California Department of Health Services, DAB No. 1240 (1991)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: California Department of Health Services

DATE:  April 4, 1991
Audit Control No. A-09-86-60225
Docket No. 90-92
Decision No. 1240

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. 977 (1988).  That decision involved a disallowance of
$5,081,970 in federal financial participation (FFP) identified by the
Health Care Financing Administration (HCFA) as overpayments to Medicaid
providers.  The Board upheld the disallowance, subject to possible
reduction to the extent that California could show that overpayment
amounts had been settled, reversed, or collected.  On remand, California
asserted that it had properly reduced the overpayment amounts by
$1,013,061, or approximately $360,000 in FFP, and that the disallowance
should be reduced accordingly.  By letter dated March 30, 1990, HCFA
advised California that no basis had been found for reducing the
disallowance. 1/  This determination is the subject of the current
appeal.

As discussed below, we conclude that --

  The amount due HCFA is properly reduced by the
  difference between the mean and lower precision levels
  in the case of overpayments which were based on
  statistical samples and calculated using the mean
  precision level rather than the lower precision level.
  California calculated the reduction on this basis as the
  federal share of $160,815.01.  We reverse this portion
  of the disallowance subject to verification by HCFA of
  the precise amount of the reduction.

  The amount due HCFA is properly reduced to the extent
  that California submits documentation for HCFA review
  that is acceptable to verify California's counsel's
  statements that California had reduced certain
  overpayment amounts based on additional evidence
  furnished by the provider, a reevaluation of the facts
  and applicable law, or on a court or an administrative
  decision.  We uphold this portion of the appeal subject
  to reduction by HCFA upon its review of further
  documentation.

  California failed to establish that any reductions other
  than those described above were appropriate.  We
  therefore uphold the remaining disallowance without
  qualification.

The record for this decision consists of written briefs and exhibits
submitted by the parties, including responses to an Order to Show Cause
issued by the Board.  In addition, at California's request, parts of the
record for the Board's decision in DAB No. 977 were incorporated in the
record for this decision.

Case Background

The original disallowance was based on an audit by the HHS Office of
Inspector General, Office of Audit (OIGOA), which in turn reviewed State
audits of payments to providers of pharmacy and laboratory services.
OIGOA determined that the State audits, which identified $13,951,875 of
overpayments made from October 1, 1976 through September 30, 1985,
complied with government accounting standards and were generally
accurate.  Accordingly, after making adjustments for changes which
occurred after the State audits were completed, OIGOA recommended that
HCFA disallow $5,081,970.  HCFA adopted this recommendation and
California appealed.

In DAB No. 977, California argued, as pertinent here, that some of the
alleged overpayments had been reduced based on settlement agreements
between the providers and the State or, where the provider appeal was
fully litigated, on decisions reversing the State's findings.  DAB No.
977 stated, however, that OIGOA had already considered settlements and
reversals through March 30, 1987, and had made a finding, not rebutted
by California, that a large proportion involved bankrupt or insolvent
providers.  Noting its holding in prior decisions that FFP is not
available in overpayments made during this time period even if a state
is unable to recover them from the provider, the Board upheld the
disallowance.  However, the Board directed HCFA to consider whether the
disallowance should be reduced based on documentation which California
might subsequently provide with respect to overpayments which were
settled or reversed. 2/

Following the issuance of DAB No. 977, counsel for California sent HCFA
two letters containing a narrative justification for California's
reduction of overpayment claims against 13 providers.  California ex. 1
and ex. 2. California took the position that it had properly reduced
these claims by $1,013,061 (State and federal share), and that there
should be a corresponding reduction in the amount due HCFA. 3/  HCFA
referred California's narrative justification to OIGOA for review, and
later advised California that "OIGOA has informed us that your
Department presented no evidence that would cause a reevaluation of the
audit conclusions in the final report or our disallowance letter dated
January 20, 1988 . . . ."  California ex. 3, p. 1. 4/  As previously
indicated, however, HCFA had already reduced the disallowance by
$254,558 in FFP.  See n. 1.

