Alaska Department of Health and Social Services, DAB No. 1452 (1993)

  Department of Health and Human Services

        DEPARTMENTAL APPEALS BOARD

     Appellate Division

SUBJECT:        Alaska Department               DATE:  December 17, 1993
    of Health and Social Services Docket Nos.
   A-93-150 and A-93-151 Decision No. 1452

   DECISION

The State of Alaska Department of Health and Social Services (Alaska)
appealed a determination by the Health Care Financing Administration
(HCFA) disallowing $1,255,147 in federal financial participation (FFP)
claimed under Title XIX (Medicaid) of the Social Security Act (Act). 1/
HCFA disallowed the federal share of payments to hospitals and long term
care (LTC) facilities found by Alaska audits to exceed the rates allowed
by Alaska's Medicaid State Plan.  The payments were for facility fiscal
years ending June 30, 1985 to June 30, 1989. 2/

After the appeals were filed, HCFA reduced the disallowance in Docket
No. A-93-150 by $31,609 to $979,253, to account for provider payments
for which Alaska had not claimed federal financial participation.  HCFA
Attachment (Att.) 9.  Thus, the amount at issue is now $1,223,538.

Alaska appealed the disallowance on the ground that these excess
payments were not "properly treated as `overpayments'" under State court
and administrative decisions holding that Alaska had no statutory
authority to recoup these amounts from the providers.  Alaska argued
that there had been no overpayments to the providers since its
rate-setting system did not provide for audit-based retrospective
adjustments so that the providers had not been paid amounts in excess of
what they were entitled to receive under the approved State plan.
Alternatively, Alaska claimed that section 1903(d)(2)(D) of the Act
relieves it of any obligation to return the federal share of these
excess payments because they have been rendered uncollectable by the
State court's decision.  Additionally, Alaska claimed that it was
entitled to a greater reduction of the disallowance than HCFA allowed
based on its failure to claim the full amount of FFP in some payments
made to LTC providers ("voluntary disallowance").

As discussed in detail below, we uphold the disallowance as reduced by
HCFA.  While we recognize that Alaska is presented with a difficult
circumstance since State court and administrative decisions have
interpreted State law against it, the federal requirements are clear and
do not provide HCFA with legal authority to pay FFP in the excess
payments.

There is no dispute here that Alaska determined through its facility
audit process that proper calculation of the payment rates would have
resulted in lower rates on a prospective basis.  Federal law limits the
availability of FFP to payments made in accordance with the methods and
standards established by the Medicaid State plan.  Thus, FFP is not
available in the payments initially made to these facilities which were
found to exceed the payments that would have been made based on
corrected rates.  It is Alaska's option under the Medicaid program how
it chooses to develop and implement procedures for recouping
overpayments from providers.  Alaska's apparent inability to recoup
excess payments under its procedures does not preclude a finding by HCFA
that unallowable expenditures were claimed for FFP.  The amounts at
issue here would not have been paid to providers had Alaska's initial
rate calculations been based upon accurate provider data.  As Alaska did
not demonstrate that it revised its audit findings, so as to determine
that the amounts originally identified as overpayments were actually
proper payments made in accordance with the methods and standards in its
State plan for determining provider payment rates, HCFA is entitled to
rely on those audit findings.  Furthermore, Alaska's apparent inability
to collect overpayments from providers under State law does not entitle
it to the exception in section 1903(d)(2)(D) of the Act for overpayments
to bankrupt or out-of-business providers.  Accordingly, we uphold the
disallowance in the amount calculated by HCFA subject to further
reduction should Alaska substantiate a larger reduction than HCFA has
allowed.  If HCFA rejects Alaska's claim for a further reduction, Alaska
may request Board review with respect to that limited issue within
thirty days from receipt of HCFA's written determination.

Relevant Authority

Title XIX of the Act provides for federal grants to aid in financing
state medical assistance programs.  Section 1903(a)(1) of the Act
provides that FFP is available in the total amount expended each quarter
as medical assistance under the approved state plan.  The plan must
fulfill certain statutory and regulatory requirements and be approved by
the Secretary of Health and Human Services (HHS).  Section
1902(a)(13)(A) of the Act requires that a state plan must provide for
payment for hospital and LTC services "through the use of rates
(determined in accordance with methods and standards developed by the
State . . .) which the State finds, and makes assurances satisfactory to
the Secretary, are reasonable and adequate to meet the costs that must
be incurred by efficiently and economically operated facilities[.]"
That section also requires assurances from states that each facility
will file uniform cost reports and that the state will perform periodic
audits of these reports.  The Secretary has also required by regulation
that states must "provide for periodic audits of the financial and
statistical records of participating providers."  42 C.F.R. .
447.253(e).  Further, states must pay providers "using rates determined
in accordance with methods and standards specified in an approved State
plan."  42 C.F.R. . 447.253(g).

