California Department of Health Services, DAB No. 1254 (1991)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  California Department of Health Services     

DATE:  June 3, 1991
Audit Control No. A-09-89-00165
Docket No. 90-223
Decision No. 1254

DECISION

The California Department of Health Services (California or State)
appealed a disallowance by the Health Care Financing Administration
(HCFA) of $11,183,898 in federal financial participation (FFP) claimed
under Title XIX (Medicaid) of the Social Security Act (Act) for the
period October 1, 1981 through September 30, 1985.  The disallowance was
based on an audit of California's records of accounts receivable and
related records as of September 30, 1988.  HCFA found that California
had failed to refund the federal government its share of amounts
identified by the State as excess or improper Medicaid payments to
providers of hospital services.

California appealed the disallowance with regard to:  (1) overpayments
to providers who are now bankrupt; (2) overpayments that the State is
barred by federal court order from collecting until the completion of
the providers' administrative appeals; (3) overpayments that have been
reduced by settlement, recalculation, or administrative appeal; (4)
overpayments which have already been collected and credited to HCFA;
and, (5) overpayments that the State is currently collecting on an
installment basis.  California essentially argued that HCFA should be
precluded from recouping the federal share until the State has recovered
the overpayment amounts from providers.

We uphold the disallowance.  To the extent that settlements,
recalculations, administrative appeal decisions, and collections since
the audit were not reflected in the disallowance, HCFA should review the
State's documentation as provided below and reduce the disallowance as
appropriate.

General Background

Title XIX of the Act authorizes federal grants to states to aid in
financing state programs which provide medical assistance and related
services to needy individuals.  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 for 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 the
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.
Specifically, section 1903(d)(2) of the Act provides that amounts paid
to a state shall be reduced to the extent of any overpayment which the
Secretary determines was made to the state for any prior quarter and
with respect to which adjustment has not already been made.

In numerous cases involving excess or improper payments by states to
Medicaid providers, this Board has held that, under section 1903(d)(2),
HCFA may require adjustment of the grant award for the federal share of
firmly established overpayments, even if a state has not yet recovered
these amounts from the providers.  The Board reasoned that excess or
improper payments are not "medical assistance" within the meaning of
sections 1903(a)(1) and 1905(a) of the Act.  See, e.g., California
Department of Health Services, DAB No. 1015 (1989); California
Department of Health Services, DAB No. 977 (1988); California Dept. of
Health Services, DAB No. 619 (1985); Massachusetts Dept. of Public
Welfare, DAB No. 262 (1982).

The Board found no basis for concluding that adjustment of the grant
award should be limited to the federal share of those improper or excess
payments which a state has already recouped from a provider.  The Board
considered arguments by states that the term "overpayment" in section
1903(d)(2) is not clearly defined and is limited in the context of the
Act by section 1903(d)(3) to include only amounts which the State has
already recouped.  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.

The Board found that section 1903(d)(3) applies only to those amounts
which would be allowable as "medical assistance furnished under the
State plan."  This would include recoveries from third parties, such as
relatives or insurers, of amounts properly paid as medical assistance.
The Board concluded that the section does not preclude treatment as
overpayments of amounts unallowable as medical assistance.  See, e.g.,
Arkansas Dept. of Human Services, DAB No. 717 (1986); New York Dept. of
Social Services, DAB No. 311 (1982).

The Board's prior holdings on overpayments issues have been upheld in
three decisions by United States Courts of Appeals: Massachusetts v.
Secretary, 749 F.2d 89 (1st Cir. 1984), cert. denied, 472 U.S. 1017
(1985); Perales v. Heckler, 762 F.2d 226 (2d Cir. 1985); and Missouri
Department of Social Services v. Bowen, 804 F.2d 1035 (8th Cir. 1986).

Case Background

The disallowance was based on an audit by the HHS Office of Inspector
General Office of Audit (OIGOA) covering overpayments to providers of
hospital services under Medicaid (called Medi-Cal in California) that
had been identified by the California Department of Health Services Rate
Development Branch.  OIGOA determined that California had not refunded
the federal share ($14,900,183) of $38,889,499 in overpayments for the
period July 1, 1980 through September 30, 1985.  HCFA's Ex. A.  In a
decision letter of October 19, 1990, HCFA disallowed $11,183,898 in FFP
for the period October 1, 1981 through September 30, 1985.  In its
brief, HCFA reported that the reduction of the amount disallowed
reflected the subtraction of fifteen months from the period of the
disallowance.  HCFA asserted that OIGOA confirmed that the methodology
followed by the State auditors in identifying the overpayments was
consistent with California's Medicaid State plan, and that the amounts
assessed were adequately documented.  HCFA also stated that the
overpayment amounts were adjusted to reflect collections received
through December 31, 1989.  Agency Brief (Br.), pp. 1-2.

