Pennsylvania Department of Public Welfare, DAB No. 765 (1986)

GAB Decision 765

July 10, 1986

Pennsylvania Department of Public Welfare; 

Docket Nos. 85-106; 85-223;
Audit Control No. 03-50601

Settle, Norval D.; Garrett, Donald F.  Ballard, Judith A.

The Pennsylvania Department of Public Welfare (State) appealed the
determinations of the Health Care Financing Administration (Agency,
HCFA) to disallow $7,329,690 and $8,227,210 in federal financial
participation (FFP) claimed under Title XIX (Medicaid) of the Social
Security Act (Act).  The disallowances were based on reviews of State
records listing outstanding and uncollected overpayments to
institutional providers of medical services;  the reviewers found that
the State had not credited the federal government with a refund of FFP
advanced for certain overpayments.  HCFA disallowed FFP for alleged
overpayments involving facilities which had not appealed the State's
overpayment determinations, which had appealed (but whose appeal had
been pending for over one year), or which had been identified as closed
or bankrupt facilities.

On appeal, the State alleged that many of the overpayments at issue had
been settled, reversed on appeal, or collected from the providers.
During Board proceedings, the Agency agreed to a remand of these
overpayments, on the terms described below on pages 3-4.  With respect
to the remaining overpayments, the State argued generally that section
1903 (d) (3) of the Act precludes adjustment of the federal share of the
overpayments prior to recovery by the State from the providers
(particularly when the overpayment represents the difference between an
interim and final reimbursement rate);  that Agency policy on what
constitutes an overpayment had been inconsistent, or had changed;  and
that, in any event, overpayments which were uncollectible should be
considered an unavoidable administrative cost of operating a Medicaid
program.  With respect to overpayments where a provider appeal was still
pending, the State alleged that the State audits on which the
overpayment determinations were based were not reliable and that Agency
use of these audits was procedurally unfair.  The State also raised a
question about overpayment determinations resulting from referrals by
the State's Medicaid Fraud Control Unit (MFCU), suggesting that this
question should also be remanded.(2)$% For the reasons stated below, we
conclude that adjustment of the federal share of these overpayments is
not contingent on the State's recovery from the providers, even when an
interim rate is involved, that Agency policy on this has been
consistent, and that uncollectible overpayments are not allowable
administrative costs.  With respect to overpayments for which an
administrative appeal is still pending, however, we conclude that the
Agency could not reasonably rely on the State audit findings under the
circumstances here, given the State's policy on collection and the
Agency's own policy issuances in this area, absent a finding that the
State unreasonably delayed its appeal process. Finally, we conclude that
a remand of the MFCU issue is not warranted since the State failed to
identify any MFCU overpayments here.  Accordingly, we uphold the
disallowance except with respect to overpayments allegedly settled,
reversed, or collected (which we remand pursuant to the parties'
agreement) and with respect to overpayments for which an appeal is still
pending (which we remand for a HCFA determination about whether the
appeal has taken too long).

Relevant Statutory Provisions

Title XIX of the Act provides for the payment of federal money 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 a 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.

The major issue of statutory interpretation in this case concerns
section 1903 (d) (2) of the Act, which 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
had not already been made under this subsection. . . .(3)

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.

As discussed below, Pennsylvania argued that section 1903 (d) (3)
constitutes a limiting definition of the term "overpayment" in section
1903 (d) (2).  Under this view, adjustments could be made only for
amounts recovered by the State from the provider.

Case Background

The Agency imposed a disallowance on May 14, 1985 for the amount of
$7,329,690 in FFP, which the Agency had determined was required because
of outstanding and uncollected overpayments by the State to
institutional providers as of June 30, 1984.  The Agency determination
was based on State audit findings.  Under State regulations, providers
of long term care medical services had a right to appeal these findings
for administrative review.  All of the alleged overpayments had either
been under appeal for over one year or had been made to closed or
bankrupt facilities.