The current provisions of section 1902(a)(13)(A) (referred to as the
Boren Amendment) were enacted in 1980 and 1981 to replace the
requirement that reimbursement for hospital and LTC facility services be
on a "reasonable cost basis" or "reasonable cost-related basis,"
respectively.  Omnibus Budget Reconciliation Act of 1980, Pub. L. No.
96-499, . 962 (1980) (the Boren Amendment, applicable to LTC
facilities), and Omnibus Budget Reconciliation Act of 1981, Pub. L. No.
97-35, . 2173 (1981) (applying the Boren Amendment's language to
inpatient hospitals).  This change was intended to provide greater
flexibility in rate setting to the states.  The assurances required from
the states were to ensure proper payments to facilities even though
there would be no detailed federal oversight of the rate-setting and
audit process.

Congress had recognized the difficulty in a state's financing the full
costs of a Medicaid program, even if subsequently reimbursed by the
federal government, and provided for 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.  A state must submit to HHS
a quarterly statement of expenditures, based on which HHS can adjust
future payments to reflect any overpayment or underpayment which was
made to the state for that quarter.  See generally California Dept. of
Health Services, DAB No. 1015 (1989); Michigan Dept. of Social Services,
DAB No. 971 (1988) (summarizing Board's overpayment analysis).

Specifically, section 1903(d)(2)(A) 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 under this section to such
State for any prior quarter and with respect to which adjustment has not
already been made under this subsection."

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 Dept.
of Health Services, DAB No. 1254 (1991);  DAB No. 971 (and decisions
cited therein).

The Board's prior holdings on these overpayment 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).

Congress created an exception to the adjustment requirements for
overpayments to bankrupt or insolvent providers identified for quarters
beginning on or after October 1, 1985.  Consolidated Omnibus Budget
Reconciliation Act of 1985, Pub. L. No. 99-272, section 9512(a)(3)
212-13 (1986), adding section 1903(d)(2)(D) of the Act.  Section
1903(d)(2)(D) provides that the federal share need not be refunded where
the state is unable to recover a debt from a provider "on account of
such debt having been discharged in bankruptcy or otherwise being
uncollectable."  See 42 C.F.R. . 433.318 (1992).

Case Background

Alaska instituted a prospective payment system for hospitals and LTC
facilities in 1983.  The State plan provisions for the rate years in
question incorporated the Alaska statutes and regulations governing rate
setting.  Alaska Exs. 29-39.  Generally, these plans provided for
prospective rates to be set by the Medicaid Rate Commission (MRC) in
advance of each fiscal year based on financial data submitted by the
facilities.  The various plan provisions specify the types of costs
allowable for rate-setting purposes.  There were different State plans
for each rate year; the parties have not indicated that variations among
the plans as to allowable costs or methods and standards applied in rate
setting are relevant to this dispute so we do not describe these
provisions in detail.

MRC began performing audits of prospective rates in 1986, and found that
Alaska had overpaid its hospital and LTC facility providers in 36
facility fiscal years.  Alaska Br. at 7.  Alaska described the results
as follows --

 the audits showed that . . . the costs reported on providers'
 budget or cost report submittals and rate requests were
 overstated because costs were misallocated between cost or
 revenue centers, or because costs were included that we
 determined were not allowable or because of similar errors.

Affidavit of Michael Sanders, Audit Manager of Alaska's Audit Unit,
Alaska Ex. 3.  State auditors (Alaska used both in-house and independent
contract auditors) calculated the difference between the rates developed
using the reported data from the facilities (i.e., the amounts initially
paid to these facilities) and the rates as recalculated based on the
audit findings, and identified this difference as overpayments to the
facilities.  Alaska Exs. 8 and 12.  Beginning in 1987, Alaska sought to
recover these funds from the providers.  Alaska Br. at 8.

Alaska's efforts to recover the overpayments were unsuccessful, because,
upon appeals by providers, State administrative and judicial proceedings
found no recoupment authority in Alaska's statutes or regulations
governing audit and rate setting.  City of Cordova vs. Medicaid Rate
Commission, 789 P.2d 346, 350-51 (Alaska 1990); In the Matter of Our
Lady of Compassion Care Center, Case No. 90-MRC-2 (Alaska Ex. 17) 3/.

In Cordova, the Alaska Supreme Court held that State law did not
authorize "retroactive recoupment" or "consider[ing] audit results in .
. . determination of prospective payment rates for the current fiscal
year[.]"  The court described Alaska's prospective rate-setting system
as "provid[ing] an incentive for facilities to minimize their costs
because a facility providing a service at a cost less than the
pre-determined rate is permitted to keep the difference (`earns a
profit')."  Cordova at 348-50.  Discussing the State statute providing
for audits of facility financial records as a condition of payment, the
court stated that "[i]t is clear that the text of the statute does not
state or imply that the amount of the payment will be affected by any
audit."  In Cordova, Alaska sought to recover overpayments for the July
1, 1984 to June 30, 1985 rate year.

