New Jersey Department of Human Services, DAB No. 480 (1983)

GAB Decision 480
Docket No. 83-115

November 30, 1983

New Jersey Department of Human Services;
Garrett, Donald; Settle, Norval Teitz, Alexander


The New Jersey Department of Human Services (State) received a
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $989,147 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance was
based on an audit report (Audit Control No. 02-30263) reviewing the
State's procedures for crediting the federal government for its share of
Medicaid collections for the period January 1, 1973 through June 30,
1981.

The major issues presented are whether section 1903(d)(2) of the Act
authorizes HCFA to demand that the State repay the federal 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 is entitled to a share of the interest the State
imposed and collected on amounts the Medicaid providers were overpaid.
For the reasons stated below, we find that HCFA may adjust under section
1903(d)(2) of the Act for overpayments to providers and is also entitled
under section 1903(d)(2) of the Act to a share in the amount of any
interest collected by the State from the providers.

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

General Background

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 the Department of Health and Human Services (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 (2) 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. . . .

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.

Case Background

HCFA audited the State's procedures for the identification and
recovery of collections due the Medicaid program and determined that
$1,978,294 (FFP $989,147) in identified credits had not been made to the
federal government as of June 30, 1981. This $989,147 federal shares
consisted of the following:

$708,450 FFP in substantiated overpayments, made to 18 nursing home
providers, that under State policy were not to be credited to HCFA until
collection from the providers was received;

$139,440 FFP in "interest payments" on the overpayments collected by
the State, but not credited to HCFA; and

$141,257 FFP in recoveries misclassified to the accounts for Personal
Needs Allowance and Medical Assistance to the Aged, which are strictly
State programs.

Declaring that federal regulations require the State to credit
Medicaid overpayments at the time the overpayment is identified and that
interest earned on federal funds must be classified as an overpayment
and shared with the federal government, HCFA adopted the auditors'
recommendations and disallowed $989,147 in FFP.

In its appeal the State claimed that at least $366,094 of the
substantiated overpayments had already been collected and credited (3)
to HCFA and that other sums were being collected from providers and
credited to HCFA on a continuing monthly basis. The State therefore did
not consider it necessary to formally appeal the whole $708,450 FFP of
the identified overpayments, but only appealed the disallowed federal
share of the overpayments yet uncollected. /1/ The State also appealed
the legal basis for the disallowance of the interest collected, but did
not dispute the accuracy of the figure of $139,440 FFP. The State did
not contest the disallowance of $141,257 attributed to misclassified
accounts. The amount in dispute, therefore, is $847,890 ($989,147 -
$141,257).


Discussion

The primary issue before us in this appeal is the question of HCFA's
authority to recover from states the federal share of overpayments to
providers prior to the states' actual recovery of the amounts from the
providers. Related to this issue, the State raised arguments why
disallowances for certain of the providers were inappropriate or should
be reduced. The remaining major issue is whether HCFA is entitled to
share in the "civil penalties" the State assessed against the providers.

I. Is HCFA's interpretation of section 1903(d) of the Act, requiring
the adjustment of identified overpayments prior to actual recovery,
correct?

The Board examined this question in a series of decisions. In
Massachusetts Department of Public Welfare, Decision No. 262, February
26, 1982, the Board found that section 1903(d)(3) does not by its terms
relate 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.

A summary of the Board's reasoning in Massachusetts was set forth in
New York State Department of Social Services, Decision No. 311, June 16,
1982 (pp. 4-5) and affirmed in Illinois Department of Public Aid,
Decision No. 404, March 31, 1983 (p. 12) and Pennsylvania Department of
Public Welfare, Decision No. 426, May 24, 1983 (pp. 4-5):

(4) Section 1903(d)(3) does not by its terms relate back to all
overpayments contemplated by section 1903(d)(2).

Since section 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 Security 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 an overpayment, merely because the
state has not recovered the amount from a provider.

