Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: California Department
DATE: May 9, 1990
of Health Services Audit Control No. A-09-87-00059
Docket No. 90-63
Decision No. 1152
DECISION
This appeal by the California Department of Health Services
(California/State) arises from a Board-ordered remand in California
Dept. of Health Services, DAB No. 1015 (1989). The California decision
involved a disallowance of $7,751,886 in federal financial participation
(FFP) identified by the Health Care Financing Administration (HCFA) as
Medicaid overpayments. The Board upheld $6,990,810 of the amount
disallowed, subject to possible reduction to the extent that the State
could show that the overpayments involved had been collected and the
federal share adjusted, or that the State's determinations had been
overturned as the result of provider appeals after the audit report.
Nothing involving the upheld disallowance is in dispute here. Regarding
the $761,076 which remained in issue, the Board remanded that part of
the case to HCFA to permit the State an opportunity to submit
information which would support California's assertion that the
disallowance should be reduced by that amount. Based on the following
analysis, we find that the State failed to provide information
supporting reversal or reduction of the $761,076 disallowed.
Consequently, we now sustain the full disallowance of that amount.
I. Background
Under Medicaid, HCFA advances funds to a state, on a quarterly basis, in
an amount equal to the federal share of the estimated cost of a program.
A state will submit a quarterly expenditure report to HCFA which serves
as the basis for adjustments to future payments to reflect any
overpayment or underpayment which was made to the state for that or any
prior quarter. See 45 C.F.R. 201.5(a)(3). In turn, states have their
own procedures for determining whether a Medicaid overpayment has been
made to a health provider. These procedures generally include audits of
the providers to determine whether they have properly reported costs
used to set per diem rates, whether patient days have been correctly
claimed, and whether the reimbursement otherwise meets the state plan
and federal requirements. States also provide administrative provider
appeals when a state audit determines that a provider has been overpaid.
A. California
In California, the State raised two issues. The State argued that HCFA
is obligated to wait until the State recovers overpayments from
providers before demanding return of the federal share. Based on past
decisions, the Board rejected that argument, but provided the State an
opportunity to show that adjustments had already been made for some of
the overpayments. The second issue raised by the State involved
$761,076 in disallowed FFP. This represented amounts initially
identified by the State as overpayments owed by Medicaid providers which
were later "reduced" by California to account for stipulated settlements
between the State and the providers. 1/ In spite of requests from HCFA
and federal auditors, California did not provide information concerning
the basis of the settlements, arguing instead that the information was
protected by the attorney-client privilege. Additionally, California
argued that, unless HCFA had evidence to show that the settlements were
no more than a means of writing off the amounts due from insolvent
providers, HCFA had to accept the State's settlement amount as the
correct amount of any overpayment. California, p. 2.
The Board concluded that the mere fact that California had settled for a
lesser amount did not mean that HCFA could not rely on California's
initial overpayment determination. However, the State ultimately agreed
to provide HCFA with non-privileged information which would explain the
bases for the settlements. HCFA agreed to review this information, as
well as to permit the State an opportunity to show that other
overpayments had been recovered, and, if necessary, to adjust the
disallowance accordingly. Id.
Thus, we remanded the disallowance of $761,076 related to the
settlements, explicitly directing the State to --
[w]ithin 30 days of receipt of this decision (or such longer
time as HCFA permits) . . . provide to HCFA all of the
admittedly non-privileged information which may explain the basis
for the settlement agreements in question, or other evidence
supporting reduction of the disallowance for these overpayments to
the federal share of the settlement amount . . . .
Id. at 8. 2/
B. The Parties' Actions on Remand
On remand, federal auditors reviewed documentation provided by the State
pertaining to the larger overpayment issue in California. The results
of their review appear as attachments to HCFA's February 13, 1990
disallowance letter, and are not in dispute here. See note 1, supra.
However, regarding the $761,076 in FFP, apparently involved in the
settlement with Paramount General Hospital, the auditors stated: "No
additional supporting documentation was provided." See Notes to
Exhibit, p. 2.
California's ensuing appeal was based on what it characterized as HCFA's
"determination not to recalculate the amount of the . . . disallowance
based on settlements" between the State and providers. California
requested an opportunity to submit a brief "concerning why HCFA should
be required to accept state audit reductions pursuant to settlements
with providers." See Notice of Appeal (March 16, 1990). 3/
C. The Order to Show Cause
We issued an Order to Show Cause (Order) on March 28, 1990, in which we
noted that the State's appeal mischaracterized the holding and remand
order in California. We found that, in spite of our specific direction
in California, the State was attempting to relitigate an argument which
we had previously considered and rejected, i.e., whether HCFA should be
required to accept State audit reductions pursuant to settlements with
providers. Clearly, relitigation of this issue was not contemplated by
our decision in California. Consequently, we directed California to show
cause --
why the Board should not affirm HCFA's disallowance of $761,076 on
the basis that the State auditors found this amount to be an
overpayment to the provider and that the State has failed to
provide any information to the contrary, in spite of having been
given ample opportunity to do so.
Order, p. 4.