Our Lady of Compassion pertained to Alaska's action to recover
audit-based overpayments for the 1986 and 1987 rate years (July 1, 1985
to June 30, 1987).  That decision relied on the conclusions reached by
the court in Cordova and held that, with the exception of overpayments
based on false information, the MRC lacked the legal authority to recoup
audit-based overpayments even under later State regulations not at issue
in Cordova.  The later regulations were described in the administrative
decision as providing only for notice by the MRC to Alaska of "amounts
due from or to the facility" and were found not to empower recovery of
such amounts.  Our Lady of Compassion at 23.

In light of the Cordova decision, Alaska initiated an attempt to recover
excess payments under a common law recoupment theory.  Alaska Br. at 10
and 11, Alaska Ex. 14.; Alaska Ex. 4 (showing status of pending
administrative action).  Alaska indicated that it "remains unclear
whether there is a basis for common law recoupment[.]"  Alaska Br. at
11.  Alaska also indicated that it had not taken any further action to
finalize some audits for the fiscal years ending June 30, 1987 through
December 31, 1988. 4/  Alaska Br. at 13.

HCFA accepted Alaska's audit reports identifying overpayments to
providers, and made corresponding disallowances of the federal share.
Alaska Exs. 6 and 10.  On appeal, Alaska argued principally that since
Cordova held that it had no statutory authority to recoup, HCFA has no
basis for requiring a refund of the federal share of disputed provider
payments.  Below, we first address this argument, and then proceed to
consider additional arguments made by Alaska.

Analysis

I.      Amounts paid to providers which exceed the rates properly paid
in accordance with the methods and standards for rate determination in
the approved state plan are overpayments for which FFP is not available
pursuant to section 1903(a)(1) of the Act.

Alaska argued that the payments at issue are not properly characterized
as overpayments because State law did not provide for retrospective
adjustment of prospective facility rates based on audit findings.
Alaska maintained that, because it had no authority to recoup
overpayments by adjusting prospective rates based on later audits, under
state law the amounts initially received by the providers were not in
excess of what the providers were entitled to receive under the approved
state plan. 5/

While Alaska's inability to recoup these amounts from its providers is
unfortunate, that inability does not render these payments medical
assistance expenditures for which FFP is available under section
1903(a)(1) of the Act.  These amounts are overpayments because they
exceed the amounts that would have been paid had Alaska applied its
rate-setting methods and standards to accurate data in the first
instance.  Accordingly, these amounts, which are in excess of properly
calculated rates, are in excess of the amounts which are "reasonable and
adequate to meet the costs which must be incurred by efficiently and
economically operated facilities."  Section 1902(a)(13)(A).

Federal regulations require that the state plan must set out the methods
and standards to be used in determining rates and that payments must be
in accordance with those methods and standards.  42 C.F.R. .. 447.252(b)
and 447.253(g).  Under section 1903(a) of the Act, in order to qualify
for FFP, Alaska's claim must be in accordance with its approved State
Medicaid plan.  Here, State auditors found that the payments were higher
than those that should have been paid under the methods and standards in
Alaska's rate-setting system.  Therefore, since Alaska does not dispute
the accuracy of the auditors' calculations (Alaska Reply Br. at 10, 17),
we conclude that these amounts must be repaid to HCFA in accordance with
well established principles governing the repayment of firmly
established overpayments.

Alaska argued that the terms of its plans in effect before September 1,
1986 did not require audit adjustments.  (These plans either merely
stated that the MRC had statutory authority for the "audit function"
(Alaska Exs. 38 and 39) or just provided for "periodic on-site audits"
(Alaska Exs. 36 and 37).)  Consequently, Alaska argued, there could be
no overpayments based on audit findings, as a matter of law.  Alaska Br.
at 16.  Alaska further argued that the explicit requirements for audit
adjustments inserted in the State plan and State regulations (7 AAC
43.693) in 1986 were invalidated by the holding in Cordova that Alaska
lacked sufficient statutory authority for the requirements.  Therefore,
Alaska claimed that it cannot be compelled to refund the federal share
of excess payments identified by its auditors.

Regardless of whether State law precluded Alaska from recouping excess
payments from its providers, Alaska's duty to refund the federal share
of these amounts to HCFA is not affected.  The relationship between
Alaska and its providers is a matter of State law and does not affect
the distinct relationship that Alaska has with HCFA in administering the
federal Medicaid program, which is determined by federal law.

Because FFP is only available in rates set in accordance with the State
plan, Alaska is required to adjust its claims to reflect these audit
findings.  If payments have, as in Alaska's case, been based on unsound
data which was shown by audits to include unallowable costs and costs
attributed to incorrect cost centers, then the providers have been
overpaid within the meaning of section 1903(d)(2).  These amounts were
not payments for medical assistance under the plan, so Alaska must
refund the federal share.  Sections 1903(a)(1) and 1905(a) of the Act
(payments for medical assistance); Section 1903(d)(2) (refund of FFP).
Even if the State plan did not spell out the effect of an audit, or
establish a mechanism for adjustments via subsequent rate changes or
cash settlements as Alaska argued, that does not legitimize the
overpayments.

