(2) of the Act for
overpayments to providers prior to the State's recovery from the
providers and may use the accounts receivable as a basis for the
disallowance. While sustaining the disallowance, we direct HCFA to
examine the documentation offered by the State to determine the accuracy
of the State's claims that the audit report contained a number of errors
and that a significant share of the amount in question has already been
recovered.
Our decision is based on the appeal file, the parties' initial
briefs, and the State's reply brief.
(2) Case Background
The HHS Audit Agency conducted an audit (Audit Control No. 05-20217)
of the State's Medicaid program to determine whether the federal
government was credited for its share of Title XIX overpayments,
identified by the State, which were no longer subject to an
administrative appeals process as of June 30, 1980. The audit did not
examine the accuracy of overpayments still being appealed by providers
as of that date. The auditors summarized their findings as follows:
The State Agency was not adjusting its claims for FFP under Title XIX
by amounts that it had overpaid providers until the overpayments were
recovered from the payees. As of June 30, 1980, State Agency records
showed an unrecovered balance of about $41.3 million in overpayments to
medical providers. We determined that $12.4 million of that amount was
firmly established, i.e., it was due from providers who had either
completed or waived the administrative appeals process.... As of June
30, 1980, the State Agency had not adjusted for $4.8 million (the
federal share of the $12.4 million) that it had identified as
overpayments.
Audit Report, p. 2.
The audit report detailed the responsibilities of the State's Office
of Health Finance (OHF) and Bureau of Program Integrity (BPI). The OHF
was responsible for annual cost audits of hospitals participating in the
Medicaid program. The BPI, through field audits and desk reviews,
examined claims submitted by all types of Medicaid providers, including
physicians, pharmacies, nursing homes, and others. The audit report
found that the State "was not properly adjusting its Title XIX claims
for overpayments identified by OHF and BPI." (p. 5) The audit report
noted:
(Expenditure) reports were being adjusted only after recoupments of
overpayments were realized. They were not being adjusted immediately
for the amount of firmly established overpayments carried as accounts
receivable, as required.
Audit Report, p. 5.
(3) In its notification of disallowance, HCFA adopted the audit
report's breakdown of the final overpayment determinations:
As of June 30, 1980
State Total Carried Not Federal
Agency's Records as Receivable Finalized Finalized of Fina
Hospital $5,616,179 $5,616,179 $1,
Settlements Desk Audits 3,981,501 3,981,501 Field
Audits 29,433,582 24,943,035 4,490,547 2,
Transfer from BPI 2,273,890 2,273,890 1,
Total $41,305,152 $28,924,536 $12,380,616 $4,
General Background
Title XIX of the Social Security Act provides for the payment of
federal monies to states to aid in financing state medical assistance
programs. Any state that wishes to participate in the Medical program
must develop and submit a plan that meets certain requirements set forth
by the Secretary of HHS. Realizing that many states might have
difficulty financing a Medicaid program even if subsequently reimbursed
by the federal government, Congress also established a funding mechanism
by which HHS advances funds to a state, on a quarterly basis, equal to
the federal share of the estimated cost of the program. After review of
the State's quarterly statement of expenditures, the Secretary may
adjust future payments to reflect any overpayment or underpayment which
was made to the State for any prior quarter. Section 1903(d) of the Act.
Section 1903(d)(2) of the Act states:
The Secretary shall then pay to the State... the amounts so
estimated, reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this section
to such State for any prior quarter and with respect to which adjustment
has not already been made under this subsection....
(4) Section 1903(d)(3) of the Act states:
The pro rata share to which the United States is equitably
entitled... of the net amount recovered during any quarter by the
State... with respect to medical assistance furnished under the State
plan shall be considered an overpayment to be adjusted under this
subsection.