In the narrative justification prepared by counsel for California,
California identified, for each provider, one or more "substantive
problems with the original audit findings" which led to either a
settlement with the provider or an administrative appeal decision
reducing the overpayment amount. California ex. 1, p. 1.  For most of
these "problems," California identified the specific amount by which the
overpayment to the provider could be reduced.  In three cases,
California identified amounts in excess of the amount of the actual
reduction of the provider's overpayment.  See California ex. 3, attached
Exhibit A.  Even if it is determined that these justifications are
acceptable, however, the disallowance clearly may not be reduced by more
than the federal share of the amount of the actual reduction.  In two
cases, California failed to account at all for a portion of the proposed
reduction in the provider's overpayment amount: $1,154 for Torrance
Plaza and $379 for Peninsula Medical Laboratory.  Id.  HCFA was clearly
justified in not accepting the reductions for these unexplained amounts.

Below, we discuss the various bases put forward by California for
reducing the overpayment amounts for the 13 providers at issue.  Some
providers fall within more than one of the categories discussed.

Difference between mean precision level and lower precision level

In eight cases, State auditors calculated the overpayment amount, which
was based on a projection from a statistical sample, using the mean
precision level rather than the lower precision level. 5/  These terms
are not defined anywhere in the record.  The Board's Order to Show Cause
stated, however, that it appeared that the "lower precision level" was
the lower confidence limit of an estimate based on a statistical sample
and that the "mean precision level" was the mid-point between the upper
and lower confidence limit.  Neither party objected to these
definitions.

California contended that it was justified in reducing the overpayments
in settlements with the providers by the difference between the mean and
lower precision levels because administrative law judges routinely used
the lower precision level in provider appeals.  California submitted
excerpts from nine administrative decisions, arising from audits
conducted from 1979 to 1985, which ordered the use of the lower level of
precision in recalculating overpayments.  California ex. 7.  In further
support of its position, California asserted that it was OIGOA's policy
to use the lower precision level in its own audits.

HCFA acknowledged that OIGOA's policy was to use the lower precision
level in its own audits.  However, HCFA took the position that,
regardless of OIGOA's policy, HCFA was justified in relying on the
original State audits, which used the mean precision level, absent
evidence that the mean precision level was unreliable.  HCFA contended
that the use of the mean precision level was mandated by the Pharmacy
Audit Manual issued by the California Department of Health Services, and
that there was a similar State manual applicable to laboratory audits.
HCFA also contended that the administrative decisions provided by
California did not invalidate the policy in the State auditing manuals
since the decisions did not specifically consider that policy or evince
any intent of establishing State policy in this area.  In addition, HCFA
questioned "how representative" the administrative decisions were,
noting that "[i]t may well be that there are other decisions upholding
the use of [the] mean in the face of provider challenges. . . ." HCFA
brief dated 2/11/91, p. 4.  HCFA also noted that few of the providers in
question here objected to the use of the mean precision level, and
argued that this suggested that providers did not commonly perceive the
use of the mean to be contrary to State policy.

We conclude that the amount due HCFA for overpayments to the providers
in question should be reduced by the difference between the mean and
lower precision levels.  Since OIGOA would have used the lower precision
level if it had directly audited California instead of relying on
California's audits, the only basis for holding California to the mean
precision level would be that State policy required its use.  We are not
persuaded that California had a policy to this effect, however.

Since California would be bound by an administrative decision in a
provider appeal requiring the use of the lower precision level, it is
appropriate to look to these decisions as evidence of State policy on
this matter.  Thus, even if State audit procedures called for the use of
the mean precision level to estimate overpayments, that would not be
dispositive here.  HCFA did not dispute that the administrative
decisions furnished by California required the use of the lower
precision level. 6/  As case-by-case adjudications, these decisions do
not purport to establish statewide policy requiring the use of the lower
precision level.  Nevertheless, to the extent that its administrative
decisions consistently required this in individual cases, California
could reasonably have anticipated that its auditors' use of the mean
precision level would not have been sustained in the cases in question
here.  Under these circumstances, it would be unreasonable to hold
California to the mean precision level.

While HCFA raised the possibility that California might have furnished a
biased sample of decisions, HCFA did not provide any evidence which
supported this.  It is mere speculation to suggest that the reason
providers did not challenge the auditors' use of the mean precision
level was that there were other administrative decisions which upheld
this auditing procedure.

