Missouri Department of Social Services, DAB No. 448 (1983)

GAB Decision 448
Docket No. 83-8 and 83-64

June 30, 1983

Missouri Department of Social Services;
Ford, Cecilia; Teitz, Alexander Settle, Norval


The Missouri Department of Social Services (State) appealed the
disallowances by the Health Care Financing Administration (HCFA, Agency)
of $2,042,191 and $349,671 in federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act).
The disallowances were based on a HCFA review of the State's accounts
receivable records for nursing homes. HCFA determined that overpayments
to nursing homes participating in the Medicaid program were not being
returned to HCFA in a timely manner because the State did not repay HCFA
until it collected the amounts from the providers.

The disallowance of $2,042,191 in Docket No. 83-8 represented
identified overpayments outstanding as of March 31, 1982. The
disallowance of $349,671 in Docket No. 83-64 represented additional
outstanding overpayments that HCFA alleged the State should have
returned to HCFA in the quarter ending June 30, 1982. /1/ The Board
granted the State's motion to consolidate the appeals, as both
disallowances concerned the same providers.


The major issues presented are: whether there was sufficient factual
basis in the State's records for HCFA to issue a disallowance; and
whether HCFA was precluded from taking the disallowance because the
amounts involved were subject either to injunctive orders by State
courts or to State administrative litigation pending at the time of
HCFA's review. For the reasons stated below, we find that HCFA was
entitled to use the State's own records as a factual basis for the (2)
disallowance, and that section 1903(d)(2) of the Act empowers HCFA to
adjust for any overpayments to a provider irrespective of the fact that
the provider sought review of the overpayment determination and obtained
injunctive relief to prevent the State from collecting the overpayment.
However, with respect to certain providers, where a court order
apparently reversed the State's initial overpayment determination, we
remand to the Agency for further examination.

There are no material issues of fact in dispute. We have determined,
therefore, to proceed to decision based on the written record.

General Background -- Statutory Framework and the State's Rate-Setting
and Payment Adjustment Methodology

Title XIX of the Act provides for the payment of federal monies to
states to aid in financing state medical assistance programs. Any state
that wishes to participate in the Medicaid program must develop and
submit a plan that meets certain requirements set forth by the Secretary
of HHS. Realizing that many states might have difficulty financing a
Medicaid program even if subsequently reimbursed by the federal
government, Congress also established a funding mechanism by which HHS
advances funds to a state, on a quarterly basis, equal to the federal
share of the estimated cost of the program. After review of the State's
quarterly statement of expenditures, the Secretary may adjust future
payments to reflect any overpayment or underpayment which was made to
the State for any prior quarter. Section 1903(d).

Specifically, 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....

Congress gave the states considerable discretion, subject to the
Secretary's approval, in formulating an appropriate rate methodology to
reimburse providers of Medicaid services.

The Medical Services Unit in the Missouri Department of Social
Services is responsible for administering the Medicaid program,
including nursing home reimbursement. Interim payments are processed
monthly through the State computerized information system, which applies
an interim per diem rate to a claim form received from the nursing
homes. Following the end of each facility's fiscal year, the Medical
Services Unit (3) determines the actual per diem rate based on a cost
report submitted by the nursing home. The correct per diem rate is
determined by a desk review of the cost report. If the desk review
computes a rate lower than that in effect for the nursing home's fiscal
year, an on-site audit is done directly from each nursing home's actual
records; this audit is an in-depth, detailed and exhaustive review of
actual historic costs. A new per diem rate for the provider is the
usual result. The State prepares a Schedule L reflecting the actual per
diem rate and the total amount the facility was underpaid or overpaid.
If the facility was underpaid, the State sends a check for this amount
to the nursing home. If an overpayment occurred, a notification letter
and a repayment agreement is mailed to the provider. It informs the
facility of the amount of the overpayment, requests repayment and
specifies repayment terms available according to the Cost Related
Reimbursement Plan for Long Term Care as follows:

a) Repay entire amount due within thirty days.

b) Request that one-sixth of the amount due be deducted from the next
six subsequent consecutive monthly payrolls.

c) Repay amount due in six equal consecutive monthly installments.

d) Request a combination of the above methods.