Parties' Arguments
The State's primary argument was that HCFA has not provided any
substantive basis for the disallowance. The State contended that
neither section 1903(d)(2) nor any other provision of the Act permits
HCFA to demand immediate reimbursement from the State of amounts
identified, in routine audits, as payments to which providers were not
entitled.The State argued that, even if the amounts at issue are
considered to be "overpayments" as contemplated by the Act, section
1903(d)(2) requires a determination by the Secretary to that effect.
The State contended that no such determination was made here; rather,
HCFA based its action on the review by its auditors of State records
which suggested that certain providers may owe certain sums to the
State. The State further argued that HCFA's interpretation of section
1903(d) expanding the definition of "overpayments" in the Act to include
overpayments identified in ongoing State audit activity is incorrect;
according to the State, section 1903(d)(3) limits "overpayments" to
amounts actually recovered by the State from providers. The State also
argued that the disallowance violated the cooperative federal/state
relationship of the Medicaid program because the State alone must bear
the full responsibility for any sums which are due from medical
providers. Finally, the State alleged that there were numerous errors
in the audit report.
HCFA argued that section 1903(d)(2), together with other provisions
of the Act, which define the scope of "medical assistance" pursuant
to a
state plan, provides the substantive basis for the disallowance. Citing
previous Board decisions, HCFA contended that section 1903(d)(3) enabled
HCFA to adjust for unallowable payments to providers, including
overpayments, even prior to the State's recovery (5) from the providers.
HCFA challenged the State's position that, before an overpayment could
be established, HCFA was required to look behind the State's account
receivable records and independently determine that an improper payment
under the Medicaid program was involved.
HCFA maintained that the accounts receivable records are a reliable
source for establishing the amount of Medicaid overpayments because of
the State's prior use of these records for its Medicaid payment
calculations. As to the State's assertion that the audit report
contained errors, HCFA contended that the errors were minor in nature
and that it was willing to adjust the amount of the disallowance if the
State could substantiate its claims.
Discussion
For purposes of analysis, we have divided our treatment of this case
into several distinct issues. We realize that our analysis of these
issues might not exactly parallel the order in which the parties
presented their arguments and that there might be some overlapping of
the parties' arguments across these divisions. We nevertheless believe
that our approach addresses all the major questions advanced by the
parties.
I. Was there a substantive basis for the disallowance?
The State asserted that HCFA has failed to provide any substantive
basis for this disallowance. The notification of disallowance referred
to section 1903(d)(2) of the Act and stateed, "Since the $4,824,026 FFP
repreents final overpayment determinations, according to your
department's own records, the amount does not qualify as medical
assistance under your department's approved State plan." (p. 3) HCFA's
reliance on section 1903(d)(2) is misplaced, according to the State,
because there has been no determination by the Secretary (discussed
below) that an overpayment has occurred as required by that section.
HCFA's position is that section 1903(d)(2), when read in conjunction
with section 1116(d) of the Act (which provides for reconsideration of a
determination that "an item or class of items on account of which
federal financial participation is claimed... shall be disallowed...")
does include, (6) as overpayments, amounts previously paid to a State
but which have been determined to be unauthorized under the Act,
regulations, or State plan. HCFA reasoned:
Under this construction, a determination that the State has claimed
and received FFP in unallowable costs is tantamount to a determination
that the disallowed amount is an overpayment to be adjusted under Sec.
1903(d)(2).
HCFA's brief, p. 7.
HCFA referred to hospital reimbursement in excess of the hospitals'
actual costs and double billing by providers, revealed in the auditors'
examination of the State records, as examples of unallowable costs.
The State apparently interpreted HCFA's reference to section 1903(
d)(2) in the notification of disallowance as the basis for the
disallowance. We find the State's interpretation incorrect. The actual
basis for the disallowance was that the State had made certain payments
to providers which had been determined improper, i.e., amounts not
considered medical assistance under the State plan. While the
notification of disallowance stated this generally, it did refer to
State records to support the disallowance determination. Section 1903(
d)(2) states the means by which these overpayments can be adjusted.