Also, there is no basis for concluding that the type of audit-based
adjustment at issue here is somehow inconsistent with prospective rate
setting in general.  Prospective rate-setting systems have been used by
the states for their Medicaid programs for many years.  See Illinois
Department of Public Aid, DAB No. 467 (1983).  A distinguishing
characteristic of prospective rate systems is that there needs to be no
retrospective adjustment to reflect the actual costs of providing
services during the rate period.  DAB No. 467 at 5.  Here, Alaska
presented no authority to support the proposition that there is also an
inherent prohibition on audit-based adjustments to correct errors that
occur in setting prospective rates.  In fact, as the Board has
previously observed, "[A]djustments for erroneous cost or statistical
reporting are consistent with a prospective-only system."  South Dakota
Dept. of Social Services, DAB No. 934 at 18 (1988).  The fact that
Alaska was found not to have reserved explicitly for itself the
authority to adjust its payments to the providers, does not render the
excess amounts payments made in accordance with the methods and
standards to be used in determining rates. 6/

In this regard, Alaska's reliance on New York State Dept. of Social
Services, DAB No. 311 (1982) is misplaced.  Alaska cited that decision's
reference to "overpayments" as "amounts paid to a provider in excess of
what the provider was ultimately entitled to under the State plan."
Alaska relied on this statement to support its argument that in light of
its inability to collect these amounts from its providers there was no
overpayment under its State plan because it was legally obliged to make
the higher payments to the facilities. 7/  Alaska uses the statement
from DAB No. 311 out of context.  In fact, the Board has specifically
said that whether a state used prospective or retrospective rate-setting
methods, amounts in excess of those payable based on the rate ultimately
determined to be correct were not medical assistance payments for which
FFP was available.  See New Jersey Dept. of Human Services, DAB No. 683,
at 7.  When the Board refers to payments of what the provider is
ultimately entitled, this refers only to payments at the correct rate.
The circumstances here where State court and administrative decisions
apparently obligate Alaska to pay excess amounts to certain providers by
precluding recoupment cannot somehow be applied to turn those excess
amounts into proper payments as a basis for claiming FFP. Moreover, in
any event, we are not persuaded that the Cordova and Our Lady of
Compassion decisions precluded Alaska from recouping for the entire
period or that the rationale for those decisions was sound.  Since
overpayments for fiscal years after 1986 were not at issue in Cordova,
it is not clear that that decision must be interpreted to preclude
Alaska from recovering overpayments from providers for those later
periods.  Moreover, although the proposed administrative decision in Our
Lady of Compassion Care applied the Cordova court's reasoning to
invalidate the application of Alaska's 1986 audit adjustment
requirements, the binding effect of that decision is questionable as
well.

Furthermore, in concluding that audit-based adjustments were not
implicit in the Alaska statutes providing for the audit of provider
records, the Cordova decision relied in part on the incentive provided
by prospective rates (because a provider could retain any amount paid in
excess of its costs).  However, we do not see this incentive component
as a persuasive rationale for a provider's absolute right to rely on
payments of the rate initially set when it was based on erroneous data.
Arguably, what occurred here was not an adjustment to a rate but merely
a corrected calculation to reflect the payment rate to which the
facility was actually entitled under Alaska's rate-setting system.
Alaska cited to no express provision in State law precluding the
recomputation of provider rates based on corrected data.  Also, HCFA
found that in July of 1985, Alaska had actually set "prospective" rates
for only 11 of 27 providers for the rate year beginning July 1, 1984.
In addition, at the time of the HCFA review, only two rates had been
finalized for the next rate year.  HCFA Ex. 2.  Alaska's failure to
actually implement its rates prospectively undercuts relying on the
prospective nature of its rate-setting system as justification for
claiming FFP in excess payments. 8/

We are also not persuaded by Alaska's argument that providers are to
retain rates higher than those derived from applying State methods and
standards to accurate provider data, as an incentive contemplated under
the prospective payment system.  Under the incentive theory, profits are
not to be awarded arbitrarily, but are intended to encourage and reward
particular provider behavior: control of costs, or efficiency of
operation.  See, e.g., 46 Fed. Reg. 47968 (September 30, 1981); 48 Fed.
Reg. 56054 (December 19, 1983).  Permitting providers to retain
excessive payments based on rates calculated using inaccurate financial
reports (for example where costs had been misidentified as allowable)
does not serve such a purpose.