On October 4, 1985, the Agency issued an additional disallowance of
$8,227,210 in FFP in outstanding provider overpayments by the State as
of April 30, 1985 for hospitals, county nursing homes, intermediate care
facilities for the mentally retarded, and for outstanding overpayments
by the State as of March 31, 1985 for privately owned nursing homes.
These State overpayment determinations were identified as either over 30
days old for which no appeal had been filed, or under appeal in excess
of one year.

Discussion

I.  Settled, Reversed or Collected Overpayments

The State provided information indicating that some of the alleged
overpayments (involving approximately $10.15 million in FFP) had been
settled, reversed on appeal, or collected from providers.  The State
indicated that it had credited the federal account with an appropriate
share of all amounts collected from providers or paid pursuant to a
settlement.(4)

The Agency agreed to accept a remand of these allegedly settled,
reversed or collected overpayments.  The Agency reserved the right to
examine the record of each case involved and to later challenge the
propriety of any settlements or reversals, or to challenge the
contention that collected funds were properly credited to the federal
account.  Telephone Conference Call, February 19, 1986.

Therefore, we remand all alleged overpayments which the State identified
as settled, reversed or collected in its letters dated February 12, 1986
and February 24, 1986.  The Agency may examine these cases individually
and is not foreclosed from further challenges.

II.  Overpayments for Which No Administrative Appeal Is Pending

The State made several arguments applicable to all alleged overpayments,
including those for which no appeal is pending (and which have not been
the subject of a settlement, reversal, or collection).  Most of these
arguments have been addressed by the Board in previous decisions.  We
will address each of the State's arguments in our discussion of the
holdings below.

   A.  HCFA is not required to wait until collection from the provider
by the State to recover identified overpayments from the State.

As the Board has stated in numerous prior decisions, the Social Security
Act provides authorization for the Agency to reduce grant awards to the
extent of any overpayment to the State determined by the Secretary to
have been made and not already used as the basis for a reduction in
federal grant funds.  See, e.g., Arkansas Department of Human Services,
Decision No. 717, January 8, 1986;  Pennsylvania Department of Public
Welfare, Decision No. 426, May 24, 1983.  Section 1903 (d) (2) states
that the Secretary may reduce or increase payments to a State "to the
extent of any overpayment or underpayment which the Secretary determines
was made . . . to such State for any prior quarter and with respect to
which adjustment has note already been made. . ." The Board has found,
on the basis of section 1903 (d) (2), that the Agency has statutory
authority to recoup the federal share claimed in an amount determined to
have been an overpayment to a provider prior to the State collecting
from the provider.  See Arkansas, supra.

The State did not contest the Agency's statutory authority to reduce
grant awards by the amount of the federal share of identified
overpayments, but requested that the Board (5) reconsider its holding
that the Agency may require repayment prior to the State's recovery from
the providers.

The State presented us with no persuasive reason why the analysis used
in prior Board decisions on this issue was incorrect.  In our prior
decisions, we rejected arguments that section 1903(d) (3) limits federal
recoupment of overpayments to those for which the State has recovered
the underlying overexpenditure.  Section 1903(d) (3) states that "(the)
pro rata share to which the United States is equitably entitled, as
determined by the Secretary, of the net amount recovered .  . . by the
State . . . with respect to medical assistance furnished under the State
plan shall be considered an overpayment to be adjusted . . . ." While
this section provides for repayment of FFP subsequent to recovery by the
State, it applies only to those payments which would be allowable as
"medical assistance" under section 1905(a) of the Act and the State
plan.  Section 1903(d) (3) provides that recoveries of these payments
will be treated as overpayments, but does not preclude treatment of
unallowable payments as overpayments.  See Arkansas, supra.

