New York State Department of Social Services, DAB No. 537 (1984)

GAB Decision 537
Docket No. 83-186

May 30, 1984

New York State Department of Social Services;
Ford, Cecilia Sparks; Settle, Norval Teitz, Alexander


The New York State Department of Social Services (State) appealed the
disallowance after deferral by the Health Care Financing Administration
(HCFA, Agency) of $22,500,000 in federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act).

The principal reason given for the disallowance was that the State
used estimated and unverified data which failed to support its claim.
HCFA cited certain statutory and regulatory provisions for its position
that only actual expenditures which are supported by adequate fiscal
records may be reported on the quarterly statement of expenditures, and
that disallowance is required when documentation is not sufficient to
determine allowability.

HCFA's disallowance stated that no documentation in readily
reviewable form was produced within the time allowed during the deferral
process. It appeared that at least some documentation was produced but
not reviewed by HCFA's auditors. The State claimed this documentation
was no longer available, but submitted documentation to support part of
its claim with its appeal file to the Board. The issue is whether the
Agency is required to examine this documentation to see if it supports
the State's claim on the quarterly statement of expenditures.

While we firmly agree in principle with the Agency that a state
cannot submit unsubstantiated claims, must adequately maintain its
records, and cannot unreasonably delay submission of documentary
evidence, the facts of this particular case lead us to conclude that the
Agency should review the documentation.

Based on the record in this case, which was developed through a
hearing and telephone conferences, we sustain the disallowance in the
amount of $8,612,619.04 for which the State offered no documentation.
Concerning the balance of the claim, we remand to the Agency to examine
the documentation submitted by the State.

(2) Background

The State submitted claims totalling $22.5 million dollars FFP for
Medicaid expenditures for the period 10/79 - 12/79. The claims were
reported on the Quarterly Statement of Expenditures for the Medical
Assistance Program (Form HCFA-64) for the quarter ended September 30,
1981. /1/


On January 15, 1982 HCFA deferred this claim, together with others
submitted by New York. The reasons given were:

The amount claimed $22,500,000.00 represents an estimate of potential
audit recoveries prepared by your Department of Audit and Quality
Control. This estimate was submitted in response to the claiming
restrictions imposed by HR 3434. /2/ It covered the period October to
December 1979 and it relates to a change from FNP (federal
non-participating) to the FP (federal participating) category.

We are deferring these claims because the supporting documentation
was not sufficient to allow for determination as to their allowability.
We believe that additional data from your records will assist us in
reaching appropriate conclusions.


Letter, O'Leary to Blum, Exhibit I, P5.

There is considerable confusion about what happened during the
deferral period of 120 days (the State requested and received an
additional extension of 60 days). In any event, the claimed amount was
paid to the State, pending a later determination of allowability. /3/


(3)

Thereafter, the Agency sent the State a letter notifying it of the
disallowance of the entire claim for $22,500,000 FFP. This letter
stated that the State had been requested "to make available all related
documents and materials necessary to determine the allowability of the
claims" in accordance with 45 CFR 201.15. The letter went on to say:

No documentation in readily reviewable form was produced within the
120 days allowed.

Letter, Toby to Perales, Exhibit III, p. 1 (emphasis supplied).

The disallowance continued with an explanation of the type of claims
involved.

Claims totalling $22,500,000 FFP, which represented estimated or
projected results of ongoing audit projects conducted by NYSDSS Division
of Audit and Control, were reported.

According to State officials these claims represented estimated
potential audit recoveries related to the period 10/79 - 12/79. The
amounts were submitted at that time in response to Public Law 96-272. .
. .

The letter then gave the specific reasons for the disallowance, with
citations.

In its effort to conform with the timeliness requirements cited
above, the State used estimated and unverified data which failed to
fully support its claim. Under Section 1903(a)(1) of the Social
Security Act, HHS grant regulations at 45 CFR 74.61(b) and (g), 45 CFR
201.5(a)(3), and Medicaid regulations at 42 CFR 431.17, and 42 CFR
433.32 only actual expenditures, which are supported by fiscal records
adequate to assure that claims for FFP are in accord with applicable
Federal requirements, may be reported on the quarterly statement of
expenditures. Further Medicaid regulations at 45 CFR 201.15(c)(5)
require disallowance when documentation is not sufficient to determine
allowability.

Letter, Toby to Perales, p. 2.

The State duly appealed to this Board. In its brief the State
claimed that during the deferral process the State had in fact provided
the Agency's on-site auditors with "access to documentation (i.e.,
adjustment schedules and pended claims) supporting (4) the allowability
of the disputed claims (Exhibit II)." Appellant's brief, p. 2. The
State admitted that this documentation "was partially duplicative of the
materials submitted by the appellant" in three other appeals to the
Board. Id.

