Ohio Department of Public Welfare, DAB No. 637 (1985)

GAB Decision 637

April 2, 1985

Ohio Department of Public Welfare;
Ballard, Judith A., Teitz, Alexander G. Ford, Cecilia S.
Docket No. 84-107

The Ohio Department of Public Welfare (ODPW, State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $5,059, 192 in federal financial participation (FFP) claimed under
Title XIX (Medicaid) of the Social Security Act (Act). The disallowance
was based on a HCFA regional office report reviewing, as of September
30, 1982, the effectiveness of Ohio's system of identifying Medicaid
provider overpayments to assure that the amounts are properly recorded
in the State's records and the federal share promptly returned to HCFA.
After the notice of appeal was filed, the proceedings were stayed to
permit the parties to reconcile and update the overpayment amounts. As
a result, the amount in dispute was reduced to $1,297,516 in FFP. The
major issues presented are whether section 1903 (d) (2) of the Act
authorizes HCFA to demand that the State repay the federal share of
identified overpayments made to Medicaid providers, even though the
State may not have yet recovered the overpayments from the providers;
and whether the record provides a sufficient factual and legal basis to
support the disallowance. We affirm our previous decisions in holding
that HCFA may adjust for identified overpayments prior to the State's
recovery of the overpayments from the providers. For the reasons
explained below, we also remand certain provider overpayments for
further consideration by the parties and sustain the rest of the
disallowance except to the extent HCFA has agreed to reduce it. General
Background Title XIX of the Act provides for the payment of federal
monies to states to aid in financing state medical(2) 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. Section
1903 (d) (2) of the Act states:

The Secretary shall then pay to the State . . . the amounts so
estimated, reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this section
to such state for any prior quarter and with respect to which adjustment
has not already been made under this subsection. . . . Section 1903 (d)
(3) of the Act states:

The pro rata share to which the United States is equitably entitled .
. . of the net amount recovered during any quarter by the State . . .
with respect to medical assistance furnished under the State plan shall
be considered an overpayment to be adjusted under this subsection. Case
Background HCFA reviewed the State's procedures for identification and
recovery of collections due the Medicaid program and determined that
$5,059,192 FFP in firmly established overpayments had not been credited
to the federal government as of September 30, 1982. State Appeal File,
Ex. 3, "Report on Review of Overpayments Made to Medical Providers . .
. " (Report), dated August 23, 1983. Based on the reviewers' findings,
the Agency disallowed $5,059,192 in FFP. Citing section 1903 (d) (2) of
the Act, HCFA concluded that "the Secretary . . . is obligated to
recover the federal share of any Title XIX overpayment she determines to
have been made and not previously adjusted. This adjustment must be
made whether or not the State has yet recovered, or ever will recover,
the amount of the overpayments from the providers." Disallowance letter,
p. 2.(3) During this appeal, the parties agreed that as of July 1, 1984
some of the disallowed amounts had been repaid to HCFA and that the
amount in dispute was reduced to $1,297,516 FFP. Letter from Agency
dated August 28, 1984. The reduced amount in dispute consists of
"overpayments" identified by various ODPW administrative components, as
follows:

FFP Hospital
Reimbursement Section 4,053 Bureau of
Nursing Home Audits 1,127,057 Attorney
General-Division of 92,267 Medicaid
Fraud Bureau of Surveillance and
63,025 Utilization Review Claims Adjustment Section
11,114 Total $1,297,516

%As we discuss below, the record shows that the Agency agreed to further
reductions during the course of Board proceedings. HCFA's Review
Findings The disallowance letter noted that the HCFA reviewers had
examined ODPW accounts receivable records as well as "numerous
management, accounting, and legal documents and reports concerning
provider payments, audits, settlements, appeals, and collections." State
Appeal File, Ex. 4. The Report summarized the ODPW overpayment
collection process as a "three stage process -- identification, appeal
and collection" and explained which administrative components of the
State were responsible for certain steps in the process. Chapter 119 of
the Ohio Revised Code contains the formal appeals process which applies
to the majority of the overpayments identified by ODPW. The Report
summarized this process as follows:

I. Overpayment is identified by limited review, audit or other
method.

II. Provider is notified of appeal rights through a "proposed"
adjudication order. The provider then has 30 days to request or waive
appeal.

III. Upon (1) expiration of 30 day time limit or (2) receipt of
waiver or (3) resolution of appeal (if requested), a "final"
adjudication order is issued to the provider.(4)

IV. After issuance of "final" adjudication order, the provider is
mailed a collection letter. The provider is permitted 30 days to remit
payment or request a payment plan.