II. Analysis
In California, we found that HCFA did not bear the burden to find
affirmatively (prior to disallowing the federal share of the overpayment
amount identified in the State audit) that a settlement is merely a
means of writing off a debt from an insolvent provider. We determined
that it was reasonable for HCFA to base a disallowance on the initial
State audit findings absent a showing that these findings were
unreliable. California, pp. 6-7. 4/
Further, we found that the fact that a dispute between a state and a
provider settled was not a sufficient basis to question a state's
initial determination, based on properly performed audits, as to the
amount of reimbursement the provider received in excess of what is
permitted under the state plan and federal requirements, i.e., the
overpayment. We noted that while the federal government might benefit,
to some degree, from the State exercising its judgment not to pursue its
audit findings in every instance, this does not justify a rule requiring
HCFA always to accept the settlement unless it makes an affirmative
finding that the settlement is in fact simply a way of writing off a bad
debt. California, p. 7.
In response to the Order, California offered an unsupported general
assertion that it had provided information "which should have been
sufficient to satisfy federal auditors and the Board" that the
settlement agreements were appropriate. California Response, p. 1.
California then noted that it had found documentation concerning a
settlement agreement at Riverside General Hospital. The State asserted
that this documentation identified $439,000 in items which the State was
likely to lose on appeal by the provider. Given this likelihood,
California "decided to reduce its original audit demand by stipulated
agreement." The remainder of the State's response addressed arguments
previously made in California. The State reiterated its concern with
not releasing allegedly privileged information regarding settlements to
Medi-Cal providers. 5/ California asserted that giving the providers
this information would prejudice its position in future provider
appeals. Additionally, California reasserted the propriety of entering
into settlement agreements with providers. California Response, pp. 1-2.
The State's response continued to ignore the underlying basis of both
the remand in California, and the Order. California's general assertion
that it provided documentation to the auditors is insufficient to rebut
HCFA's audit finding that no documentation was provided for the $761,076
overpayment on remand, particularly since the only further reference to
documentation in California's response explains that the State had found
some documentation relating to Riverside General Hospital. As we
explained in note 1 above, the record indicates, and the State did not
deny, that the $761,076 relates to overpayments to Paramount General
Hospital. Moreover, the State did not provide this, or any,
documentation or supporting evidence to us, in spite of the State's
clear obligation under the Order to do more than make unsupported
allegations.
The remand was provided to permit the State an opportunity to submit
documentation which, if accepted by HCFA, could provide a basis for
reducing the disallowance. The remand was premised on the State's
willingness "to provide such information as it can without waiving the
attorney-client privilege." California, pp. 5-6. The State led both the
Board and HCFA to believe that it had such information available. Id. at
7. California has consistently failed to take advantage of its
opportunity to submit additional documentation on this issue. Thus,
California's assertion, in its notice of appeal, that HCFA had refused
to recalculate the disallowance in accordance with the remand is
inaccurate. Rather, it is the State's failure to provide any
information (or even offer any information which is clearly relevant),
which justifies HCFA's reliance on the State's initial audit findings.
We recognize that there are some circumstances where it may be both in
the State's and HCFA's interest to negotiate settlements with providers.
However, the State is unreasonable in taking the position that it has no
accountability to HCFA for settling provider appeals, even though HCFA
participated in the provider payments at issue. Moreover, while the
State may have legitimate reasons to protect the confidentiality of its
settlement agreements, it also has an obligation under 45 C.F.R. Part
74, Subpart D, to give HCFA access to pertinent records. HCFA had
indicated that it was willing to work with the State to establish
procedures to provide federal auditors with adequate documentation while
satisfying, as far as practicable, the State's legitimate interest in
preserving the confidentiality and integrity of its legal files. See
California, p. 6, n. 3. Yet, there is no indication on the record here,
that the State made any accommodations to HCFA's needs to ensure the
allowability of costs charged to federal funds.
III. Conclusion
The State failed to provide any information which would assist HCFA in
recalculating the disallowance. Further, California's response to our
Order did no more than restate arguments previously considered and
rejected by the Board. Accordingly, we sustain that part of the
disallowance in California ($761,076) which had been remanded to HCFA
for further consideration.
Donald F. Garrett
Alexander G. Teitz
Judith A. Ballard Presiding Board Member
1. The audit report which served as the basis for the disallowance in
California did not identify "the particular disputes that gave rise to
the settlement agreements." California, p. 5. However, the
disallowance letter giving rise to this appeal indicated that the
$761,076 was related to "settlement agreements with one hospital."
See
Notice of Disallowance (February 13, 1990). The disallowance was
accompanied by two attachments, (HCFA) Exhibit (Ex.) A and a document
titled Notes to Exhibit. These attachments identified Paramount General
Hospital as involved in a $761,076 settlement with the State. See HCFA
Ex. A, p. 5, and Notes to Exhibit. Thus, as the Board noted in its
Order issued to the State, it appears that the disallowed amount relates
only to Paramount General. The State provided no information in
response to the Order to show that, in fact, other overpayments were
included in the disallowed amount.
2. The Board also indicated that if the State was unable to provide
"sufficient direct support for the basis of the settlement . . . it
might be able to provide other collateral evidence concerning the reason
for the settlement. . . ." California, p. 7, n. 4.
3. California also noted that on February 23, 1990 HCFA had recouped
FFP which was the subject of the provider settlement agreements.
California asserted that HCFA should not have recouped this money
because the Board had not issued a final determination concerning that
part of the disallowance. The Board's decision left open the
possibility of further review if HCFA rejected documentation provided by
the State; thus, HCFA could have reasonably determined that the State's
failure to provide any documentation effectively ended the matter.
4. Citing California Dept. of Health Services, DAB No. 977 (1988).
5. "Medi-Cal" is the name of the California Medicaid