The appellant continued to maintain that the documentation made
available to the on-site auditors during the deferral process was in
"readily reviewable form" (as required by 45 CFR 201.15). However, it
had compiled "further documentation" that supported the allowability of
$13,887,380.96 FFP of the claims in question. This documentation was
composed of computer extracts and adjustment schedules submitted as part
of the State's appeal file. The State added that this attached
documentation was "in readily reviewable form and relates to the subject
matter of the claims currently in controversy." The State went on to say
that documentation relating to the remaining amount in issue
($22,500,000 less 13,887,380.96) was "currently being compiled and will
be available in the immediate future." Appellant's brief, p. 2. /4/


Now the confusion began. On November 4, 1983 the Agency attorney
telephoned the Board that the Agency had due to error failed to examine
documentation offered by the State during the deferral process. The
Agency was now willing to examine this documentation submitted during
deferral, and also the documentation submitted to the Board with the
State's appeal file. /5/


Other telephone calls followed; these brought out that the State did
not have the documentation submitted during deferral and not examined by
the Agency. At least some of the material had presumably been submitted
in other appeals before the Board. The Agency now took the position
that if the State could not identify the material made available during
deferral, the Agency would refuse to examine even the material submitted
by the State with its appeal file. Summary of Telephone Conference of
November 16, 1983.

(5) A thirty-day stay was granted to permit New York to try to put
together the documentation offered during deferral. The State was not
able to accomplish this and the parties proceeded with the normal Board
briefing schedule. The Agency submitted with its brief an affidavit
from William Provost, a staff auditor for HCFA, and the key figure in
this case. He stated that the only documents submitted in support of
the claim were two internal State memoranda which identified the claim
as an estimate (Affidavit, PP10, 11). As to the material submitted
during deferral, not examined, and now missing, Mr. Provost had only
this to say:

Until it submitted its appeal file in the instant appeal, I was
unaware that the State had furnished or made available to HCFA any
additional documentation in support of the claim at issue herein.

Id., P15.

The controversy over what did actually happen during the deferral
period continued unabated. The State submitted with its reply brief an
affidavit of a Principal Accountant in the State Bureau of Cash
Management. In this affidavit he stated that during the deferral period
he had met with members of the on-site audit team for the Bureau of
Financial Operations of HCFA. As a result, "materials (i.e., adjustment
schedules and pended claims) supporting the allowability of the claims .
. . were made available for the review of the on-site audit team."
(Galarneau affidavit, P4). The affidavit further stated that in
confirmation Galarneau had drafted a memorandum to Harry Ellowitz, lead
on-site auditor (Attachment A to Affidavit), which was delivered to HCFA
on May 14, 1982.

This memorandum is significant in this case in relation to later
activities of federal personnel. In part it read as follows:

On April 5, 1982, Commissioner Blum received a letter signed by
Arthur J. O'Leary notifying New York State that an extension of sixty
days to May 15, 1982 (second extension) had been granted to provide the
requested data in support of this claim.

This memorandum is to advise you that the requested documentation has
been assembled and is available for review. The information is on file
in two separate units in our Agency.

(6) Part of the documentation consists of adjustment schedules and
pended claims. The reports are available for your review in our Claims
Unit. The second part of the documentation is on file in the Bureau of
Audit and Quality Control. This data consists or schedules which relate
to claims filed in the Claims unit and information recorded on
microfiche.

Mr. Larry Weaver from the Bureau of Finance and Local Operations
(phone no.) and Mr. James White from the Bureau of Audit and Quality
Control (phone no.) should be contacted in order to arrange for your
review of this data.

If I can be of any further assistance in this matter, please do not
hesitate to contact me.

While much of what happened after this is unclear, it is clear that
Mr. Provost never did contact Jim White or anyone in the Bureau of Audit
and Quality Control. Transcript of Hearing (Tr.), pp. 34-35, 53.

The State's reply brief with the Galarneau affidavit attached was
dated January 25, 1984. On February 8th the Agency submitted a second
affidavit by William Provost to amend his earlier affidavit of January
11. Since its contents go to the heart of the controversy, it is
necessary to consider this second amended affidavit in some detail.

First, Provost stated that he recently "reinvestigated the claim for
$22,500,000.00 and circumstances surrounding it." (P5) He now believed
that in May 1982 the State did make available to HCFA auditors certain
materials which the State claimed supported its FFP claim. (P6) Provost
stated that he recalled going "to the offices of State personnel" and
asking the location of supporting materials for the claim. He was then
shown "a stack of material." (P8) There follow conclusions as to why
this material did not change Provost's opinion that the claim was not
allowable.

Provost testified at the hearing that during the deferral period he
inquired as to the location of the adjustment schedules and pended
department claims referred to in memoranda given him. He was directed
to Joseph Humik; Provost had been told he had custody of these papers.
Humik showed him the material, which Provost described as "three or four
stacks of papers, adjustment schedules and RF-2's piled on Mr. Humik's
window sill." Tr., (7) p. 26. Provost estimated the volume to be
"perhaps, nine linear feet." Id.

Provost could not locate any summary sheet with the documentation.
He "briefly thumbed through the documentation, looked at . . . certain
of the adjustment schedules and pended claims, basically to ascertain
their nature." Tr., p. 27. The reason for this brief review was that
the volume of the documentation, namely only six or six and a half
million dollars, did not even closely approximate the State's claim of
twenty-two and a half million dollars. Therefore Provost concluded that
the amount claimed was in fact an estimate not supported by quarterly
fiscal records. Tr., pp. 27-30.