V. If the provider fails to respond to the collection letter, the
overpayment is certified to the Attorney General for collection. As a
general rule, the reviewers considered an overpayment to be firmly
established upon the issuance of the adjudication order in step III.
The Report contained a separate section of findings and recommendations
for each administrative component reviewed. The reviewers' overall
conclusion was that:

(Overpayments) were not credited until . . . actually collected,
deposited, and posted to ODPW's accounting records. In many instances,
Federal credit was delayed for months, and occasionally years, due to
administrative delays, lack of aggressive collection efforts, or the
allowance of extended repayment schedules.

Report, p. 4 For each component, the Report stated what types of
determinations the reviewers regarded as firmly establishing overpayment
amounts. /1/ The Report included schedules for each administrative
component listing, by category of overpayment, the providers, pertinent
dates, and the amount due as of September 30, 1982. (The schedules were
updated as of August 28, 1984 to reflect the overpayment amounts in
dispute on July 1, 1984.) The Report also included the State's comments
on a draft report.

Analysis I. Whether HCFA can adjust for overpayments prior to recovery.
A. Previous Board decisions. The general question of whether HCFA has
the authority to demand from states the federal share of identified
Medicaid(5) provider overpayments 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 the Act to collect the federal share of these payments,
even if a state has not yet recovered them 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; Pennsylvaania Department
of Public Welfare, Decision No. 426, May 24, 1983; Missouri Department
of Social Services, Decision No. 448, June 20, 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. In Massachusetts v. Heckler, 576 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). In Massachusetts v. Secretary, 749 F. 2d 89 (1984), however, the
United States Court of Appeals for the First Circuit, on November 28,
1984, 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, in Perales v. Secretary, Case No.
83-CV-900, affirmed Board Decision No. 311. /2/

(6) In the above appeals, states argued generally that HCFA was not
entitled to recoup the federal share of overpayments 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 can 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 1903 (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 had (7) 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 set seg.; 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 unallowable, merely because the
state has not recovered the amount from a provider. /3/

B. The State's arguments here. Notwithstanding the above cases, the
State argued in this appeal that the Board and HCFA have misinterpreted
section 1903 (d) of the Act. According to the State, the disputed
amounts were costs incurred for medical services under the State plan
and thus were payments for "medical assistance" which, under section
1903 (d) (3), cannot be considered "overpayments" until the State
actually recovers them. The State also relied on the cooperative
federalism/partnership concept of the Medicaid program to support
reversal of the disallowance. Our 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 noted that--

the specific subject of (d) (3) is not "recovery of overpayments" as
the State alleged, but treatment of (8) 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. The Court in
Perales, supra, called this statement a "sound conclusion . . . amply
supported by the statutory language." Slip op., p. 14. The State argued
that the bulk of the disallowance was comprised of excess payments to
nursing home providers, resulting from the State's reimbursement
systems. Under the systems in effect during the time periods at issue
here, the State asserted that it made payments to providers at interim
rates subject to later downward adjustment. Final rates were determined
through a cost settlement process for the rate year. The State pointed
out that the district court in Massachusetts held that payment by a
state of a higher interim rate than final rate did not constitute an
overpayment for purposes of Section 1903 (d) (2) of the Act. The State
further noted that its reimbursement systems "ha(d) all of the
characteristics that led the court in Massachusetts to its decision."
State's Reply Brief, p. 9. (See State's Reply Brief, pp. 6-9, for a
discussion of the reimbursement systems and why the State argued the
Massachusetts district court opinion applied in general to all the
disputed overpayments.) Replying on the Massachusetts district court
decision, the State also advanced the proposition that none of the
disallowed overpayments were subject to adjustment prior to recovery by
the State since that would "place the full burden of unrecovered
Medicaid payments on the states (and) would violate the federal-state
partnership. . . . " State's Reply Brief, p. 9. After the State had
submitted its briefs in this appeal, the Court of Appeals for the First
Circuit issued its decision in Massachusetts reversing the district
court. While (9) declaring 1903 (d) "less than crystal clear" and
calling the question "close", the court adopted the Secretary's
interpretation of 1903 (d). Massachusetts, p. 94. Essentially, the
court of appeals found the Secretary's interpretation of the statute as
reasonable as that of Massachusetts, holding that "Congress could
scarcely have meant to reimburse a state for excessive cost of
services." Id. In upholding the Secretary's position, the court declared
that it was appropriate to give deference to the reasonable and
statutorily permissible interpretation of the agency responsible for the
administration of the program. Id., pp. 95-96. Notwithstanding the
court of appeals decision, the State continued to rely on the district
court's decision as the correct interpretation of the Act and urged the
Board to adopt the lower court's analysis in this case. The State's
continued reliance on the lower court's decision and the State's general
line of reasoning, in essence, ignore the focal point of the Board's
analysis which was upheld by the court of appeals in Massachusetts. By
reimbursing Medicaid providers amounts in excess of what the providers
were entitled to be paid under the State plan, the State claimed FFP in
an amount greater than it was entitled to claim, i.e., FFP in the rate
ultimately determined to be the correct one. The court confirmed that
such excess amounts are not "medical assistance furnished under the
State plan," but rather are overpayments subject to the provisions of
section 1903 (d) (2). Moreover, as discussed below, some of the
disputed amount here represent "improper payments," that is, payments
for services not provided, not covered under the State plan, or
otherwise unauthorized. /4/

