Iowa Department of Human Services, DAB No. 629 (1985)

GAB Decision 629

March 18, 1985

Ford, Cecilia Sparks; Settle, Norval D. (John) Ballard, Judith A.


The Iowa Department of Human Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $81,594 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance arose
from an overpayment, identified during an ongoing review of program
integrity cases, made to a medical equipment provider. According to
HCFA, the amount in question did not qualify as medical assistance
payments under the State Medicaid plan and applicable federal rules and
regulations. The State declared that it would not repay the federal
share of the overpayment until the State had recovered the amount due
from the provider. The major issue presented is whether section 1903(d)
(2) of the Act authorizes HCFA to demand that the State repay the
federal share of an identified overpayment to a Medicaid provider, even
though the State may not have yet collected the overpayment from the
provider. For the reasons discussed below, we find that HCFA may adjust
under section 1903(d)(2) for an overpayment to a provider prior to any
State recovery from the provider. Accordingly, we uphold the
disallowance. 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 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.(2)
Specifically, section 1903(d) (2) of the Act states:

The Secretary shall then pay to the State . . . the amounts so
estimated, reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this section
to such state for any prior quarter and with respect to which adjustment
has not already been made under this subsection . . . . The issue here
arises because 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 During the period July 30, 1981 through May 7, 1982, the
State paid a medical equipment dealer $147,414 (FFP share $81,594) for
electric hospital beds furnished to Medicaid patients. The beds were
prescribed by chiropracters. The Medicaid regulations allow FFP,
however, for only those expenditures in accord with the State Medicaid
plan. 42 CFR 440.2(b). According to section 6.d.2.b. of the State
plan, claims submitted for this type of medical equipment must be
ordered by a doctor of medicine or osteopathy. Section 440.70 of 42 CFR
further requires that medical equipment, in order to qualify for FFP,
must be ordered by a physician. Services rendered by chiropractors are
considered to be medical care provided by licensed practitioners other
than physicians. The State did not contest HCFA's determination that the
expenditure for the hospital beds constituted an overpayment to the
provider. The State successfully took legal action against the
provider. According to the State, however, the provider was able to
return only a small portion of the amount to the State. HCFA
nevertheless disallowed the full federal share, $81,594, of the
expenditure for the beds. Analysis The general question of whether HCFA
has the authority to demand from states the federal share of identified
Medicaid overpayments to providers prior to the actual recovery of the
overpayments by the states has been examined by the Board in a series of
decisions. In these decisions the Board has held that improper or
excess payments to providers do not constitute "medical assistance"
within the meaning of the Act, and that, therefore, HCFA is empowered by
section 1903(d) (2) of(3) the Act to collect the federal share of these
payments, even if a state has not yet recovered the amounts from the
providers. 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; New Jersey Department
of Human Services, Decision No. 480, November 30, 1983; New York
Department of Social Services, Decision No. 526, March 30, 1984; and
California Department of Health Services, Decision No. 619, January 28,
1985. Several of these decisions have been appealed to federal courts.
InMassachusetts v. Heckler, 575 F. Supp. 1565 (D. Mass 1984), 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). InMassachusetts v. Secretary, 749 F. 2d 89 (1984), however, the
United States Court of Appeals for the First Circuit reversed the
judgment of the District Court and upheld Board Decision No. 262. On
October 1, 1984, the United States District Court for the Northern
District of New York, inPerales v. Secretary, Case No. 83-CV-900,
affirmed Board Decision No. 311. /1/

(4) I.What is the proper interpretation of section 1903(d)? In the
above appeals, states argued generally that HCFA was not entitled to
recoup the federal share of improper or excess payments to providers
until the payments were recovered, and that section 1903(d) (3) limited
any federal interest to a pro rata share of the amount actually
recovered. The Board's reasoning in rejecting these arguments may be
summarized as follows:

- 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 Secretary to adjust in
situations where a question might have existed as to a state's liability
to repay the federal share or the Agency's ability to recoup the share
by an offset to future claims.