Discussion

I.      Overpayments to bankrupt and insolvent providers

As the State acknowledged, the Board has found that HCFA may require
return of the federal share of excess or improper payments prior to a
state's recovery of the amounts due from providers, whether a provider
is solvent or insolvent.  Thus, states must account for the federal
share of excess or improper payments even when the states may never
recover the money because of provider bankruptcy.  See, e.g., California
Department of Health Services, DAB No. 977 (1988); California Department
of Health Services -- Accounts Receivable, DAB No. 334 (1982). 1/  The
Board reasoned that states administer the Medicaid program, contract
directly with providers, and have the ability to ensure that the program
contracts only with responsible providers.  Also, since only the state
dealt directly with the providers, it was the party able to ensure
timely audit and collection of identified overpayment amounts.

Although it recognized this line of cases, California reserved the right
to challenge the analysis if it chooses to seek judicial review.
California also asserted that these losses should be shared by the
federal government, just as it must share in other normal costs of the
Medicaid program.  The Board notes, however, that under this line of
cases, excess or improper payments are not "medical assistance" within
the meaning of the Act, and are thus not allowable costs of the Medicaid
program.  We conclude that the fact that some of these overpayments were
made to now bankrupt providers does not provide a basis for reversing
the disallowance.  Consequently, based on the rationale in DAB Nos. 977
and 334, which we incorporate here, we uphold this part of the
disallowance.


II.     Overpayment determinations being challenged by providers and
subject to court order

As discussed above, HCFA may require adjustment of awards to account for
firmly established overpayments by a state, even if the state has not
yet recovered the overpayments from providers.  The Board has also held
that the mere fact that providers have challenged the state
determinations of overpayments through an administrative appeals process
does not preclude HCFA from adjusting the federal share.  DAB Nos. 334,
977.  The Board has previously considered the use of state overpayment
records as a basis for disallowance, and has held that where a state
conducts audits as part of its provider reimbursement system, in
accordance with established standards, HCFA may reasonably rely on state
overpayment records when the following criteria have been met:

 -       HCFA provides sufficient detail to identify the records
 from which the disallowed amounts are derived.

 -       The State is provided an opportunity to show that:

  -       adjustments have been made to the state
  findings;

  -       the records were 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 overpayments
  in the first place.

DAB Nos. 334, 765, 977.

In DAB No. 977, the Board upheld HCFA's disallowance of overpayments
based on state records even though California law precluded collection
of disputed amounts prior to the completion of the administrative review
process.  A key element in that decision was a finding that the State
overpayment determinations had a high degree of reliability.  The Board
observed that California did not dispute HCFA's findings that the State
audits had been performed in accordance with governmental auditing
standards, and that the federal auditors had examined the documentation
underlying the audit.  The Board also noted that the administrative
appeals at issue in DAB No. 977 had been pending between 2 and 5 «
years, and that the State did not deny that the appeals were all beyond
the first level of review.  Finally, the Board found that there was no
evidence that a California statute barring collections of disputed funds
from providers until the completion of all levels of administrative
review was based on an assessment that the overpayment determinations
were unreliable, or that the law reflected federal policy or served a
federal interest.  Based on these factors, the Board concluded that
California's audit findings had a high degree of reliability and could
be used by HCFA as the basis of a disallowance.  The mere existence of
provider appeals did not render unreliable the State audit findings upon
which the disallowance was based.

Similarly, California here did not take issue with OIGOA's and HCFA's
statements that they examined California's determination of overpayments
to ensure that the overpayments were not reimbursable under federal
regulations, that the State's methodology was consistent with the State
Medicaid plan, and that the amounts were adequately supported.  The
State also did not dispute HCFA's assertion that all of the
administrative appeals and adjustments that were still unresolved at the
time of the disallowance were from 2 to 6 years old.