If a response is not received within 30 days, the State will
immediately initiate option b above. Overpayments determined, cash
payments received, payroll deductions made, and adjustments supported by
Schedule L's resulting from field audits and/or additional information
received from providers are entered in the accounts receivable control
records.

Case Background

HCFA conducted a review of outstanding Medicaid nursing home
overpayments in the State of Missouri in March 1982. The review covered
the State's reimbursement of nursing homes for all quarters prior to
March 22, 1982. As a result of this review, HCFA determined that the
State's nursing home outstanding overpayments accounts receivable
control records were accurate and properly supported by Schedule L forms
resulting from cost report desk reviews, field audits, or adjustments
due to reopening the actual cost settlement file. HCFA found, however,
that the federal share of identified overpayments was not being returned
to HCFA on a timely basis. The federal share was being returned only as
cash (4) payments or payroll deductions were made from the nursing
homes.

In response to the HCFA review, the State reported:

The outstanding overpayments are due to nine stay orders, 22
temporary restraining orders, and seven homes which are out of business.
These are cases which we have not yet been able to collect on. When we
have exercised all due diligence in pursuing overpayments but cannot
collect, it is unreasonable that we be penalized by having to repay
Federal funds.

(State's Ex. 2, p. 1)

Nevertheless, in both notifications of disallowance at issue here,
HCFA concluded:

Since the overpayment amounts... are due from providers who are
bankrupt, providers that are no longer participating in the Title XIX
program, and providers who have had overpayments determined as part of a
cost settlement process they represent final overayment determinations.
Accordingly, those amounts are subject to recovery, as overpayments,
under Section 1903(d)(2).

Discussion

The question of HCFA's ability to recover from states overpayments to
providers prior to the states' actual recovery of the amounts from the
providers has been examined by the Board in a series of decisions, most
extensively in Massachusetts Department of Public Welfare, Decision No.
262, February 26, 1982. There the Board held that excess payments to
providers do not constitute "medical assistance" within the meaning of
the Act, and that, therefore, HCFA is empowered by section 1903(d)(2) to
collect the federal share of excess payments, even if a state has not
yet recovered the excess amounts from the providers. The Board recently
reaffirmed this position in Illinois Department of Public Aid, Decision
No. 404, March 31, 1983, and Pennsylvania Department of Public Welfare,
Decision No. 426, May 24, 1983. We note that the State here has not
argued that Massachusetts was wrongly decided, but has attempted to
distinguish the appeals at issue from Massachusetts.

I. Was there an adequate factual basis for HCFA to issue a
disallowance?

The State argued that HCFA's review of the State's records, upon
which the disallowances were based, was inadequate as a factual basis
for a disallowance. The State claimed that the (5) "HCFA review merely
adopted figures from the State's records and determined that those
amounts were overpayments." (State's brief, p. 7) According to the
State, in the intervening period between the March 1982 review and the
December 1982 disallowance, many of the alleged overpayments were
recovered and reported to HCFA, thus rendering much of the disallowance
moot. While recognizing that HCFA is not precluded from issuing a final
decision that may be "provisional on intervening collections," the State
objected to the fact that HCFA's final decision was based upon "a review
that contains no evidence that the reviewers took any cognizance of the
fact that a large number of overpayments were subject to imminent
collection by the State." (Id., pp. 6-7) The State cited the Board's
decisions in California Department of Health Services, Decision No. 159,
March 31, 1981, and California Department of Social Services, Decision
No. 244, December 31, 1981, for the proposition that "HCFA may not
disallow amounts of FFP without a sufficient factual and legal basis for
doing so, and has the burden in proving that the factual basis exists."
(Id., p. 7) The State additionally argued that the review was flawed
because HCFA knew many of the providers were involved in litigation
contesting the State's rate determinations, and that, therefore, the
accuracy of the State audits and desk reviews was not ensured.