In its response to the Board's Order to Show Cause, California provided
a statistical summary of the overpayment calculation for each of the
providers in question showing the amount by which the original
overpayment would be reduced using the lower precision level.
California brief dated 2/13/91, ex. 8 - 16.  Based on these
calculations, California contended that the total overpayments should be
reduced by $160,815.01 (State and federal share).  Since HCFA has not
had an opportunity to review these calculations, we reverse this portion
of the disallowance subject to verification by HCFA of the precise
amount of the reduction.  If California disagrees with the amount of the
reduction determined by HCFA, it may return to the Board on this limited
issue. 7/

Administrative hearing and handling costs

California took the position that it was justified in reducing the
overpayment amounts in settlements with seven of the providers based on
the estimated cost to the State of conducting an administrative hearing,
including salaries of the administrative law judge, staff counsel,
pharmaceutical consultant, and health auditor. 8/ In an eighth case,
California took into account the estimated cost to the State of
collection and handling of the overpayment. 9/  California contended
that this in turn justified a reduction in the amount due HCFA.

HCFA declined to accept these reductions on the ground that California
had not provided documentation to support its cost estimates.  HCFA also
suggested that California may have charged administrative hearing and
handling costs as operating costs under its cost allocation plan, in
which case they could not be used to reduce overpayments.  HCFA
indicated that, in light of these considerations, it was unnecessary to
determine whether avoidance of administrative hearing and handling costs
could be considered a valid basis for reducing the overpayment due HCFA.

California responded that it could not provide documentation of its cost
estimates because it would compromise the State's position in future
provider appeals if a provider knew at what point the State would
consider a case too expensive to be worthwhile.  California nevertheless
offered to make some documentation available to the Board provided that
it would not be subject to public inspection.  California also argued
generally that HCFA's refusal to recognize administrative hearing and
handling costs was unreasonable because the effect would be to require
states to litigate questionable cases in which these costs exceeded the
overpayment, and ultimately, to discourage states from auditing other
than "simple, easy-to-win" cases.  California brief dated 2/13/91, p. 5.

We conclude that no purpose would be served by reviewing documentation
of California's cost estimates.  While it may have been reasonable for
California to take potential administrative hearing and handling costs
into account in determining whether to settle a claim against a
provider, this does not mean that the amount of the provider overpayment
originally found by the State audits was in error.  Administrative
hearing and handling costs are the types of costs properly treated as
administrative costs for purposes of a state's Medicaid claims.
However, HCFA is not required to consider such potential administrative
costs as offsets to provider overpayments originally intended for
medical services (which were claimed at a higher rate than the rate
applicable to administrative costs).  Moreover, the Board has
consistently declined to consider the policy implications argued by
California, which are beyond the scope of the Board's review.  See
California Department of Health Services, DAB No. 1015 (1989);
California Department of Health Services, DAB No. 1152 (1990).
Accordingly, we conclude that HCFA was not required to reduce the
disallowance to account for administrative hearing and handling costs
which California avoided by entering into settlements with the
providers.

Likelihood of prevailing on appeal

California took the position that the reduction of overpayment amounts
due HCFA was justified to the extent that the settlements were based on
a determination that, if the provider appeal had been fully litigated,
the administrative law judge was likely to have ruled against
California.  California argued that, under New Jersey Dept. of Human
Services, DAB No. 683 (1985), overpayments were properly reduced if the
reductions were based on a state's assessment that its audit findings
were not sufficient to permit it to prevail in the administrative
process, and that the state was not required to have actually determined
that the audit findings were incorrect.  California asserted that it
could be assumed that the settlements were based on such an assessment
unless they were entered into at a time when the provider had already or
was about to go bankrupt or out of business, and provided uncontradicted
evidence that this was not the case for any provider here.  California
further asserted that, in New Jersey, the Board had employed a "flexible
approach" in determining whether a settlement was based on the merits,
noting that the Board there accepted the reduction of an overpayment
based on a settlement even though New Jersey had not "completely
establish[ed] that the [settlement] amount was directly related to an
overpayment determination. . . ." California brief dated 2/13/91, p. 7,
quoting New Jersey.  Finally, California argued that it would
"compromise future state audits" if the State provided a further
explanation of the basis for the settlements at issue.  Id., p. 8.

