California Department of Health Services, DAB No. 1480 (1994)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: California Department of Health Services

DATE: June 28, 1994
Docket No. A-93-103
Decision No. 1480

DECISION

The California Department of Health Services (California or DHS)
appealed a determination by the Health Care Financing Administration
(HCFA) disallowing $50,432,756 in federal financial participation (FFP)
claimed under title XIX (Medicaid) of the Social Security Act (Act).
California claimed the FFP for targeted case management (TCM) services
provided by nonprofit corporations (called Regional Centers) between
April 1, 1988 and June 30, 1990. California had paid the Regional
Centers for TCM services covered under California's approved Medicaid
State plan and provided to developmentally disabled individuals eligible
for Medicaid.

The dispute here arose because California had funded a State program for
TCM services before Medicaid covered such services. HCFA originally
disapproved California's plan amendment covering such services, because
HCFA was concerned that State program costs were being improperly
shifted to federal Medicaid funds. Congress intervened, however,
providing specifically that the fact that a state had previously paid
for TCM services was not a basis for denying federal coverage, so long
as the services were not provided "without charge." HCFA subsequently
approved the plan amendment and paid claims for TCM services provided
after February 14, 1991, but disallowed all claims for services provided
prior to that date, on a number of alternative grounds.

In a prior decision, this Board rejected HCFA's grounds as inconsistent
with the provision enacted by Congress to address this dispute and
inconsistent with HCFA's only published definition of "without charge."
Under that definition, services are not considered to be "without
charge" if third party reimbursement is sought. California had asserted
that it did apply its Medicaid system for seeking third party
reimbursement to TCM services. The Board addressed several legal issues
related to this assertion and remanded the case for further examination
of the facts.

On remand and during the subsequent appeal to the Board, HCFA took the
position that California had not demonstrated that third party
reimbursement was sought. HCFA relied on its finding that the majority
of the providers of the services -- the nonprofit Regional Centers --
did not have functioning systems for billing health insurance companies
during the disallowance period. Contrary to what HCFA argued, our prior
decision did not require this. Instead, our decision required that
California demonstrate that it had established a system for seeking
reimbursement from liable third parties, consistent with its obligations
under applicable Medicaid requirements. California presented extensive
and uncontradicted evidence concerning the many steps California took to
apply its approved third party liability system to TCM services, so that
Medicaid would not pay for any TCM services for which a third party was
liable.

HCFA cited to nothing in the applicable requirements for a third party
system that requires contemporaneous billing by the service providers.
Instead, when a provider submits a claim where there is probable
existence of a liable third party (such as potential health insurance
coverage), a state must deny the claim unless and until the provider
documents that the third party is not in fact liable. Where there is a
potentially liable tort-feasor, a state may pay the claim and then seek
to recover the costs of the services from the tort-feasor. California
documented that it had implemented both parts of this system for claims
for the TCM services at issue here (with the exception of one quarter,
for which California's documentation shows that it reduced its FFP claim
based on an estimate, rather than actually identifying potentially
liable third parties).

California reasonably concluded for most of the period here that it met
both the terms and the underlying purposes of the "without charge"
provision. HCFA's continued denial of any funding for these services,
based on evolving and unpublished interpretations of Medicaid
requirements, contravenes Congressional intent.

Thus, we conclude that California's evidence shows that the services at
issue (other than for the one quarter) were not provided "without
charge." While HCFA may of course examine further the allowability of
individual services, disallowance of all TCM services is not
supportable.

Below, we summarize the prior dispute between HCFA and California over
these claims, the Board's holding in its prior decision, and HCFA's
finding on remand. In our analysis, we first address the threshold
question of what our prior decision required California to demonstrate.
We then discuss the Medicaid requirements for a third party system, what
California did to apply its cost avoidance system and pay and recovery
system to TCM services; and why, except for the quarter ending June 30,
1988, we reverse HCFA's finding that the TCM services at issue here were
provided "without charge."

Summary of Prior Dispute and DAB No. 1285

TCM services are "services which will assist individuals eligible under
the [Medicaid state] plan in gaining access to needed medical, social,
educational and other services." Section 1915(g)(2) of the Act. Added
as an optional Medicaid service by Congress in 1985, TCM services
benefit program recipients by assisting them in obtaining access to
needed services and also may benefit program management by reducing
costs.

In December 1987, California submitted Medicaid State Plan Amendment
(SPA) No. 87-15 to HCFA. With this amendment, California sought to add
TCM services provided to developmentally disabled people as a covered
service under its State plan. State Ex. 9. At that time, TCM services
for developmentally disabled people were being funded by California
under its Lanterman Developmental Disabilities Services Act of 1977.
These TCM services were provided by a network of nonprofit corporations
known as "Regional Centers." In its amendment, California proposed that
the Regional Centers continue to deliver the TCM services. Id.

Initially HCFA refused to approve SPA 87-15 on the basis that California
funded these TCM services and that California law precluded individuals
or their families from being charged for the Regional Center TCM
services. In October 1988, Congress enacted section 8435 of Public Law
No. 100-647, which provided that HCFA could not refuse to approve a plan
amendment or deny payment on the grounds that a state was paying for TCM
services with non-federal funds. Section 8435 also provided: "Nothing
in this section shall be construed as requiring the Secretary to make
payment to a State . . . for such case- management services which are
provided without charge to the users of such services." In September
1989, HCFA approved SPA 87-15 with an effective date of October 1, 1987.