In response, HCFA argued, "The mere fact that an overpayment
determination is being appealed does not make the overpayment so
'uncertain' that the disallowance is not legally or factually
supportable." (HCFA's brief, p. 14) HCFA detailed the steps it took in
its review before it issued the disallowances. In addition to accepting
the figures from the audits, desk reviews, and accounts receivable
ledgers, HCFA verified the amounts listed on the accounts receivable
ledgers by reconciling those amounts with the Schedule L forms for each
nursing home. HCFA also reviewed the State's correspondence with the
providers regarding collection of overpayments and pending litigation.
According to HCFA, this evidence was sufficient to provide a factual and
legal basis for a disallowance. As to the State's claims that its own
records were potentially inaccurate because of the possibility the
provider might prevail upon appeal, HCFA stated that it did not believe
it was bound to wait until the conclusion of an appeals process that
might take months or years to conclude. Finally, HCFA contended that
there was sufficient evidence so that the overpayments could not be
considered uncertain, even though the overpayment amounts subject to
disallowance may change, due to administrative orders or repayment by
the providers, during the pendency of the disallowance proceedings.

(6) The issue of HCFA's reliance on state records as a factual basis
for a disallowance has been before the Board in several cases. 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) In the particular
circumstances in California, Decision No. 244, supra, the Board reversed
a disallowance because HCFA's basis for determining the amount of
overpayments was insufficiently supported by the record. The Board
stated:

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.

In Illinois, supra, HCFA used state records as a basis for its
disallowance. The State of Illinois contended that HCFA was required to
make its own independent evaluation of the state's records rather than
relying on determinations made by the state's own auditors. The Board
considered the question to be one of reasonableness:

We do not think it is necessary that HCFA must, in effect, duplicate
the work of the State's own auditors and independently evaluate each
available record. HCFA should 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. pp. 9-10.

In support of this standard, the Board cited 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 (7) ultimate burden of documenting the allowability of
costs claimed rests with the State. p. 5.

In its March 1982 review, HCFA notified the State of the providers
and amounts in dispute, and the time periods in which the overpayments
occurred. HCFA further identified the State's records - desk reviews,
audits, accounts receivable, and Schedule L forms - as the basis for its
findings. We thus find that HCFA has provided the State with sufficient
detail to enable the State to respond to the disallowance. Furthermore,
we think that HCFA is justified in relying on State accounts receivable
records where, as here, it has verified their accuracy, and where those
records are derived from reviews and audits performed as part of the
cost settlement process, according to generally accepted standards.
See, 42 CFR 447. The State has not shown that its records were
unreliable, and, indeed, the State itself used them as a basis for
collection from the providers.

As for the State's claim that its records may eventually be found
inaccurate as a result of State administrative or judicial proceedings,
we do not think that HCFA should be forestalled from collecting its
share of the overpayments for an indeterminate period of time on the
mere possibility that the State records may be found to have been in
error. HCFA declared that, if the providers do prevail in the appeals
process, the State could submit the final judgment to HCFA as evidence
that there were no overpayments to those providers. (HCFA's brief, p.
13) HCFA stated that it would then consider that evidence, along with
other relevant evidence, to determine whether the State's FFP should be
adjusted to allow FFP for the amount at issue. We conclude that the
mere possibility of a future discovery of error in the State's records
is insufficient grounds to declare that the disallowances are factually
incorrect.

The State complained that the disallowance was factually incorrect
because in the interim between HCFA's review and the disallowance many
of the overpayments were repaid. We do not see how the State has been
prejudiced by this action, however. Intervening collections are a
common practice and should not be cause for invalidating the substantive
basis for a disallowance. In such circumstances, HCFA has agreed to
deduct from the amount of the disallowance any overpayments that the
State can document it has already returned to HCFA.

(8)

II. Was HCFA precluded from disallowing overpayments that were either
subject to injunctive orders by State courts or the subject of pending
State administrative litigation at the time of HCFA's review?

