New York State Department of Social Services, DAB No. 982 (1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  New York State        
Department of Social Services

Docket No. 88-44
Decision  No. 982

DATE:  September 1, 1988

DECISION

The New York State Department of Social Services (State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $873,607 in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act).  HCFA disallowed the
State's claims for being filed beyond the time limits set forth in the
Act.

The issue presented is whether the statutory two-year limit for filing
claims does not bar payment of the State's claims here because the
claims come within the exception in the statute for any expenditure
involving "audit exceptions."  For the reasons discussed below we find
that the claims do not come within the "audit exception" provision of
the statute, and sustain the disallowance.

Factual Background

The State developed a Shares Reclassification System (SRS) for the
processing of its Medicaid claims, a method involving the review and
comparison of State and federal computer-generated files.  The SRS
identified expenditures which were initially mischaracterized as being
ineligible for federal funding.  Once identified, an expenditure was
reclassified as being federally eligible and a claim for FFP was filed.

For the period June through December 1985, the State filed $38,983,835
in Medicaid claims which related to expenditures reclassified by SRS.
The State, however, determined that the SRS claims might have been
improperly calculated and conducted a re-audit to verify the amount of
reclassified expenditures being claimed.

As a result of this re-audit, the State reduced its net SRS claims by
$8,797,618 to $30,186,217.  HCFA accepted this reduction and paid the
adjusted claims, with the exception of $873,607.  This amount
represented upward adjustments relating to expenditures, identified by
the re-audit, that were incurred during the period July 1, 1983 through
December 5, 1983.  The State had filed Medicaid claims for these
expenditures on December 5, 1986.  HCFA disallowed the $873,607 in
claims as being untimely, since the expenditures were incurred more than
two years before the date of filing.

The Two-Year Filing Requirement

Section 1132(a) of the Act requires that a claim by a state for FFP
"with respect to an expenditure made during any calendar quarter" must
be filed within the two-year period which begins on the first day of the
calendar quarter immediately following such quarter.  This section also
provides that no payment of FFP shall be made for expenditures not
claimed within this period, except that payment will not be denied "with
respect to any expenditure involving court-ordered retroactive payments
or audit exceptions, or adjustments to prior year costs."

The implementing regulations, found at 45 C.F.R. Part 95, Subpart A,
repeat the two-year filing requirement (45 C.F.R. 95.7) and also list
the exceptions to the time limits, including "any claim resulting from
an audit exception."  45 C.F.R. 95.19(b).  An "audit exception" is
defined as "a proposed adjustment by the responsible Federal agency to
any expenditure claimed by a State by virtue of an audit."  45 C.F.R.
95.4.

Discussion

I.  The SRS process was an audit.

The State has not disputed the Agency's position that the disallowed
costs were claimed more than two years after the expenditures
representing those costs were made.  The State has argued, however, that
the SRS process was an audit, and that its re-audit of the SRS claims
constituted an audit exception within the meaning of the Act and the
regulations, thereby exempting the claims at issue from the two-year
filing requirement.

The State devoted an entire section of its brief (pp. 10-12) to show
that the SRS process came within the definition of an "audit."  The
Agency stated that the Board did not need to address this question,
although the Agency did not accept this characterization of the SRS
process as an audit.  Agency's brief, p. 7.  We ordinarily consider
first whether the questioned process is an audit, before we proceed to
the next question, namely, whether claims made for expenditures growing
out of the "audit" constitute an "audit exception."

Neither the Act nor the regulations define an audit.  The Board has in
prior decisions stated that an audit is commonly understood to involve
the formal inspection of accounting records.  See Oklahoma Department of
Human Services, DGAB No. 809 (1986).  Under this definition the process
used by New York is clearly an audit.  The only question before us then
is whether the process used for claiming the expenditures is an "audit
exception."