We also find the Cordova court's logic flawed.  Under the State plan the
rates were not treated as immutable once set since the State plans did
provide for adjustments in the initial payment in some circumstances.
Alaska Exs. 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, and 39 (State plan
amendments for rate years at issue).  Federal regulations required, and
the plans provided for, an appeal process whereby dissatisfied providers
could protest their rate determinations and obtain adjustments.  42
C.F.R. . 447.253(c).  Also, providers could request a budget amendment
during a fiscal year (to adjust for significant changes) whereby the
rate would be adjusted for the remainder of the rate year.  See, e.g.,
Alaska Exs. 38 and 39 at 3-4.  All the State plans provided for some
type of mid-rate-year adjustment to reflect changed circumstances.  The
1985 plan referred to adjustments based on a year-end conformance
report:  if actual patient days exceeded "established variances" from
approved budget, "future prospective payment rates will be adjusted to
reflect the actual total financial requirements and volumes of the prior
period."  State Plan Amendments 85-6 and 85-5, Alaska Exs. 36 and 37, at
2.  All the State plans effective from July 1, 1985 forward provided for
some type of year-end conformance adjustment whereby a later year's rate
would be adjusted to reflect the circumstances during the prior year.
For example, the State plan for hospitals for the rate year beginning
July 1, 1987 called for the reduction of a subsequent year's rate based
on a comparison of approved and actual charges per adjusted admission
for the 1987-1988 rate year.  Alaska Ex. 33 at 8-9.

Alaska further contended that HCFA must defer to its reasonable
interpretation of the cash settlement provision of its post 1986 State
plans--i.e., as requiring audit adjustments to be treated as
overpayments only to the extent authorized by statute.  Alaska asserted
that in light of the Cordova decision holding that audit-based
recoupment was not required, the State plan provision could not be
interpreted to require that these amounts be treated as overpayments.
In support, Alaska cited DAB No. 934.  Alaska Br. at 23, n. 17.    The
circumstances in DAB No. 934 are distinguishable and that decision does
not support Alaska's arguments here.  In DAB No. 934, the Board reversed
HCFA's determination that South Dakota had not calculated certain LTC
facility reimbursement rates in accordance with its approved state plan.
The Board discussed the factors to be considered in cases involving the
interpretation of state plan provisions.  The Board noted that under the
Boren Amendment, a state's rate-setting methods were accepted so long as
it provided the requisite assurances.  Moreover, HCFA had not found that
South Dakota's rate setting was inconsistent with any federal
requirement or policy.  The Board found both that South Dakota had a
reasonable interpretation and consistent state practice concerning the
patient days number to be used in its rate calculation and that South
Dakota's prospective reimbursement methodology did not require
comparison of the "anticipated costs" figure used in the rate
calculation and the actual costs incurred during the rate year.  Here,
however, there is no dispute between HCFA and Alaska as to the
interpretation of the methods and standards specified in the State plan
for determining facility rates, so our holding in DAB No. 934 is
inapplicable.  The absence of statutory recoupment authority does not
present a state plan interpretation question analogous to that presented
in DAB No. 934.  For this reason, we also do not consider Michigan Dept.
of Social Services, DAB No. 971 (1988) to advance Alaska's position
here.  DAB No. 971 involved the interpretation of the rate-setting
system's treatment of depreciation.   Alaska relied on Washington Dept.
of Social and Health Services, DAB No. 693 (1985), and argued that the
Cordova decision had the effect of retroactively modifying its post-1986
State plans to invalidate the provision for cash settlements of
overpayments with facilities.  However, the circumstances here are not
analogous to those in DAB No. 693.  In that decision, a state court
judgment required recalculation of facility payment rates based on a
determination that the initial rate had not been adequate to reimburse
an efficiently and economically operated facility.  In DAB No. 693 both
HCFA and Washington had agreed that the state plan provisions for rate
setting were retroactively modified.

Moreover, Alaska's position that the amounts in question are not
overpayments is also undermined by the fact that it does not dispute
that overpayments were made to one facility where Alaska had made errors
in the 1987 rate calculation.  Alaska Br. at 2, note 2.  We see no
distinction for federal purposes between this circumstance and the
circumstances here where there were errors in the reported data upon
which the rate calculation was based.  Alaska determined through its
audits that proper calculations would have resulted in lower rates for
some facility fiscal years.  Regardless of the origin of the error, the
incorrect rate calculation resulted in a rate that did not comply with
the methods and standards set forth in the State plan and approved by
HCFA.

II.     HCFA's decision not to impose a particular adjustment mechanism
by federal regulation does not obviate Alaska's obligation to repay the
federal share of identified overpayments.

Alaska maintained that because HCFA declined to promulgate regulations
specifying methods by which states must apply the results of required
audits to their various payment systems, federal law does not require
any audit-based adjustments.  Alaska Br. at 25-29.  Alaska cited HCFA's
responses to comments on its audit rule, 42 C.F.R. . 447.253(e), which
show that more detailed regulations were considered but rejected, to
support its contention that HCFA was attempting to enforce a policy
which it had specifically chosen not to adopt.  Alaska Br. at 28; Alaska
Exs. 23 and 24.  Alaska's argument that HCFA's decision not to specify
an audit adjustment mechanism by regulation meant that no adjustment of
the federal share of excess payments is required must fail, however.