California asked that the holding in DAB No. 977 be reversed, and
asserted that that decision abandoned Board precedent by permitting
recoupment where state law precluded collection of disputed amounts
prior to the completion of the administrative review process.  We do not
agree.  California misconstrued the Board's discussion in that decision
of its holding in Pennsylvania Department of Public Welfare, DAB No. 765
(1986), that HCFA could not rely on state-level records of overpayments
to long-term care facilities where there were pending administrative
appeals and state law precluded collection prior to their resolution.
As noted in DAB No. 977, the Pennsylvania decision was based on a
determination that HCFA failed to give notice of a 1981 change in its
policies which had permitted states to retain FFP pending resolution of
administrative appeals.  The limited circumstances which supported the
Board's decision in Pennsylvania, supra, were not present in
California's earlier appeal, and are not present here.  The alleged
overpayments in this case were to hospitals, while HCFA's policy
permitting states to retain FFP pending resolution of administrative
appeals was applicable only to long-term care facilities.

Further, California did not allege the existence of any federal policy
barring HCFA from recouping overpayments to hospitals on which it might
have relied.  As the Board observed in DAB No. 977, the State has had
ample notice that it could not retain FFP throughout the appeal process
for providers of services other than long-term care.

California also observed that, unlike in DAB No. 977 where it was
prohibited by State law from recovering disputed payments from
providers, it is here barred by federal court order in the class-action
case Fountain Valley Community Hospital v. State Department of Health
Services, No. CV 84-0896 (C.D. Cal. 1989), from collecting any amount
determined to have been overpaid to a hospital provider until the
provider has exhausted all administrative appeals.  Declaration of Elena
Ybarra, State Ex. C.  It sought to distinguish this appeal from the
Board's holding in DAB No. 977 on that basis.

In Fountain, the court ordered that California not reduce interim
reimbursement rates or otherwise adversely affect reimbursement or
payments to any plaintiff hospital "prior to the conclusion of the final
settlement of the hospital's cost report affected by such Medi-Cal
rules, including the completion of all administrative adjustments and
appeals concerning the final settlement[.]"  State Ex. A, Judgment, p.
3.  The court's decision was based on a determination that the State was
constrained by the language of its regulations from applying certain
reimbursement limits that were at issue in the suit (identified in the
court's opinion as the "55% occupancy" limit and the "all-inclusive rate
per discharge") until the time of final settlement. 2/   The court's
order contains no finding that California's overpayment determinations
were defective, and our review of the Fountain Valley order and judgment
that California submitted reveals nothing which impugns the reliability
of the State's audit process or overpayment determinations.

California also sought to distinguish this appeal from its appeal in DAB
No. 977 on the grounds that the Fountain Valley court order was based
not merely on state law, but on federal Medicaid law and California's
approved State Medicaid plan.  California asserted that the court order
was based in part on an interpretation of the plan as prohibiting
collection of provider overpayments until the completion of all
administrative appeals, and maintained that HCFA should be precluded
from recouping the federal share of these overpayments since it approved
the State plan.  The State presented a list of ten providers included in
the federal disallowance, along with the fiscal year for which an
overpayment determination was made, and stated that it was precluded by
the court order from collecting any overpayment pending the completion
of administrative appeals.  Declaration of Elena Ybarra, State Ex. C.

We find this argument unavailing.  Even if the court order may be read
as interpreting the State plan to bar the State's collection of
overpayment amounts pending application of certain cost limits (the "55%
occupancy" limit and the "all inclusive rate per discharge"), and that
these limits may not be applied until final settlement, the State did
not relate the court's determination to the disallowance at issue here.
The State simply listed the providers included in the federal
disallowance for which overpayments had been identified during the
tentative or final settlement process and which were party to the
litigation, and the cost years at issue (which ended between October 31,
1981 and June 30, 1985).  The State presented no evidence that there has
not been a final settlement for these providers, or that the
overpayments at issue here are related only to application of the
specific limits addressed in the court's opinion. 3/  (We note that the
term final settlement means the State's "final" determination based on
an audit of the provider's costs and does not ordinarily refer to any
appeal or review process that may be available to a provider from that
"final" determination.)