After the approval of SPA 87-15, California began submitting claims for
FFP for TCM services. It is undisputed here that the FFP California
claimed relates to payments made to the Regional Centers for providing
TCM services to Medicaid eligible individuals, in accordance with the
approved plan amendment. HCFA denied all of these claims on several
grounds, however, including that no individual had been charged for
these services and therefore they had been provided "without charge."
California appealed these denials to the Board.

In California Dept. of Health Services, DAB No. 1285 (1991), the Board
rejected HCFA's grounds for the disallowance as inconsistent with
section 8435 and with HCFA's only definition of "without charge," as
promulgated in HCFA's State Medicaid Manual. Section 5340 of the Manual
gave California timely notice that services which are available "without
charge" to everyone in the community are not eligible for federal
reimbursement. Section 5340 defined "without charge" as follows:

Services without charge, for purposes of Medicaid, means that no
individual or family is charged for medical care, and third party
reimbursement is not sought.

Applying HCFA's own definition, the Board concluded that the fact that
recipients were not charged for TCM services did not make them "without
charge" so long as third party reimbursement was sought for such
services. The Board rejected HCFA's argument that section 5430
concerns only the third party reimbursement actions of providers.
Further, the Board rejected HCFA's position that only payments for which
third party reimbursement has in fact been sought are eligible for FFP.
Instead, the Board said, the issue is whether the services as a class
are services for which third party reimbursement is sought, consistent
with federal requirements.

California had consistently represented that it had sought third party
reimbursement for TCM services through its approved Medicaid system for
seeking reimbursement from third parties. HCFA challenged this
assertion, but the record was not sufficiently developed as to
California's practices concerning the services in question. Therefore,
the Board remanded the case to HCFA "to determine whether California has
met its third party obligations under the Act, its state plan, and the
State Medicaid Manual." DAB No. 1285, at 3. The Board noted:

California must do more than produce some isolated cases for which
third party reimbursement was sought. Rather, California must
demonstrate that it had established a system which complies with
the standards in the Act, regulations, and its state plan for
seeking third party reimbursement for these services.

DAB No. 1285, at 21.

After DAB No. 1285, HCFA asked California to provide certain information
and then conducted a review of Regional Center billing for TCM services.
1/ HCFA found as a result of its review that California had not met
the requirements of DAB No. 1285 because the majority of the Regional
Centers did not have functioning systems for billing potentially liable
insurance companies prior to the end of the disallowance period. 2/
Specifically, HCFA found that "during the pertinent disallowance period
. . . only three of the 21 Regional Centers . . . established a
functioning third party billing system meeting applicable Federal
requirements . . . . Of the three, only one center, Kern, had claims
for TCM services . . . that were included in the disallowance." State
Ex. 36. HCFA therefore concluded that these TCM services generally had
been provided "without charge," even though HCFA had evidence that other
Regional Centers had either subsequently billed insurance companies for
TCM services provided during the disallowance period, or had assured
California they would bill retroactively.

California appealed, arguing that the evidence showed it had established
a third party liability system meeting applicable requirements
(including a "pay and recover" system which HCFA did not examine), and
that, in any event, further provider billing of health insurance
companies was a futile exercise since surveys showed that TCM services
were not covered by health insurance.

In a preliminary analysis, we noted that HCFA had not cited to any
provision on the timing of billing of insurance companies, nor had HCFA
found that Medicaid was charged for any service for which a Regional
Center should have first billed a third party and did not. We said that
HCFA's basis for its remand determination misconstrued the prior
decision by focusing solely on the timing of when third parties were
billed by the service providers, rather than on whether California
applied and implemented its Medicaid third party liability system with
respect to the class of TCM services for which it was claiming federal
reimbursement. The parties provided written and oral comments on the
preliminary analysis and each other's comments.

Analysis

A. What DAB No. 1285 required

HCFA's comments on the Board's preliminary analysis raised threshold
legal questions concerning what DAB No. 1285 required California to
demonstrate on remand. According to HCFA, its approach of looking at
whether the Regional Centers had functioning billing systems during the
disallowance period was what DAB No. 1285 required. In particular, HCFA
focused on the following wording in DAB No. 1285:

California must demonstrate that it had established a system which
complies with the standards in the Act, regulations, and its state
plan for seeking third party reimbursement for [TCM] services.

DAB No. 1285, at 21 (emphasis added). HCFA argued that the Board's use
of the pluperfect "had established" (and the Board's use of the past
tense elsewhere in the decision) "unequivocally indicate the Board's
view that the State must prove that any such system was operational
during the disallowance period." HCFA Response to Order at 2. HCFA
also argued that the issue of whether third party reimbursement is
sought is different from the question of whether California met its
Medicaid obligations for seeking third party reimbursement. HCFA stated
that "unless there is a system in place for billing third parties at the
time services are provided such services are provided `without charge.'"
Id. at 6. HCFA pointed to nothing in the wording of the "without charge"
definition that supports this conclusion, but asserted that its position
was "[c]onsistent with" that definition. Id.; see also Transcript of
May 11, 1994 Teleconference at 9.