The State disagreed strongly with the findings expressed in these
Board decisions. Citing a Report of the U.S. Comptroller General,
HRD-80-77, June 10, 1980 (GAO Report), the State contended that HCFA has
been inconsistent in its policy of administering overpayment recovery
activities and that HCFA only recently implemented a policy of immediate
refund of overpayments. This policy, according to the State, violates
the relationship of cooperative federalism contemplated in the Medicaid
program, with the states and the federal government sharing in the
financing of the program.

The State argued that the Board and HCFA have misinterpreted section
1903 by confusing the two types of overpayments which may arise under
the Medicaid program: overpayments of FFP to a state and overpayments
of medical assistance to a provider. According to the State, section
1903(d)(2) applies only to the former. All the payments in question,
without excessive or not, the State continued, were for medical
assistance to providers. What is due HCFA is only the pro rate share of
the overpayments actually recovered by the State in accord with section
1903(d)(3). The State contended that any other interpretation of
section 1903 would be contrary to the federal-state partnership nature
of the Medicaid program by inequitably placing the economic burden of
unrecovered overpayments solely on the State.

In response, HCFA contended that the State's arguments concerning the
interpretation of section 1903 had already been considered and rejected
by the Board in past decisions. HCFA argued that the (5) State failed
to acknowledge that excessive payments to providers must be, by their
nature, unallowable costs and not medical assistace. Thus, according to
HCFA, section 1903(d)(3), being concerned only with recoveries with
respect to medical assistance, is inapplicable to overpayments to
providers.

The State has not persuaded us that the Board's prior analysis of the
overpayments question was incorrect. The Board examined the cited GAO
Report and allegations of HCFA inconsistency in its overpayments policy
in New York, supra. There the Board stated:

The statement (in the GAO Report) concerning a lack of consistent
policies relates to state administration of overpayment recovery
activities, which is not at issue here. With respect to Agency policy
governing denial of FFP in outstanding overpayments, the General
Accounting Office (GAO) report merely states the policy is not clear as
to the timing and circumstances of such denial.

p. 9.

Finding no inconsistency on HCFA's part, the Board continued:

(Where) the Agency itself has determined through an audit that FFP
has been claimed by the State for improper provider payments, the clear
Agency policy has been to disallow the costs and to require the state to
adjust immediately (or on an installment plan) when the disallowance
decision in final. See 45 CFR 201.14(e) (1977-1981); 45 CFR 201.66
(1977 - 1981); State of Georgia v. Califano, 446 F. Supp. 404 (N.D.
Ga. 1977). Although a number of states have argued before the Board
that the Agency should wait until recovery before disallowing, no state
has called to Board attention any instance in which the Agency construed
its disallowance authority to be contingent on recovery.

As to the State's complaint that HCFA's policy violates the
cooperative federalism relationship of the Medicaid program, the Board
also addressed that argument in New York, supra:

(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 (6) 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.

The Board adopted that position in Illinois, supra, p. 13, and we
continue to do so here.

Nor are we convinced that the distinction the State drew between
section 1903(d)(2) applying to overpayments of FFP to states and section
1903(d)(3) applying to overpayments of medical assistance to providers
is warranted. As HCFA pointed out, the crucial factor is that FFP is
permitted only for allowable costs. An overpayment to a provider
represents a determination that an expense has been found to be
unallowable, and hence not medical assistance under the Medicaid
program. It results in the State having received an overpayment of FFP
for that provider, which HCFA is entitled to recoup under section 1903(
d)(2). We believe that the analysis of section 1903 of the Act
contained in the Board decisions cited above remains valid and applies
to the facts of this case. Therefore, based on the reasoning contained
in these decisions, we hold that HCFA has the right to demand the
federal share of identified overpayments prior to the State's actual
recovery of the overpayments. /2/

(7)

II. The Individual Providers

In addition to its general arguments that HCFA was prevented from
demanding the federal shares of overpayments prior to actual collection,
the State made various claims concerning why each of the 18 providers
should have their respective disallowances reduced or forgiven. A
discussion of these providers follows.