Under Missouri law providers may appeal an overpayment determination,
based on desk review or audit, to an independent administrative body.
Section 161.274 RSMo. (1982 Supp.) According to HCFA, of the 109
nursing homes reviewed, 14 had obtained temporary restraining orders
from a State court barring further collection or withholding action by
the State; and 33 had appealed to the Missouri State Administrative
Hearing Commission, with 11 receiving stay orders for relief from any
collection or withholding action, pending an appeal decision. (HCFA's
brief, p. 5)

It is the State's position that an overpayment is not truly found and
determined until the correct rate has been arrived at through the
appeals process. The State alleged that in its experience many of the
records used to determine an initial overpayment have been proven to be
inaccurate during the appeals process. According to the State, HCFA,
when it made its review and issued the disallowances, knew that the
State was precluded from collecting the overpayments from the providers
by judicial restraining orders and administrative stay orders. The
State contended that the presence of these injunctive orders
distinguishes these appeals from Massachusetts, supra, and other Board
decisions where HCFA's policy of instituting a disallowance prior to a
state's recovery of overpayments from providers was upheld. In support
of its argument that the presence of injunctive orders prevents HCFA
from issuing a disallowance, the State cited Ohio Department of Public
Welfare, Decision No. 173, April 30, 1981. In Ohio the Board held that
HCFA's disallowance of FFP for payments made to nursing homes without a
valid Medicaid provider agreement was invalid, subject to certain
conditions, if the state was making such payments pursuant to a court
order. The State contended that it was essentially in the same
situation as that of Ohio; it could not collect the overpayments from
providers who had sought and received injunctive relief. Charging that
HCFA's policy of collecting the federal share of such overpayments is
burdensome, arbitrary, and capricious, the State concluded:

In these situations, the State must litigate against HCFA to keep its
FFP claim alive while at the same time going to court against the
provider in an attempt to recover the overpayments. HCFA policy in this
case forces the State to "ante up twice" by withdrawing a second federal
share which, pursuant to judicial or (9) administrative order, remains
in the hands of the appealing nursing home.

State's brief, p. 12.

In response, HCFA argued that the general principle, affirmed by
Board decisions, that HCFA is entitled to recover the federal share of
overpayments is applicable to the facts of these appeals. HCFA pointed
out that past Board decisions have held that the fact that a state was
prevented from recovering overpayments did not absolve the state of its
responsibility to return the federal share of those overpayments. HCFA
referred to Massachusetts, where the Board upheld the disallowance
although the State was permanently prevented from recovering the
overpayments from providers who had been declared bankrupt or who were
no longer participating in the Medicaid program or who were out of
business. HCFA argued that the fact that a State's recovery is
prohibited by court order rather than by statute (e.g., the federal
bankruptcy law) should make no difference to whether overpayments are
subject to recovery pursuant to section 1903(d)(2) of the Act. HCFA
claimed that there would be a logical inconsistency with the past Board
decisions if the Board, after having held that a state must repay the
federal share of overpayments which it is permanently prevented from
recovering, would hold that the issuance of a restraining order or a
stay order, which only temporarily prevents a state from recovering an
overpayment, allows the state to delay indefinitely the repayment of the
federal share of the overpayment. As stated above, if a provider were
to be upheld in the appeals process, HCFA declared that it would take
that decision into account as evidence should the State return to HCFA
to seek an adjustment of FFP based on the newly established rate.

The Board has never directly ruled on whether a provider appeal or
injunctive relief is grounds for a state to delay returning to HCFA the
federal share of an overpayment once the overpayment has been
determined. In California, Decision No. 244, the provider appeal issue
was raised, but the Board reversed the disallowance there on other
grounds and never addressed the question. In a footnote in that
decision, at page 6, the Board noted that the regulations and a HCFA
(10) action transmittal concerning the question were somewhat ambiguous.
/2/

The effect of a provider appeal or injunctive relief is to delay,
assuming the State prevails, the State's recovery of the overpayment
from the provider. The question before us is whether HCFA should be
expected to wait to collect the federal share of an overpayment until
the appeals process is completed. We conclude that HCFA should not be
required to so delay its recoupment of the federal share.

Section 1903(d)(2) of the Act authorizes the Secretary to adjust FFP
for an overpayment that has been determined. Such a determination
occurred here when the State, after an examination of its records,
decided that certain providers had received excess payments and HCFA,
after its own review, adopted the State's findings.

