GAB Decision 588
Docket No. 84-78
October 31, 1984
New York State Department of Social Services;
Settle, Norval; Teitz, Alexander Ballard, Judith
The New York State Department of Social Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $98,197 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance was
based on an audit report reviewing the collection of fraud and abuse
overpayments from providers of Medicaid services. HCFA adopted the
audit report's finding that $98,197, identified as interest, had not
been credited to HCFA.
The major issue presented is whether HCFA is entitled to a share of
the interest earned on Medicaid payments, placed in special accounts by
the State, either withheld from providers or collected in fraud and
abuse recoveries. For the reasons discussed below, we find that, as the
Medicaid payments in question were jointly funded by the federal
government and the State and as the interest sought was for only those
amounts ultimately determined to have been overpayments, HCFA is
entitled to share in the interest generated by the payments withheld or
recovered from providers. Otherwise, the State would be the beneficiary
of a windfall.
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.
Case Background
The HHS Office of Inspector General, Office of Audit (OIGOA), issued
a report entitled "Report on Audit of Collection of Fraud and Abuse
Overpayments Received from Medicaid Providers Under Title XIX of the
Social Security Act: New York State Department of Social Services" (ACN
02-30201). The purpose of the audit was to determine if the State
correctly reported the federal share of fraud and abuse collections of
Medicaid overpayments on the Quarterly Expenditure Report (QER), and
properly used credits to reduce the Medicaid letter-of-credit cash
withdrawals. The audit report covered the period (2) March 1, 1979
through September 30, 1982. For that period, the auditors found that
the State did not credit the federal government with a share of the
interest earned on Title XIX payments withheld from providers ($67,666
FFP) and Title XIX fraud and abuse recoveries ($30,531 FFP).
The auditors identified $67,660 as the federal share of interest
earned on payments withheld from Medicaid providers for the period May
1, 1979 through September 30, 1982. The State identified providers
suspected of possible fraud and abuse activities. The State withheld
payments from the providers' current claims until a determination was
made regarding a fraud and abuse action. State practice was to place
amounts withheld in an interest-bearing account if a provider was
suspected of certain proscribed activities. Withheld payments but not
the interest they generated would be released to the provider if,
following the normal administrative process, it was determined that the
provider had not engaged in any proscribed conduct.
The auditors identified $30,531 as the federal share of the income
earned on Medicaid fraud and abuse collections which were deposited in
interest bearing accounts for the period March 1, 1979 through May 31,
1982. The collections were made pursuant to voluntary restitution
agreements which were entered into by Medicaid providers which were
determined to have received overpayments as a result of proscribed
activities.
In both instances the State credited the federal share of the
principal amount on the QER and the Medicaid letter-of-credit account.
The State, however, did not report on the QER the interest earned on
this principal amount. Rather, the State retained the interest.
Following the audit report's recommendations, HCFA found that: the
interest earned on the principal amount constituted an applicable
credit, under 45 CFR Part 74, Appendix C, Part I, C.3, that was not
applied to reduce the State's claim to federal funds; /1/ section
2555.2E of the State Medicaid (3) Manual - Part 2 requires that any
interest assessed or earned by the State must be shown on the QER and
the federal share returned; and, consequently, there was an
overpayment, within the scope of section 1903(d)(2) of the Act, in the
amount of $98,197 FFP that HCFA is entitled to recover.
The Parties' Arguments
The State argued that there is no statutory authorization entitling
HCFA to share in the interest at issue. Disputing HCFA's position that
the interest constituted an "overpayment" within the meaning of section
1903(d)(2) of the Act, the State further argued that the
Intergovernmental Cooperation Act (ICA) specifically excludes the
federal government from sharing in the interest earned on grant money
pending its disbursement. The State maintained that the withheld
Medicaid payments were placed in the interest-bearing account while the
providers' questioned practices were being examined; therefore,
according to the State, the payments were withheld pending their
possible disbursement. /2/
HCFA's position was that the interest did, in fact, constitute an
overpayment since the interest amounted to an applicable credit which
should have reduced the State's claim for Medicaid payments. In the
telephone conference, HCFA clarified its stance, indicating that it was
seeking (4) the interest only on payments claimed by providers whose
proscribed activities had been definitively determined by the State.