- The more general language of section 1903(d) (2) has been
consistently read together with section 1116(d) of the Act, so that a
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 subsection 1903(d) (2). See,, e.g., 45
CFR 201.10 et. seq.; Solomon v. Califano, 464 F. Supp. 1203, 1204 (D.
Md. 1979).

- 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 unallowable overpayment, merely
because the state has not recovered the amount from a provider. /2/

(5) Notwithstanding the above cases, the State has argued that the Board
and HCFA have misinterpreted section 1903(d) of the Act. According to
the State, it is subsection (3) of section 1903(d), not subsection (2),
that governs the recovery of overpayments, with HCFA's recoupment
limited to a pro rata share of the amount actually recovered by the
State from the provider. The State disputed the Secretary's authority
to unilaterally determine what is considered to be an "overpayment"
under section 1903(d). The State further contended that HCFA's
interpretation of section 1903(d) results in unfair treatment of the
State, thereby violating the Congressional intent that the Medicaid
program be a cooperative partnership between the federal government and
the states. The Board's past decisions recognized, and the reviewing
courts have concurred, that the difficulty in interpreting section
1903(d) stems from the lack of a definition of "overpayment."
Considering the section, as a whole, however, HCFA's reading makes more
sense. In analyzing an argument similar to the State's position above,
the Board declared that --

the specific subject of (d) (3) is not "recovery of overpayments" as
the State alleged, but treatment of certain recoveries as overpayments.
The plain language of (d) (3) concerns amounts which would ordinarily
not be considered "overpayments" because they were "medical assistance
furnished under the State plan" and therefore, were allowable when made.
When such amounts are recovered, (d) (3) describes the extent to which
the federal share is to "be considered an overpayment" for purposes of
adjustment under (d) (2). Thus, (d) (3) does not constitute a limiting
definition of the term "overpayment" in (d) (2). Contrary to the
State's assertion, the Agency interpretation does not render (d) (3)
superfluous, ineffective, or insignificant, but, rather, gives effect to
both provisions and is supported by the statutory scheme as a whole.
Decision No. 311, pp. 5-6.(6) The Court in Perales, supra, called the
above quotation a "sound conclusion . . . amply supported by the
statutory language." Slip op., p. 14. We believe that the State has
overlooked a central point in questioning the Secretary's authority to
make a unilateral determination as to what constitutes an "overpayment."
"Medical assistance" is defined by section 1905(a) of the Act. Whenever
the Secretary determines that a state has claimed and received FFP based
on a payment to a provider which does not constitute "medical assistance
under the State plan" within the meaning of section 1903(a), the
Secretary has in effect determined that the state has been overpaid
federal funds, and the Secretary is authorized under section 1903(d) (2)
to make an adjustment for that FFP. Thus, the issue here is whether the
amounts in dispute were "medical assistance furnished under the State
plan." As pointed out above, the State has acknowledged that the beds
were not authorized under its State plan. In its brief, the State relied
on the district court's opinion in Massachusetts v. Heckler, supra.
That case involved excess payments arising from Massachusetts' use of a
retrospective reimbursement system to pay Medicaid providers. Under this
system, Massachusetts made provisional payments to providers at interim
rates based on the providers' previous year costs. At the end of the
fiscal year, the provider submitted a cost report. Massachusetts then
determined a final rate for the year. If the final rate was lower than
the interim rate, Massachusetts recovered the difference from the
provider. The Board rejected Massachusetts' contention that, since it
was acting in accord with its State Medicaid plan, HCFA was entitled to
a refund only of the federal portion of excess payments actually
recovered by Massachusetts. In Massachusetts, and also in Missouri,
supra, where that state had a similar type of reimbursement system, the
States' arguments focused on whether they had made payments to providers
in accordance with their approved State Medicaid plans, contending that
the payments were authorized when they were first made since the
approved retrospective reimbursement system contemplated payments at an
interim rate. This line of reasoning was refuted in the Board's
analysis in Massachusetts, supra, which was upheld by the Court of
Appeals. The amounts in question were found to be inexcess of what the
providers were entitled to retain as final payments under the State
plan. As a result of reimbursing the providers an excess amount, the
states claimed FFP in a greater amount than they were ultimately
entitled to, i.e., FFP in the rate ultimately determined to be the
correct one under the State plan. Since HCFA determined that the amounts
were not "medical assistance furnished under the State plan," this
constituted a determination that FFP in the amount was(7) an overpayment
subject to the provisions of section 1903 (d) (2). In this appeal,
however, the amounts in question do not represent the difference between
an interim and a final reimbursement rate under an authorized
reimbursement system. Here, Iowa's payments to the provider for the
hospital beds were in direct contradiction to the State plan and the
Medicaid regulations. The State cannot claim that payments for beds
prescribed by chiropracters were authorized under the State plan even
when they were made. The payments simply were not "medical assistance
furnished under the State plan." Since the State claimed FFP for the
purchase of the beds, it received FFP in a greater amount than it was
entitled to. As such, the Secretary could legitimately determine that
an overpayment of the type mentioned in section 1903 (d) (2) had
occurred. The situation here is thus more flagrant than in many of the
other overpayment cases that have been before the Board where the states
could at least arguably contend that the questioned payments were, for
some time, authorized under their State plans. If we were to accept the
State's position, HCFA would be required to provide FFP for services not
otherwise authorized under the Act simply because the State could not
recover the entire payment from the provider. As to the State's argument
that HCFA's interpretation of section 1903 (d) is unfair and contrary to
the intent of Congress that the federal government and the states should
share proportionally in the costs of the Medicaid program, the Board has
previously concluded:

(W)hile it is true that Congress devised the Medicaid program as a
joint federal-state endeavor, the states have the primary responsibility
for administering the program, including the duty to take steps to
prevent improper payments in the first instance and to identify and
recover overpayments in a timely manner when they do occur. In some
instances the loss of funds might be unavoidable. However, to sort out
these cases would be difficult, requiring a highly judgmental
case-by-case analysis. Viewing the program as a whole, therefore, we
think that the Agency is not unreasonable in requiring the states to
bear the burden of unrecovered overpayments.

Decision No. 311, p. 7. The First Circuit essentially agreed with
this analysis:

Since Medicaid is a joint program of the state and federal
governments for providing health care, it is appropriate to inquire
whether imposing that portion of the rate differential at issue on
Massachusetts or the Secretary will better conserve the limited pool of
(8) resources available for that purpose. Since only Massachusetts
deals directly with the providers, and since the state is empowered to
perform on-site audits of these institutions, it is clearly the party
best able to minimize the risks resulting from dealing with insolvent
providers.

749 F.2d 89, at 96. See also, , Perales, supra, Slipop., p. 21.
Iowa has presented no reason why this rationale should not apply here as
well. II.Do HCFA's proposed rules support the State's position? The
State contended that rules proposed by HCFA in 1983 indicate that an
"overpayment," as used in section 1903 (d) (3), includes "payments for
noncovered services," that is, services not considered medical
assistance under the State plan. The State submitted that, if the First
Circuit in Massachusetts v. Secretary had been presented with HCFA's
position as stated in these rules, that court would not have reversed
the district court's decision. The rules and statements cited by the
State come from a notice of proposed rulemaking, 48 Fed. Reg.
14664-14668 (1983), in which HCFA proposed an amendment to section 447
of 42 CFR that "would revise current policy that requires medical
assistance to be reduced at the time overpayments are reported." The
proposed regulation, not yet published in final form, would give the
states a period of time after identifying an overpayment before that
overpayment would be offset against a grant award. The State focused on
the following from the preamble to the proposed rules:

Improper payments inevitably will occur from time to time in any
large claims processing system. Examples of improper payments in the
Medicaid reimbursement process are duplicate payments for the same
services, payment to the wrong provider, payments for noncovered
services, and excessive provider reimbursement attributable to
reimbursement rate setting methods . . . .