HCFA's reliance on the use of pluperfect and past tenses in DAB No. 1285
is misplaced, because it does not answer the question of which entity
had to have established a system: California or the providers. The
antecedent of the pronoun "it" in the phrase "it had established"
(underlined in the quote above) is clearly California. To the extent
that the "had" implies "during the disallowance period," it clearly
refers to California's system, not the providers' system.

In the prior proceedings, California's consistent position was that it
had applied its approved Medicaid third party system to TCM services and
therefore third party reimbursement was sought, within the meaning of
section 5340 of the State Medicaid Manual. HCFA had argued that the
section 5340 definition of "without charge" was not met unless the
provider was charging either individuals or third parties, because it is
providers who typically charge for services. We rejected this
interpretation, stating that "section 5340 should be read in conjunction
with California's third party liability responsibilities under its state
plan." DAB No. 1285, at 15. We noted that federal requirements
described two methods of recovering from third parties ("cost avoidance"
and "pay and recover") and that it would be the state, not the provider,
which would do the actual billing under a pay and recover system.

The Board's description of the third party system requirements may have
erroneously implied that billing and seeking third party reimbursement
are equivalent. See DAB No. 1285, at 15. DAB No. 1285 read as a whole,
however, clearly stated the issue on remand as whether California had
established a third party system meeting the applicable requirements for
such a system, not whether the providers were in fact billing. 3/

California could reasonably have thought that the "without charge"
definition did not require contemporaneous billing by the providers.
First, nothing in the wording of the definition refers to the timing of
third party billing. Second, contemporaneous billing of a third party
is not possible if the provider is not aware of health insurance
coverage at the time the service is provided. Third, HCFA did not
identify any purpose of the "without charge" provision which requires
contemporaneous billing by providers. Indeed, HCFA's current position
that the providers must bill when they provide the services is
inconsistent with HCFA's remand finding that focused on whether
providers were billing during the disallowance period.

Moreover, focusing on whether third party reimbursement was sought by
California using its approved third party system (rather than on whether
the providers were in fact billing contemporaneously) makes sense under
the particular circumstances here. California was not itself the
service provider; instead, the nonprofit Regional Centers provided the
TCM services. HCFA's allegation was that California's funding of the
services made them "without charge" and that this violated Medicaid
principles such as the principle that Medicaid is the payor of last
resort. Requiring California to demonstrate that it had established a
complying third party recovery system thus is consistent with the idea
that California had to show it did not undertake to pay for all TCM
services with state funds. This requirement is also consistent with the
"payor of last resort" principle because it ensures that the Medicaid
program does not pay where there is a liable third party. 4/ Indeed, DAB
No. 1285 partly viewed this interpretation as a protection to HCFA
because otherwise California might point to a few isolated instances of
seeking third party reimbursement and claim that this proved the
services as a class were not "without charge."

Also, DAB No. 1285 recognized that it was doubtful that there would be
any recovery for TCM services from insurance companies, given the nature
of the services. The decision noted that if California could seek third
party reimbursement from tort-feasors (or their liability insurers),
this was sufficient for purposes of HCFA's existing definition of
"without charge." DAB No. 1285, at 16-19. The record here provides
further evidence that recovery from health insurance companies was
doubtful and that billing was likely a futile exercise. As discussed
more fully below, California nonetheless took a conservative approach
and required that the Regional Centers document that they had billed any
health insurance company identified for a recipient of TCM services
before Medicaid could be billed. HCFA identified no federal interest
that was not fully protected by this system.

HCFA also argued that the Board's preliminary analysis was wrong since
it did not address California's failure to establish a fee schedule for
these services. HCFA said that the Board's prior decision required
application of all parts of the State Medicaid Manual provision,
including the requirement for a fee schedule.

Section 5340 states that, if Medicaid is to be billed for services
provided by other agencies or programs financed by federal and state
funds, a fee schedule must be established for each service billed to
Medicaid. HCFA pointed with approval to the fee schedule adopted by
California in February 1991 which imposed fees on recipients based on
their income. However, the term "fee schedule" in section 5340 should
not be limited to fees imposed on individuals receiving the services.
Such a restricted reading would not be consistent with the section's
recognition that Medicaid will pay for services for which no individuals
are charged as long as third parties are charged. For such services,
there are necessarily no "fees" for individuals. Rather, the need for a
"fee schedule" for the services is to allow third parties (and Medicaid)
to be charged.