Provost did not give the State an additional 15 days to put the
material in a readily reviewable form, because that was not going to be
his basis for recommending disallowance. Tr., p. 30. /6/


The Agency's principal arguments

The main thrust of the Agency's position was that the New York claims
were not allowable because they were estimates. The disallowance letter
pointed out that State officials had stated that the claims represented
"estimated potential audit recoveries" submitted in response to Pub. L.
96-272. In its efforts to conform with the timeliness requirements, the
State used "estimated and unverified data which failed to fully support
its claim." The disallowance went on to say that under certain specified
statutory and regulatory requirements "only actual expenditures, which
are supported by fiscal records adequate to assure that claims for FFP
are in accord with applicable federal requirements, may be reported on
the quarterly statement of expenditures." In addition, 45 CFR
201.15(c)(5) required disallowance "when documentation is not sufficient
to determine allowability."

In its brief, HCFA also relied on what HCFA calls a "policy
statement" in an Action Transmittal for its position that estimates are
not permitted on a QER. HCFA AT-78-95 was prepared for and sent to all
State agencies administering or (8) supervising administration of
approved State Medicaid plans. This transmittal included the following
instructions for preparation of the HCFA Form 64.9:

A State Agency is to report actual expenditures which are supported
by the State's accounting records. A State Agency is not to estimate
Medical Assistance Expenditures on Form HCFA 64.9.

Exhibit B to Agency's brief, p. 16.

The Agency relief on the State's own documents for its position that
the State's claims were estimates. The Agency submitted two internal
State memoranda which Provost stated he was given when he asked for
documentation before deferral. The first one, dated November 24, 1981,
used the word "estimate" four times.

As per our recent discussions, I am forwarding to you our estimate of
potential audit recoveries for the period 10/79 - 12/79.

In the area of Income Maintenance, the estimate is $15 million . . .
the Medicaid estimate is $50 million and included such projects as 15%
incentive and MA FNP to FP. These estimates are based on our experience
in each of these areas and a review of the current data available.

If you have any questions, please contact Jim White.

The second memorandum, dated November 28 1981, began as follows:

As per the request of your staff, I have further broken down the HR
3434 estimate of my November 24, 1981 memorandum as follows:

* * *

Medicaid - ($50 million)

Medical assistance $45 million Administration $5 million

If you have any questions, please contact Jim White. (tel. no.)

Both memoranda were headed "HR 3434" under SUBJECT. They were
submitted as Attachment 1 to the first Provost affidavit, Exhibit A,
Agency brief.

(9) ANALYSIS

There is only one issue to decide in this case, despite the extensive
coverage by the parties of related and tangential issues. The issue is
whether the Agency should examine the documentation submitted during the
appeal process to see if it supports any of the State's claim for
$22,500,000.00 FFP for medical assistance under the State Medicaid
program. We consider the arguments advanced by the parties to reach our
conclusion.

I. Deferral v. Disallowance.

Under the provisions of 45 CFR 201.15(c), a claim for reimbursement
for expenditures for medical assistance reported on the QER is to be
deferred if HCFA "believes the claim or a specific portion of the claim
is of questionable allowability." We need not decide whether we would
have affirmed an outright disallowance without deferral because that is
not what happened here. The Agency chose to defer; it was therefore
bound to permit the State to use the deferral period "to make available
for inspection documents and material" which supported the allowability
of the State's claim. The State did make some documents and material
available within the 120-day period allowed (60-day original time plus
60-day extension granted). /7/


It is too late for the Agency to claim now that it had ample basis
for disallowing the claim on the QER out-of-hand. Having chosen to
defer, the Agency must deal with what was submitted after it deferred
the claim.

II. What material is before the Board.

There were three separate batches of supporting material which could
be of significance in this case: (1) material submitted during
deferral; (2) material submitted during the appeals process; and (3)
material still to be submitted.

(10) We can dispose readily of the third classification. The State
did say in its opening brief that documentation relating to several
million dollars in FFP ($22.500,000.00 claimed less $13,887,380.96) "was
currently being compiled, and will be available in the immediate
future." Appellant's brief, p. 2. The Agency devoted a substantialy
part of its brief (pp. 25-29) to arguing why it should in any event not
have to review any material submitted in the future. The problem was
removed, if not solved, when the State in its reply brief abandoned any
attempt to produce still more material.

As for item 1, material submitted during deferral, here again there
is nothing for the Board to do. The State said this material was taken
apart and was no longer available. The State was given a 30-day stay to
permit it to try to put the material together again, but it was unable
to do so. See, confirmations of telephone conferences of November 16
and December 21, 1983.

For the purpose of this case it does not matter that the missing
documentation was "partly duplicative" of materials submitted by the
State in other Board appeals. Appellant's brief, p. 2. The Agency
argues that this "very strongly suggests" that the material never was
documentation for this particular claim. Agency brief, p. 14. We must
take the situation as we found it. The inability of the State to
reassemble the documentation for a claim of $22,500,000.00 is strange,
but then it is not the only strange thing in this case. As far as the
Board is concerned, we need decide only whether the Agency should review
the second class of documentation referred to above, namely, that
submitted by the State during the appeal process.