HCFA took the position that the reductions were not justified, citing
the statement in New Jersey that "[t]he mere speculation that audit
findings would have been revised if a hearing had been held is
insufficient."  New Jersey, p. 14.

We conclude that reductions in the amounts due HCFA were not justified
on the basis asserted here.  California's reliance on New Jersey is
misplaced.  In that decision, the Board first cited the general
principle, established in earlier decisions, that before HCFA can
reasonably rely on state audit findings as a basis for a disallowance,
the state must be provided an opportunity to show that "adjustments have
been made to the State findings" or that "the findings are unreliable
for some reason."  New Jersey, supra, p. 8.  Under this principle, if a
state made a determination at the time of settlement that its audit
findings were incorrect, or showed later that the audit findings were
erroneous or unreliable in some other respect, HCFA could not rely on
these findings.  At the same time, this assures that a state cannot
preserve its claim for FFP by simply disavowing its audit findings.  New
Jersey's treatment of the provider overpayment noted by California is
consistent with this principle since the Board found that there was
sufficient evidence to show "a revision of the State's original
determination on which HCFA relied" notwithstanding New Jersey's failure
to account for the full amount of the reduction in the overpayment.
Id., p. 12 (emphasis added).  Thus, contrary to California's
understanding, New Jersey does not stand for the proposition that a
state may simply rely on a settlement agreement which was entered into
without a determination by the state that its audit findings were
incorrect.

In the cases in question here, there is no evidence that California ever
determined that any of the audit findings were incorrect.  In seven of
the eight cases, the narrative justification merely states a conclusion
that California either was unlikely to win or would not win the provider
appeal. 10/  In the remaining case (Semca Pharmacy), the narrative
justification simply states that documentary evidence could be submitted
at the appeal level, leading to a reversal of the audit findings.  This
appears to be pure speculation, since there is no indication that
documentation was in fact available.  Moreover, California in effect
conceded that there was no certainty that it had made a specific
determination that the audit findings in any of these cases were
incorrect, stating --

 Most settlements are not based on a determination that the
 original state audit findings were incorrect.  In fact if a
 state determines that its initial audit findings were incorrect,
 it could simply modify or withdraw altogether its initial
 findings.  A settlement is not really necessary in this
 situation.

California brief dated 2/13/91, p. 6.  Thus, even if the ability of the
providers to repay California was not a consideration in the
settlements, this does not mean that the settlements were based on the
merits of the individual cases.  California here provided only very
general and vague explanations of its reasons for settling.  These
explanations are insufficient to call into question the reliability of
California's original audit findings.  Furthermore, as noted above,
consideration of the policy implications of HCFA's refusal to recognize
these settlements as a basis for reducing overpayment amounts is beyond
the scope of this decision.  Accordingly, we decline to reduce the
disallowance based solely on California's unsupported assessments that
it was unlikely to win on appeal.

Undocumented reductions

According to California's narrative justification, however, other
overpayment amounts were reduced because California actually determined
that its auditors had incorrectly identified the amounts in question as
overpayments to providers.  The narrative justification indicated that
reductions were based on additional evidence submitted by the providers
11/ or on a reevaluation of the facts and applicable law. 12/  In
addition, the narrative justification indicated that some reductions
were based on court or administrative decisions. 13/  HCFA took the
position that the reductions in question were not justified because
California did not provide any supporting documentation.  The Board's
Order to Show Cause tentatively concluded that HCFA could not reasonably
be required to rely on California's unsupported allegations regarding
the bases for the reductions since those allegations were inconsistent
with California's own audit findings.

In response to the Order, California offered to provide the
documentation which was used to prepare its narrative justification. 14/
According to California, for each provider except Peninsula Medical Lab,
there was a memorandum prepared at or near the time of settlement which
contained a general explanation of the basis for the settlement.
California brief dated 2/13/91, pp. 11-12.  (California stated that the
narrative justification for Peninsula Medical Lab was based solely on
"the recollections of staff in the Audits & Investigation Division."
Id., p. 11.)  However, California stated that it would release these
documents only "if it is assured by the Board that the documents can be
reviewed in camera and not made available for public inspection or
discussed in detail in the Board's final decision."  Id., p. 12.