In its response to comments showing concern about the lack of
specificity in its interim final rule on audits, HCFA stated that the
lack of detail was "consistent with the statutory requirement for audit
and the general statutory emphasis on State, rather than Federal,
activity in this area."  48 Fed. Reg. 56046, 56053 (December 19, 1983)
(preamble to final rule).  More detailed requirements for audit
activities, related to the former federal statutory requirements for
reimbursement systems, were deleted with implementation of the Boren
Amendment because HCFA believed "the specific requirements regarding
desk reviews and audits are not needed to implement the amendment, and
that retaining them could limit States' discretion to design audit
programs to meet their needs."  46 Fed. Reg. 47964, 47967 (September 30,
1981) (preamble to interim final rule).  HCFA clearly did not by this
choice intend to permit states to ignore audit results, as the next
sentence of the preamble just cited read:  "However, we expect that
States will, under the revised regulations[,] maintain the minimum level
of audit activity needed to ensure that payments are being made in
accordance with their State plans and to detect and correct provider
fraud and abuse."  Id.

Moreover, when responding to a comment concerning rate adjustments
following provider appeals, HCFA indicated that it did not find a
prescriptive federal rule mandating either retroactive or prospective
adjustments to "be appropriate or in keeping with the intent of State
flexibility [since] . . . fair and reasonable rate adjustments are
implicit in an appeals process[.]"  48 Fed. Reg. 56052 (December 19,
1983).  We consider HCFA to have applied the same reasoning to the audit
requirement as it did to the requirement for a provider appeal process
which it discussed in the immediately preceding section of the preamble,
that is, that adjustments to assure payments are made in accordance with
the state plan are implicit in each general requirement.  Thus, the
history of the regulation shows that HCFA intended to leave to the
states the selection of recovery and adjustment methods appropriate to
the particular pattern of their payment methodologies.  The discretion
provided to states in setting recovery and adjustment procedures,
however, in no way undercuts the basic requirement that federal funding
is limited to payments made in accordance with the state plan.
Therefore, Alaska's apparent inability to recoup overpayments from
providers under procedures it devised and relied upon cannot alter
Alaska's obligation to repay the federal share of these excess payments.

III.    In seeking refund of the federal share, HCFA may rely on
Alaska's audit findings since Alaska did not demonstrate that its
findings have been revised or are otherwise unreliable.

Alaska contended that for the amounts at issue in Docket No. A-93-151,
HCFA relied improperly on audit reports furnished by State contractors,
because Alaska had not "accepted" the reports.  Alaska Br. at 13.
However, Alaska explained this lack of acceptance as primarily a
response to the Cordova decision, and did not indicate that this
reflected on the reliability of the reports themselves.  Alaska advanced
no reasons for distinguishing the types of audit findings made in those
cases from the earlier audits where Alaska sought recoupment.  Id.

Moreover, despite having attempted to collect the excess payments
identified by other audit reports, Alaska claimed to have subsequently
"revised" the audit findings to determine that the auditors' findings
were incorrect as a matter of law, based on the State Supreme Court's
holding in Cordova that there was no legal authority for recoupment of
overpayments under the prospective payment system.  Alaska Br. at 23-25.
The record does not support this claim.

Elsewhere, Alaska made clear that but for the interpretations of the
Cordova court and the subsequent administrative decision, it would
continue to rely on the audit findings.  Alaska stated:

 . . . it is not DHSS [the State Medicaid agency] that originally
 "disavowed" the auditors' conclusions; rather, the State Supreme
 Court and an administrative law judge rendered decisions that
 undermined the auditors' "overpayment" findings.  Left on its
 own course, DHSS would not have disavowed the audit findings to
 avoid financial penalty by HCFA; instead -- as its initial
 actions demonstrate -- it would have vigorously pursued recovery
 of what State auditors concluded were "overpayments" made during
 the periods in which the Audit Function/cash settlement were in
 effect.

Alaska Reply Br. at 10.

The Board has frequently reiterated the circumstances under which HCFA
is permitted to rely on state audit findings:  HCFA must provide
sufficient detail to identify the records from which disallowed amounts
are derived, and must allow a state the opportunity to show that it has
made adjustments to audit findings, that the records on which the audit
was based are for some reason unreliable, that the overpayments have
been recouped and FFP already refunded, or that the state never claimed
FFP for the overpaid amounts in the first place.  California Dept. of
Health Services, DAB No. 1254, 5 at (1991) (and decisions cited
therein).  The state has the burden of showing that it has revised its
findings, specifically that it has changed its determination and found
that funds previously identified as overpayments were in fact expended
for medical assistance.  California Dept. of Health Services, DAB No.
1391, at 8 (1993).  Alaska has not met that burden here.

In support of its contention, Alaska cited three Board decisions.
Alaska cited these cases for the general proposition that HCFA is not
entitled to disallow overpayment amounts based on state audit findings
if a state establishes that it has reduced the overpayments based on a
reevaluation of the facts and applicable law or on a court or
administrative decision requiring payment of the costs.