III. Timely claiming.

Timely filing of claims for FFP is not a direct issue in this appeal.
That is, the Agency has not given as a reason for disallowance failure
of New York to file its claims within the statutory period allowed by
section 1132 of the Social Security Act. Nevertheless, the question
crops up repeatedly. The State's memoranda given to Provost refer to HR
3434, which led to section 1132. The letter of the State on March 12,
1982 asking for a 60-day extension to the deferral period stated clearly
that the "estimate was submitted in response to the claiming
restrictions imposed by HR 3434."

The State was in effect saying that it submitted its claim earlier
than it might otherwise have done because of the claiming restrictions.
Its position has been that it claimed for "actual expenditures" based on
audit projections. It could not wait any (11) longer to have more exact
data because then the claim would have been time-barred.

The Agency's position was that the State was frustrating the
intention of Congress to require claims to be filed promptly by filing
estimates of claims to be fleshed out later. The Agency did not mind
how much time a State took to file its FFP claims before section 1132.
After the timely claiming statute the Agency had no choice but to
tighten up. If a State threw in simply a guess of any amount when its
time for filing was almost up, it could then in effect file "new" claims
by first producing the documentation during the deferral process. If it
could produce still more new material with its appeal file, it could
extend the statutory filing period far beyond its original two-year
limitation. /8/ If the State were permitted to add even more material
during the appeal process, as it first sought to do here, it could in
theory extend the claiming period almost indefinitely.


The answer is not an easy one. The volume of timely claiming cases
before the Board involving huge sums of money shows that the entire
subject of time restrictions on filing claims is a difficult one. The
obvious answer, that claiming is one thing and documentation is another,
is too simple. Of course the documentation must relate to the claim as
it was filed. But suppose the claim is identified only as being for
Medical Assistance payments, "MA FNP to FP." The Agency has a good
argument that almost anything in the way of documentation could support
such a claim. We will deal with this further below under "Estimates."
For our purposes here, we realize the Agency's dilemma. It is
justifiably concerned with its responsibility to carry out the
congressional intent to require timely filing of claims. As long as the
statute is effective, the states will have to comply with it even though
the timeliness requirements cause great hardship. For our purposes
here, we can say only (12) that when a dispute comes before us we will
decide it on its own individual merits.

IV. Actual expenditures.

The question of "actual" expenditures was raised in the disallowance
letter. One statute and four regulations were cited for the proposition
that:

(O)nly actual expenditures, which are supported by fiscal records
adequate to assure that claims for FFP are in accord with applicable
Federal requirements, may be reported on the quarterly statement of
expenditures.

The Agency referred in its brief to Decision No. 451, Pennsylvania
Department of Public Welfare, July 29, 1983. The Board there stated
that "a State is clearly entitled to be reimbursed only for its actual,
as opposed to estimated, expenditures." (p. 7) In that case, it was a
question of whether an amount allocated to Title XX was based on
estimates or on actual costs.

Here the State argued that its claim was for "actual" expenditures
for medical assistance, i.e., that money was actually paid out by the
State to provide medical services (and for administrative costs) to
actual recipients. That is not seriously disputed but that is not the
point. The real question is whether the money was expended for persons
who were eligible for Medicaid, the Title XIX partially federally-funded
program, or for persons who were eligible only for some form of wholly
state-funded home relief.

V. Estimated expenditures.

The disallowance letter linked the use of estimated data with the
requirement for documentation of actual expenditures. The letter said
that in its effort to conform with the timeliness requirements, "the
Setate used estimated and unverified data which failed to fully support
its claim." Throughout the hearing, however, the primary rationale given
for the disallowance was that the amount claimed on the QER was an
estimate. /9/


(13) A consideration of what an estimate is requires a brief
description of the method of financing public assistance spending by the
states, as provided for in sections 1903(a) and (d) of the Social
Security Act, and as spelled out in 45 CFR 201.5. A State estimates how
much it will expend under each of the public assistance programs in a
particular quarter, and how much FFP it believes it is entitled to. It
is given a grant for a coming quarter based on that estimate, on which
it draws by a letter of credit arrangement. After the end of the
quarter the state agency must also submit "a quarterly statement of
expenditures" for each of the public assistance programs:

This is an accounting statement of the disposition of the Federal
funds granted for past periods and provides the basis for making the
adjustments necessary when the State's estimate for any prior quarter
was greater or less than the amount the State actually expended in that
quarter. . . .

45 CFR 201.5(a)(3).

Clearly this contemplates some sort of reconciliation at the end of
each quarter. The regulation recognizes that the system is not going to
work perfectly at the end of every quarter, since it refers to the
State's estimate "for any prior quarter," not just for the preceding
quarter.

The first question raised is whether it is all right to use an
"estimate" on the QER. The State points out correctly in its brief that
none of the authorities cited in the disallowance letter specifically
prohibit the use of an estimate on a QER. While 45 CFR 201.5(a)(3)
implies that an estimate should not be used in reconciliation at the end
of a quarter, it does not actually prohibit it.

The Agency in its brief relies on an action transmittal for a
specific prohibition against using an estimate on the QER. This
transmital, HCFA AT-78-95, is referred to by the Agency in its brief as
"a HCFA policy statement." HCFA brief, p. 9. The instructions for
preparing the HCFA Form 64.9 to report Medical Assistance Expenditures
claiming increasing adjustments for prior quarters state:

A State Agency is to report actual expenditures which are supported
by the State's accounting records. A State Agency is not to estimate
Medical Assistance Expenditures on Form HCFA-64.9.