A. As noted previously, the State claimed that nine of the providers
had completely repaid the overpayments and that HCFA had been credited
with the federal share of these payments. HCFA did not state that it
agreed with the State's claim, but indicated a willingness to credit
whatever payments it receives from the State against the outstanding
amount and to reduce the disallowance accordingly. We direct HCFA to
examine any documentation offered by the State in support of this claim
and adjust the disallowance accordingly.

B. For one provider, Hilltop Private Nursing Home, the State argued
that HCFA's initial determination of an overpayment of $146,583 ($73,292
FFP) was superceded by a consent order that set the overpayment figure
at $104,000 ($52,000 FFP). During the course of the appeal HCFA
accepted the amount set by the consent order. Therefore the amount of
the disallowance for this particular provider is reduced from $73,292 to
$52,000.

C. With respect to the Queen of Carmel facility, the State contended
that the disallowance of $89,278 FFP should be reversed because the
provider's audit, confirming an overpayment determination, had not been
finalized. The State argued that HCFA's disallowance for this provider
was premature in that the facility had not passed through the final
audit process of an exit conference or the State's administrative
appeals process. HCFA argued that the federal auditors had based their
audit findings on State audit findings and that this was sufficient
evidence to support an overpayment determination. Noting that the State
had questioned only the finality of the audit findings and not their
accuracy, HCFA pointed out that the State had not offered any specific
evidence or reasons why the disallowance amount may be erroneous. HCFA
added that, should there be a revision in the amount in question as a
result of the audit or administrative appeals process, HCFA would adjust
the disallowance.

What is at stake here is which party has use of the funds in question
during the audit and appeals process. In Missouri (8) Department of
Social Services, Decision No. 448, June 30, 1983, the Board took the
position that it was unreasonable that HCFA should be required to wait
for an indeterminate amount of time for the preliminary determination of
an overpayment to be finalized through a state's administrative appeals
process. The State claimed that an exit conference usually results in a
change in the audit figure generally to the benefit of the provider. We
consider this mere speculation in the face of the fact that it is
uncontested that an overpayment did occur in the facility, especially
when the State has offered no evidence to why the initially
determination may be incorrect. Indeed, the State itself considered
this determination to be sufficiently final that the State could
properly begin to withhold a portion of Medicaid funds from the provider
and credit a share of the withheld funds to HCFA. We therefore sustain
the disallowance for Queen of Carmel, minus whatever sums the State may
have already credited to HCFA.

D. The State contended that three of the providers had entered into
extended payment plans with the State to pay off their overpayments on a
monthly basis. The length of these plans ranged from 32 to 67 months.
We agree with the State that HCFA should reduce the disallowance by
those amounts which can be verified as credited to HCFA under the
payment plans. But for the reasons already stated above, we do not
agree that HCFA must wait for its share of all the overpayments until
the State has actually recovered them. Once again, the issue is who has
the use of the funds in question during the length of the payment plan.
In response to Board questioning, the State admitted that interest, in a
declining balance, is being assessed against the providers on the
payment plans. We therefore do not see how the State is injured by
HCFA's demand for immediate repayment of the amounts in question. /3/

E. The State argued that overpayments of $391,262 ($195,631 FFP)
from the four remaining providers were unrecoverable because of
bankruptcy, destruction of the facility, or lack of corporate assets.
The Board, however, in Massachusetts, supra, ruled that the inability to
collect overpayments from a provider does not relieve a state of its
responsibility to account for the overpayments. Noting that each state
has the authority to administer its own Medicaid program and that HCFA
has no direct role in the recovery of an overpayment to a provider, the
Board declared, "It is the State's responsibility to recover these costs
and it must bear the consequences for failing to do so." (p. 14) (See
also our discussion on p. 6, supra) We therefore sustain the
disallowance for these four providers.