(11) In some circumstances, administrative or judicial action
subsequent to a State's initial determination that a provider had been
overpaid might raise doubts as to the validity of the initial
determination so that HCFA would not be justified in relying on that
determination without performing its own review of the underlying facts
and law. Here, however, there is no indication that the providers who
merely obtained injunctive relief were likely to prevail on the merits.
/3/ In fact, as the State pointed out on page 7 of its brief, "Missouri
law provides for administrative stay orders against agency action with
no burden upon the Medicaid provider filing appeal to show irreparable
harm or a chance to prevail on the merits." (emphasis added) In short,
there has been no showing that the injunctive orders were issued after
an evaluation of the merits of each provider's case which would cast
doubt on the State's initial overpayment determination.


The State argued that the overpayments were not "final" until the
appeals process is completed. The State has not indicated, however, how
long the appeals process takes. The State admitted that 150 provider
appeals had been filed against the State, with only three having been
decided by the administrative tribunal and none having reached final
judicial review. (State's brief, p. 5) We share HCFA's concern that
such an appeals process might take years to conclude. (Id.) We think it
unreasonable that HCFA should be required to wait for an indeterminate
amount of time for a provider appeal to wend its way through the State's
administrative and judicial process. Whether a provider may prevail in
this process is mere speculation.

The State complained that HCFA's action to disallow was arbitrary,
capricious, and unfair because injunctive relief prevented the State
from collecting the overpayments from the providers. As HCFA
analogized, we fail to see how the State's situation is worse than that
in Massachusetts where the providers' bankruptcy prevented that state
from recovering the overpayments. We do not necessarily agree with HCFA
that we would be inconsistent with past Board decisions if we were to
hold that in some situations a temporary action, such as a restraining
order, might permit the State to delay returning the federal share of
the overpayment to HCFA. In a case where a state determination did not
have sufficient finality or otherwise was not (12) reliable, it is
possible that there would be grounds for delaying the return of the
federal share. That, however, is not the case here.

The State's reliance on Ohio for its position is misplaced. In Ohio
the Board found that FFP was authorized in a situation where a HCFA
policy guide specifically provided for the continuation of a facility's
Medicaid provider agreement and payments pursuant to a court order
pending appeal of the non-renewal or termination of the agreement. No
such policy exists in the situation where an overpayment has been
determined. Also in Ohio, the Board found that 45 CFR 205.10(b)(3) (now
42 CFR 431.250 for Title XIX) provided grounds for FFP for payments of
assistance made in accordance with a court order. The normal context of
45 CFR 205.10(b)(3) concerned fair hearings for individual recipients of
(or applicants for) public assistance. In the Ohio situation, though,
HCFA declared that the scope of this regulation could be extended to a
provider appealing its Medicaid decertification. HCFA contended,
however, that 45 CFR 205.10(b)(3) was not applicable to the
circumstances of the present appeals. The State has not disputed this
position.

As we stated in the first section of our analysis, HCFA has agreed to
reexamine the record for possible adjustment of FFP should a provider
prevail on appeal. On that condition, we find that the State is not
faced with the situation where the State is forced to "ante up twice" as
it has claimed. At most, the State is required to return the federal
share of an overpayment before it collects from the provider. The
length of such intervening time is solely dependent on the State's
appeals procedures. If the State were to expedite the appeals process,
any outflow of funds incurred by the State could be kept to a minimum.