California did not allege the existence of any specific federal
provision which precludes HCFA from collecting the federal share of
overpayments to providers prior to recovery by states.  HCFA's ability
to recoup such overpayments is well-established under the decisions
discussed above.  We note that the amounts in question here were found
to be in excess of what the providers were entitled to under the State
plan.  Since such amounts are not "medical assistance," this constituted
a determination that FFP in these amounts was an overpayment subject to
the provisions of section 1903(d)(2).  See, e.g., DAB No. 619.  We
therefore conclude that California did not relate the collection policy
reflected in State law as interpreted by the Fountain Valley court to
any federal policy or federal interest.  Moreover, but for the Fountain
Valley order, State law would provide for recovery by the State of
overpayment amounts based on the limits at issue at tentative or final
settlement, irrespective of a provider's appeal.  Cal. Welf. & Inst.
Code sections 14105.15 and 14172.5, HCFA Br., Exs. D and E.
Consequently, there is no basis here to determine that the overpayment
amounts at issue are unreliable as a basis for adjustment of the federal
share.

In conclusion, California did not challenge HCFA's assertion that the
methodology applied by the State auditors in identifying the
overpayments was consistent with California's Medicaid State plan and
that the amounts assessed were adequately documented, and failed to
relate the Fountain Valley court order to any negative assessment of the
reliability of the audits, or to any federal policy or interest.  We
therefore conclude that HCFA may reasonably adjust for the federal share
of overpayments to hospitals even though California is barred from
recovering overpayments prior to the completion of the administrative
review process.  We do not find this case substantively distinguishable
from DAB No. 977, and we decline to reverse that holding.

III.    Overpayments reduced by settlement, appeal decision, or
recalculation.

California asserted that some overpayments to providers have been
reduced by settlement, recalculation, and administrative appeal since
the disallowance was calculated.  The State enclosed with its appeal
file documentation of overpayment reductions, and contended that a
proposed overpayment amount that has been reduced by stipulated
settlement or during the audit appeal process is not an overpayment
under federal law.  HCFA did not dispute that overpayments may have been
reduced, but requested that, pursuant to DAB No. 1015, the Board affirm
the disallowance subject to HCFA's adjustment for justifiable,
documented reductions based on settlement, recalculation, or
administrative appeal decisions.  In reply, the State asked that,
pursuant to DAB No. 1015, this part of the disallowance be remanded for
HCFA to review the State's documentation and recalculate the
disallowance if appropriate.  California requested an opportunity to
show why the original audit findings in cases involving reductions were
unreliable prior to the Board's rendering a decision upholding the
disallowance.  The State asserted that many of its employees who worked
on cases where overpayments were reduced are no longer available, and
requested that it be given a minimum of 60 days to provide necessary
documentation to HCFA.

In DAB No. 1015, the Board remanded that portion of the disallowance
which California maintained had been affected by settlement agreements.
The Board upheld the remainder subject to reduction to the extent that
the State could show that overpayments had been collected and refunded
to HCFA, or that its overpayment determinations had been reversed on
appeal.  For the portion of the disallowance upheld, the State was given
the option of returning to the Board if it disagreed with HCFA's
recalculation of the disallowance amount.

The remand in DAB No. 1015 involved a discrete portion of the
disallowance being challenged.  In this appeal, by contrast, the State
failed to specify a dollar amount by which overpayment amounts have
allegedly been reduced.  Although the State's appeal file includes a
list of cases "in which the final overpayment determination has been
made and the outstanding overpayment is less than the amount relied upon
by HCFA in issuing its disallowance," (State Ex. C) it appears that this
list includes both settlements and administrative decisions.  It is also
not clear from the documentation supplied by the State that the
reductions of overpayments through settlements provide a basis for a
corresponding reduction in this disallowance.

Given these uncertainties, we see no reason why the disallowance should
not be sustained subject to HCFA's review of California's documentation
of settled, reversed, or collected amounts.  In making this
determination, we note that the mere fact that a dispute between a state
and a provider has settled is not sufficient to call into question the
state's initial audit determination, based on properly performed audits,
as to the amount of reimbursement the provider has received in excess of
what is permitted under state plan and federal requirements, and that a
state may have reasons for settling a dispute other than a reevaluation
of the merits of the audit findings.  See, e.g., DAB No. 1015.  A state
may not simply rely on a settlement agreement which was entered into
without a determination that its audit findings were incorrect.
California Department of Health Services, DAB No. 1240 (1991).