In one case, the Board held that a disallowance must be reduced to
reflect a determination by a state administrative law judge that the
underlying audits had applied an incorrect methodology.  Specifically,
the state auditors had calculated the overpayments by a statistical
projection method, but used a "mean precision level" rather than the
"lower precision level" routinely used by state administrative law
judges.  California was permitted to rely on the amounts derived by
administrative proceedings rather than its original audit findings.
California Dept. of Health Services, DAB No. 1240 (1991).

In another case, when reviewing the disputed amount for one provider,
the Board held that HCFA could not rely on certain state audit findings
where the state had established that they were "amounts from uncompleted
audits," and that subsequent documentation "was sufficient to show that
the original State audit determination on which HCFA relied was
incorrect[.]"  New Jersey Dept. of Human Services, DAB No. 683 at 15
(1985).  In the third decision cited by Alaska, DAB No. 1391, the Board
found that California failed to show that its audit findings were
incorrect, and upheld the protested disallowances.

These decisions are inapposite here.  In each of the first two
decisions, where the Board found that overpayment amounts were reduced,
the state showed that it had erred in identifying as overpayments
amounts that were in fact expended for medical assistance within the
meaning of sections 1903(a)(1) and 1905(a) of the Act.  Here, however,
Alaska relied on a court's determination that its actions to recover
overpayments were unauthorized as a matter of law, and not on a
determination that the expenditures identified as overpayments were
actually payments that Alaska ought to have made in light of the State
plan's methods for calculating rates, despite the audit findings.  In
the third decision, the Board rejected the state's argument that by
compromising overpayment claims against providers the state had revised
its original overpayment findings.

Furthermore, after its attempt to recover the overpayments based on
authority in State law was defeated by Cordova, Alaska initiated an
action for common law recoupment of the same overpayments, as well as
overpayments to additional providers.  Alaska Ex. 14 (Memorandum
Decision on common law recoupment); Alaska Exs. 4 and 1 (case status
report and accompanying affidavit).  This action indicates that, for at
least these providers, Alaska considered that the audits correctly
identified overpayments, and that the auditors correctly recalculated
provider rates lower than had been paid.  While Alaska has indicated
that it has desisted from efforts to recover the funding from some
providers based on the auditors' identification of overpayments, Alaska
has not disputed that in determining that there were overpayments, the
auditors properly applied Alaska's methods and standards to data the
providers should have supplied in the first instance.  Alaska Ex. 40.
Accordingly, we conclude that Alaska has not revised its audit findings;
HCFA may reasonably rely on these findings in adjusting FFP paid to
Alaska.

IV.     HCFA may require Alaska to adjust for the federal share of
overpayments even though Alaska has not recovered from the providers,
because the providers are not bankrupt or insolvent as required by the
statutory exception.

Alaska argued that since the State Supreme Court in Cordova rendered the
disputed provider payments uncollectable, section 1903(d)(2)(D) of the
Act relieves Alaska from the obligation to refund the federal share.
Essentially, Alaska claimed that the structure of its Medicaid payment
system, which according to the State Supreme Court provided for no
audit-based adjustments to prospective payment rates, brought it within
the statutory exception because it rendered collection of any
prospective rate amounts from providers legally impossible.  This
argument has no merit.

Section 1903(d)(2)(D) states that the federal share of overpayments need
not be refunded where a state is unable to recover a debt from a
provider "on account of such debt having been discharged in bankruptcy
or otherwise being uncollectable."  As the conference report explains,
the phrase "otherwise . . . uncollectable" was intended to extend the
notion of bankruptcy to include providers which were insolvent or out of
business but which had not availed themselves of the federal bankruptcy
statute.  H. Rep. No. 453, 99th Cong., 1st Sess. 548 (1985); S. Rep. No.
146, 99th Cong., 1st Sess. 314-15 (1985).

The rationale for the general rule, that a state must refund the federal
share of overpayments regardless of its ability to recover from
providers, is that a state is in a better position than the contributing
federal agency to control a contractual relationship between itself and
a local provider, and thus should bear the associated risks.  The
limited exception in section 1903(d)(2)(D) for bankrupt and
"out-of-business" providers established federal sharing of the risk
where inability to recover occurred because of the acts of providers
beyond a state's control.  The exception is based on the financial
condition of particular providers, not, as Alaska claimed, on the
structure of a state Medicaid payment system--a matter entirely within
Alaska's control.

According to its Supreme Court, Alaska failed in its drafting of the
State Medicaid plan and associated statutes and regulations to create
specific authority for recovery of improperly expended program funds.  A
gap in state administrative law, as interpreted by a state court, is a
consequence of legislative events controlled by the state, not business
decisions of private actors, and therefore does not provide a basis for
relief under the exception of section 1903(d)(2)(D).  Accordingly, this
exception is not applicable here.