California reasonably determined that its TCM unit cost methodology
constitutes such a "fee schedule." As discussed in DAB No. 1285,
initially California proposed that it determine Regional Centers' TCM
costs by calculating an average monthly case management cost multiplied
by the number of Medicaid recipients receiving TCM services. State Ex.
9, at 12-13. HCFA rejected this methodology and California redesigned
its system to require each Regional Center (1) to calculate its cost of
providing a unit of TCM services and (2) to document individual "units"
of service which are allocated or "charged" to specific Medicaid
recipients. State Ex. 12, at 14-15. In fact, in its correspondence to
HCFA, California described the revised methodology as a "fee-
for-service reimbursement methodology." State Ex. 39, Att. 5 at 6.
Regional Centers use this cost unit to bill insurance companies for the
number of units of TCM services provided to specific Medicaid
recipients. The cost unit is the "fee" for those services and satisfies
the purpose of the section 5340 fee requirement by providing a method
for calculating third party charges.

In effect, HCFA's attempts on remand and in its arguments to us to add
additional barriers to paying California for covered services, without
citing any specific policy statements or reasons in support of those
barriers, suggest that HCFA is simply still uncomfortable with using
Medicaid funds for services previously covered with state funds. While
we can understand this reluctance in a time of federal budgetary
constraints, we cannot uphold a disallowance on this basis in light of
the specific Congressional directive to the contrary.

We next discuss California's cost avoidance system for TCM services and
then its pay and recover system for TCM services, and explain why we
conclude that California demonstrated that it had established a
complying system for services provided during most of the disallowance
period.

B. Whether California Had Established a Cost Avoidance System

Section 1902(a)(25) sets forth standards for recovery of third party
reimbursement which must be included in state plans. The regulations
and Manual provisions implementing section 1902(a)(25) set forth two
methods of seeking third party reimbursement: "cost avoidance" and "pay
and recover." 42 C.F.R. Part 433, Subpart D; Chapter X of the State
Medicaid Manual. Cost avoidance requires that, whenever a state has
established the probable existence of third party liability at the time
a claim is filed, the state must reject the claim and return it to the
provider. When the amount of liability is determined (either by the
provider or a third party resource), the state then pays the claim to
the extent the allowable payment exceeds the amount of any third party
payment. 42 C.F.R.  433.139(b)(1).

In this section we discuss the undisputed evidence concerning how
California applied and implemented its cost avoidance system with
respect to TCM services, and why we conclude that, except for the
quarter ending June 30, 1988, California's system satisfied applicable
federal requirements.

(1) How California Applied Its Cost Avoidance System to TCM
Services

California uses cost avoidance for Medicaid services for which it has
established the probable existence of third party liability at the time
a claim is filed by the provider. 5/ Prior to the approval of SPA 87-15
and prior to claiming FFP for TCM services, California expressly applied
its cost avoidance requirements to Regional Centers for TCM services.
California represented, and HCFA did not dispute, that California took
the following actions to establish a cost avoidance system for Regional
Centers: it included provisions concerning recovery of third party
reimbursement in the TCM contracts between DHS and the Department of
Developmental Services (DDS); it issued instructions to Regional Centers
concerning their third party billing obligations; it engaged in
extensive discussions with Regional Centers concerning these
obligations; and it programmed the DHS Medicaid computer system to
identify TCM recipients who had other health coverage and to eliminate
their claims from the federal claiming process until third party
reimbursement had been sought for them. Each of these activities is
discussed below.

For State fiscal year 1987-1988, DHS, the Medicaid single State agency,
and DDS, the State agency responsible for services to people with
developmental disabilities, entered into a contract concerning the
administration of TCM services for developmentally disabled people.
State Ex. 53, Tab C. That contract provided:

DDS shall ensure that regional centers make reasonable efforts to
recover the value of targeted case management services rendered to
clients eligible for services under this agreement whenever these
clients have third-party health coverage or insurance for the same
services. . . . Regional centers shall seek reimbursement from
available third-party health coverage before services under this
agreement are billed to the Medi-Cal program; DHS shall be the
payor of last resort.

The subsequent contracts between DHS and DDS also contained this
language. State Ex. 53, Tab D; and Ex. 46.

In August 1989, one month prior to the approval of SPA 87-15, California
presented each Regional Center director with instructions concerning how
Regional Centers were to pursue insurance reimbursement. HCFA Ex. AA at
4. These instructions became section 2088 of the California Medicaid
Procedures Manual, which provides:

The Medi-Cal Program reimburses providers for the cost of services
only after all liable third parties, such as health insurance
companies, have paid the provider. Consequently, for clients
having "other health coverage," the regional center must make all
reasonable efforts to secure payment from the liable third party
before the Department seeks payment from the Medi-Cal Program for
Targeted Case Management (TCM) services.

The Manual then describes the specific steps the Regional Center must
follow for third party reimbursement: obtain information from a client
regarding the client's other health coverage which could be a potential
funding source for TCM services; use HCFA-1500 to request payment from
third party payers; pursue payment prior to submitting a claim for
payment by Medi-Cal; obtain other coverage denial in the form of a
letter or Explanation of Benefits from the insurer; keep on file other
coverage denials and/or a record of the attempt to follow-up on
unanswered claims; and if the claim is denied on the grounds TCM
services are not a covered benefit, bill the third party annually to
ascertain whether there is a change in covered benefits.

California also engaged in extensive discussions and training with the
Regional Centers on California's cost avoidance system. HCFA submitted
as an exhibit a four- page list compiled by California of meetings,
correspondence, and training sessions California conducted to apprise
Regional Centers of how the cost avoidance system worked. HCFA Ex. AA.