California also argued that, to the extent that documentation in support
of the narrative justification was not available, HCFA was estopped from
objecting to the reductions because it never notified California that it
would be required to establish the validity of the settlements.
California asserted that, had it been notified, "documentation could
have been prepared and saved specifically for the purpose of
establishing the validity of the settlements."  California brief dated
8/17/90, p. 9.  California also argued that, in the case of several of
the providers at issue, the records retention period set by 45 C.F.R.
74.21(b) expired "prior to the date of the original federal draft audit.
. . ."  California brief dated 12/3/90, p. 3.


We conclude that California's estoppel argument has no merit.  The
traditional elements of estoppel -- reasonable detrimental reliance on a
misrepresentation intended to be acted on -- are not present here.
California did not allege that there was any misrepresentation by HCFA.
Moreover, there was clearly no detrimental reliance if, as California
alleged, it has contemporaneous documentation of the basis for the
settlements in all but one case.  In addition, as early as 1982, the
Board held that the burden is on the state to establish why it no longer
regards its initial audit determinations as reliable.  California Dept.
of Health Services -- Accounts Receivable, DAB No. 334 (1982).  In order
to meet this burden, some level of documentation is necessarily
required.  Thus, California's claim of lack of notice is disingenuous.
In any event, any lack of notice should not have affected California's
ability to document the basis for the settlements in some acceptable
fashion.  For example, if, as California alleged, there was a reduction
based on additional evidence furnished by Peninsula Medical Laboratory,
the provider should have been able to verify this.

We also reject California's argument that it was excused from providing
documentation relating to several providers by virtue of the expiration
of the records retention period.  (We note that Peninsula Medical
Laboratory was not included among the providers named by California.)
The Board has consistently held that a state is not excused from
producing relevant documentation unless it shows that specific documents
relevant to the disallowance actually existed, were retained for the
requisite three-year period, and then were innocently destroyed by the
state to its prejudice prior to the start of an audit of the costs in
question (which would toll the records retention period until the audit
was resolved).  See, e.g., California Dept. of Health Services, DAB No.
1007 (1989).  Here, however, California did not identify the specific
documents which were presumably lost or destroyed or state when the
alleged loss or destruction actually occurred.  Thus, we conclude that
California was not prejudiced by the expiration of the records retention
period.

Furthermore, we cannot accept California's offer of documentation for
our inspection in camera.  The Board's rules require that a copy of all
documents submitted by a party be served on the other party (45 C.F.R.
16.20(c)) and prohibit the Board from considering any information
outside the record (45 C.F.R. 16.17).  While the Board may, for example,
review a document in camera to determine if it is properly subject to
discovery by the other party, all documents on which the Board relies to
decide a case are public records.  Accordingly, we cannot reduce the
amounts due HCFA based on the provision of additional evidence by
providers, reevaluation of applicable facts and law, or court or
administrative decisions since California was not willing to provide
documentation to support its allegation that it reduced providers'
overpayments on these bases, in accordance with the Board's rules.

Although the Board cannot appropriately examine the documentation under
the conditions specified by California, California could make available
for the limited purpose of HCFA review during settlement discussions
documents which would substantiate its narrative justification but which
would not be a part of the record for this appeal.  Accordingly, we
uphold this portion of the disallowance, subject to reduction by HCFA
upon its review of any documents provided by California within 30 days
of its receipt of this decision in support of the reductions specified
in this section of the decision.  In all but the three cases referred to
below, a reduction would clearly be justified if HCFA determines that
the documents support the statement in the narrative justification
concerning the basis for settlement since HCFA objected only to the lack
of underlying documentation, not to the substantive basis for the
reduction.  Nevertheless, in the three cases which involve reductions in
the providers' overpayments based on a reevaluation of the facts and
applicable law, a reduction would not be justified if HCFA determined
that FFP was not available in the amounts in question as a matter of
federal law.  California may appeal any adverse determination regarding
the proposed reductions discussed here to the Board pursuant to 45
C.F.R. Part 16.