II.  The claims derived from the SRS process do not come within the
definition of an audit exception.

     A.  The federal government must accept the proposed adjustment in
     order to have an audit exception.

In 45 C.F.R. 95.4, as noted above, there is a definition of "audit
exception" as "a proposed adjustment by the responsible Federal agency
to an expenditure claimed by a State by virtue of an audit."  The issue
presented then is whether the State-sponsored re-audit of the SRS claims
falls within this definition.

We note at the outset that the fact that this was a State audit, not an
Agency audit, is not determinative of this issue.  The State cited New
York State Department of Social Services, DGAB No. 521 (1984), p. 7,
where the Board said:

     The regulation's definition of "audit exception" could on its face
     apply to an "audit" conducted by the State, as well as one
     conducted by an Inspector General or by the General Accounting
     Office.

The critical fact is not that there has been an audit, but whether the
federal government accepted it.  We went on to say:

     However, the vital issue is not who does the audit, but who accepts
     it.  The regulation requires a proposed adjustment "by the
     responsible Federal agency."

     The regulation makes it clear that a proposed adjustment to claims
     for prior year costs based on a state audit is not enough to
     constitute an "audit exception."  The federal government--the
     responsible federal agency--must propose to make an adjustment in
     the claims for prior years.  Only then does the statute of
     limitations not run on the time for filing or amending such claims.
     Id.

In this case HCFA, the responsible federal agency, denied that it made
any proposed adjustment to expenditures claimed by the State that would
show that it had somehow adopted or accepted the SRS re-audit.  HCFA
asserted that the filing of the claims at issue was a unilateral act on
the State's part with no intervention from any federal agency.  HCFA
contended that the SRS re-audit was a routine situation, with the State
giving no reason why the questioned claims could not have been
classified as eligible for FFP and properly claimed within the two-year
limitation.  (This last contention is discussed in section E below.)

 B.  The Agency did not accept the proposed SRS upward
 adjustment by accepting the State's downward adjustment of its
 claims.

The State contended that the Agency had in essence made a proposed
adjustment as a result of the SRS re-audit by accepting the downward
adjustment of the State's claims.  The State pointed out that the Agency
readily adopted the re-audit's finding that the State had originally
made an overstated claim of $8,797,618 FFP.  The State supplied various
documents (State's Exhibits 4, 5, and 6) which, the State argued, showed
that the Agency had accepted the validity of the SRS audit process.
Therefore, according to the State, the Agency should be required to
adopt all the re-audit's findings.

The State questioned why, after accepting the downward adjustment in the
State's claims, HCFA then disallowed the upward adjustment of $873,607,
stemming from the same re-audit, on no substantive basis but solely on
grounds of being untimely.  The State suggested that the Agency here was
employing the audit exception provision on a claim-specific basis, i.e.,
that the Agency was selecting individual items from the audit to
disallow.  Thus, according to the State, the Agency's position appeared
to be that acceptance of a given audit did not necessarily mean that
each individual item contained in that audit would be exempt from the
two-year filing requirement.  The State argued that this Agency
interpretation of section 1132(a), that a claim would only qualify as an
audit exception when the responsible federal agency proposed to make an
adjustment based upon that particular claim, lacked merit and conflicted
with previous Board decisions, namely, Oklahoma Department of Human
Services, DGAB No. 809 (1986), and Minnesota Department of Human
Services, DGAB No. 911 (1987).

Contrary to the State's assertions, we find that the Agency's acceptance
of the downward adjustment does not require it to accept an upward
adjustment, though generated by the same audit, if that adjustment has
not been timely filed.  As the Agency has pointed out, its only action
in the entire SRS process was its acceptance of the State's decreasing
adjustments and payment of claims at the reduced amount.  The mere fact
that a state returns money to a federal agency which a state audit has
identified as an overclaim does not mean that the federal agency must
accept the entire audit and consider any claims for underpayments
growing out of the same audit as coming within the definition of "audit
exception."

The Board decisions cited by the State do not support its argument.  The
underlying issue in both Oklahoma and Minnesota was whether the reviews
conducted by a federal agency or employee were audits, not whether a
state audit had been accepted by a federal agency.