Finally, California programmed its Medi-Cal computer system to delete
all recipients with third party health coverage from the federal
claiming process until the relevant Regional Center sought third party
reimbursement. California described this system as follows:

Regional centers document TCM services provided to Medi-Cal
eligible clients on a unit-of-service basis. Recipient-specific
claims for the cost of services are submitted by the regional
centers to the State Department of Developmental Services (DDS)
each month. DDS transmits this recipient-specific information to
the State Department of Health Services (DHS) to verify Medi-Cal
eligibility in the month of service for each client who has
received at least one unit of service. This verification is
accomplished via a computer match with the DHS Medi- Cal
Eligibility Data System (MEDS). This same MEDS matching process
also identifies Medi-Cal eligible TCM recipients with "other health
coverage."

An invoice for costs is subsequently prepared by DDS for all
verified Medi-Cal eligibles without health insurance and is sent to
DHS for federal payment.

All potential Medi-Cal claims for TCM services provided to verified
Medi-Cal eligible recipients with other health coverage are held in
a computer suspense file pending the outcome of the regional
center's pursuit of payment from the health insurance company.
Computer generated lists of eligible recipients with "other health
coverage" are issued monthly to each regional center. Regional
center staff complete HCFA 1500 claim forms and send these forms to
the recipient's insurance company requesting health insurance
payment for the services.

State Ex. 37, at 1-2. 6/

California developed its system for identifying recipients with other
health coverage prior to HCFA's approval of SPA 87-15 in September 1989.
As early as June 1, 1989, the DHS Data Systems Branch was prepared to
identify TCM Medi-Cal eligible clients who had other health coverage and
to transmit to DDS "client-specific other health coverage information
for the purpose of recovering the cost of TCM services from liable third
parties prior to billing the Medi-Cal program." California Ex. 43, Att.
B.

Further, California took steps to ensure that services with potential
third party coverage which were rendered prior to HCFA's approval of SPA
87-15 were also excluded from its retroactive claims for federal
reimbursement. 7/ In October 1989, the month after HCFA approved SPA
87-15, California created a suspense file from the MEDS computer which
"consisted of the records of individuals who were found to be eligible
for Medi-Cal services in the month of service but who were also found to
have other health coverage. . . . " State Ex. 43. This data match
included all records for all beneficiaries reported to have received TCM
services from July 1, 1988 through June 30, 1989. These claims were
remitted to the Regional Centers for billing of third parties. State
Ex. 53.

HCFA did not present any evidence to rebut California's evidence about
all the steps California took to apply and implement its cost avoidance
system for TCM. Nor did HCFA contest California's assertion that its
system was effective in ensuring that, for recipients with other health
coverage, California did not submit claims for FFP until the Regional
Centers had billed third parties. 8/ (California's evidence, however,
does not support a finding that it identified claims with other health
coverage for any period prior to July 1, 1988.) Therefore, the
unrebutted evidence in this case establishes that California applied and
implemented its approved cost avoidance system for TCM services provided
after June 30, 1988.

(2) Why California's Cost Avoidance System Satisfies All Federal
Requirements for a Third Party System

Because the majority of the Regional Centers did not engage in billing
during the disallowance period, HCFA concluded that the California
system did not satisfy federal requirements. HCFA argued that the
failure of the majority of the Regional Centers to engage in billing
during the disallowance period was critical to whether a third party
system was established, and that California could not rely on billing
conducted by the Regional Centers after the end the disallowance period.

This argument has no merit. While the federal regulations require
states generally to return the claims to the provider for billing before
seeking FFP, they do not impose any time standards on the provider for
when it must bill or on the state for supervising the provider's
timeliness in billing. Therefore, HCFA could point to no authority for
the proposition that the failure of the Regional Centers to bill within
a discrete time period violated any applicable requirement for a third
party system. 9/ The absence of such a requirement is understandable in
light of how a cost avoidance system operates: once a state rejects a
claim it does not come back into the state's claiming process until the
provider completes the third party billing process specified as a
condition for resubmitting the claim. Since the benefit of a provider's
delay or failure to bill inures to Medicaid in the form of temporarily
or permanently cost avoided claims, it would not appear to be in HCFA's
interest to impose timeliness requirements on the provider or monitoring
requirements on a state.

HCFA cited section 5340 of the State Medicaid Manual for its position
that Regional Centers must engage in billing during an identified time
period. That section provides that, if Medicaid is to be billed for
services provided by other agencies or programs financed by federal and
state funds, billing of all third party resources must be documented.
HCFA argued that, since the Regional Centers did not implement the
billing system during the disallowance period, California could not
document that all third party resources were billed during the
disallowance period and thus could not satisfy all federal requirements
for third party reimbursement.