(10) As to the issue of the compatibility of HCFA's position on recovery
of overpayments with the cooperative federalism foundation 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 district court in Perales supported this
view for similar reasons, and concluded that:

The partnership upon which plaintiff relies does not in and of itself
entitle the State to disclaim or abdicate its own obligations in order
to make its own responsibilities easier to bear. Slip op., p. 21. The
Court of Appeals for the First Circuit said:

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
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.
The fact that Massachusetts will in any event bear a share of the loss,
and so already has some incentive to minimize these risks, diminishes
but does not destroy the force of this observation. Placing an
additional burden on the state will increase its incentive to take care,
whereas the Secretary remains powerless to reduce the risks no matter
what the costs imposed on her.

Massachusetts, p. 96.(11) The court of appeals' decision also answers
another argument advanced by the State. The State contended that
section 1903 (d) is ambiguous and that Congress can impose conditions on
grant of federal monies only if it does so unambiguously. In support of
this proposition, the State cited Pennhurst State School v. Halderman,
451 U.S. 1 (1978). The court of appeals declared:

We do not believe that Pennhurst requires that every arguably
ambiguous provision conditioning the receipt of federal funds by a state
be construed in the state's favor. . . . Pennhurst found the imposition
of new conditions on the receipt of federal funds repugnant to the
notion that by accepting the funds the state had thereby entered into a
contract with the federal government and was entitled to have its
bargain enforced as written. Pennhurst, 451 U.S. at 17. The present
case involves not the imposition of a new condition on the state but the
interpretation of the provisions governing the remedies available to the
federal government. No principle of contract law requires us to
construe such a provision consistently against a federal government
obligee.

Massachusetts, p. 95. In light of the Board's past decisions and the
court of appeal's opinion in Massachusetts, we are not persuaded that
HCFA's interpretation of section 1903 (d) is incorrect, that this
interpretation violates the partnership concept of the Medicaid program,
or that it involves the improper imposition of conditions on the receipt
of grant funds. II. Is there a sufficient factual and legal basis to
support HCFA's disallowance in general? The State additionally argued
that HCFA's review and findings based on the State's records were
inadequate as a factual and legal basis for the disallowance. The State
argued that HCFA's "audit did not consist of a comprehensive review of
Appellant's audits and/or claims, nor did Respondent actually audit the
providers in question." /5/ State Brief, p. 6. The State cited the
Board's decisions in (12) California Department of Healthe Services,
Decision No. 159, March 31, 1981, and California Department of Social
Services, Decision No. 244, December 31, 1981, for the proposition that
disallowances based upon HCFA's adoption of State audits will be upheld
only if the record before the Board is adequate to support a factual and
legal determination that the State claimed FFP for unallowable costs.
State's Brief, p. 7. The State relied on these decisions as well as the
Board's decision in South Carolina Department of Social Services,
Decision No. 149, February 3, 1981, arguing that certain factors that
caused the Board to reverse these disallowances were present here.

While the Board did reverse disallowances initially based on state
findings in the three Board cases cited by Ohio here, the Board has also
in a number of cases upheld disallowances based on state findings.
Through these decisions, the Board has developed some standards for use
of state audits or other findings as a basis for disallowance. The
Board has determined that the Agency may reasonably rely on state
findings provided:

* The Agency provides sufficient detail as to the audits or other
sources from which the disallowed amounts are derived; and

* The State is provided an opportunity to show that

- adjustments have been made to the State findings;

- the findings are not reliable for some reason;

- the State has already recovered the amount identified as an
overpayment and has already adjusted the federal share; and