The rationale of these prior Board decisions was that if the federal
audit directed, or directly caused, the claims in question to be filed,
they came within the audit exception provision because they had been or
must be accepted by the responsible federal agency.  The audit here was
a state audit.  It was neither originated nor carried out by a federal
agency.

 C.  The statute requires the Agency to disallow untimely claims
 for underpayments.

The Board has previously categorically rejected the argument that it was
inequitable for the Agency to recover overpayments without any time
limitation, while denying claims for any underpayments beyond the
two-year limit. See Illinois Department of Public Aid, DGAB No. 715
(1986), and South Carolina Department of Social Services, DGAB No. 612
(1984).  In those decisions the Board noted that states are given
considerable discretion in fashioning and administering their formula
grant programs such as Medicaid, and that Congress gave the states a
reasonable amount of time, two years, to submit their claims.  The Board
concluded that the consequences for not adhering to the deadlines were
the states' responsibility. We find this position neither unfair nor
inequitable.  If the State had not submitted a downward adjustment, but
rather the original figure of $38,983,835 in claimed FFP, it does not
follow that HCFA would have reimbursed the State that amount.  HCFA
always had the prerogative to conduct its own review or audit of any
claim submitted to it.  Presumably HCFA, if it had undertaken such a
review or audit, would have detected the misclassification of the
$8,797,618 as Medicaid eligible.

By adjusting downward its claims by $8,797,618, the State was not then
giving up something to which it had a legitimate claim.  The State
simply had no right to  payment for non-Medicaid eligible services.  And
in accepting the downward adjustment, HCFA was not being relieved of any
obligation for payment it owed the State.

The Agency has valid reasons for holding the State to the two-year
filing requirement of Section 1132(a):

     The purpose of this legislation was not on its face to save federal
     money by depriving the states of FFP in valid claims for
     expenditures.  The purpose was to prevent the states from coming in
     many years after expenditures were made and claiming FFP, or
     transferring claims for FFP from one program to another, without
     any time limit.  Such delayed claiming made it difficult for the
     Department of Health and Human Services to plan its budget; claims
     for millions of dollars for expenditures in years long gone could
     turn up at any time.  New York, supra, p. 8.

Since the claims at issue were admittedly filed more than two years
after the quarter in which the expenditures occurred, and did not come
within the "audit exception" provision, the disallowance must be upheld.
The fact that the State returned money to HCFA based on an audit which
identified the overpayment does not mean that HCFA accepted the audit or
any proposed adjustments for amounts the State contends it underclaimed.

In a sense, therefore, the audit exception provision is a claim-specific
one.  The Agency can recover money from a state when the state's audit
shows it had claimed erroneously, even though more than two years had
elapsed since the expenditures were made.  At the same time the Agency
is required to interpose the timely claiming bar if the state tried to
collect money, identified by the same audit, which the state was no
longer entitled to claim.  That is the requirement of section 1132(a),
and the Board is bound by it.  45 C.F.R. 16.14.

 D.  There is no support for the State's argument that the Agency
 adopted the re-audit.

We find no evidence in the record to support the State's assertion that
the Agency adopted the re-audit.  An examination of the exhibits cited
by the State does not support the State's position.  Exhibit 6, a letter
from the State to the Agency, says nothing relevant to the issue before
us, although the State claimed that this was evidence of an earlier
understanding reached between the parties, of which Exhibits 4 and 5
provide a detailed explanation.

The State in its appeal file identified both Exhibits 4 and 5 as
memoranda from HCFA's on-site audit staff to the State's Office of Audit
and Quality Control.  The only reference in Exhibit 4 to any agreement
on the SRS process indicates that "[s]ince both parties are in agreement
with the results of the review", the State "will initiate the
preparation of decreasing adjustments reflecting the $46 million, FFP,
disallowed by the review."  Nothing here indicates that there was any
agreement on any claims by the State for alleged underpayment.  As a
matter of fact, the Exhibit clearly contemplates further review by HCFA
of any outstanding claims.  Reviews are definitely contemplated for SRS
claims "submitted after January 1, 1986," and the claims disallowed here
were submitted in December 1986.