HCFA declared that it was not seeking a share of the interest on the
withheld payments to providers who had either been found innocent of
proscribed activities or were still being investigated by the State.
HCFA maintained that the ICA was not intended for a sitation such as
presented by this appeal, where the ultimate determination on the
disbursement of grant funds could possibly take years to resolve.
Discussion
I. Does the Interest Constitute an Overpayment?
Two claims for interest are at issue here: $30,531 FFP of interest
on amounts actually refunded by providers as a result of stipulated
agreements arising from fraud and abuse actions; and $67,666 FFP of
interest on amounts withheld from providers suspected of proscribed
activities. HCFA took the disallowance on the ground that this interest
represented an overpayment within the meaning of section 1903( d) of the
Act. Subsection (d)(2) of that section provides that the Secretary's
quarterly payments to the State for the Medicaid program shall be --
. . . reduced or increased to the extent of an overpayment or
underpayment which the Secretary determines was made under this section
to such State for any prior quarter . . . .
Subsection (d)(3) further provides that--
(the) pro rata share to which the United States is equitably
entitled, as determined by the Secretary, of the net amount recovered
during any quarter by the State or any political subdivision thereof
with respect to medical assistance furnished under the State plan shall
be considered an overpayment to be adjusted under this subsection.
The State maintained that it is section 1903(d)(3) of the Act, and
not section 1903(d)(2), that governs HCFA's ability to recover from
states overpayments to providers. The Board has held in a series of
decisions, however, that excess payments to providers are not "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
(5) payments, even if a state has not yet recovered the excess amounts
from the providers. /3/
Moreover, the Board has found that interest earned by a state on
Medicaid funds recovered from providers who received excess payments
gives rise to an overpayment within the meaning of section 1903(d)(2).
North Carolina Department of Human Resources, Decision No. 361, November
30, 1982. /4/ In North Carolina, that State placed recoveries from
Medicaid providers in an interest-bearing account pending the ultimate
(6) distribution of the recoveries to federal, state, and county
governments. Interest earned from this account was credited to the
state's General Fund and not to the federal government for its share of
the account's funds. Like the State in the present appeal, the
appellant in North Carolina argued that "interest" does not constitute
an overpayment within the meaning of section 1903(d) and that therefore
interest can not be used to reduce the state's claim of federal Medicaid
funds.
The Board, citing previous decisions, /5/ interpreted the term
"overpayment" as used in section 1903(d) broadly, as encompassing
the
total federal/state fiscal relationship. The Board found that the
Secretary's determination that a state has claimed and received FFP in
unallowable costs is tantamount to a determination that the disallowed
amount is an overpayment to be adjusted under section 1903(d)(2). The
Board found that the interest earned constituted an "applicable credit"
within the meaning of 45 CFR Part 74, Appendix C, Part 1, C.3 (1979).
That provision states in pertinent part, that --
a. Applicable credits refer to those receipts or reductions of
expenditure-type transactions which offset or reduce expense items
allocable to grants as direct or indirect costs. Examples of such
transactions are: purchase discounts; rebates or allowances;
recoveries or indemnities on losses; sale of publications, equipment,
and scrap; income from personal or incidental services; and
adjustments of overpayments or erroneous charges.
b. Applicable credits may also arise when Federal funds are received
or are available from sources other than the grant program involved to
finance operations or capital items of the grantee. . . . These types
of credits should likewise be used to reduce related expenditures in
determining the rates or amounts applicable to a given grant.
The cost principles further provide that, to be allowable under a
grant program, costs must "(be) net of all applicable credits." 45
CFR
Part 74, Appendix C, Part I, C.1.g. (1979). The Board reasoned in North
Carolina that "(if) the interest constituted an applicable credit under
C.3., part of the State's claim -- equal to the federal share of the
interest-- for FFP under Title XIX would be unallowable under c.1. g.
because the interest was not deducted from the claim." p. 7.