- the State never claimed FFP in the overpayment in the first place.
In evaluating whether the Agency has provided sufficient detail to
enable a state to respond, the Board has found that HCFA met its burden
by identifying the names of the providers which allegedly received
overpayments, the respective amounts, and the relevant time periods.
Decision No. 426, p. 7; Decision No. 448, p. 7. If HCFA has done this,
and the State has been provided an opportunity to make the showings
listed above, the Board must then analyze the record as a whole to see
whether there is a factually and legally supportable basis on which to
uphold the disallowance.(13) This analysis depends on various factors
such as the nature of the overpayments involved; the nature of the
state findings involved; the extent to which HCFA independently
determined that the state had claimed unallowable costs; the issues
raised by the state; and the evidence the state has provided in support
of its positions. For example, where HCFA's determination was based on
state audits all performed as part of a cost settlement process governed
by specific audit requirements and establishing final rates under a
state plan, the Board found the audits to be reliable as a basis for
disallowance in spite of California's general allegations that they were
not. Decision No. 334. The Board also found that the mere fact that
some providers were appealing the audit findings did not render those
findings unreliable where the State considered the findings to be
sufficiently final so that the state could take action to collect the
excess payments from the providers. Id. In each case, the Board will
consider the particular circumstances in determining the adequacy of the
record before it. For each individual overpayment amount here, HCFA's
Report identified the provider, the relevant time periods, and why HCFA
considered the amount to be firmly established. Thus, there is no
question that HCFA met its burden to provide sufficient detail about the
overpayments so that the State is obliged to go forward to show why
HCFA's determinations should be reversed. In evaluating whether the
State has met its burden here, we make the following general
observations:

* The State did not attack the reliability per se of its own audits
or other review mechanisms used to identify provider overpayments.

* These systems, in general, identified amounts determined to be
either improper payments (that is, for services not actually provided,
not covered under the State plan, or otherwise not in accordance with
federal requirements) or amounts in excess of what the provider was
ultimately entitled to (such as the difference between an interim and
final reimbursement rate). /6/

(14)

* The State did not deny that it had claimed and received FFP in each
of the payments in question.

* As mentioned above, the State did present evidence to HCFA that the
State had recovered some of the overpayments identified in the HCFA
review and made the corresponding adjustment of the federal share, and
HCFA reduced the disallowance accordingly. The primary questions the
State's arguments raised are whether HCFA's determinations should be
reversed because the HCFA reviewers had either mistakenly included some
payments in with groups of overpayments which were considered firmly
established or had mistakenly considered some groups of overpayments as
firmly established which were not. In addition, the State raised
separate arguments concerning several specific overpayments, which, for
the most part, HCFA accepted as a basis for reducing the disallowed
amount. /7/ We discuss the various categories of overpayments below,
analyzing individually issues raised concerning the amounts remaining in
dispute.

111. Are determinations on specific overpayments adequately supported on
the record? As noted above, HCFA categorized the overpayments generally
by the State administrative component which was responsible for
identifying the overpayment. We discuss the arguments related to
specific overpayments in each category below. A. Hospital Reimbursement
Section ($4,053 FFP) The Agency has acknowledged both that $4,053 FFP is
not due HCFA for Polyclinic Hospital and that there is a balance of
$1,457 due the State for this provider. B. Bureau of Nursing Home Audits
($1,127,057 FFP) As discussed above on page 8, ODPW stated that the
nursing home reimbursement systems in effect during the time period in
question here involved interim payments subject to later adjustment.
HCFA's Report stated that final rate settlements for nursing homes were
subject to the Chapter 119 appeals process described on pages 3-4. The
nursing home final settlement overpayments which HCFA determined were
firmly established as of September 30, 1982 are:

Category FFP Nursing
homes that submitted $ 20,286 119
hearing waivers Final adjudication orders
180,117 TL ? issued to providers Audits returned as
801,108 undeliverable Bankrupt providers
125,546 $1,127,057