Two types of excess payments appear to be at issue here: amounts
determined through the hospital cost settlement process that represent
overpayments to providers; and amounts identified by BPI as excess
payments for a variety of reasons. The substantive basis for a
determination that these costs were unallowable was that the costs were
in excess of amounts allowable under the State plan or were for services
not covered under the State plan.
As to the hospital cost settlement amounts, the State argued that
these were not unallowable costs because the payments were made in
accordance with an approved rate reimbursement methodology. In
Massachusetts Department of Public Welfare, Decision No. 262, February
26, 1982, the Board addressed a similar argument. There the Board held
that excess payments made as part of a cost settlement process are
nevertheless overpayments and that once a final rate is determined
pursuant to a state plan methodology, any excess amount made as (7) an
interim payment is unallowable under the State plan. While the State's
practice here was never to call excess payments to hospitals
"overpayments" and to give the hospitals 60 days to make an offsetting
adjustment, the State's procedure is essentially similar to that
examined by the Board in Massachusetts. The Board noted there that
section 1905(a) of the Act defines "medical assistance" as "payment
of
part of all of the cost" of covered services and that section 1902(a)(
30) of the Act provides that state plans must provide methods and
procedures relating to payment for care and services assuring that
payments are "not in excess of reasonable charges consistent with
efficiency, economy, and quality of care." See, also, section 1902(a)(
13)(D). The "cost" of Medicaid services is therefore limited to the
amount determined as the correct final payment in accordance with the
methods set out in the State plan.
The Board thus found that excess payments made as a result of the
rate reimbursement methodology were not medical assistance under the
State plan. That was the substantive basis for the disallowance in
Massachusetts, and we find that reasoning applicable here to the
questioned hospital settlement costs.
As to the excess payments identified by BPI, it is true that the
notification of disallowance did not specify any substantive violations
of the Act or applicable regulations. The State itself, however,
identified in the record before the Board some payments to providers as
belonging to a category of payments which would be unallowable, e.g.
duplications of other payments, payments to ineligibles, payments for
services never rendered, etc. While the amount and finality of these
payments are still in dispute (discussed below), the State has not
contended that these payments were allowable. /1/ It is reasonable to
conclude that these (8) payments would not qualify as medical assistance
under the State plan and, therefore, there is a substantive basis for
the disallowance. /2/
II. Was there a determination by the Secretary here?
The State argued that its appeal is distinguishable from
Massachusetts because there has been no determination by the Secretary
that the sums at issue represent overpayments to the State. The State
pointed to the language of section 1903(d)(2) requiring an adjustment
for amounts "which the Secretary determines" were either an overpayment
or underpayment. The State claimed, "At most there has been a cursory
review by Federal auditors who have reported that there are State
records which support that certain providers may owe certain sums to the
State." State's brief, p. 5. The State accused HCFA of attempting to
elevate the entries from the State ledgers to determinations by the
Secretary. The State indicated that the records on which the
disallowance was based were not limited to areas which would constitute
overpayments under the Act and that some of the sums identified in the
records constituted violations of State, but not federal, requirements.
HCFA's response to this line of reasoning was that the Secretary did
make a determination that there were overpayments, based on the State's
records, and that this determination was made by the Secretary's
delegate in the disallowance letter:
Since the $4,824,026 FFP represents final overpayment determinations,
according to your department's own records the amount does not qualify
as medical assistance under your department's approved State plan.
Accordingly, the overpayments must be returned to the Federal Government
even though your agency has not yet collected from the providers
involved.
Appellant's Ex. No. 3, p. 3.
(9) According to HCFA, that determination itself satisfied the
wording of section 1903(d)(2), requiring the adjustment of the federal
share of overpayments where the evidence of an overpayment is
sufficiently persuasive to satisfy the Secretary that an overpayment has
been made. Here, HCFA concluded, that evidence was present because the
State treated the BPI accounts receivable balances as Medicaid
overpayments.