The Board's analysis has been upheld in two United States Court of
Appeals decisions:  Massachusetts v. Secretary, 749 F.2d 89 (1st Cir.
1984), cert. denied, 105 S. Ct. 3478 (1985) and Perales v. Heckler, 762
F.2d (2d Cir. 1985);  see also Florida v. Heckler, 762 F.2d (2d Cir.
1985);  see also Florida v. Heckler, Civ. No. 82-0935 (N.D. Fla 1984).
The Eighth Circuit is currently considering the issue in an appeal of
Missouri Department of Social Services v. Heckler, No. 84-4106-CV-C-5,
W.D. Mo., Sept. 10, 1984.  The district court in Missouri rejected the
Board's analysis, but it based its holding on the Massachusetts district
court opinion at 576 F. Supp. 1565 (D. Mass. 1984), which was reversed
on appeal in Massachusetts v. Secretary, supra.

   B.  The difference between interim and final rates under a
retrospective reimbursement system is an overpayment.

Many of the overpayments arose out of the operation of Pennsylvania's
retrospective rate system.  Providers are paid for services rendered at
an "interim" rate based on historical costs adjusted for inflation and
other relevant factors.  The interim rate is an estimate, which is
subsequently adjusted by the State, based on actual costs, to arrive at
a "final" rate.  If the final rate is higher than the interim rate, the
State pays the difference to the provider, and claims additional FFP
from the federal government.  If the final rate is lower than the
interim(6) rate paid, the State tries to collect the difference from the
provider, either directly or by reducing later payments to the provider.

The State argued that the language of the reimbursement provision at
section 1903(a) (1) indicates that the difference between interim and
final rates is not an overpayment subject to recoupment under section
1903(d) (2).  Section 1903(a) (1) requires federal reimbursement for a
percentage of all funds "expended . . . as medical assistance under the
State plan." The State argued that the interim rate was the amount
actually paid out, or expended, that it was paid to providers for
medical assistance, and that it was properly paid under the provisions
of the approved State plan.  The State concluded that although
subsequent adjustments were made, these adjustments were not
overpayments, because the interim rate had been properly paid and was
properly reimbursable.

The State failed to recognize that payments which are in excess of
allowable costs were not properly paid as medical assistance, even if
the State chose a payment system which allowed such payments to be made.
Medical assistance is defined as "payment of part or all of the cost" of
specified services.  Section 1905(a) (emphasis added).  The Act requires
that each state have a state plan to determine proper rates for
reimbursement of provider services.  Section 1902(a) (3).  These rates
must be "reasonable and adequate to meet the costs which must be
incurred by efficiently and economically operated facilities." Id.
Amounts paid which are in excess of what a state plan establishes as the
proper reimbursement for services are not within the definition of
medical assistance.

Under the State's retrospective reimbursement system, the State is
permitted to advance funds to a provider based on an interim rate
constructed from past cost reports and to claim advances of FFP based on
the amount to be advanced.  This State advance, however, is subject to
adjustment to conform to a final payment rate based on reports of the
actual costs of services.  The final rate is the State's determination
of the proper reimbursement for provider services.  In examining
retrospective rate systems, the Board has found that the final rate,
based on the State's determination of the actual cost of services,
determines the allowable amounts of medical assistance paid.  See, e.g.,
New York, Decision No. 311, June 16, 1982, aff'd, Perales v.  Heckler,
supra.

Payments in excess of the amount established by the State plan as the
amount which the provider is entitled to retain(7) are not properly
medical assistance, and, therefore, are not eligible for FFP under
section 1903(a) (1).  The Secretary may require repayment of the federal
share of the excess amount by adjusting current federal payments under
section 1903(d) (2) of the Act and under authority to disallow claims
which are outside of the statutory authorization for federal financial
participation.  See, e.g., section 1116(d) of the Act;  45 CFR 201.5 and
201.66.  As we stated above;  since the State's claims were not for
allowable medical assistance, section 1903(d) (3) does not apply.

We reject the State's contention that an interim payment should be
considered an expenditure for medical assistance eligible for FFP also
because the State's position would weaken a major check on the State's
administration of the Medicaid program.  If payment of the interim rate
qualified as a "medical assistance" expenditure, the State would have
less incentive to establish interim rates with care and to adjust
payments to providers based on the final rate.  We therefore reject the
State's view and reaffirm our earlier decisions on this issue.

   C.  The State presented no evidence of inconsistent Agency
interpretation of these points, and had notice of Agency policy.