(7) In finding that the interest generated did constitute an
applicable credit, the Board looked to the source of the interest. /6/
We are not persuaded by the argument that the interest was generated
by the State's investment activities rather than by the Medicaid
program. The Medicaid recoveries directly supplied capital for
investment; the interest in dispute would not have been earned if the
State had not recovered money from its Medicaid providers. . . .
Since the interest was attributable to the Medicaid program, it
should have been credited against program expenditures. pp. 8-9.
While the situation in this appeal is not as blatant as in North
Carolina, where that State kept the Medicaid funds in a special account
for many months after recovering them from providers, the principle is
the same here. Particularly in regard to the $30,531 interest earned on
amounts recovered from providers by agreement, this appeal closely
resembles the situation in North Carolina. As in North Carolina, the
State was not required by federal statute or regulation to place the
withheld and recovered Medicaid payments in an account that earned
interest. Once the State did so, however, the federal government became
entitled to share in that interest. The ultimate source of a portion of
these funds was federal monies and the federal government is entitled to
a pro rata share of the interest those funds earned. This interest, if
not applied as an applicable credit, results in an overpayment within
the meaning of section 1903(d)(2).
(8) II. Is the Intergovernmental Cooperation Act Applicable Here?
The State argued that even if the interest earned on the funds in
question could be considered to be an overpayment within the meaning of
section 1903(d), the Intergovernmental Cooperation Act of 1968, 42 U.S.
C. 4213, allows the State to retain the interest. Section 203 of the
ICA provides as follows:
Heads of Federal Departments and agencies responsible for
administering grant-in-aid programs shall schedule the transfer of
grant-in-aid funds consistent with program purposes and applicable
Treasury regulations, so as to minimize the time elapsing between the
transfer of such funds from the United States Treasury and the
disbursement thereof by a State, whether such disbursement occurs prior
to or subsequent to such transfer of funds. States shall not be held
accountable for interest earned on grant-in-aid funds, pending their
disbursement for program purposes.
The State contended that, since it had not yet been determined that
overpayments had been made, the withheld Medicaid funds were being held
"pending their disbursement for program purposes" within the meaning
of
section 203 of the ICA.
HCFA responded that the funds here did not constitute funds drawn
down for disbursement. Rather, according to HCFA, these funds have
already been disbursed, the recovered amounts when first paid to the
providers and the withheld amounts when placed into a special account to
serve as an offset against any determined overpayment. HCFA concluded
that disbursement occurred before the funds generated any interest and
that, accordingly, any interest earned on these amounts would not be
exempted from recovery under section 203 of the ICA because the interest
was earned on Medicaid recoveries.
Furthermore, HCFA argued, even if the Board were to determine that,
at the least, the amount giving rise to the $67,666 FFP did constitute
funds "pending disbursement," the ICA was not intended to protect
this
kind of interest from recovery. HCFA contended that section 203 was
directed towards scheduling the transfer of grant funds to states in a
manner that reduced to a minimum the time between the transfer of the
funds from the U.S. Treasury to actual disbursement by the states. HCFA
argued that section 203 did not address the situation where interest was
earned on funds improperly drawn down by a state which had no
expectation of paying out those funds until there had been an
investigation of a provider's alleged proscribed activities. HCFA cited
a Department of (9) the Treasury regulation, 31 CFR 205.4(a), as
requiring letter-of-credit recipients to limit their cash advances to an
immediate need level:
Cash advances to a recipient organization shall be limited to the
minimum amounts needed and shall be timed to be in accord only with the
actual, immediate cash requirements of the recipient organization
carrying out the purpose of the approved program or project. The timing
and amount of cash advances shall be as close as is administratively
feasible to the actual disbursements for direct program costs and the
proportionate share of any allowable indirect costs.
Thus, HCFA concluded that the ICA exemption on federal recoupment of
interest was not warranted in the situation where there was no intent to
disburse the funds until a fraud investigation, possibly taking years,
was completed.