We reject this argument because section 5340 does not clearly impose a
time requirement on when the billing by providers must occur. Rather,
it can reasonably be read as requiring that, when billing does occur, it
must be documented. Under the California system, provider billing of
all third party liable resources was documented. Section 2089 of the
California Medicaid Procedures Manual requires Regional Centers to bill
insurance companies prior to seeking reimbursement from Medicaid for
claims with other health coverage and requires them to maintain
documentation of their efforts to recover third party reimbursement.
California Ex. 43, Att. C. The fact that this billing and documentation
occurs subsequent to California's claims for FFP for TCM services
without other health coverage is not relevant to whether documentation
occurs. Again, HCFA has focused on the timing of the billing and
documentation process rather than the fact that California had a system
for requiring billing as a prerequisite to claiming under Medicaid.

Nor did the delay of some Regional Centers in billing third parties
prejudice HCFA's legitimate interest in ensuring that states recover all
possible third party reimbursement and that HCFA not participate in
unnecessary costs. In this case, HCFA never disputed California's
representation that its MEDS system eliminated claims with other health
coverage from the federal claiming process until the Regional Centers
completed their billing procedures. Therefore, not only did
California's system satisfy all federal standards for cost avoidance
systems, it also satisfied the purpose of those requirements: it
excluded claims with potential health insurance coverage from the
federal claiming process.

Further, HCFA did not allege that California was improperly instructing
the Regional Centers or somehow complicitous in their failure to engage
in prompt billing. 10/ Rather, the record shows that DHS repeatedly
requested the Regional Centers to bill insurance companies and resubmit
claims. State Ex. 53, Tab A; HCFA Ex. AA, History of Targeted Case
Management Billing Insurance Companies, unnumbered pages 2-6. As DHS
pointed out to the Regional Centers, failing to bill third parties cost
California potential federal reimbursement for those claims. State Ex.
53, Tab A. Moreover, California obviously attempted to supervise the
practices of the Regional Centers by setting documentation standards and
document retention standards, by requiring monitoring by DDS, and by
repeatedly instructing them about the billing requirements. State Ex.
43, Att. C; State Ex. 53, Atts. C, D; HCFA Ex. AA.

Finally, while the majority of Regional Centers did not have functioning
billing systems prior to the end of the disallowance period, the
Regional Centers were not precluded from later billing for services
which they had previously provided. In fact, this was required as a
prerequisite for resubmitting a Medicaid claim. Information gathered by
HCFA in the course of its review indicates that, after the end of the
disallowance period, all of the Regional Centers either had billed or
assured they would bill retroactively for services provided from July 1,
1988 for which other health coverage had been identified by the MEDS
system. 11/ See HCFA Ex. AA and BB. For the preceding reasons, we
conclude that, for all TCM services provided July 1, 1988 or after,
California had established a cost avoidance system which satisfied
applicable standards and prevented federal participation in costs which
might be paid by insurance until providers had attempted to obtain such
payment. Consequently, these services were not provided "without
charge."

(3) Whether California Is Entitled to Reimbursement for TCM
Services Provided During the Quarter Ending June 30, 1988

During the quarter ending June 30, 1988, four "pilot" Regional Centers
provided TCM services. California requested $443,422 in FFP for these
services. Because California did not implement its cost avoidance
system with regard to these services, we conclude that the services were
provided "without charge" and uphold this part of the disallowance.

On October 7, 1989, DHS ran a MEDS match to identify all Medicaid
recipients who had received TCM services prior to the approval of SPA
87-15 on September 12, 1989. (California represented that until the
approval of SPA 87-15, DDS had no legal authority to request such a
match because the MEDS data was confidential. State Ex. 53.) However,
the MEDS active history file included only the current and preceding 15
months. Consequently, California could not identify recipients with
other health coverage receiving TCM services prior to July 1988. Id.
In order to compensate for its inability to identify and eliminate
specific claims, California reduced the total units of TCM services
provided by each of these four centers by 10%, a percent which it
represented exceeded the units provided to recipients with other health
coverage. State Ex. 55. It then multiplied the reduced number of units
by the unit rate of each of the centers to calculate its FFP claim. Id.

California's methodology for this period did not constitute seeking
third party reimbursement and therefore these services were available
"without charge." California's third party reimbursement system is
premised on the correlation of specific recipients with specific
services and insurance coverage. The applicable requirements governing
California's third party liability system do not contemplate reducing an
FFP claim based on an estimate.

The fact that California's inability to use its MEDS system to identify
specific claims resulted from the length of time HCFA took to approve
the amendment does not excuse California's inability to identify these
claims. From almost the beginning of the amendment process, California
program officials represented to HCFA that they would apply California's
third party system to seek reimbursement for these costs. They knew or
should have known that they could honor this representation only if they
devised a way to retain the necessary information concerning other
health coverage for individual TCM services. While a 10% reduction was
a method for avoiding costs to the federal government, it was not a cost
avoidance system meeting applicable state and federal requirements for
seeking third party reimbursement.

California argued that what California did should be viewed in the
context of the real world, in which no health insurer is going to pay
for TCM services in any event. California argued that the Board had
recognized this in its prior decision, and that HCFA had acknowledged it
to some extent by approving a plan amendment waiving cost avoidance in a
slightly different context for other types of health services.

As HCFA pointed out, however, with respect to the other health services
mentioned by California, California had sought and obtained a waiver for
application of a cost avoidance system. California did not do this with
respect to TCM services, instead determining that TCM claims with other
health coverage should be remitted to the Regional Centers for billing.
Thus, California itself identified these claims as ones where there was
a probable existence of third party liability.