%Many of the nursing home overpayment amounts in dispute were set by the
State using its "reduction to lowest rate paid" cost settlement concept.
The State indicated that, when a provider was considered unauditable,
the State "had a policy of reducing the provider to the 'lowest rate
paid a like facility' for purposes of a final rate to be utilized in its
final settlement." State Brief, p. 8. The State contended that there
has been no determination that these overpayment amounts represent
unallowable costs and that there are questions concerning whether these
amounts are reliable and final. State Brief, pp. 10-11. The State
argued that most of the providers ultimately submit auditable records
and that any overpayment amount set by the "reduction to lowest rate
paid" method is overstated since the proposed settlement is calculated
based on the "minimal amount" that the State would pay. The State
further argued that "(F) or the most part then, the reduction to 'lowest
rate paid' final settlements act as a starting point from where findings
usually go down after an audit is performed." State Brief, p. 9. The
State also indicated that it is involved in litigation with providers
over this method of cost settlement. State Brief, pp. 8-11. In making
these arguments, the State initially referred only to some of the homes
in the "Audits returned as undeliverable" category. The State noted
that there were 46 homes in this category "of which at least 36 were
declared unauditable and had final settlements calculated upon a
'reduction to lowest rate paid' concept. Of these . . . 20 were
declared unauditable . . . because auditors could not locate the
providers for an audit." State Brief, p. 8. The State asserted that two
of the four homes categorized as having submitted Chapter 119 hearing
waivers had submitted unacceptable waivers, had subsequently requested
hearings, and had had appeals pending for five months at the time the
disallowance was taken (Wilmington Extended Care Facility, $7,032 FFP
and Lebanon Health Care Center, $7,987 FFP). State Reply Brief, p. 10
and Exs. E, F, G, H, I, and J. For the 13 homes categorized as having
received final adjudication orders, the State argued that this category
was misleading and "creates the impression that these cases have been
properly finalized through the . . . administrative review process."
State Reply Brief, p. 11. Specifically, the State contended that 10 of
the homes were unauditable and that for six of the 10 unauditable homes
the proposed or final adjudication orders were not delivered to proper
parties (Meredith View Nursing Home, Valley Hills Nursing Home,
Crestwood Convalescent Center, Central Nursing Home,(17) Twilight
Nursing Home, Hamilton Nursing Home). The State explained the factual
circumstances for several homes and argued that these overpayments were
not firm, final, adjudicated amounts. For example, for Meredith View
Nursing Home, the State submitted a letter to support its assertion that
the accountants could not locate the provider to audit. The State
further stated that it had issued a final settlement based on the lowest
rate paid and a final adjudication order which it "now believes . . .
was never received by the real parties of interest." State Reply Brief,
p. 12. For the three bankrupt providers, the State relied only on the
district court'sMassachusetts decision as precluding recovery. The
State presented no factual information or argument to show that the
individual overpayment determinations were not final. State Reply
Brief, pp. 13-14. With regard to the "reduction to lowest rate paid"
cost settlements, HCFA argued that it should be able to rely on the
State's policy concerning final rate settlements. HCFA pointed out that
this method was used where providers could not be audited and asserted
that the State ignored "the fact that many of these overpayments date
from the 1970's" (HCFA Response, p. 21), that the State failed to follow
its procedures concerning attempts to notify facilities about
undelivered audits, and that as of July 1, 1984 the overpayment amounts
for at least 25 of the providers in the undeliverable audits category
remained unchanged ($456,000 FFP). The Agency thus regarded "reduction
to lowest rate paid" overpayment amounts as final. In light of the
considerations mentioned in Part II above, we will examine the
sufficiency of the record as a basis for sustaining the disallowance for
each of the nursing home overpayment categories. 119 Hearing Waivers.
The record shows that Lebanon Health Care Center and Wilmington Extended
Care Facility are not properly categorized as cases where a hearing was
waived since ODPW did not accept the waivers submitted by the facilities
and both facilities subsequently entered the appeals process. We remand
to the parties the question of whether overpayment amounts are firmly
established and as yet unpaid for these two facilities. The
disallowance is sustained for the remaining two facilities in this
category. Final Adjudication Orders Issued. Appellant admitted that two
facilities, Brightside Nursing Home and Hope Haven(18)$%Nursing Home,
properly received final adjudication orders and were repaying the
amounts due. The disallowance for these two facilities is thus
sustained. In addition, the parties agreed that there was no longer an
outstanding overpayment due for Bie Bricker Home. We discuss below the
ten remaining homes in this category which the State argued were
properly characterized as unauditable and for which the "reduction to
lowest rate paid" final rate was used. Audits Returned as Undeliverable.
The disallowance is sustained for the approximately 10 homes which were
not declared unauditable since the State presented nothing to refute the
finding that there were firmly established excess payments. We remand
for further consideration by the parties the approximately 46 homes
where the overpayment amounts were determined according to the State's
"reduction to lowest rate paid" method. /8/ The record before us
presents a substantial question as to whether these amounts can properly
be regarded as firmly established excess payments.