The outset, it appears to us that the ICA, if it should be applicable
here, can apply only to the $67,666 interest on amounts withheld from
providers.
The funds which gave rise to the $30,531 in interest clearly come
within our analysis in North Carolina -- they represented amounts
collected from providers as overpayments following a determination that
the provider had engaged in fraud or abuse activities. Thus, the funds
had been previously disbursed to the provider, recovered back from the
provider, and held in an interest-bearing account pending repayment of
the federal share, not pending disbursement to the provider.
The funds which gave rise to the $67,666 in interest did not have
quite the same status. These funds represented current claims of
providers suspected of having engaged in fraud and abuse activities.
Although the auditors found that, in some instances, the amounts were
withheld after the providers had signed stipulation agreements to repay
certain overpayments (audit report, p. 8), it appears that not all of
the amounts withheld had been firmly established as the amount of an
overpayment. Moreover, the State said in the telephone conference call
that there was not always an exact correlation between the amount
withheld and an amount the State suspected a provider was previously
overpaid, and that, in some instances, it might be that the State
questioned all of a provider's claims, including the current claims
which were withheld. Based on this, we cannot find that, at the time
the State withheld the funds, the State's action amounted to a
recoupment of previous overpayments. Thus, we do not totally agree with
the Agency's characterization of these amounts as "recoupments."
(10) But the real issue here is not whether these funds were
recoupments but whether they should be considered funds "held pending
disbursement for program purposes" within the meaning of the ICA, so
that the State is not liable to the federal government for interest
earned on the funds. The State would have us conclude that, merely
because there was the potential, at the time the funds were withheld,
that some of them might have been disbursed, we should determine that
they were withheld "pending disbursement." We disagree. The State's
position ignores the fact that the amounts on which the auditors
calculated the $67,666 interest were never actually disbursed. Rather,
the State ultimately determined that they should not be disbursed but
should be retained as a recovery of past overpayments or because they
related to an improper claim.
While the ICA does not explicitly state that states may retain
interest only on amounts actually disbursed, we think that this
interpretation is consistent with the wording of the ICA, with the
underlying purposes of the interest provisions, and with basic notions
of fairness.
We conclude that the ICA does not apply to the facts of this appeal
because it is evidence that the $67,666 interest was earned on funds
that were not disbursed to providers. The general rule is that the
federal government is entitled to interest earned on federal funds. The
ICA provision the State relies on, as an exception to that rule, should
be interpreted narrowly. It is evident that the exception should be
read only in the light of the requirement of minimizing the time between
the transfer of funds to the states and actual payment. The ICA is a
recognition that it is not always possible for a state to immediately
disburse funds once they are transferred to the state. Here, it is
reasonable to conclude that the funds in question were not held "pending
disbursement for program purposes," but were held pending a
determination on the providers' activities and then further held pending
a repayment to the federal government. We could find no evidence that
Congress, when it enacted the ICA, contemplated a state retaining all
interest earned where funds are deliberately withheld from a provider
and, ultimately, returned to the federal government.
This interpretation does not result in any inequity to the State.
The State's system of placing questionable payments in interest-bearing
accounts may be reasonable. If the State retains all the interest
generated by those accounts, however, the State receives a windfall.
The State is no worse off after this disallowance than if it had simply
delayed drawing down the federal share of the payments that were being
questioned. Once the State did draw down the federal share for those
payments and place those payments in an interest-bearing account, the
federal government became (11) entitled to share in interest on the
funds that were never disbursed for program purposes.
Conclusion
For the reasons stated above, we sustain the disallowance in the
amount of $98,167. /1/ The State argued that any HCFA reliance on this
provision as grounds for the disallowance was misplaced since
Appendix C was deleted from 45 CFR Part 74 on May 22, 1980. 45 Fed.
Reg. 34274. HCFA has correctly pointed out, however, that the
provisions of Appendix C had been adopted from Office of Management and
Budget (OMB) Circular A-87. OMB Circular A-87, formerly designated FMC
74-4, is made directly applicable to states at 45 CFR 74.171.