(emphasis added by the State) According to the State, that shows that
"the Department has consistently considered(footnote omitted) 'improper
payments for uncovered services' as an overpayment." (State's Reply
Brief, p. 4) The State apparently thought that this meant that since
improper payments were considered overpayments, section 1903 (d) (3)
applied. We agree that the Department has considered improper payments
for uncovered services to be overpayments, but we believe(9) that the
State has misinterpreted the effect of this. Rather than supporting the
State's position on section 1903 (d), the rules support the position
that amounts expended not as "medical assistance under the State plan"
are to be adjusted in accord with section 1903 (d) (2) irrespective of
recovery. The rules would not alter HCFA's interpretation of section
1903 (d) but only change the time frame when the amounts would be
adjusted. We cite another part of the preamble to these rules:

Section 1903 (d) (2) of the Social Security Act requires that FFP be
reduced or increased to the extent of any overpayment or underpayment
which the Secretary determined was made to a State in any prior quarter.
Additionally, section 1903 (d) (3) of the Act states that the Secretary
will consider the pro rata Federal share of the net amount recovered
during any quarter by a State to be an overpayment. Under the authority
of section 1903 (d) (2), HCFA has adjusted FFP for the quarter in which
an overpayment is reported. This offset normally has been contingent on
whether a State notifies HCFA of an improper payment to a provider, or
on overpayments identified through HHS, HCFA or GAO audit processes.
(emphasis added)

48 Fed. Reg. 14664 Contrary to the State's arguments, the above
quotation reasserts HCFA's policy. Improper payments, i.e., payments
outside the scope of "medical assistance under the State plan," are to
be adjusted under section 1903 (d) (2). The federal share of
expenditures for items authorized under the State plan are to be
adjusted only when recovered because then section 1903 (d) (3) applies.
These proposed rules, then, do not indicate that HCFA has consistently
considered payments for uncovered services to be governed by section
1903 (d) (3). The key point, which we have stressed, and the reviewing
courts have sustained, is whether the questioned payments were within
the scope of the State Medicaid plan. The payments at issue here
clearly were not. Conclusion For the reasons stated above, we sustain
the disallowance in the amount of $81,594. If, as a result of court
action, the State should obtain any recovery from the provider and
repay(10) the federal share of the recovery to HCFA, the disallowance
should be adjusted accordingly. /1/ District courts have reviewed other
Board decisions on the issue of recovery of overpayments. On
January 5, 1984, the United States District Court for the Northern
District of Florida inFlorida 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. On September 27, 1984, the United States District Court for
the Western District of Missouri, inDepartment of Social Services v.
Heckler, Case No. 84-4106-CV-C-5 (appeal pending), reversed Board
Decision No. 448. The results of the district court decisions appear to
hinge on the type of rate-setting mechanism and excess provider payment
involved. The Court of Appeals decision inMassachusetts, however,
allows recovery of the federal share of the excess payments irrespective
of the rate-setting system that may have generated the overpayments.
Compare, Arkansas v. Heckler, Case No. LR C 83 467, Eastern District of
Arkansas, September 17, 1984. /2/ In the Massachusetts District
Court decision (followed in Missouri, supra), the court held that, where
there is an overpayment, there need be no recovery by a state before the
overpayment can be properly disallowed, but disagreed whether there was,
in fact, an overpayment when an interim rate was later found to be
greater than a final rate. In Arkansas, supra, the Court upheld the
Secretary's authority to adjust for excess payments but found the
Board's distinction between overpayments found in a federal audit and
overpayments found in a state audit to be inadequately explained. The
Court also disagreed with the Board concerning whether the accuracy of
the federal audit was, in fact, contested, and remanded the case for
further factual development.

JUNE 06, 1985