The State alleged that the Agency had been inconsistent in its policy,
or that Agency policy had changed.  The State also argued that since the
State's interpretation of the statute was reasonable, and since the
Agency had not given the State notice of any consistent Agency
interpretation, that the State was not bound by later Agency adoption of
its present policy.  The only evidence presented by the State was a 1979
Agency memorandum which stated that the author could find no Agency
policy to support a disallowance prior to the State's recovery of funds.
Appeal File 50a-52a. /1/

.(8)

But this memorandum specified that a regulation, 42 CFR 447.296, applied
to support a disallowance for overpayments to institutional providers
identified through audit.  The memorandum distinguished its facts -
individual providers who had agreed to make restitution - from the facts
found in this case.  In this case, the disallowance involved
institutional providers identified through audit.

The regulatory provision at 42 CFR 447.296 gave notice to the State of
the Agency's interpretation that adjustment of FFP for overpayments to
nursing homes is not contingent upon collection by the State.  This
provision required that the State "must account for overpayments found
on the quarterly statement of expenditures no later than the second
quarter following the quarter in which the overpayment was found."

This regulation was issued originally in 1974 and later recodified at 42
CFR 447.296.  It was issued with a set of regulations detailing required
State audit procedures and practices.  It was repealed in 1981 along
with the other audit regulations in that section, and replaced with a
more general regulation stating that states must provide for periodic
audits of participating providers.  42 CFR 447.265.  The Agency stated
that the purpose of the repeal was to grant the State greater
flexibility in fulfilling audit requirements.  The Agency did not
indicate any intention to change its interpretation that it could
require adjustment for overpayments prior to collection by the State.

Furthermore, shortly after repealing 42 CFR 447.296 in 1981, the Agency
issued a section of the State Medicaid Manual which stated, at 2555.2(
B):

   Overpayments are not considered payments made in accordance with a
State Plan and, therefore, no FFP is available for such payments.  The
Federal share must be returned to HCFA in the same quarter in which the
overpayment is (9) and is neither contingent upon, nor subsequent to,
the State's recovery of any portion of the overpayment.

This provision clearly states that the Agency may require adjustment for
overpayments prior to recovery of the amounts by the State, and could
have left no doubt that this policy had not been changed in repealing 42
CFR 447.296.

As stated above, the Act itself indicates that the difference between
interim and final rates should be considered an overpayment.  Payments
to providers in excess of the final rate determined under the State plan
are not allowable medical assistance costs even if made as an interim
payment.  No separate Agency interpretation was necessary to give the
State notice of this fact.

   D. Uncollectible overpayments are not authorized as "administrative
costs" allowable for federal financial participation.

The State presented no statutory or regulatory authority which supported
its claim that uncollectible payments should be considered as
"administrative costs" in which the federal government must participate.
Under section 1903(a)(3)(7) of the Act, FFP is available at a 50% rate
in "amounts expended . . . as found necessary by the Secretary for the
proper and efficient administration of the State plan." /2/


We addressed the issue of federal participation in overpayments to
bankrupt and closed facilities in greater detail in Massachusetts
Department of Public Welfare, Decision No. 262, February 26, 1982, aff'd
in Massachusetts v. Secretary, supra, and in Pennsylvania v.  Department
of Public Welfare, Decision No. 426, May 24, 1983.  Although we noted
that such overpayments may be uncollectible and may be considered a loss
by the State, we(10) found many reasons why HCFA acted reasonably in
refusing to participate in such overpayments.  It is the State's
responsibility to establish and operate a payment system which minimizes
overpayments and to expeditiously recover overpayments which have been
made.  The Agency has no direct role in either of these functions.
Massachusetts v. Secretary, supra, p. 96.  While there may be some
instances in which a state can not have avoided making the overpayment
or failing to collect it prior to the provider declaring bankruptcy or
taking some other action which rendered the payment uncollectible,
deciding the issue of whether a state was not at fault would require a
highly judgmental, case-by-case analysis.  (See in this regard the
Board's discussion at pages 15-16 in Arkansas, Decision No.  717,
supra.) We also note that these uncollectible overpayments are no
different, in essence, from bad debts, for which the State was
unquestionably precluded from claiming FFP under the cost principles
established by OMB Circular A-87, Attachment B, Section D(1), made
applicable to HHS grants to states by 45 CFR 74.171(a).