Conclusion

For the foregoing reasons, we reverse the disallowance in part and
uphold it in part (with part subject to reduction by HCFA based on
documentation submitted by California).

In order to implement this decision, HCFA should:

     (1)  Use documentation already available to it to verify that
     California correctly calculated the amount of the reduction based
     on the difference between the mean and lower precision levels and,
     if necessary, recalculate the reduction (see page 7 above);

     (2)  Review any documentation submitted by California within 30
     days of its receipt of this decision to determine if the
     documentation substantiates the statements in California's
     narrative description that it reduced provider overpayments based
     on additional evidence furnished by the provider, a reevaluation of
     the facts and applicable law, or on a court or administrative
     decision.  If HCFA finds that the documentation substantiates the
     narrative descriptions, then HCFA should accept the reduced
     overpayment amounts unless it determines that the reductions are
     not permissible as a matter of federal law (see pages 15 - 16
     above).

HCFA should inform California in writing of its determinations in regard
to (1) and (2) above.  Within 30 days of its receipt of a determination
from HCFA, California can request Board review of the following limited
aspects of this case:

     (1)  The calculation of the reduction to reflect the lower
     precision level;

     (2)  Whether the documentation presented in fact substantiates
     California's narrative justification;

     (3)  Any question of federal law raised by California's reduction
     of provider overpayments based on its reevaluation of the facts and
     applicable law.

 

 

       Judith A. Ballard

 

 

       Norval D. (John) Settle

 

 

       Cecilia Sparks Ford Presiding Board Member


1.     HCFA later corrected this statement, documenting that, shortly
after the issuance of DAB No. 977, it reduced the disallowance amount by
$254,558 in FFP to reflect adjustments it accepted.  Letter from Stein
to Ford dated 3/20/90.  These adjustments are not a part of the
$1,013,061 in dispute here.

2.     The remand in DAB No. 977 was predicated on the assumption that
California had already given the auditors information about settlements
or reversals prior to March 30, 1987.  However, the decision did not
preclude California from providing on remand information about any
earlier settlements or reversals not previously considered by the
auditors.  California indicated that the information it provided for
eight of the 13 providers at issue involved settlements prior to 1987.
California brief dated 12/3/90, Appendix 1.  HCFA did not assert that
any of this information had previously been considered by the auditors.

3.     This figure comes from a summary of California's narrative
justification prepared by OIGOA.  California ex. 3, p. 2.  The total of
the audit reductions shown by California in Appendix 1 to its reply
brief is different due to errors by the State in calculating the
reductions for Garfield Prescription Pharmacy and Semca Pharmacy.
Compare California ex. 1 (Semca Pharmacy) and ex. 2 (Garfield
Prescription Pharmacy).

4.   California contended on appeal that the overpayment amount shown
for Bio-Med Labs in the notes prepared on remand by OIGOA was $168,000,
that this figure was incorrect and that OIGOA's audit report correctly
identified the amount as $16,269.  California brief dated 8/17/90, p.
12.  The overpayment amount shown in OIGOA's notes as well as in the
audit report is $184,269, not $168,000 as stated by California.
California ex. 3, pp. 2-3; Docket No. 88-37, ex. A, p. 8.  In any event,
it appears that California confused Bio-Med Labs with another provider
identified in the audit report -- Biomedical Resources Lab -- which had
an overpayment amount of $16,269.  California apparently intended to
contest the overpayment for the latter provider since the narrative
justification refers to a $16,269 audit demand for "Biomedical Resources
Corp."  California ex. 2, p. 1.

California also contended on appeal that the $56,727 overpayment for
Berliner's Pharmacy shown in both OIGOA's notes and audit report was
overstated by $14,400, the amount of the settlement agreement with the
provider.  California brief dated 3/17/90, p. 12.  However, HCFA
provided documentation, not challenged by California, which established
that the overpayment originally identified by State audit was $71,127.
HCFA ex. D, p. 5. Thus, HCFA took the $14,400 settlement amount into
account in calculating the $56,727 which it identified as the
overpayment.

