New York State Department of Social Services, DAB No. 1049 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: New York State Department DATE: May 30, 1989 of Social
Services Docket Nos. 88-166, 88-215, 88-216, and 88-253
Decision No. 1049

DECISION

The New York State Department of Social Services (State) appealed four
disallowances by the Health Care Financing Administration (HCFA, Agency)
of federal financial participation (FFP) totalling $11,147,529 in the
State Medicaid program under Title XIX of the Social Security Act (Act).
The first disallowance (Docket No. 88-166) was for $10,301,307 in
claims for the period January 1, 1987, through March 31, 1987, which
represented amounts which the State had retained because of suspected
fraud and abuse activities on the part of certain providers. Instead of
disbursing the funds to the providers, the State deposited them in its
Short Term Investment Pool (STIP), which earned interest, and it
earmarked the funds as "Non-Medicaid." The other three disallowances
represent the Agency's estimates of the interest earned on the principal
amount; these four disallowances were consolidated for Board
consideration by consent of the parties.

The State contended that its withholding of the disallowed payments
until final determination of the provider/claimants' fraud and abuse
activities was authorized by federal regulations, and that, since the
funds actually belong to the provider/claimants, they have been
"expended" within the meaning of the Act. The State also argued that
the Agency is not entitled to any of the interest earned by the account.
The Agency contended that, based on previous Board decisions, no
Medicaid expenditures had been made and thus the State's claims for FFP
in these claims was improper. In addition, the Agency maintained that
the interest on the improperly claimed FFP belonged to the Federal
Government.

As discussed below, we uphold the disallowances in full because no
expenditure within the meaning of the Act was made by the State.

Background

Title XIX of the Act authorizes federal grants-in-aid to states to help
finance state Medicaid programs. A state that wishes to participate in
the Medicaid program must develop and submit a plan that meets specific
requirements set forth by the Secretary, Department of Health and Human
Services.

The Medicaid program provides for FFP in medical assistance only for
expenditures made in accordance with a state plan. Section 1903(a)(1)
of the Act requires the Secretary of HHS to pay participating states

an amount equal to the Federal medical assistance percentage . . . of
the total amount expended . . . as medical assistance under the State
plan . . . .

(Emphasis added.) Section 1903(d)(2)(A) authorizes the Secretary to
make quarterly advances and to adjust the federal share of estimated
Medicaid expenditures in amounts:

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.

Agency regulations at 42 C.F.R. 455.23(a) authorize withholding by a
state of payments otherwise due to a provider for services rendered to
Medicaid-eligible individuals where a state has a reasonable belief that
an overpayment has been made. Those regulations provide:

Basis for withholding. The State Medicaid agency may withhold Medicaid
payments, in whole or in part, to a provider upon receipt of reliable
evidence that the circumstances giving rise to the need for a
withholding of payments involve fraud or willful misrepresentation under
the Medicaid program. The State Medicaid agency may withhold payments
without first notifying the provider of its intention to withhold such
payments. A provider may request, and must be granted, administrative
review where State law so requires.

In the present case, the State intercepted payments to providers
suspected of fraud and abuse activities pending a determination on the
allegations and deposited these funds in the STIP, where they were
designated as "Non-Medicaid." Interest was earned on these deposits
which, according to the unchallenged assertion of the Agency (response
brief, p. 3), is retained by the State whether the funds are ultimately
paid to the provider or returned to the Agency.

The escrowed amounts were claimed on the State's Quarterly Expenditure
Reports for the period January 1, 1987 through March 31, 1987. In a
federal review titled "Amounts in the MMIS [Medicaid Management
Information System] Non-Medicaid Clearing Account," the Agency concluded
that the funds in this account were not expended by the State pursuant
to section 1903(a) of the Act. The Agency cited an earlier case before
this Board, New York Dept. of Social Services, DAB No. 261 (1982), which
it claimed supported its conclusion that no expenditure had been made.
In its subsequent disallowances, the Agency maintained that the interest
earned on these funds belonged to the Federal Government since it was
earned on funds that rightfully belonged to the Federal Government.