III.  Alleged Overpayments for Which an Administrative Appeal Is Pending

The State identified 16 facilities which are contesting alleged
overpayments through administrative appeals (involving approximately
$1.3 million in FFP).  The State argued, generally, that the State did
not have to return the federal share of these overpayments until the
appeals were resolved. This argument was based upon contentions that the
State audit reports alleging the provider overpayments were not final
findings of overpayments;  that the Agency had not clearly adopted any
policy requiring repayment of FFP for alleged provider overpayments
prior to the resolution of provider appeals;  and that, even if the
Agency had such a policy, it represented a change in policy adopted
without following required procedures.

In submitting a list of overpayments subject to pending provider
appeals, the State excluded overpayments to hospitals for services other
than "long stay" nursing services.  State's Letter of February 24, 1986.
We, therefore, restrict discussion below to only those overpayments
identified in the State's submission.  We note that since the State's
arguments are based on a regulatory provision applying only to nursing
home services, 42 CFR 447.296 (deleted in 1981), the State's arguments
are inapplicable to overpayments for inpatient hospital services.(11)

The major issue with respect to alleged overpayments under appeal is one
of timing:  When has a state made an overpayment determination that the
federal government may use as a basis for disallowing the federal share
of the overpayment and requiring a state to adjust its claims
accordingly?

Neither party disputed that the Agency may issue a disallowance based
upon an independent audit of State or provider accounts, regardless of
any State determination or appeal process.  In this case, however, the
Agency relied on State audit findings, which the State alleged were not
a sufficient basis to support a disallowance since provider appeals are
pending.  No independent federal review was conducted.  See Agency
letter of February 25, 1986.

A.  Agency reliance on state audit findings

This Board has considered the use of state audit reports in several
prior decisions.  See, e.g., Ohio Department of Public Welfare, Decision
No. 637, April 2, 1985.  The Board held that the Agency may reasonably
rely on state audits when a state conducts those audits under
established standards as a part of its provider reimbursement system,
and when the following criteria have been met:

   - The Agency provides sufficient detail as to the audits from which
the disallowed amounts are derived.

   - The State is provided an opportunity to show that

   - adjustments have been made to the audit findings;

   - the audits are not reliable for some reason;

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

   - the State never claimed FFP in the overpayment in the first place.

The State's argument here that the audit findings are unreliable because
the providers have appealed was raised and addressed in California
Department of Health Services -- Accounts Receivable, Decision No. 334,
June 30, 1982.(12)

Here, however, the State also based its arguments on the Agency's own
policy and procedural fairness;  in our view, these arguments presented
a new factor to be considered in determining whether the Agency's
reliance on the audits prior to resolution of the appeals was
reasonable.

In California Accounts Receivable, the Board rejected California's
argument that the mere fact that providers of inpatient hospital
services had appealed State audit findings meant the State determination
was not reliable.  The Board declined to adopt a rule which would always
required the Agency to make an independent analysis of the facts and law
underlying the State's determination in order to support a disallowance
taken prior to the end of the State's two-level appeal process.  The
Board noted that there were countervailing considerations:  a state is
put into a difficult position in defending a federal disallowance at the
same time it is litigating with the provider;  on the other hand, the
states have control over the provider appeal process, and federal
recovery of unallowable costs should not have to wait indefinitely for
the end of state administrative proceedings.  Under the particular
circumstances of the California case, the Board rejected the State's
assertion that its audit findings were not sufficiently valid.  A major
factor was that the State itself would act to recover the overpayments
at the end of the first level of appeal (completed for the audit
findings at issue).