Agency brief, Attachment B, p. 16.

(14) The State argued that this is a "technical instruction" which
does not have the force and effect to law. State reply brief, p. 6. We
have often held the states to compliance with interpretative policy
statements of an Agency where the states have actual notice.

This action transmittal dates back to 1978, and clearly did not
anticipate the problems which would arise under the timely claiming
statutes. Of course when a state claims an amount of money on a QER it
must have some basis for the figure it puts down. Until the timely
claims requirements this was no problem since a state could wait until
it had every expenditure added up to the exact penny. Once the two-year
limitation came along, it is easy to see how a state with huge
expenditures for public assistance and with a complicated system of
payments by many local government units could have difficulty arriving
at an exact figure within the limitation time frame. At the same time,
it is clear that the state is required to develop the most
well-established claim it can under the circumstances.

We do not agree with the State's argument that the action transmittal
did not need to be complied with because it was only a "technical
instruction." However, we find that the figure on the QER, even though
referred to by both the State and the Agency as an "estimate," was not
the kind of an "estimate" reasonably prohibited by the action
transmittal. /10/


There is no definition of what is an "estimate" in either the action
transmittal or in any of the regulations cited. The dictionary
definitions are not much assistance. In Webster's Third International
Dictionary the third definition given of the noun "estimate" is: "a
judgment made from usu. mathematical calculation esp. from incomplete
data: a rough or approximate calculation." Black's Law Dictionary
(Fifth Edition) is similar: "A rough or approximate calculation only.
. . . This word . . . implies a calculation or computation. . . ."

(15) There are practical common-sense considerations which must be
taken into account. The HCFA Form 64 calls for just one figure on line
7 for increasing adjustments for prior quarters. It is unlikely that
this would be an exact figure to the penny representing the sum of all
the RF2's and adjustment schedules. Clearly $22,500,000.00 would be
more plausible than $22,498,998.98. The real question is where did the
figure come from. As Black says, an estimate "implies a calculation or
computation."

If it is a figure taken out of the air, rather than a calculation or
computation, even if approximate, it is not sufficient. If it is a
guess, or in common parlance, a "guestimate," then it will not do.
Clearly a figure grabbed out of nowhere to beat the timely filing
deadlines is not enough. What is clearly required is a figure which is
as definite as reasonably possible under the circumstances.

We are faced here with a continuum. At one end is the ideal
situation, where every figure put down on a QER would be an exact
computation of every eligible expenditure, correct to the penny. At the
other end is a figure drawn out of a hat, with no plausible explanation
of where it came from, and made up solely to avoid the timely filing
limitation.

Of course, as in so many gray areas, the question is where you draw
the line. Here there was lengthy testimony of James White in the New
York Office of Audit and Quality Control, who coordinated the State's
Medicaid audit activities. He was asked to describe "what the figure of
22.5 million dollars represents and how it was arrived at." Tr., p. 85.
His direct and cross examination, and questioning by the Board,
continued through to p. 106. Salient parts of his testimony show where
the 22.5 million dollar figure on the QER came from and why it was
substantially more than a mere guess:

* The 22.5 million dollar figure was arrived at through a
computerized audit process designed to identify Medicaid claims which
were at first considered not eligible for FFP and to convert them to
claims for federal participation. Tr., pp. 85-86.

* These cases were originally classified as Home Relief (all
state-funded general assistance) and subsequently accepted under the
Supplemental Security Income program (SSI), which made them eligible for
Medicaid and hence for FFP. Tr., p. 86.

* The program by its very nature involved a retroactive period of
eligibility, and the process took several months to complete. Tr., p.
86.

(16) * The amount of the claim was developed by the same person who
developed the computerized process to identify the claims eligible for
Medicaid. Tr., p. 85.

* The amount of the claim was based on actual expenditures for
medical care eligible for FFP. Tr., p. 90-91.

* The amount of the claim was conservative. Tr., p. 91.

* There were several types of documentation available at the time the
claim was submitted; this included certain audit reports and microfiche
details of expenditures from some counties. Tr., pp. 91-92.

Taking White's testimony as a whole, we believe that the disallowance
cannot be upheld on the ground that the figure on the QER was an
"estimate," because the record supports the State's position that its
figure, while not as finally definitive as would be desirable, was
considerably more than just a guess.

The Agency here has asserted that the claim itself is deficient, thus
obviating the need for the Agency to determine whether substantively
this type of claim can be paid in any amount on review of the
documentation submitted. We cannot conclude that the claim itself is
deficient where the amount is determined by a systematic analysis of
expenditures designed to identify those appropriately claimed for FFP.

VI. Documentation.

The Agency relied on lack of documentation for its disallowance, in
addition to its position that the amount claimed on the QER was
unacceptable since it was an estimate. Thus, after stating that the
$22.5 million dollar claim by the State was an estimate, Provost gave
another reason for the disallowance:

Secondly, that the provision of approximately six and a half million
dollars of related documentation is in our position inadequate
documentation.

Tr., p. 51.