Consequently, the State remains bound to the applicable credits
provisions. /2/ The State also contended that the State Medicaid
Manual is not authority for the disallowance because it was not
promulgated according to the rulemaking provisions of the Administrative
Procedure Act (APA), 5 U.S.C. Sec. 551 et seq. Section 2535.2E of the
Manual, cited by HCFA, reads in part: "Any interest assessed or earned
by the State on such collections or other grant-related funds must also
be shown on the HCFA-64, and the Federal share returned . . . ." HCFA
responded that the Manual is a collection of the Secretary's
interpretations of the Medicaid statute and regulations, and, as such,
falls within the section 553(b)(A) exception to the notice and comment
requirements of the APA. The Board in the past has found that Action
Transmittals, part of the Manual, may be interpretive rules binding on
those who have timely actual notice of them, even though the
transmittals were not promulgated in accordance with the APA. See,
e.g., Maryland Department of Human Resources, Decision No. 358, November
29, 1982. Because we find, below, that the Medicaid statute in
conjunction with OMB Circular A-87 provides grounds for the
disallowance, we do not believe it is necessary to find that the State
Medicaid Manual provides an independent basis for the disallowance.
/3/ See, e.g., Massachusetts Department of Public Welfare, Decision No.
262, February 26, 1982; Florida Department of Health and Rehabilitative
Services, Decision No. 296, May 15, 1982; New York State Department of
Social Services, Decision No. 311, June 16, 1982; Illinois Department
of Public Aid, Decision No. 404, March 31, 1983; Pennsylvania
Department of Public Welfare, Decision No. 426, May 24, 1983; Missouri
Department of Social Services, Decision No. 448, June 30, 1983; and New
Jersey Department of Human Services, Decision No. 480, November 30,
1983. Several of these decisions have been appealed to United States
District Courts. As of the date of this decision, the Board is aware of
four decisions on these appeals. On January 5, 1984, the United States
District Court for the Northern District of Florida, Tallahassee
Division, in Florida v. Heckler, Civ. No. 82-0935, affirmed Board
Decision No. 296, holding that the State of Florida was liable for
Medicaid overpayments made to providers notwithstanding the providers'
bankruptcy. In Massachusetts v. Heckler, 576 F.Supp. 1565 (D. Mass.
1984) (appeal pending), Board Decision No. 262 was reversed on the
grounds that HHS had not established that payments to a provider at an
interim rate higher than a final rate constituted an overpayment for
purposes of section 1903( d)(2). On September 27, 1984, the United
States District Court for the Western District of Missouri, Central
Division, in Department of Social Services v. Heckler, Case No.
84-4106-CV-C-5, reversed Board Decision No. 448. On October 1, 1984,
the United States District Court for the Northern District of New York,
in Perales v. Secretary, Case No. 83-CV-900, affirmed Board Decision
No. 311. The results of these decisions appear to hinge on the type of
excess provider payment involved. Here, the excess payments do not
represent the difference between an interim and final reimbursement
rate, as the excess payments in the Massachusetts and Missouri decisions
did. /4/ The Board's decision was upheld in State of North
Carolina v. Heckler, 584 F.Supp. 179 (E.D. N.C. 1984). /5/ Texas
Department of Human Resources, Decision No. 213, September 22, 1981, and
California Department of Health Services, Decision No. 244, December 31,
1981. /6/ Similarly, in New Jersey Department of Human Services,
Decision No. 480, November 30, 1983, the Board looked beyond the label
"civil penalty" which that State used to describe the funds received
by
New Jersey from providers who had received overpayments. The providers
were required to pay New Jersey a fixed percentage of the amount of the
overpayment as a civil penalty. The Board considered the Medicaid
overpayments to the providers to have been, in effect, loans, with the
penalty being interest on the loans. In finding that New Jersey was
required to share the civil penalty with the federal government, the
Board stated that federal Medicaid funds were used to generate the
penalty payments from the providers.
MARCH 19, 1985