III. What is the effect of a court order entering judgment for certain
providers?

Although, as discussed above, we do not think that generally the
injunctive orders here indicate that the initial audit determinations
were unreliable, the State submitted one court order which does raise a
substantial question concerning whether certain amounts reviewed by HCFA
were, in fact, overpayments. This court order, dated February 15, 1983,
and included with the State's Exhibit 5 to the Appeal File, is very
succinct, entering judgment for the plaintiff nursing homes in the sum
of $77,000 based on the parties' stipulation of facts. According to the
explanation which the State provided at page 13 of its appeal brief and
in a footnote to the schedule of adjustments in Exhibit 4 to the Appeal
File, the order resulted from a lawsuit in which the (13) plaintiff
nursing homes sought an additional payment of $500,000 for fiscal years
1979 and 1980 and the defendant State agency counterclaimed for its
overpayments amounting to $901,000. The judgment for the providers
would appear to indicate that they had not been overpaid, but the basis
for this conclusion is unclear from the record. In footnote 8 on page
13 of the appeal brief, the State refers to auditors having made a
$50,000 error due to improperly reclassifying patient days from Medicaid
to private, but does not explain whether and why the remaining
overpayments covered by the court order were in error. Further, the
overpayments covered by HCFA's review and identified in Exhibit 4 as
those involved in the litigation resulting in the February 15, 1983
order add up to approximately $1.4 million and it is unclear how this
amount relates to the $901,000 counterclaim mentioned by the State.

In its brief, HCFA did not respond to the State's explanation of this
litigation. The State has raised a substantial doubt about the
reliability of its initial overpayment determinations for these fiscal
years for the providers involved in the litigation. Under the
circumstances, however, the State's showing is insufficient as a basis
for determining what part of the disallowance should be reversed. In
view of the lack of clarity in the State's presentation, we remand this
issue to HCFA for further clarification. HCFA should provide the State
an opportunity to show the relationship between this litigation and the
overpayments in question here and the nature of the court's order. /4/
If the State makes this showing, HCFA should then either reduce the
disallowance accordingly or issue a written statement as to why it will
not.The parties may return to the Board if there is a further dispute
over this matter.


(14)

Conclusion

For the reasons stated above, we sustain the disallowances in part,
subject to a reduction for any amounts the State can document have
already been returned to HCFA, and remand to the Agency for an
examination of the effect of the February 15, 1983 court order discussed
above. /1/ In its Notice of Appeal in Docket No. 83-64, the State
alleged that the disallowed sum of $349,671 represented a duplication of
an amount already disallowed in Docket No. 83-8. In response HCFA
stated that the amount disallowed in Docket No. 83-64 was a new amount,
not covered by the previous disallowance, representing payments due for
adjustment in a subsequent quarter. As the State has not objected to
HCFA's explanation of the disallowances, we conclude that two separate
amounts, $2,042,191 and $349,671, are at issue. /2/ Section
447.296 of 42 CFR (1978) states: The (state) agency must account for
overpayments found in audits on the quarterly statement of expenditures
no later than the second quarter following the quarter in which the
overpayment was found. HCFA Action Transmittal, AT-77-85 (September 1,
1977) defined "the quarter in which found" provision of the regulation
as "the quarter during which the administrative hearing procedures of
the State have been exhausted and a determination of overpayment has
been sustained." HCFA rescinded 42 CFR 447.296 on September 30, 1981.
Although never formally repealed, the Action Transmittal became
inoperative when the regulation on which it was based was rescinded. We
find that the regulation and Action Transmittal cannot be applied to
overpayment determinations occurring after the regulation's recision.
Thus, the regulation and Action Transmittal have no bearing on the
present appeals.Even if the regulation and Action Transmittal were
applicable to the facts of these appeals, they would not affect the
Board's finding here. The policy behind HCFA's not requiring a state to
adjust until the exhaustion of the hearing procedures is to give the
state time to resolve state audit findings or to make a recovery. Here,
HCFA made an independent determination of the overpayments. As such, in
accord with section 1903(d)(2) of the Act, it was entitled to make an
adjustment for the excess payments. /3/ A possible exception to
this general proposition concerns an order, discussed below, which
appears to have actually entered a judgment for certain providers. /4/
The State should of course have the same type of opportunity in
any of the pending provider appeals that are finally determined in favor
of the provider on the merits. While the Agency by this decision can
now properly collect the amount of the FFP in the overpayments in these
cases, nothing in this decision is intended to preclude the State from
seeking a return of FFP in all or any part of the overpayments where the
final State administrative or judicial finding is that there was in fact
not the overpayment originally determined by the State.

JULY 07, 1984