The disallowance letter also gave a similar reason:

Further Medicaid regulations at 45 CFR 201.15(c)(5) require
disallowance when documentation is not sufficient to determine
allowability.

(17) There is no dispute about the State's requirement to document
its claim for FFP. This is the burdent of a grantee generally. See,
e.g., Wisconsin Department of Public Welfare, Decision No. 524, April
30, 1984; Cappalli Fed. Grants & Coop. Agreements, Vol. 1, Sec. 4:30,
n.2 (1982). It is clearly stated in the deferral regulation:

It is the responsibility of the State agency to establish the
allowability of a deferred claim.

45 CFR 201.15(c)(7).

It is not disputed that Provost looked at some of the documentation,
which the State says it had available, but not all of it. Guided by
various memoranda, he went to the State office of Joe Humik. Here he
saw four stacks of papers, adjustment schedules and RF2's piled on Mr.
Humik's window sill, some nine linear feet of them. He thumbed through
the documentation only briefly because the memoranda he had been
provided with indicated that:

"The State really, in fact, had only six or six and a half million
dollars of documentation in support of a claim of $22.5 million dollars
that they had made."

Tr., p. 27.

In fact, even this brief review was basically done as a courtesy.
Tr., p. 28. Provost did not contact Jim White or anyone in Audit and
Quality Control despite memoranda indicating more documentation was
available there for review. Tr., pp. 32-35. The sole reason why
Provost did nothing more than thumb through the material in Humik's
office was because it could add up to only six or six and a half million
dollars. Provost's testimony was not that this material did not support
the claim; its deficiency was that it was not enough. He recommended
disallowance because in his judgment "it was an estimate, which was
precluded from Federal Financial Participation in the regulations, and
that it was inadequately supported by documentation." Tr., p. 46. His
definition of estimate was "something other than actual." He stated very
definitely why he did not request additional documentation under 45 CFR
201.15.

The documentation that was provided to me within the time frame
allowed in the deferral regulations clearly indicated to me that six and
a half million dollars worth of documentation applied to the $22.5
million dollar claim by the State, . . . this was such for me to
conclude that the original amount, (18) the $22.5 million dollars was an
estimate, as the documentation provided did not closely approximate the
amount submitted . . . Secondly, that the provision of approximately
six and a half million dollars of related documentation is in our
position inadequate documentation.

Tr., p. 51.

We conclude that the refusal to consider the documentation in Mr.
Humik's office was unreasonable under the circumstances. Provost did
not refuse to examine the documentation because it was not in support of
the claim. He admitted that "six and a half million dollars worth of
documentation applied to the $22.5 million dollar claim by the State."
The only reason for rejecting the documentation was because the 6-1/2
million dollars available was less than the $22.5 million claimed. We
consider this unreasonable under all the circumstances. We agree in
principle that in the absence of other considerations, submission of
only 6-1/2 million dollars worth of documentation calls into question
whether the 22-1/2 million claim was anything more than a guess. Here,
however, the circumstances indicate it was not reasonable, in context,
to deem the 6-1/2 million the only documentation which might then have
supported the claim.

Concerning the failure of Provost to go to Audit and Control,
although Provost had not only State internal memoranda which said to
contact Joe White for additional information but also a State memorandum
to his team leader to the same effect, Provost said he did not do so
because the memoranda he had indicated to him that whatever there was in
Audit and Control did not relate to this particular claim. Here again
we conclude this was unreasonable. Provost had merely to go to an
office in the same building two floors from his, and ask a person whom
he knew, if there was in that office any additional documentary support
for the State's claim. It is the State's obligation of course to
provide documentation to support its claim. But it is not unreasonable
to ask an auditor to follow up on the State's affirmative statement that
additional information was nearby. We understand that the auditor may
have had legitimate doubts about the relevance of the supposed
documentation. But in the circumstances here, where the issue is the
narrow one of how definitive the claimed amount was, we find that it
would be unfair to preclude substantive inquiry into the validity of the
claim merely because the auditor chose not to look at information which,
if it existed and was relevant, had been pointed out by the State and
was quite close by. This would appear to elevate minor personal
convenience to a point where it impinged on substantive concerns. If
the State had not (19) pointed out the additional information, we would
agree that the auditor would have had no reasonable duty to seek it.
But since the State did indicate that there was such information, we
conclude that in all fairness, the auditor should have taken the few
extra minutes needed to confirm, or rebut, his anticipation that the
information was not relevant.

VII. Agency duty to ask for documentation.

Neither party addressed the specific regulatory requirement that if
the Agency did not believe the documentation submitted by the State
during the deferral period was sufficient, the Agency was required to so
notify the State and give it additional time.

If the Regional Commissioner or Regional Medicaid Director finds that
the documents and materials are not in readily reviewable form or that
supplemental information is required, he will promptly notify the State.
The State will have 15 days from the date of notification to complete
the action requested. . . .

45 CFR 201.15(c)(5). (Emphasis supplied).

Provost testified that he did not notify the State that the
documentation offered was not in readily reviewable form because that
was not a basis of his recommendation for disallowance. Tr., p. 30.
However, if lack of sufficient documentation was a reason for
disallowance, then the State should have been so notified and given the
extra 15 days. The word "supplemental" in the regulation is not
defined, but the meaning seems clear on its face. If the State has not
furnished all materials required to document its claim during the
deferral period (60 or 120 days), then it must be notified and given the
extra 15 days.