The question before us, then, is whether HCFA was entitled to make a
determination that overpayments occurred on the basis of the State's own
records or was required to make its own independent investigation of the
accounts receivable. In South Carolina Department of Social Services,
Decision No. 149, February 3, 1981, the Board held that HCFA is entitled
to rely on a State audit or certification of an amount overpaid when
such reliance would be justified under the circumstances of the case.
(p. 4) Yet in California Department of Health Services, Decision No.
244, December 31, 1981, the Board, while upholding HCFA's right to
adjust under section 1903(d)(2) for unallowable payments to providers,
nevertheless reversed a disallowance because HCFA's reliance on the
accounts receivable records for determining to amount of overpayments
was insufficiently supported by the record:
Where... a federal audit merely adopts figures from State records,
assuming that overpayments for State purposes are necessarily
overpayments for federal purposes, and where the State has shown that
this assumption may not be warranted, the Respondent must provide more
specific evidence and authority to support its allegations.
We do not hold here that Respondent may never base a disallowance on
findings adopted from a State audit. However, Respondent should not
adopt State audits where there are indications that the State audits are
not reliable.
p. 10.
The question, we believe, comes down to one of reasonableness. We do
not think it is necessary that HCFA must, in effect, duplicate the work
f the State's own auditors and independently evaluate each available
record. HCFA should (10) be entitled to reasonably rely on the accuracy
of the State's own records unless the State can show how the records may
be erroneous. The State has pointed to several inaccuracies in the
audit report (discussed below) which may be grounds for an adjustment of
the disallowance amount.
The State, however, alleged that the audit report not only contained
factual inaccuracies, but also had false premises, namely that the audit
included amounts for violations of State, rather than federal,
requirements and that some overpayments involved funds from State-only
programs. HCFA's response to the former allegation was that the State
requirements were incorporated into the State's Medicaid plan, which is
the basis for FFP, and therefore the payments were subject to
adjustment. (HCFA Ex. No. 3, p. 4) The State did not deny the
allegation that the State's requirements were part of the State plan.
As to the latter allegation, HCFA responded that the State itself
treated all overpayments in its records, from both federal/State and
State--only programs, by applying a flat percentage rate to determine
the necessary adjustment of FFP; thus the State should not now complain
that the accounts receivable records are an unrealiable method for
determining the federal share of Medicaid overpayments.
The State did not deny that, rather than breaking down each
overpayment into its federal and State funding components, the State
used a predetermined rate to determine the federal share. While it is
possible that, for a given period, that process might have resulted in
an excess adjustment for FFP, this would be difficult to document unless
the State could specifically identify the respective federal and State
shares of each overpayment. To instead separate out only a limited
number of overpayments would undermine the premise of using an average
rate, i.e., the premise that in some instances the State share would be
exceeded and in others the federal share and that, in the end, each
party would receive its fair share. Thus, we find HCFA's reliance on
the State's fixed rate to be reasonable. /3/
(11) The Board thoroughly examined the relative obligations of
parties in audit disagreements in California Department of Health
Services - Accounts Receivable, Decision No. 334, June 30, 1982. There
the Board stated:
In identifying overpayment amounts in circumstances such as here,
there is a joint burden: the Agency must provide sufficient detail
concerning the basis for the disallowance to enable the State to
respond, but the ultimate burden of documenting the allowability of
costs claimed rests with the State.
p. 5.
We find that HCFA has met that burden here. HCFA based its
disallowance on State audits, providing sufficient detail to enable the
State to respond. /4/
We conclude that there was a determination by the Secretary, through
his delegate, and that this determination was reasonably based on the
State's own records.
III. Is HCFA entitled to demand repayment prior to the State's
actual recovery from the providers?