In Exhibit 5 there is even clearer evidence that there was no blanket
approval of the SRS audit process.  This memorandum states that the
Regional Office and the State's Office of Audit and Quality Control
"have reconciled Shares Reclassification System claims to be reviewed in
the near future," and a meeting will be arranged "to initiate
statistical sampling of the various universes involved."  There is
nothing here which indicates in any way that the Agency had agreed to
accept the SRS audit claims without further review; no sampling would be
necessary if it had.  In fact, the memorandum goes on to say that while
funds which had been deferred would be paid in full, the State is
reminded that "previous audit experience has indicated that certain of
these costs are of questionable allowability."  (Emphasis added)  No
words could possibly show any clearer that the SRS claims would not be
accepted without review by the Agency.  This being so, we conclude that
the claims were not derived from a proposed adjustment accepted by the
federal agency, and do not come within the definition of an "audit
exception."

The State seemed to imply that the agreement by the Agency to pay the
State's SRS claims, subject to later review of the substantive
allowability of the claims, was somehow inconsistent with the Agency's
disallowance of the claims on the ground of late filing.  The Agency's
answer was that the Agency could not properly enter into any agreement
not to apply claiming deadlines, since payment of claims not timely
filed was expressly prohibited by statute.  A better answer, we believe,
is that if there was no agreement on substantive allowability, the
Agency did not accept the results of the audit; therefore the claims
based on this audit did not by definition come within the term "audit
exception" and were untimely.


 E.  The delay in filing the disallowed claims was the fault of
 the State.

In New York, supra, we stated that the exceptions in the timely claims
statute were intended to cover only "extreme situations."  p. 8.  We
went on to say:

     [The exceptions] were not intended to cover a routine situation
     where a state simply did not get around to getting its data
     together in time to file a claim within the statutory requirements.
     The exceptions are to take care of those cases where it would be
     patently unfair to a state to outlaw its claim merely because of
     the passage of time.

The State explained its SRS audit process in considerable detail in its
brief.  pp. 6-10.  Generally speaking, the claims generated by SRS were
Medicaid claims for recipients who had originally been erroneously
classified as eligible only for State-funded Home Relief.  The State
then retroactively filed Medicaid claims when it was determined that the
recipients were in fact categorically.eligible for Medicaid.  The brief
outlined three types of cases:  where the recipients were eligible for
Medicaid because they were eligible for SSI or were "SSI related"; where
the recipients were Medicaid eligible because they were entitled to
Title II disability benefits; and where a case shifted to a category
eligible for federal participation.

There is nothing to indicate that these situations were at all unusual
in New York.  The fact that the total claims based on SRS amounted to
over 38 million dollars indicates the extent of the problem.  Nowhere in
the record is there anything to show why the State could not have
uncovered the erroneous classifications promptly, or at least within two
years after the State made the expenditures.

It is clear, on the State's own representations, that the re-audit (on
which the disallowed claims are based) had to be conducted because of
the fault of the State.  In its brief (p. 13, n. 7) the State stated
that "[t]he audit was flawed in several ways."  None of the reasons
given can be blamed on the Agency, and none are due to any "extreme
situations."

In New York we gave (at p. 9) an example of where the "audit exception"
provision of the statute would apply.  We referred to a hypothetical
audit which showed clearly "that due to no fault of the state, an error
was made in claiming."  Obviously that is not the case before us.
.Conclusion

For the reasons discussed above, we find that the disallowed claims do
not qualify as coming within an "audit exception" to the two-year filing
requirement.  Accordingly, we sustain the disallowance of $873,607.

 


 ________________________________ Donald F. Garrett

 

 ________________________________ Norval D. (John) Settle

 

 ________________________________ Alexander G. Teitz Presiding
 Board