The State was clearly not so notified in this case. Tr., p.
113-114. This failure of the Agency to comply with the requirements of
its own regulation is alone enough reason for us not to uphold the
disallowance, so far as it is based on lack of adequate documentation
for the State's claim.

VIII. Fiscal records.

The disallowance letter cites also as support for the disallowance
certain regulatory requirements for fiscal record-keeping. The general
grant regulatioin for "Financial Management Standards," 45 CFR 74.61,
requires proper accounting records in subsection (b) and source
documentation in (g). The Medicaid regulations cited, 42 CFR 431.17 and
42 CFR 433.32, are general provisions for maintenance and retention of
records. These, together with (20) section 1903(a)(1) of the Social
Security Act, are cited for the proposition that:

(O)nly actual expenditures which are supported by fiscal records
adequate to assure that claims for FFP are in accord with applicable
Federal requirements, may be reported on the quarterly statement of
expenditures.

This general statement has been considered above under various
headings. We have considered the requirement that only "actual
expenditures" may be claimed on the QER in connection with the use of an
"estimate" for the amount of the claim. The State's testimony was that
at the time the claim was filed there were available in state and local
offices records showing expenditures for medical assistance eligible for
FFP which totalled at least the amount claimed on the QER. We do not
believe that anything in the regulations requires that at the moment the
QER is filed the State must in fact have assembled all compilations of
these expenditures adding up to the exact amount claimed on the QER. As
we indicated above, it is unrealistic and unfair to expect a state to do
this and still be able to file its FFP claims within the statutory time
limitations. In short, the regulations require fully supportative
documentation, but, at least in the narrow context here, they do not
reasonably require an instantly available, final compilation of the
required documentation.

We must not lose sight of the fact that what we have before us is not
a review of a disallowance based on a fully documented claim. All we
have to decide here is whether, considering all the circumstances, we
should direct the Agency to review the documentation which the State has
submitted to the Board during the appeals process. The Board has no
interest in seeing its appeal process misused as a means of delay, and
normally we will not consider documentation which should have been
submitted earlier. The peculiar facts here, however, lead us to
conclude that it would be unfair to the State to preclude review of the
documentation in question in this case. Further, as we have pointed out
above, the ultimate burden of properly documenting its claim is always
with the State.

IX. Other Board decisions.

Both parties rely on prior Board decisions, the Agency on Decision
No. 433 and the State on Decision No. 445. /11/


(21) In Decision No. 433, New York State Department of Social
Services, May 31, 1983, the Board sustained disallowances because the
documentation submited during the appeal process was not related to the
claims described in the memoranda which the State submitted to the
Agency in lieu of the normal first level of documentation.

That is not this case. Here Provost admitted that the documentation
he examined in Humik's office was related to the claim. We do not, of
course, know whether the documentation submitted with the State's appeal
file is related in subject matter to the claim, because the Agency has
never examined it nor have we. The State, of course, affirmatively
maintains that it is related. The Agency can of course disallow any
part of the claim which is not supported by documentation.

The Agency relies on language in Decision No. 433 to the effect that
documentation submitted by a State during the deferral or appeal process
must be related to the claim on the QER in amount as well as in subject.
(p. 6) In n. 4 on p. 6 it is pointed out that exact correspondence
between the amount of a claim and the amount represented by supporting
documentation is not always required, but the magnitude of the
difference between the amounts in dispute and the amounts reflected in
the adjustment schedules helped to persuade the Board that the schedules
were not related to the claims made.

It is obvious that the difference between the amount originally
claimed and the documentation submitted is also of substantial magnitude
here. But in Decision No. 433 the difference in amount, coupled with
the difference in subject matter, helped persuade the Board that the
documentation submitted was not related to the claims made. Here the
difference is in amount only, not yet identified as any difference in
subject matter.

In addition, we believe that there is a great difference between
submitting documentation greatly exceeding a claim and offering
supporting material for less than a claim. In Decision No. 433 the
State offered some $102,000,000.00 of documentation for $52,000,000.00
of claims. Obviously much of the supporting material could not possibly
relate to the claim. As the Board said, what the State has done is
tantamount to a taxpayer's giving the IRS voluminous records to support
a particular deduction, when he should have offered only the records
pertaining to the deduction. Decision No. 433, p. 6.

The situation here is just the reverse. The State has offered some
$13,000,000.00 documentation to support a $22,500,000.00 claim. At
least theoretically all of it can be related to the (22) claim. In
Decision No. 433 on its face about half the documentation could not
possibly relate to the claim; here it all can. Therefore we do not
believe this case is controlled by Decision No. 433.

The State relies on Decision No. 445, New York State Department of
Social Services, June 30, 1983. There we held that under the particular
circumstances the Agency was unreasonable in refusing to examine
material submitted during the appeals process because it had not been
submitted during the deferral process. One of the reasons the Board
directed the Agency to examine the documentation was that the Agency had
already had the identical documentation before it in other appeals
before the Board and examined it voluntarily.