The final settlements proposed using the "reduction to lowest rate paid"
approach were not based on facility audits and were thus based on
factors unrelated to the costs actually incurred by the facilities.
Moreover, the Report finding of firmly established overpayments for
these homes was based on categorizing them either as having
"undeliverable audits" or as having received "final adjudication
orders." With regard to undeliverable audits, the Report finds only that
the State did not follow its procedures and publish notices in the
newspaper for facilities whose audits were returned as undeliverable.
The Report in discussing both categories does not even mention the
"reduction to lowest rate paid" final cost settlements so there is no
specific conclusion by the HCFA reviewers that overpayment amounts set
by this method should be regarded as firmly established unallowable
costs. We do not regard the State's general allegations concerning
pending litigation over the "reduction to lowest rate paid" method to be
significant since the record does not show a direct impact by this
litigation on any of the particular facilities involved in this dispute.
Nevertheless, it may(19) be significant that ODPW "is currently electing
not to use (this method) to resolve the claims in question." State Reply
Brief, p. 18. Also, Exhibit D to the State Reply Brief, State plan
transmittal 77-17, effective December 1, 1977, states:

Financial and statistical records . . . supporting the cost reports
shall be retained for at least three years. Failure to retain the
required financial and statistical records renders the provider liable
for monetary damages equal to the difference between (1) the per diem
paid to the provider for the prospective year in question and (2) the
lowest per diem paid in the State of Ohio to an owner of the same type
of facility. . . . Although the relevance of the quoted State plan
provision is unclear on the current record, it casts further doubt on
treating "reduction to lowest rate paid" settlements the same as
overpayments where a final rate has been set and the resulting
overpayment amounts firmly established. Not only were the rates set
using "reduction to lowest rate paid" not based on facility audits, but
also, there may be facility cost reports which would provide, absent
fraud or error, an actual cost basis for determining a final rate.
While we do not decide that a "reduction to lowest rate paid" cost
settlement can never be the basis for a firmly established overpayment,
the record here does not provide sufficient support for any particular
home to show that an unaudited "minimal rate" should ultimately
determine the provider overpayment. For any home where the State
disputes use of this method, it should within 45 days of receiving this
decision submit to HCFA specific information showing the audited final
settlement or other information necessary in its view to rebut the
"reduction to lowest rate paid" cost settlement overpayment. If the
parties cannot agree as to the amount of any firmly established
overpayments, they may return to the Board. /9/ The disallowance is
sustained for any home for which the State does not present further
information on remand.

(20)$UBankrupt Providers. It is well settled that HCFA is not precluded
from adjusting for overpayments simply because the provider is bankrupt.
California Department of Health Services, Decision No. 334, June 30,
1982. Florida Department of Health and Rehabilitative Services,
Decision No. 296, May 17, 1982. There is no basis in this record for
questioning that the overpayment amounts for the bankrupt providers are
firmly established and relate to improper or excess payments.
Accordingly, this portion of the disallowance is sustained. C.Attorney
General of the State of Ohio Medicaid Fraud Control Section ($92,267
FFP) The Medicaid Fraud Control Section of the Attorney General's Office
was responsible for investigating and prosecuting Medicaid fraud cases.
The Report found overpayments to be firmly established upon a provider's
conviction or agreement to a negotiated plea. The $92,267 FFP in dispute
pertains to four providers; the State asserted that for the most part
the amounts are uncollectible. The State specifically discussed the
$109,536 ($60,354 FFP) in alleged overpayments to a provider who fled
the country rather than defend the suit brought by the State; a default
judgment was then entered against the provider. The State asserted that
since default judgments can be set aside, there should be no recovery by
HCFA until the State actually recovers from the provider. The State did
not provide any evidence that the amounts established pursuant to
convictions or negotiated plea agreements were allowable Medicaid costs.
Assuming the amounts are truly uncollectible, the circumstances here are
somewhat analogous to the situation presented by a bankrupt provider.
HCFA may adjust these amounts under 1903 (d) (2) as firmly established
overpayment amounts regardless of whether the State has recovered from
the providers. D. Bureau of Surveillance and Utilization Review
($63,025 FFP) The Bureau of Surveillance and Utilization Review (SUR)
examines the historical payment records of providers and recipients
suspected of abusing or overutilizing the (21) Medicaid program. SUR
issues demand letters based on "limited specific findings concerning
medical necessity." Report, p. 18. SUR issues reports of examination
based, generally, on final fiscal audits. A provider receiving a demand
letter may request reconsideration by the State. The Report found that:

If a written reconsideration request or payment is not received by
ODPW within 30 days of the postmarked date of a demand letter, the
overpayment amount is certified to the Attorney General for collection.
Therefore, a SUR demand letter amount may be firmly established when (1)
a provider does not responds within 30 days or (2) a provider responds
within 30n days by remitting payment or requesting a payment plan.