III. Was the recovery by the State of $278,880 from the providers
interest to be shared with the Federal government ($139,440 FFP) or a
penalty to be retained solely by the State?

The State contended that HCFA's disallowance of $139,440, on the
basis that civil penalty interest assessed and collected by the State
pursuant to State statute was subject to federal recoupment, was
unsupported by any statute or regulation. According to the State, prior
to 1976 the only civil remedy the State had in the case of an
overpayment of medical assistance was a recovery of the principal
amount. In 1976 the New Jersey legislature enacted civil penalty
provisions in conjunction with various Medicaid amendments. In the case
of nonfraudulent receipt of excess medical assistance payments, the
legislature provided that the receiver "shall be liable to a civil
penalty of payment of interest on the amount of the excess benefits or
payments at the maximum legal rate in effect. . . ." N.J.S.A. 30:4D-17(
f). According to the State, the civil penalty of interest is one of
strict liability, contingent only upon the receipt of overpayments of
medical assistance.

The State cited the case of In re Garay, 89 N.J. 104, 444 A.2d 1107
(1982), in which the court found the civil penalties to be in effect
liquidated damages for the state's costs in the investigation and
prosecution of Medicaid fraud. The State also declared that the intent
of the New Jersey legislature to impose the automatic payment of
interest as a penalty is evidenced by the mandatory nature of the
penalty, in contrast to the imposition of interest which lies within the
discretion of a judge. The State concluded that the purpose of the
imposition of penalty interest is to act as a deterrent to false
Medicaid claims and not as a recovery for the loss of use of funds by
the State.

HCFA responded that section 1903(d) of the Act permitted the federal
recoupment since the interest was received by the State as part of its
recovery from providers under the State's plan for medical assistance.
HCFA reasoned that since the providers were overpaid, in part, with
money the State received from the Federal government, the interest
collected by the State was an overpayment subject to federal recovery.
HCFA cited North Carolina Department of Human Resources, Decision No.
361, November 30, 1982, for the proposition that interest generated by
the Medicaid program was subject to a disallowance of the federal share.
According to HCFA, just because the State labelled the recovery as a
penalty does not automatically preclude a federal recovery when the
effect of the penalty is nothing other than a traditional remedy for the
loss of use of funds. HCFA concluded that it would be inequitable for
the State to use federal funds to generate additional monies and then
not permit the federal government to recoup its share.

In support of its claim that there are no federal statutes or
regulations providing for a federal share of civil penalty interest, the
State cited a 1981 letter to the State from the Region II Medicaid
Director:

Section 1903(d) of the Social Security Act provides the authority for
the Federal government to share in the principal and interest paid by
the provider to the State. However, the Federal government would not
share in the State's receipt of penalty income or damages assessed
against providers unless it could be shown that the interests of the
Federal government, in relationship to the State Medicaid program, were
also affected by the provider's action, or unless there was a specific
Federal-State agreement to that effect. For the Federal government to
share in penalty income or damages wuld require the support of
Departmental regulation and no such regulation is being contemplated at
this time.

State's Reply Brief, Ex. A.

HCFA considered this irrelevant, because the funds collected by the
State were not penalties, but interest recoverable under section 1903(
d).

We begin our analysis of this question by noting the State's position
that North Carolina is not on point to the facts of this appeal. In
North Carolina the state recovered Medicaid overpayments from providers
and placed the overpayments in interest-bearing instruments. The Board
found that HCFA was entitled to share in the interest generated by these
investments. The State contended that this case was distinguishable
from North Carolina because there the state voluntarily withheld federal
funds for use in subsequent investments to earn income. Rather,
according to the State, here it merely enforced the (11) mandate of its
legislature to impose a penalty upon the providers in question.