In this case, the Agency had at first agreed to review this
documentation submitted with the appeal, as well as that offered during
deferral. When the State could not produce the deferral process
documentation, the Agency refused to look at the material submitted with
the appeal. As in Decision No. 445, we hold that this was unreasonable
under all the circumstances. /12/ Again, as in Decision No. 445, we
point out that the decision is limited to the facts of the case. We are
not saying that a state may purposely ignore the deferral process and
wait until the appeal process to submit all its evidence for the first
time. See, Decision No. 445, p. 6.


X. Remedy.

We are faced here with a serious question of what remedy we can give
the State. The normal remedy for failure of the Agency to examine
documentation would be what the Board did in Decision No. 445, namely,
remand to the Agency to examine the documentation submitted during the
deferral process and with the State's appeal brief. We obviously cannot
direct the Agency to examine material no longer available. We do,
however, believe that under all the (23) circumstances it is reasonable
to direct the Agency to examine what it was willing to look at before,
namely, the documentation submitted during the appeals process.

The State will of course have to show that the documentation is
related in subject matter to the claim made in the State's QER. It is
the State's burden to show where particular documentation supports the
particular claim, as we said in Decision No. 445, at p. 8.

CONCLUSION

We remand to the Agency to examine the documentation submitted by the
State with its appeal.

The State claims that this documentation "adequately supports the
allowability of $13,887,380.96 of the claim in dispute." Reply brief, p.
9. Since the State has not even offered any documentation for the
remaining amount (Id., p. 2, n.), we sustain the disallowance in the
amount of $22,500,000 minus $13,887,380.96, or $8,612,619.04.

If the examination of the documentation as indicated above results in
a new disallowance, the State may then appeal that to this Boad. /1/
The HCFA-64 form is often referred to as a QER, Quarterly
Expenditure Report. /2/ HR 3434 became Pub. L. 96-272.
Subsection (a) of section 306 of Pub. L. 96-272 was later codified as
section 1132 of the Social Security Act. This section required claims
for FFP for expenditures by a state to be filed within two years after
the quarter in which the expenditures were made, with some stated
exceptions. /3/ Under 45 CFR 201.15(c)(6) a deferred claim has
to be paid to the State if the Agency is unable to complete its review
of the documentation within 90 days after it is available. Payment is
subject to a later determination of allowability. /4/ In its
reply brief the State stated that "documentation relating to the
remaining amount at issue" had not as yet been compiled and would
therefore not be submitted in this appeal. (n. p. 2) /5/ The
Agency was not willing to examine any additional documentation to be
submitted during the appeal process. The State never did submit any
such material (see n. 4), so the refusal to examine it when submitted
became academic. /6/ The disallowance letter said that no
documentation in readily reviewable form was produced within the 120
days of the deferral period. Provost testified that in a draft of the
disallowance letter he had prepared he stated that some documentation
was available. Tr., p. 112. /7/ In its brief the Agency
questioned whether HCFA was notified timely that the State had assembled
the supporting materials. The State's original memorandum was dated May
14, 1982 and the follow-up letter May 21. The State's extension was to
May 15. (Agency brief, n., p. 4) Galarneau's affidavit states that the
May 14, 1982 memorandum "was delivered to Mr. Ellowitz as part of the
normal course of my bureau's business on the 14th day of May, 1982." The
Agency has offered no evidence to contradict this. The date of the
follow-up letter is not significant if the original memorandum was
timely. /8/ The Agency in its brief is critical of the Board's
reading of the preamble to the deferral regulations, and the
reconsideration regulations in 45 CFR 201.14(d)(4), as affording the
State an additional opportunity to submit documentation on appeal. See,
Decision No. 445, New York State Department of Social Services, June 30,
19839, Agency brief, pp. 24-25. The language of Decision No. 445 on
this point must be read solely in connection with submitting additional
documentation during appeal to support an otherwise validly-filed claim.
It was not intended to permit a State to evade the timely filing
requirements; it assumed that the State had timely filed a valid claim.
/9/ Provost testified that he recommended disallowance of the entire
amount, as he "was convinced by what had transpired that the
(twenty-two) and a half million dollars originally claimed was, in fact,
an estimate." Tr., p. 30. Later, he stated that the documentation
provided to him during the deferral period "was such for me to conclude
that the original amount, the $22.5 million dollars was an estimate. . .
." Tr., p. 51. /10/ It is significant that the Agency referred to the
State's claim for $22,500,000 as being an "estimate" when it deferred
the claim, without raising any objection on that ground. The Agency
stated that the amount claimed "represents an estimate of potential
audit recoveries prepared by your Department of Audit and Quality
Control." Letter, O'Leary to Blum, P5. The reason given for the
deferral of this claim and others listed was that "the supporting
documentation was not sufficient to allow for determination as to their
allowability." Id. /11/ Decision No. 433 is continually mistakenly
referred to in the Transcript as Decision No. 43. /12/
We are mindful of the fact that the State's inability to duplicate the
documentation available during deferral casts some suspicion on its
position of being the wronged party. The State cannot move its
documentation around from one claim to another without some question
being raised as to whether it can in fact document certain claims, or is
simply shifting from case to case in the hope of finding some approval
somewhere. Nevertheless, we have found the Agency sharing
responsibility for confusion in this particular case, so the State
should have another chance.

NOVEMBER 14, 1984