V.      Alaska's arguments regarding amounts of FFP not claimed during a
period of voluntary disallowance are not sufficiently documented in the
record to be addressed in this decision.

Alaska asserted that it did not claim federal funding for payments to
LTC facilities during fiscal years 1985 and 1986 in an effort to comply
with the "Medicare upper limit" on Medicaid rates, and therefore the
portion of the disallowance attributable to payments to these LTCs is
without factual support.  HCFA responded that it made an adjustment to
account for this voluntary disallowance.  HCFA Att. 9.  However, Alaska
asserted that HCFA did not provide a basis for reducing the disallowance
by a smaller amount than Alaska had calculated ($31,609 rather than
$182,531), and requested that the Board "direct the parties to confer in
an effort to reach agreement about the dollar portion of the
disallowance amount that was never claimed by the State[.]"  Alaska
Reply Br. at 2.  We therefore uphold HCFA's calculation subject to
reduction should Alaska provide explanation and documentation
substantiating its larger voluntary disallowance figure.  Alaska may
appeal that limited issue should the parties not agree on the proper
amount of the reduction.

.Conclusion

Based on the analysis above, we uphold the disallowance in the amount of
$1,277,372.  This amount is subject to reduction, as explained
immediately above, should Alaska substantiate that there should be a
further reduction of the disallowed amount to fully account for its
"voluntary disallowance."  Should the parties not agree, Alaska may
request Board review with respect to this limited issue within thirty
days of receipt of HCFA's written determination.

       Donald F.
       Garrett

       Norval D. (John)
       Settle

       Cecilia Sparks
       Ford Presiding
       Board Member

1.     The total disallowance was originally $1,308,981:  $1,010,862
associated with Docket No. A-93-150 and $298,119 with A-93-151.  Alaska
did not contest $53,834 of the disallowance, which it attributed to its
rate calculation errors respecting a single provider.  Alaska Brief
(Br.) at 2; see also In the Matter of Our Lady of Compassion Care
Center, Case No. 90-MRC-2, included as Alaska Exhibit (Ex.) 17.  (See
section V below.)

2.     The disallowance underlying Docket No. A-93-150 was described as
involving payments for provider fiscal years ending June 30, 1985
through June 30, 1989, while Docket No. A-93-151 involved payments for
provider fiscal years ending June 30, 1987 through December 31, 1988.
Alaska Exhibits (Exs.) 6 and 10. However, the detailed chart
accompanying the disallowance letter for Docket No. A-93-150 shows a
fiscal year for one provider ending December 31, 1984.  Alaska Reply Br.
at 2; Alaska Exs. 10 and 12.

3.     Our Lady of Compassion Care is a "Proposed Decision" by a hearing
examiner.  According to the process described in a memorandum dated
March 12, 1991 from the hearing examiner to the Commissioner of the
Department of Health and Social Services, the Commissioner is authorized
to adopt a proposed decision, remand for further administrative
findings, or render an independent decision on the record.  HCFA Att. 7.
As HCFA pointed out, and Alaska nowhere contradicted in its reply,
Alaska did not adopt the hearing examiner's proposed decision.  HCFA Br.
at 16.  The Commissioner appears to have responded to the decision by
issuing a settlement offer to the provider "without taking a position on
the issues involved."  HCFA Att. 7.

4.     Consequently, Alaska indicated that it had not accepted or
released to the providers the audits that were the basis for the
disallowance in Docket No. A-93-151.  While Alaska has not proceeded to
implement these audits, it did not assert that the audit findings were
distinguishable from the findings in earlier years' audits which were
implemented.

5.     State plan provisions in effect as of September 1986 provided for
"cash settlement . . .[with] the facility either in the form of a
payment to or collection of funds" based on audit findings relating to
prior fiscal years.  Alaska Exs. at 29, 30, 31, 32, 33, 34, and 35.
Earlier State plans had no such provision.  Because of the State court
and administrative decisions holding that Alaska had no statutory or
regulatory authority to adjust its prospective rates based on audits,
Alaska also asserted that, notwithstanding this State plan provision, it
could not treat the amounts at issue as overpayments.

6.     Alaska relied on Austin v. Owsley County Health Care Center, 1988
Ky. App. LEXIS 80 (Ct. App. Ky. 1988) for the proposition that state
rate-setting systems could properly use unaudited costs with no
provision for audit-based adjustments.  Austin does not clearly support
that proposition.  Also, because this case concerns rates set in
accordance with Alaska's methods and standards, the flexibility accorded
states in general is not relevant.

7.     Under the Boren Amendment, Alaska had the responsibility and
flexibility to establish whatever rate setting system it chose so long
as it could make the assurances required by section 1903(a)(13)(a).
Alaska cannot bootstrap what could be regarded as an oversight on its
part in drafting its audit statute into a valid FFP claim.

8.     Furthermore, since rates at least for these years had not been
timely set, this raises the question why Alaska did not have correct,
audited data for its rate-setting purposes by the time it actually set
the