Discussion

The question to be resolved in this case is whether the amounts
deposited by the State in the STIP are moneys "expended," within the
meaning to the Act, for which the State may properly claim FFP. If
there were no expenditures, then neither the federal share of the
escrowed funds nor the interest earned on the federal share should be
retained by the State.

In the previous New York case, the State had established a similar
escrow account to withhold current payments from providers in cases
where past overpayments to those providers were suspected. In that
case, the Board held that no expenditure within the meaning of the Act
had taken place. Specifically, the Board stated:

The State did not release the checks to the providers, the providers did
not in any other way receive any funds, and the record contains no
evidence that the providers had any legal entitlement, by agreement or
otherwise, to the funds before resolution of the overpayment questions.
Furthermore, in simple fact, the State retained the funds and apparently
even earned interest on them. The funds remained in the custody and
legal control of the State. Apparently, there was no way for the
providers to compel payment by the State. Since the providers could not
use the funds held by the State, these funds could not be considered
expenditures by the State because the State retained all indicia of
ownership pertaining to the held funds.

In this context, to consider the State's preliminary claim processing as
tantamount to actual payment would require an attenuated and
unreasonable reading of the term "expended." p. 3

The State argued that the deposits in this case were authorized by
Agency regulations at 42 C.F.R. 455.23, and that the language in the
preamble to those regulations recognized such escrowed funds as Medicaid
expenditures for FFP purposes. The State also claimed that, unlike the
previous New York case, money credited to providers with money in this
holding account was reported to the Internal Revenue Service (IRS) by
the State, and providers had various legal means for seeking access to
the money, so that the funds could be said to have been expended when
they were deposited in the account.

First of all, we agree with the Agency that the regulations authorizing
the withholding of these funds are irrelevant to the question of whether
the State could properly claim FFP in them. The regulations themselves
do not address the question of when an expenditure by the State takes
place in such cases. Similarly, while the statement from the preamble
(52 Fed. Reg. 48814, December 28, 1987) that "[t]he provider would
continue to be credited for services furnished, even though payments
would be temporarily withheld," supports the State's undisputed practice
of reporting these payments to the IRS, as we discuss below, "crediting"
a provider with a payment is not the same as the State's expending money
for Medicaid services when the State does not relinquish control of the
funds. In any event, these regulations were not effective until
December 28, 1987, more than eight months after the ending date for the
disallowance of the principal amount.

The State also asserted that the funds in the escrow account belonged to
the provider/claimants suspected of fraud and abuse activities. In
support of this assertion, the State noted that it issued IRS Forms
1099, with IRS approval, to the claimants and set aside appropriate
amounts in still another separate account for taxes on the withheld
funds. In addition, the State pointed to a State procedure available to
claimants which allows leniency when withheld claims cause hardship.
Finally, the State asserted that funds in the STIP belong to the
providers because they can sue the State in the New York Court of
Claims, or file for a writ of mandamus to obtain access to these funds.

We find that the State's elaborate argument seeking to establish the
providers' entitlement to the account is unavailing. As in the previous
New York case, the State has earmarked these funds as reflecting an
interest of the providers or their priority creditors, but the providers
have no access to or control over these funds and consequently no
indicia of ownership. Thus, while we might agree with the State that a
ledger transfer, rather than a physical transfer, could constitute an
accounting expenditure, these transfers were only a mere ledger notation
-- although the funds were segregated in a special account, the point of
this entire operation was to retain State control of the funds until
questions involving provider fraud or abuse were resolved. Thus, in the
present case, as in the previous New York case, the necessary transfer
of substantial control over the funds is still lacking.

Similarly, distribution of Forms 1099 to the claimants and segregation
of "withheld" amounts in a separate tax account are for the purpose of
transferring the funds to the IRS if the funds are later determined to
be rightfully paid to the provider; these actions do not give the
providers access to or control over any funds in either account. The
establishment and maintenance of the STIP is still not for the purpose
of disbursement, but to await final determination of fraud and abuse
allegations concerning the providers.