Although California ultimately obtained information from billing done by
Regional Centers and from surveys of certain health insurance companies
which could have led California to believe that there was no probable
existence of liability of health insurance companies for TCM services,
California did not establish that it knew this at the time in question
here. We think it is fair in these circumstances to require that
California demonstrate it actually applied the cost avoidance system it
adopted as a means of seeking third party reimbursement. California did
not do that for TCM services provided in the quarter ending June 30,
1988. 12/

C. Pay and Recover

Under a pay and recover system, the state pays the provider and then
seeks reimbursement from the third party. Where probable existence of
third party liability is established at the time a provider claim is
filed, a state must use cost avoidance unless it has obtained a waiver
from HCFA to use pay and recover. 42 C.F.R.  433.139(b). Where
probable liability has not been established or benefits are not
available at the time the claim is filed, a state may pay the provider
and proceed itself against the third party. 42 C.F.R.  433.139(c).

As part of its third party liability plan, California maintained a pay
and recover system for seeking third party reimbursement when probable
liability was not established or benefits were not available at the time
the claim was filed. For TCM cases, this system involved recovery of
TCM costs from tort-feasors and liability insurance companies.
California argued that it applied its pay and recover system to TCM
services.

In reviewing whether California sought TCM third party reimbursement,
HCFA did not review California's pay and recover system. The parties
faulted one another for the fact that HCFA did not review this part of
California's system. California argued that it did not submit
additional information because HCFA did not request it and therefore
California had concluded that HCFA regarded the system as acceptable.
13/ HCFA argued that it was California's responsibility to produce
information on its system and that HCFA's correspondence to California
should be read to include a request for pay and recover information.

We conclude that it is appropriate to consider California's pay and
recover system in determining whether California sought third party
reimbursement for these services. First, DAB No. 1285 made it clear
that California's pay and recover system should be considered in whether
TCM services were "without charge." DAB No. 1285, at 15-19. Second,
we do not read HCFA's requests for specific information from California
as being directed to its pay and recover system. Moreover, HCFA was
informed that the Board would consider California's pay and recover
evidence prior to close of the record and prior to the final conference
call in this case. HCFA did not offer contradictory evidence, did not
request an opportunity to conduct a further review of California's
system, and did not request a hearing in which to cross- examine
California's declarants.

The record in this case contains the following uncontroverted evidence
concerning California's pay and recover system and California's use of
that system for TCM costs.

DHS administers California's pay and recover system to recoup monies
resulting from settlements and judgments obtained by Medi-Cal
beneficiaries in personal injury actions. This system, or one
essentially like it, has been in place since prior to the disallowance
period. California Ex. 49, Declaration of Patricia A. Masuda, Chief of
Personal Injury Unit, Third Party Liability Branch at 1. Pursuant to
the system, DHS opens a recovery file on Medi-Cal beneficiaries whenever
it has evidence of possible a possible personal injury action;
determines through the Medi-Cal computer system how much Medi-Cal has
paid on behalf of the recipient; files a Medi-Cal lien for these
expenses; and recovers amounts to satisfy the lien. California Ex. 49,
Third Party Liability Plan at 15.

Prior to the submission of SPA 87-15, DHS operated this pay and recovery
system pursuant to section 14124.71(a) of the California Welfare and
Institutions Code. That statute provides that when Medi-Cal benefits
have been or will be provided to a Medi-Cal recipient because of an
injury for which another person is liable, or for which a carrier is
liable, DHS may recover from the person or carrier the reasonable value
of the benefits. While California maintained that this pre-existing
statutory authority was sufficient to enable it to recover the costs of
Medi-Cal TCM services (California Ex. 41), California supplemented its
general mandate with statutory provisions specific to TCM services.
Effective January 1989 (nine months prior to the approval of SPA 87-15),
California enacted section 14124.71(d) to provide that the cost of
services provided to an eligible developmentally disabled Medi-Cal
beneficiary under section 14132.44 (i.e., TCM services) "may be
recovered by the director [of Health Services] from a liable third
person or an insurance carrier." Because HCFA was continuing to
question California's intent and ability to recover TCM third party
reimbursement, California enacted additional clarification that TCM
costs were recoverable against liable third parties. Section 14132.46,
effective January 1990, provides that:

Pursuant to 14024 and 14124.90, the Director of Health Services may
recover for the cost of targeted case management services rendered
under Section 14232.44 to eligible Medi-Cal beneficiaries, from any
person, corporation, or partnership who, at the time services are
rendered, has a contractual or legal obligation to pay for the
services.

In addition to amending its statutory authorization for its pay and
recovery system, California included tort- feasor recovery in its
inter-agency contracts between DHS and DDS. Section IV.I.1. of the 1987
contract provided that DHS would periodically review DDS' listing of TCM
clients to identify cases with related tort actions and that Regional
Centers were obligated to notify DDS of cases involving tort liability.
State Ex. 53, Tab C. The subsequent DHS/DDS contracts also contained
these provisions. State Exs. 46 and 52, Tab D.