This case is distinguishable from California Accounts Receivable and
from other cases where we have upheld disallowances of overpayments
irrespective of provider appeals. Here, Pennsylvania did not use its
State audit findings as a basis for collection from the providers at
issue prior to the end of the appeal process.  The State submitted a
section of the Pennsylvania Code which allows nursing homes to retain
amounts in dispute pending an appeal.  55 Pa. Code 1181.101(f) (2). The
State promulgated a broader provision in 1983 permitting collection from
all providers within six months after an overpayment determination.  55
Pa Code 1101.84(b) (4);  Respondent's Appeal File, Tab C.  However, the
State asserted that, under a subsequent legal interpretation of its
regulations, nursing homes still had a right to retain disputed funds.
When the Board asked the State to support this assertion, the State
submitted evidence that its current policy is that it will not seek (13)
collection where a nursing home specifically invokes its right to retain
funds pending appeal. /3/


In addition, this case is distinguishable because the overpayments were
for nursing home services, not impatient hospital services as in
California Accounts Receivable.  There, the Agency had admitted that it
had a policy, between 1977 and 1981, allowing the State six months after
a provider appeal process had been exhausted before accounting for
nursing home overpayments, but had explained that this policy did not
apply to hospitals because of differences in the reimbursement system.
As we explain below, the fact that the overpayments here were to nursing
homes is critical because of the history of the Agency's policy
regarding such overpayments.

B.  Agency policy regarding accounting for overpayments to nursing homes

In 1974, the Agency promulgated a regulation concerning nursing home
overpayments, which was later recodified at 42 CFR 447.296.  That
provision required that states "account for overpayments found in audits
on the quarterly statement of expenditures no later than the second
quarter following the quarter in which the overpayment was found." In
Action Transmittal 77-85 (AT-77-85), the Agency clarified the
regulation, stating that "(the)' quarter in which found' means the
quarter during which the administrative hearing procedures of the State
have been exhausted and a determination of overpayment has been
sustained." The Agency did not contest that, under this rule, the State
would not be(14) required to repay alleged overpayments under
administrative appeal until the appeal had been concluded, stating only
that this rule was never intended to apply if the Agency disallowed the
amount on the basis of an independent audit or if the State had failed
to diligently pursue the appeal.

Under 42 CFR 447.296, as interpreted by AT-77-85, the State had less
incentive to require immediate repayment of disputed amounts because the
State itself did not have to repay the federal share until the appeal
was resolved.  If the State had to repay the federal share prior to
resolution of the appeal, then the State would have a strong incentive
to change its relationship with providers to require immediate
repayment.  Otherwise, the State would be doubly penalized -- forced to
repay the federal share of alleged overpayments while providers retained
the disputed funds.

The Agency argued that the deletion of 42 CFR 447.296 in September 1981
implicitly repealed AT-77-85 and revoked any exception to a statutory
policy requiring immediate repayment of overpayments.

We find that the deletion of 42 CFR 447.296 gave no notice of any change
in policy.  The regulation was deleted along with other audit
regulations in a measure to conform the regulations to the Omnibus
Budget Reconciliation Act of 1981.  In deleting the provision, the
Agency did not indicate any reason for the deletion which would call
into question the continuation of the policy in AT-77-85.  In fact, the
notice of the deletion stated that the reason was to give states greater
flexibility, not to impose new requirements.  46 Fed. Reg.  47066, 47967
(Sept. 30, 1981).

The repeal of 42 CFR 447.296 left no guidance, either statutory or
regulatory, regarding the time states must adjust claims for FFP.  In
December 1981, shortly after the deletion of 42 CFR 447.296, the Agency
issued a new section of the State Medicaid Manual which stated that an
overpayment "must be returned in the same quarter in which the
overpayment is identified. . . ." State Medicaid Manual Section 2555.2.
This section did not address the key issue of when an overpayment is
reliably "identified." Therefore, this issuance cannot be said to have
established any clear Agency policy or guidance on the effect of
provider appeals.