Accordingly, California should submit documentation supporting the
claimed reductions within 60 days of receipt of this decision, or such
longer time as HCFA may permit.  For each reduction, the State should
identify the provider, amount of the initial overpayment, amount of the
reduction, and the basis for the reduction.  To the extent that
settlements, recalculations, and administrative appeal decisions since
the audit was conducted were not reflected in the disallowance, HCFA
should review the State's documentation and reduce the disallowance as
appropriate.  If the parties are unable to agree on the propriety or
amount of any reduction, the State may return to the Board for review
within 30 days of receipt of the Agency's determination after review of
the State's documentation.  See, e.g., DAB No. 977.

IV.     Overpayments which have already been collected and refunded to
HCFA.

California stated that some of the overpayments to providers that were
disallowed have been collected from providers and the federal share
refunded to HCFA since the disallowance was calculated.  The State also
asserted that it cannot be ordered to refund amounts already collected
and refunded to HCFA, which it argued amounts to being charged twice.
HCFA proposed to take into account collections received after December
31, 1989 in the final resolution of the audit, and stated that
California will not be charged twice.  Accordingly, we uphold this
portion of the disallowance subject to adjustment by HCFA upon its
review of collections received since the disallowance was calculated.
As above, if the parties are unable to agree on the proper amount of
such a reduction, the State may return to the Board for review of this
limited issue.   See, e.g., DAB No. 977.

V.      Overpayments currently being collected under an installment
agreement.

California noted that overpayments to one provider are being recovered
pursuant to an installment agreement with the provider, and argued that
states should not have to refund overpayments to HCFA until they are
collected from the provider.  As in DAB No. 977, California's arguments
did not call into question HCFA's authority to recoup the federal share
of overpayments prior to recovery by states, pursuant to the
interpretation of the relevant statutory provisions discussed above.
Accordingly, we conclude that HCFA may require California to adjust
claims for federal funds to account for excess or improper payments,
regardless of whether California is recovering funds under an
installment agreement.

Conclusion

We uphold the disallowance subject to adjustment as appropriate based on
settlement, reversal, recalculation, and to reflect collections by the
State that have been refunded to HCFA.  We find that HCFA is not
precluded from recouping the federal share of excess or improper
Medicaid payments because California has not collected the overpayments
from providers, where the State's audit processes and overpayment
determinations have not been shown to be unreliable.  This principle is
not altered by provider bankruptcy or insolvency.  Similarly, we find
that the federal court order preventing California from collecting
overpayments from providers before completion of the administrative
appeal process does not impugn the reliability of the State's
overpayment determinations, and provides no basis for reversing the
disallowance.

To the extent that settlements, recalculations, administrative appeal
decisions, and collections since the audit was conducted were not
reflected in the disallowance amount, California should submit
documentation supporting the claimed reductions within 60 days of
receipt of this decision, or such longer time as HCFA may permit.  For
each reduction, the State should identify the provider, amount of the
initial overpayment, amount of the reduction, and the basis for the
reduction.  To the extent that settlements, recalculations,
administrative appeal decisions, and collections since the audit was
conducted were not reflected in the disallowance, HCFA should review the
State's documentation and reduce the disallowance as appropriate.  If
the parties are unable to agree on the propriety or amount of any
reduction, the State may return to the .Board for review within 30 days
of receipt of the Agency's determination after review of the State's
documentation.  See, e.g., DAB No. 977.

 

 

       Judith A. Ballard

 

 

       Norval D. (John) Settle

 

 

       Cecilia Sparks Ford Presiding Board Member


1.  Congress created an exception to the adjustment requirements for
overpayments to bankrupt or out of business providers identified for
quarters beginning on or after October 1, 1985.  Consolidated Omnibus
Budget Reconciliation Act of 1985 (COBRA), Pub. L. No. 99-272, section
9512(a)(3), adding section 1903(d)(2)(D) of the Act.  See 42 C.F.R.
433.318 (1989).  The alleged overpayments at issue here were for
quarters prior to October 1, 1985, so this exception does not apply.

2.  The court expanded the notion of final settlement as including the
completion of all administrative adjustments and appeals.

3.  The court does not explain the apparent determination in its
judgment that final settlement includes the completion of the
administrative appeals process.  California presented no rationale for
why that portion of the court order should affect California's
obligation to refund the federal share of the overpayment amounts at
issue here, especially where it appears that the State's own law clearly
provided that the State could begin collections of overpayments to
institutional providers 60 days after issuance of "the first statement
of accountability or demand for repayment after issuance of the audit"
report establishing the overpayment.  Cal. Welf. & Inst. Code section
14172.5, HCFA Br., Ex.