5.   The providers in question are Avalon Slauson Pharmacy, Duz-Mor
Diagnostic Laboratory, Torrance Plaza, Mini Fox Pharmacy, Noubar's El
Adobe Pharmacy, Peninsula Medical Laboratory, University Pharmacy and
Garfield Prescription Pharmacy.

6.   HCFA did state that the decisions "may well be distinguishable from
the circumstances of the audits at issue here for reasons which are not
apparent either because of the State's editing or because the unedited
decision did not address such distinctions."  HCFA brief dated 2/11/91,
pp. 4-5.  However, the issue here -- the use of the mean versus the
lower precision level -- is sufficiently clear-cut that any such
distinctions are unlikely.


7.   Since California has had ample opportunity to document the amount
of the reductions, HCFA would be justified in not accepting those
reductions which cannot be verified based on the documentation already
provided by California or prepared by OIGOA.

8.   The providers in question are Avalon Slauson Pharmacy, Semca
Pharmacy (no amount specified), Torrance Plaza (no amount specified),
Noubar's El Adobe Pharmacy, Peninsula Medical Laboratory, Biomedical
Resources Lab (no amount specified) and ICN Pharmacy (no amount
specified).

9.   The provider in question is Duz-Mor Diagnostic Laboratory.

10.  The providers in question and the relevant language are as follows:

 Avalon Slauson Pharmacy -- "There were several audit adjustments
 involving lack of records and excessive services with a
 potential loss of $11,437 if the case was taken through the full
 appeal process."

 Berliner's Pharmacy -- "The Department also determined that
 success was unlikely if it continued to pursue excessive service
 exceptions for some other drugs."

 Duz-Mor Diagnostic Laboratory -- "It was determined that the
 Department would not prevail in administrative appeal on a
 billing issue worth $22,262."

 Torrance Plaza -- "The loss factor if a hearing was held was
 $2,400."

 Mini Fox Pharmacy -- "A total of $88,216 was reduced for an
 ingredient cost issue that the Department determined it would
 likely lose on appeal."

 Peninsula Medical Lab -- "The Department determined that it
 would likely lose on appeal a mis-billing issue worth $62,503."

 ICN Pharmacy Inc. -- "Because of the complicated nature of the
 case, there was a good deal of uncertainty concerning whether
 the department would prevail as to the provider's appeal . . .
 ."

See California ex. 1 and ex. 2.

11.  The providers in question are Noubar's El Adobe Pharmacy, Peninsula
Medical Laboratory and Garfield Prescription Pharmacy. State's ex. 1, p.
4; State's ex. 2, p. 2.

12.  HCFA identified the providers in question as Berliner's Pharmacy,
University Pharmacy, and Biomedical Resources Corp. (Lab).  HCFA brief
dated 10/17/90, p. 9.  It appears that HCFA intended to refer only to
item #1 of the narrative justification for Berliner's Pharmacy, and that
item #2 is governed by the discussion in the prior section.  Item #1
involves a reduction based on a determination by Department medical
staff that the cost of a particular drug was covered by Medicaid under
the circumstances presented.  According to the narrative justification,
the reductions for University Pharmacy and for Biomedical Resources
Corp. (Lab) were based on the fact that the guidelines on which the
original adjustments relied were not in effect during the relevant
period.

13.  According to the narrative justification, the overpayment to Daven
Drug was reduced "pursuant to court decision," while $9,124 of the
overpayment to Mini Fox Pharmacy was reduced "[p]ursuant to adjustments
ruled in favor of the provider by the administrative law judge."
State's ex. 1, pages 2 -3.  California also claimed that the overpayment
for Mini Fox Pharmacy was reduced by an additional $35,856 "[p]ursuant
to the decision of an administrative law judge."  Id., p. 3.  However,
since the $35,856 reduction of the Mini Fox Pharmacy overpayment
represents the difference between the mean and lower precision levels,
it is justified regardless of whether California can establish the
reduction was specifically required by an administrative decision.

14.  This clarified an earlier offer of proof by California, which the
Board had not understood to pertain to the settlements in question here.
See Order, p. 11, n.