Report, p. 19. Reports of examination can be appealed under Chapter
119. The amounts identified in reports of examination that remain at
issue here concern overpayments which the reviewers considered to be
firmly established because (1) an appeal had been pending more than one
year or (2) the audit had been certified to the Attorney General. There
were no nursing home providers included in the SUR category. There were
some hospitals; most of the providers were M.D.'s, D.D.S.'s, or
pharmacies. The State argued that the claims arising out of the SUR
demand letters and reports of examination dealt with "disputed billing
practices and/or interpretations of Appellants' rules or policies" so
that they were expenditures for medical assistance coming under section
1903 (d) (3) of the Act. State Reply Brief, p. 22. Despite the State's
general allegation to the contrary, the State's determinations that
amounts are due resulting from abuse or overutilization of the Medicaid
program must be regarded as determinations that unallowable costs were
charged to Medicaid. The State has presented no information to show
that any particular provider overpayment amount should not be regarded
as final. For the demand letter overpayments ($13,551 FFP), the Report
shows a reasonable basis for considering the overpayment(22) amounts to
be firmly established and the State has presented no specific
information for any provider to refute the reviewers' findings. /10/

For the reports of examination ($49,474 FFP), the record shows that one
provider's (No. 1799095) appeal was resolved for the provider by a State
court ruling and the Agency accepted that there is now no overpayment
due ($30,497 in alleged overpayments). We conclude that HCFA may
immediately adjust for those remaining report of examination
overpayments which were certified to the Attorney General. These
overpayments certainly should be regarded as firmly established. Where
the provider appeals have been pending for more than one year, however,
we cannot sustain HCFA's initial findings that the overpayment amounts
are firmly established. With respect to other categories of
overpayments, HCFA considered State determinations which were subject to
the Chapter 119 process and which had, in fact, been appealed to be
firmly established only if a final adjudication order had been entered.
We see no reason to treat this category of overpayments differently
merely because the appeal process has continued for more than a year.
Unlike the State systems we addressed in Decision Nos. 334, 438, and
480, the State's process here does not treat an overpayment
determination to be sufficiently final to be a basis for collection if
an appeal is still pending at the administrative level. However, given
the length of time which has passed since HCFA's review, it is likely
that final adjudication orders have now been entered, and, unless the
State can show that these orders favored the provider, an adjustment of
FFP would be appropriate. On remand, the State should have an
opportunity to show that appeals are still pending or adjudication
orders favored the provider. E.Claims Adjustment Unit ($11,114 FFP) The
Report found that "(c)ollection procedures utilized by ODPW include the
use of credits against future billings." Report, p. 22. The Claims
Adjustments Unit, part of ODPW's (23) Division of Claims Processing, is
responsible for monitoring the credit balances. Where providers with
credit balances had discontinued billings to Medicaid, after a period of
9 to 12 months the overpayment was certified to the Ohio Attorney
General for collection. The Report found 88 Medicaid provider credit
balances ($11,114 FFP) outstanding for more than one year where the
federal share had not been credited to HCFA. ODPW's response to the
draft Report stated:

. . . approximately $8,000 has been received, leaving a net liability
of $3,210.85.

When provider balances are on file for one year, the amounts are
transmitted . . . for certification to the Attorney General's Office.
The federal share will be credited at the time of certification to the
Attorney General.