The State questioned HCFA's authority to demand the federal share of
overpayments prior to the State's actual recovery of the amounts from
the providers. The State argued that HCFA's interpretation of section
1903(d) as allowing immediate repayment of an overpayment upon discovery
is erroneous because section 1903(d)(3) limits the federal share to a
portion of "the net amount recovered... by the State." (emphasis adde)
The Board examined this question in a series of decisions, most
extensively in Massachusetts, supra. There the Board found that section
1903(d)(3) does not by its terms relate (12) back to all overpayments
contemplated by section 1903(d)(2) and that section 1903(d)(3) refers to
amounts recovered with respect to "medical assistance furnished under
the State plan"; excess payments to providers, however, would not
qualify as medical assistance. We incorporate here the summary of the
Board's reasoning in Massachusetts as expressed in New York State
Department of Social Services, Decision No. 311, June 16, 1982:
Section 1903(d)(3) does by its terms relate back to all overpayments
contemplated by section 1903(d)(2).
Since 1903(d)(3) refers to amounts recovered with respect to "medical
assistance furnished under the State plan," it reasonably may be viewed
as referring only to state payments which are allowable "medical
assistance" costs, under section 1905(a) of the Act.
The legislative history supports the Agency's position that section
1903(d)(3) was designed to authorize the Secretary to adjust in
situations where a question might have existed as to a state's liability
to repay the federal share or the Agency's ability to recoup the share
by an offset to future claims.
Neither the Agency nor the courts have ever interpreted section
1903(d)(3) to prevent adjustment under section 1903(d)(2) of an amount
determined by the Secretary to be an overpayment, merely because the
state has not recovered the amount from a provider.
pp. 4-5.
IV. Does the disallowance violate the cooperative federal/state
relationship of the Medicaid program?
The State alleged that HCFA, by its position that the State alone
must absorb the risk of recovering from audited providers, ignored the
Medicaid program's concept of cooperative federalism. According to the
State, HCFA required that the State, which was a partner with the
federal government in all other aspects of the Medicaid program, stand
alone in attempts to recover payments from providers. As an example
(13) of HCFA's rejection of the concept of cooperative federalism, the
State pointed to HCFA's insistence that the State pay back money due
from a provider that has filed for bankruptcy when federal laws bar the
State from recovering the funds from the provider.
This argument has been raised in other cases before the Board. In
New York, supra, the Board gave its opinion as to why it is not
unreasonable for HCFA to place the burden for recovering payments from
providers on the states:
(While) it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, the states have the primary responsibility
for administering the program, including the duty to take steps to
prevent improper payments in the first instance and to identify and
recover overpayments in a timely manner when they do occur. In some
instances the loss of funds might be unavoidable. However, to sort out
these cases would be difficult, requiring a highly judgmental
case-by-case analysis. Viewing the program as a whole, therefore, we
think that the Agency is not unreasonable in requiring the states to
bear the burden of unrecovered overpayments.
p. 7.
We adopt that position here.
V. Is the federal audit fatally flawed because of the presence of
errors?
The State challenged the accuracy of the audit report because of
alleged errors in several areas:
the accounts receivable;
the transfers from BPI; and
the hospital cost settlements.
In support of its position the State submitted voluminous
documentation in its appeal file and offered to submit even more
documents at the Board's request. The federal auditors did not have
access to all this documentation when they prepared the audit report.
(14) The State noted that in past cases involving overpayments the
Board's response to a disagreement between HCFA and a State over the
accuracy of a disallowance amount has been to affirm the disallowance
with instructions to HCFA to work with the state to re-examine the
documentation to eliminate any errors. Here the State asked the Board
not to follow this course, but to dismiss the disallowance in its
entirety on the basis of the State's argument that the mere
identification of numbers taken from the State's ledgers is not a
determination by the Secretary which can serve as a basis for a
disallowance under section 1903(d).
As discussed above, we agree with HCFA that section 1903(d)(2)
requires adjustment of the federal share of overpayments where the
evidence is sufficiently persuasive to satisfy the Secretary (though his
delegate) that an overpayment has been made. That requirement has been
satisfied here.