The Agency apparently recognized the difficulty for a state to readjust
its relationship to the providers without notice.  In a Financial
Management Review Guide, issued 1982 as an internal reference guide, the
Agency stated that "(the) regulations (42 CFR 447.296), and the AT
interpretation, are still applicable to overpayments made to LTC(15)
(long-term care) facilities during periods when they were in effect,
July 1, 1976, through September 29, 1981." State's Appeal File, p. 16a.
Yet, the Agency did not explain, in this case, why it did not treat
overpayments made before September 29, 1981 under the policy of 42 CFR
447.296 and AT-77-85.  The Guide also asserted prospectively that,
absent 42 CFR 447.296, the Agency may adjust immediately for
overpayments it determines have been made. State's Appeal File, pp.
11a-31a, and 16a.  This issuance, however, did not discuss specifically
when the Agency may rely on appealed state audit findings as the basis
for a disallowance.  Furthermore, the Financial Management Review Guide
was an internal Agency publication.

On April 5, 1983, the Agency proposed a new regulation which would
address the use of audit findings as a basis for adjustment of claims
for FFP. 48 Fed. Reg. 14664.  Although the proposed rule would have
introduced a requirement that adjustment be made within certain time
periods even if the audit findings were "tentative" (two years if a
tentative finding was appealed), no final regulation has been issued.
Additionally, the preamble to the proposed regulation did not indicate
any shift in existing Agency policy on provider appeals since 42 CFR
447.296 was in force.

We agree with the Agency that it has a certain amount of discretion in
deciding the timing of when it will require a state to adjust the
federal share of alleged overpayments.  Once the Agency has exercised
its discretion to permit states to wait until the appeal process has
been completed, however, the Agency cannot simply adopt a different
interpretation without adequate notice, particularly where the original
interpretation had an effect on the State's relationship with its
providers. /4/

(16)

We do not reach the question of whether the Agency must use notice and
comment rulemaking to establish its policy regarding appealed audit
findings, or may use a less formal procedure.  Here, subsequent to the
issuance at AT-77-85, the Agency has not issued any policy statement on
this issue.

We conclude that the Agency cannot reasonably rely on the appealed State
audit findings alone.  The Agency gave insufficient notice to the State
that appealed audit findings should be used to adjust claims for FFP and
Agency use of appealed State audits to require adjustment was
inconsistent with the Agency's only articulated policy statements on the
subject under which the State permitted providers to retain disputed
funds.

This conclusion is limited to Agency treatment of appealed State audit
findings under the particular circumstances here.  We do not suggest any
limitation on the authority of the Agency to independently review State
claims for FFP and require adjustments under section 1903(d) (2) of the
Act.

Our decision is also qualified in another respect. The Agency asserted
that, even under AT-77-85, it could impose a disallowance if the State
had been remiss in processing the appeals in a timely fashion.  The
State agreed that the Agency could disallow overpayments under appeal if
the appeal has taken an unreasonable amount of time.  Telephone
Conference, February 25, 1986.  We therefore remand the disallowances
for alleged overpayments under administrative appeal, identified in the
State's letter of February 24, 1986, for Agency consideration of whether
the appeal process has taken an unreasonable amount of time. We agree
with the State that this cannot be a purely mechanical review.  The
Agency may not simply reassert the position taken by the auditors,
finding that any overpayment where the appeal has taken over one year
should be disallowed (the "one-year rule" challenged by the State). The
Agency must provide an opportunity for the State to explain any delays
involved in these appeals.

IV.  Medicaid Fraud Control Unit Referrals

In a prehearing conference, the State argued that a memorandum by the
Chief of the State Fraud Branch of the Office of Inspector General of
the Department of Health and Human Services, dated March 6, 1984,
indicated that unrecovered overpayments identified by Medicaid Fraud
Control Units (MFCUs) should not be subject to Agency(17) disallowance.
Appeal File at 53a.  The State withdrew its prior argument based on that
memorandum.  See note 3.  HCFA indicated a willingness to reconsider any
MFCU-referred overpayments on a remand.