ODPW's Letter of July 22, 1983. HCFA provided the State with a list
showing the providers by name, number, and address and giving the credit
balance and date. The State questioned whether the credit balances were
"reliable, sustainable, or represent unallowable costs charged to the
federal program." State's Brief, p. 17. HCFA had relied on information
from the State's own computer. The State argued, however, that only a
portion of the credit balances were referred to the Attorney General,
that only 14 of these were ultimately collected, and that the remaining
credit balances have been deemed uncollectible. In general, the State
contested the reliability of using ODPW's credit balance system to
determine firmly established overpayments. We consider ODPW's
acknowledgment that the federal share would be credited upon
certification of credit balance amounts to the Ohio Attorney General to
show that credit balance amounts relate to overpayments which may be
adjusted under 1903 (d) (2) prior to recovery by the State. There is no
basis for concluding that the credit balances were somehow related to
allowable costs for medical assistance. The State's general arguments
to the contrary do not persuade us that this record is insufficient to
support the disallowance of credit balance amounts pending for over one
year which have either been referred to the Attorney General or
determined to be uncollectible. We do not regard it as significant if
certain overpayments were deemed uncollectible and not referred to the
Attorney General. The State's argument here is basically one of the
administrative (24) inconvenience to collect small amounts of money and
does not refute a finding that credit balances pending in excess of one
year are properly regarded as firmly established overpayment amounts.
There is no substantive basis in the record for distinguishing the
uncollectible balances from those referred to the Attorney General for
which the State had agreed to credit HCFA prior to recovery. Thus, we
sustain the disallowance for this category of overpayments. Conclusion
We remand for further consideration by the parties (1) whether
overpayments were firmly established for certain nursing homes and (2)
whether certain providers receiving reports of examination have Chapter
119 appeals pending or decided in their favor. For the remaining
overpayment amounts in dispute, subject to any overpayment amounts (1)
which the State can document have been repaid since July 1, 1984 or (2)
where the record here shows there is no longer an amount in dispute, the
disallowance is sustained. /1/ For example, the reviewers said that
overpayments identified by the Attorney General-Medicaid Fraud
Control Section "are firmly established on the date of the conviction or
negotiated plea agreement." Report, p. 14. /2/ 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, 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. On September 27, 1984, the
United States District Court for the Western District of Missouri, in
Department 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 provider payment involved. The court of appeals decision
in Massachusetts, however, allows recovery of the federal share of the
excess payments irrespective of the ratesetting system that may have
generated the overpayments. Cf. Arkansas v. Heckler, Case No. LR C 83
467, Eastern District of Arkansas, September 17, 1984. The term
"improper payments" is sometimes used to distinguish payments violating
federal requirements (even when made) from "excess payments,"
representing the difference between final reimbursement rates and
interim rates, where payment at the interim rate was authorized under
the approved State plan. /3/ In the Massachusetts district court
decision (followed in Missouri), 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, the district 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 there was, in fact, contested, and remanded the case
for further factual development. /4/ Section 1905 (a) of the Act
defines "medical assistance" generally as "payment of part or all of the
cost" of covered services provided to eligible individuals. The State
argued that the term "cost" here should be read as meaning the "price
paid," so that any amount paid by a state to a provider should be
considered "medical assistance." State Reply Brief, pp. 5-6. To adopt
this reading would totally ignore other statutory and regulatory
provisions setting limits on allowable provider reimbursement amounts
and, indeed, ignores the rest of section 1905 (a) which limits "medical
assistance" to covered services provided to eligible individuals. See,
e.g. section 1902 (a) (13). /5/ The State also stressed its
"aggressive stand toward the pursuit of overpayments," noting that "(N)
ow, in controversy, is $1,297,516 FFP. This means that the Appellant has
recouped over 75% of the overpayments identified in the audit." State
Brief, p. 2. /6/ In its reply brief, the State conclusorily
stated with respect to non-nursing home overpayments that "these
overpayments, for the most part, are based upon billing practices that
Appellant does not condone or its belief that billings are violative of
its regulations or policies. Findings of these types are not
determinations that these costs are unallowable under the State plan or
the Federal program generally." State Reply Brief, p. 14; pp. 4-5.
The State provided no evidence in support of this proposition and did
not explain how improper "billing practices" could be distinguished from
a claim for unallowable costs. In general, a state is likely to
challenge a billing practice where a provider is claiming more than
allowed under the State's reimbursement system or for services not
actually provided. Moreover, federal cost principles require that costs,
to be allowable, must be "authorized or not prohibited under State or
local laws or regulations." OMB Circular A-87, Att. I, C.l.b.; 45 CFR
74.171. In California Department of Health Services, Decision No. 564,
August 22, 1984, we held that, where California had established that
some of the overpayment determinations there were based solely on State
requirements, the State was entitled to wait to adjust the federal share
until the overpayment had been finally determined through the State's
applicable appeal process. In other words, given the cost principle
cited above, the fact that some overpayment determinations may be based
on State laws or regulations which are not State plan or federal
requirements at most affects the timing of the federal adjustment. It
is not a basis for concluding that the costs are allowable. /7/
We also recognize the likelihood that the actual amount in dispute has
been further reduced since July 1, 1984. Our discussion of the various
overpayment categories reflects the amounts in dispute as of July 1,
1984. Where the record shows an adjustment, we will note this.
Moreover, nothing in our decision precludes the State from showing HCFA
that it has made further adjustments since its last submission.
/8/ 10 homes categorized as receiving final adjudication orders and 36
homes categorized under undeliverable audits. /9/ For Norwalk
Quality Care and Vernon Convalescent Care Center, the State settled
pending litigation with providers by accepting overpayment amounts that
were less than the final settlements initially determined using the
"reduction to lowest rate paid" method of final settlement. Although
the State provided some reasons for its decision to settle with these
providers, HCFA did not accept the reduced amounts. On remand, the
State will have the opportunity to show why the reduced amounts
represent proper final settlement amounts. HCFA indicated that the
State had presented no objective basis for accepting the reduced amounts
(See pages 23 and 24 of HCFA's Response). 10 The record shows that the
State has recovered the overpayments in dispute from two providers
receiving demand letters, Nos. 8962421 and 4509286. HCFA acknowledged
that the overpayments for these providers would no longer be at issue
once the State credited HCFA for the federal share.

JUNE 06, 1985