We believe that we must look behind the labels of "penalty" and
"interest" used by the State and HCFA respectively to describe the funds
received by the State from the providers to the source of these funds.
An overpayment to a provider is in effect a loan to the provider; the
provider has the use of money for services that were either not rendered
or not necessary. The provider, of course, has an obligation to repay
the overpayment, but in the meantime it has the use of funds to which it
was not entitled. We believe it altogether reasonable that the provider
render a payment for the use of these funds. The State called this
payment a "civil penalty"; HCFA called it "interest." Yet, whatever
term is used, the result is the same. The State received a payment for
funds "loaned" to the provider.

The funds the State loaned to the provider, however, were not solely
State monies. Half the funds were supplied by the federal government.
We note that the amount of the civil penalty imposed by the State on a
provider was a percentage of the whole amount of the overpayment, not
just that portion funded by State monies. Thus, if the State were to
retain all of the payment from the provider, the State would in effect
be profiting from the use of federal funds. It is receiving not only a
civil penalty on its own funds "loaned" the provider, but also on the
federal funds. We agree then with HCFA's position that here, as in
North Carolina, federal funds were used to generate the penalty payments
received from the providers. As federal funds were used to produce
these payments, they constituted an applicable credit within the meaning
of 45 CFR Part 74, Appendix C, Part I, C.3 (1977). /4/ Applying this
applicable credit means a reduction in the State's expenditures
allowable for FFP. We conclude, therefore, that under section
1903(d)(2) of the Act the State has received an overpayment in the
amount of the federal shares of the interest, which HCFA was entitled to
disallow.


We note additionally that the State's position was weakened by its
argument, as cited in Garay, that the penalties were used to fund state
activities in the investigation and prosecution (12) of Medicaid fraud.
HCFA already compensates the State at a FFP rate of 90% for State
activities for Medicaid fraud. Section 1903(a)(6) of the Act, 42 CFR
455.300(j)(1). Thus, the stated rationale for the imposition of a civil
penalty would result in the Medicaid fraud activities being funded
twice.

Conclusion

For the reasons stated above, we sustain the disallowance, subject to
a reduction of $21,292 for the Hilltop Private nursing home and an
adjustment for amounts credited to HCFA. HCFA should review the State's
claims in this regard and 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/ While the State has
asserted that a substantial portion of the overpayments has
already been credited to HCFA, we have not received any notification
from HCFA that it has accepted the State's claim. In order to protect
the State's interests, we have considered the State's appeal as
including all the overpayments. As discussed below, HCFA can make
adjustments later for credited overpayments. /2/ The State argued that
it was inappropriate for HCFA to rely on previous Board
decisions: (It) would violate all principles of due process to apply
the decisions rendered in unpublished administrative cases to which New
Jersey was not a party to the State in the instant case. Thus,
application of the prior decisions to this case is precluded. State's
Reply Brief, p. 1. We believe that there was no deprivation of due
process here. Our reference to prior Board decisions does not mean that
the Board is always bound to follow those decisions. Rather, we use
these decisions to indicate the Board's reasoning in prior cases. We
would follow our earlier decisions in the absence of anything to show us
those cases were wrongly decided. If an appellant could demonstrate
that a prior case was wrongly decided, the Board would be free to
reevaluate its reasoning and reverse its position on an issue. In this
particular case, however, the State has not convinced us that the
Board's prior reasoning on the overpayments question was incorrect.
/3/ In contrast to the interest received under the State's civil penalty
provision (see discussion, infra), the State will not have to share with
the federal government the interest collected from providers with
extended payment plans. As the State is required to repay immediately
the federal share of the overpayments, the principal involved in the
payment plans consists solely of State funds. As such, any interest
collected will accrue to the State. /4/ Appendix C of 45 CFR
Part 74 is now Office of Management and Budget (OMB) Circular A-87. OMB
Circular A-87, formerly designated FMC 74-4, gives the cost principles
for grants to state and local governments. The State claimed lack of
knowledge of OMB Circular A-87. OMB Circular A-87 is made applicable to
states at 45 CFR 74.171.

NOVEMBER 14, 1984