Although we indicated to the State on several occasions that it should
identify any overpayments related to this argument, the State did not
produce even this minimal information.  We initially requested
identification of MFCU referrals at a telephone conference call on
February 19, 1986, when the State initially raised these arguments.
When the State failed to submit responsive information, we specifically
repeated our request in a letter on February 28, requiring submission
prior to the oral conference scheduled for March 18, 1986.  No
responsive information was submitted, but at the conference we granted a
further extension of time until April 8 for the State to identify MFCU
referrals.  On April 8, the State submitted a letter listing referrals
to the MFCU, but stating that it could not provide information on
referrals from the MFCU for several weeks.  The Board has not received
any further information.

In light of the lengthy period of time which the State was given to
identify MFCU referrals, and its failure to provide even minimal
information to support its claim, we decline to order HCFA to examine
this issue on remand.  If the State raises an argument, it has a duty at
the very least to be able to identify in a timely manner payments to
which that argument relates.  Accordingly, we find that there were no
MFCU referrals involved.

Conclusion For the reasons stated above, we uphold the Agency's
disallowances, with the exception of two parts which we remand for
further Agency review, as follows.  By agreement of the parties, we
remand approximately $10.15 million of the disallowances related to
overpayments the State has identified as settled, collected, or reversed
on appeal (see page 4).  We also remand approximately $1.3 million of
the disallowances related to overpayments to long term care facilities
under provider administrative appeal for Agency(18) consideration of
whether the appeals have taken an unreasonable amount of time (see page
16).

   Norval D. (John) Settle

   Donald F. Garrett

   Judith A. Ballard

   Presiding Board Member /1/ The State originally offered an additional
        memorandum, written by the Chief of the Office of Inspector
General State Fraud Branch, as support for this proposition. Appeal File
53a.  The State later withdrew this memorandum from consideration on
this issue, stating that it believed the memorandum applied only to
Medicaid Fraud Control Unit cases, which are discussed below.  Since the
State nonetheless referred to this memorandum during oral arguments, we
note that, when the Board considered the memorandum in Minnesota
Department of Human Services, Decision No. 653, June 7, 1985, pp. 13-15,
we found no evidence that the memorandum reflected HCFA policy.  Our
decision in Minnesota was based in part on the affidavit from the author
of the memorandum, which is also part of the record in this case, at
Exhibit B.  The State had an opportunity to refute this affidavit but
voluntarily withdrew both its argument and its request to cross-examine
the author.         // We note that the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA) Pub. L. 99-272, contains a provision
which would allow states to retain FFP for overpayments to bankrupt
providers or which are "otherwise uncollectible." This provision is
effective only for overpayments identified for quarters after October 1,
1985, however. COBRA, section 9512.  Although given an opportunity, the
State chose not to comment on this provision.  In our view, if Congress
intended the provision to merely clarify past intent, it would have
given the provision retrospective effect.         /3/ The State
submitted a memorandum dated April 21, 1986, from an Assistant Counsel
to the Assistant Comptroller for Auditing regarding county home
settlements.  This memorandum states that "the determination for the
Office of Hearings and Appeals . . . (is) the event that triggers
collection, absent a stay by the courts." State's letter of June 4,
1986, Att.  Although this memorandum is not a formal and comprehensive
statement of State policy, we will accept the memorandum as evidence
that repayment by nursing homes is not required under State law when the
provider requests a hearing by the Office of Hearings and Appeals and
declines to repay voluntarily pending the results of that hearing.  The
Agency submitted no contradictory evidence, and the State is in a
position where it has to avoid jeopardizing any potential litigation
with providers.         /4/ While the State attempted to change its
relation with providers in November 1983, by promulgating a regulation
requiring all providers to repay disputed amounts pending appeals, the
State alleged that this was attempted as a result of internal State
concerns, since no official Agency policy had been formally communicated
to the State.  55 Pa. Code 1181.84(b) (4).  As mentioned above, the
State continued applying an older regulation, allowing nursing home
providers to retain disputed amounts pending appeal, which had not been
repealed.  55 Pa. Code 1181.101(f);  Appellant's Letter of February 24,
1986.