In addition, although the State asserted that the providers could obtain
access to the deposited funds by showing hardship, filing suit against
the State in a State Court of Claims, or petitioning for a writ of
mandamus, this is not the same as the provider having the type of
undisputed access to the money that outright payment provides.
Moreover, in actions in mandamus or a Court of Claims, the State could
pose as a defense the allegations of fraud and abuse that inspired the
withholding. See, e.g., N.Y. Court of Claims of Act, section 9
(McKinney 1963). The fact remains that the provider cannot gain access
to the fund without availing itself of these extraordinary remedies.
Thus, this "right" to the funds is also illusory.

The undisbursed federal share of the funds in the account, therefore,
really belongs to the United States because, although the State drew
down the funds tacitly in order to expend them as medical assistance
under its plan, the actual expenditure of these funds as assistance
never took place. These amounts therefore represent overpayments to the
State under section 1903(d)(2)(A) which must be adjusted against amounts
due the State for subsequent quarters.

Where, as here, a state does not actually "expend" funds it drew down
for medical assistance (having placed the funds in a special account
because of suspected fraud or abuse on the part of the provider), an
"overpayment" exists for the quarter for which the funds were drawn
down. Under section 1903(d)(2)(A), the Secretary must adjust subsequent
quarterly payments to the State in light of "any overpayment . . . which
the Secretary determines was made . . . to such State for any prior
quarter. . . ." See, e.g., the discussion of section 1903(d)(2) in
California Dept. of Health and Human Services, DAB No. 1015 (1989) pp.
2-3; and North Carolina Dept. of Human Resources, DAB No. 361 (1982),
aff'd sub nom. State of North Carolina v. Heckler, 584 F. Supp. 179
(E.D.N.C. 1984).

The second concern of this appeal is the disposition of interest earned
on the FFP in the STIP account. Simply put, we find that interest
earned using the United States' money is interest that belongs to the
United States.

Here, the State determined that it would be appropriate to withhold
payments to particular providers because of probable fraud and abuse
activities. Knowing this, the State deposited the funds in an interest
bearing account and, as we concluded above, improperly claimed these
amounts as payments to providers on its Quarterly Expenditure Report.
The delay in disbursing or returning the deposited amounts permitted
interest to be earned from funds earmarked for use as expenditures in
the Medicaid program. This FFP was not provided for the purpose of
enriching the State treasury, however, but to share Medicaid costs with
the State based on its estimate of expenditures for medical assistance.
Based on the same principle, we have consistently held in cases where a
state has earned interest on undistributed funds collected through the
child support enforcement program under the Title IV-D of the Act, that
interest earned prior to crediting the federal government with its share
must be applied as a credit to reduce the drawdown of federal funds.
See Utah Dept. of Social Services, DAB No. 750 (1986); New York Dept. of
Social Services, DAB No. 794 (1986); South Carolina Dept. of Social
Services, DAB No. 926 (1987). We have reached the same conclusions
concerning earned interest on recoveries from Medicaid providers which
had been placed in a holding account pending their distribution to the
Federal Government. North Carolina, supra.

Since the funds were not obtained for a current expenditure, the FFP
should not have been claimed in the first place. Consequently, all of
the interest earned on that FFP belongs to the rightful owner of the
funds, the Federal Government, not the State.

Conclusion

In summary, we find that the deposit of funds into the STIP account did
not constitute an expenditure within the meaning of the Act. The
providers had neither access to nor control over the account; therefore,
they were not entitled to the account or its benefits. The FFP was
transferred to the State for use as the federal share of Medicaid costs
expended in the Medicaid program. Since there was no expenditure, the
funds were also not lawfully the State's, and therefore the Agency is
entitled to immediate return of the FFP plus all earned interest
attributable to the FFP.

________________________________ Donald F. Garrett


________________________________ Cecilia Sparks Ford


________________________________ Norval D. (John) Settle
Presiding Board