We believe, nevertheless, that the State has raised reasonable doubts
about the accuracy of the disallowance amount. In such cases the Board
generally asks the parties to review the documentation together to see
if they can reach agreement on their own. HCFA has already indicated a
willingness to adjust the disallowance if the State can substantiate its
claims. We will briefly summarize what we believe are the key areas of
dispute.
The State asserted that the auditors made numerous errors in their
examinations of the accounts receivable. (State's Ex. Nos. 5-11) The
State claimed that nearly all of the sums identified for nursing homes
had been recovered, either through credit adjustments or through
adjustments at the local office level. The State also asserted that a
significant portion of the sums identified for individual practitioners,
laboratories and pharmacies was either incorrect or had been recovered.
HCFA replied that the errors pointed out by the State involved less than
4% of the total amount in dispute and that the errors were the result of
the State's ineffective procedures.
As to the $1,136,945 federal share of transfers from BPI, the State
argued that HCFA's understanding and use of a State memorandum (HCFA Ex.
No. 1) as a basis for this determination was incorrect. The State
maintained that it has now located records serving as the basis for the
amount mentioned (15) in the memorandum, and that the records indicate
that more than half the amount in question represent findings from desk
reviews. The State claimed that HCFA did not recognize desk audits as
final and excluded other desk audit findings from this disallowance.
/5/
Concerning the $1,441,808 federal share of hospital cost settlements,
the State indicated in its reply brief that the vast majority of this
amount has been recovered and should no longer be part of this
disallowance. The State asserted that it had records to support this
claim.
HCFA should review the State's documentation in these three areas,
and, if warranted, adjust the disallowance amount accordingly.
Conclusion
For the reasons stated above, we sustain the disallowance. Since the
State has raised reasonable questions about the amount of the
disallowance, however, HCFA should examine (16) the documentation the
State presented in these three areas in support of its position. After
reviewing this documentation submitted by the State, HCFA should
recalculate the amount of the disallowance. If the State disputes the
accuracy of this recalculation, the State may appeal that determination
to the Board. /1/ The State did argue that some of these payments
violated only State, and not federal, requirements, and,
therefore, should not have been disallowed. As discussed below,
however, the State requirements were incorporated into the State plan,
and thus are a proper basis for a disallowance. /2/ Under other
circumstances, we might require HCFA to relate these excess payments to
specific program requirements. Here, however, the State itself included
these payments in a category covering clearly unallowable costs, and, as
discussed below, has not come forward with anything to show that part or
all of the payments might have been allowable. /3/ We are not
persuaded by the State's argument that application of the fixed
percentage rate of 50% was unfair since the State now uses a different
percentage. The State itself chose the 50% rate for the period in
question and has presented nothing to show that it was not a fair
average rate at the time. /4/ With respect to the hospital cost
settlement amounts, HCFA identified the specific providers and gave
amounts for each provider. The disallowed amounts identified as
"Transfers from BPI" were less specific but were based on a State
memorandum and the State was able to identify from its own records the
amounts included. /5/ In a different context, the Board has
previously held that there is no valid basis for distinguishing over
payments determined as a result of desk reviews from overpayments
determined as a result of field audits. Florida Department of Health
and Rehabilitative Services, Decision No. 296, May 14, 1982, pp. 9-10.
However, that case involved desk reviews performed as part of the rate
determination process, in accordance with standards specified by
regulation. The State has described the "desk reviews" here as "a
review of computer printouts to identify potential amounts that may be
due the Department from a medical provider." We note, though, that the
reason stated in the Audit Report (p. 7) for not recommending
disallowance of the overpayments identified through desk reviews (which
were part of the rate determination process) was that the State records
did not show the appeal status of these amounts. The auditors had
determined that overpayments which were still subject to appeal were not
sufficiently final because the original overpayment determinations were
often altered in favor of the provider as a result of an administrative
appeal.
SEPTEMBER 22, 1983