California represented that it applied its pay and recover system to TCM
costs by seeking to recover the costs of services to recipients with
possible claims against third parties. State Ex. 49, Declaration at 1.
In support of this assertion, California submitted computer reports of
matches it had generated between the DHS Casualty/Compliance Accounts
Receivable Master File, which identifies all DHS recovery files, and the
DDS TCM eligibility file, which identifies all dates of service for all
TCM clients. State Ex. 57, Tabs A-1, A-2, and A- 3. For all TCM
Medicaid recipients with a DHS recovery file, the reports identify the
recipient, the Regional Center providing the service, the charges, and
the dates of service. The reports demonstrate that the TCM pay and
recovery system was statewide, i.e., DHS received data and sought
recovery for TCM services provided by all of the 21 Regional Centers.
The reports also demonstrate that, with the exception of the quarter
ending June 30, 1988, California sought recovery for services provided
throughout the disallowance period.

While HCFA objected that California had not demonstrated that its system
"was in place during the disallowance period," we do not find this
objection dispositive of whether these services were provided "without
charge." HCFA again focused on the timing of the final implementation
rather than the fact that California applied its pay and recover system
to charge liable third parties for TCM services provided during the
disallowance period. In fact, California had a pay and recover system
in place during the disallowance period and California clearly intended
to apply it to TCM services if its plan amendment for TCM services was
approved. There is no evidence that California did not act in a timely
manner to recover costs for TCM services once it learned of potentially
liable third parties, i.e., once it completed its computer match for
recipients with recovery files. This match identified services provided
during the entire disallowance period except for the quarter ending June
30, 1988.

In the absence of any contrary finding by HCFA, we conclude that
California sought third party reimbursement for these services by the
following actions. California amended its statutes to clarify that it
was authorized to recover TCM costs from tort-feasors; California
included TCM services in its existing system for recovery of costs from
tort-feasors; California required DDS and Regional Centers to assist DHS
in identifying cases with potential third party liability, and
California demonstrated that it sought recovery for TCM services
provided by all Regional Centers and for services beginning at least in
July 1988.

Conclusion

California sought third party reimbursement for TCM services by applying
both its cost avoidance system and its pay and recover system to TCM
services. HCFA did not identify any applicable standard concerning
third party reimbursement systems which California did not satisfy.
Therefore, we conclude that California demonstrated that it had
established a system which complies with the standards in the Act,
regulations, and its State plan for seeking third party reimbursement
for TCM services provided beginning July 1, 1988, and that these
services were not provided "without charge." We uphold the disallowance
of $443,422, which represents the costs of TCM services provided in the
quarter ending June 30, 1988, but reverse the remaining disallowance.


_____________________________ Cecilia Sparks Ford

_____________________________ Norval D. (John)
Settle

_____________________________ Judith A. Ballard
Presiding Board Member

1. HCFA requested information concerning (1) written documentation
of when the policy of billing third parties for TCM services was
actually implemented, (2) evidence of billings to third parties, (3)
copies of responses from third parties, and (4) evidence that the
billing continued throughout the disallowance period. California Ex.
38. California provided information which included California's rules
for Regional Center billing and its process of identifying and
eliminating claims with other health coverage from its FFP claims. HCFA
requested specific information, which California obtained and provided,
on the months in which each Regional Center sent claims to insurance
companies, the number of claims sent for each month, the amount billed
and the third party payment received for each month. HCFA also made
site visits to three Regional Centers to review their billing
documentation.

2. The funds at issue in this case involve FFP claims for expenses
incurred between January 1, 1988 and June 30, 1990. After our prior
decision concerning California's TCM claims, HCFA deferred additional
claims for TCM reimbursement. These deferrals include claims for
expenses California incurred through February 14, 1991. Thus, when HCFA
referred to the "disallowance period," it meant the period ending
February 14, 1991. While the deferrals for the period July 1, 1990
through February 14, 1991 are not before the Board, HCFA indicated that
the Board's decision in this case "will govern the disposition of the
additional TCM claims which have been deferred." HCFA's Reply to
California's Response to the Board's Order to Develop the Record at 6.

3. California asserted that HCFA's position that California must
show more than that it met the applicable requirements for a third party
liability system (because the State Medicaid Manual requires more) is a
new argument, improperly made on remand. There is some merit to
California's assertion. HCFA did not seek reconsideration, nor even
clarification of DAB No. 1285. Indeed, when describing generally what
California had to demonstrate on remand, HCFA wrote that the purpose of
the review was "to provide the State with an opportunity to demonstrate
that it 'had established a system which complies with the standards in
the Act, regulations, and its state plan for seeking third party
reimbursement for . . . [TCM] services.'" State Ex. 36, HCFA letter of
December 20, 1992.


4. In footnote 8 of DAB No. 1285, at 13-14, the Board identified two
other programmatic purposes met by a charge requirement, and concluded
that California's actions in response to HCFA's denial of the plan
amendment were sufficient to fulfill those purposes.

5. Even prior to the approval of SPA 87-15, California statutorily
required any provider who sought Medicaid reimbursement to bill health
insurers prior to billing Medicaid. Section 14023.7 of the California
Welfare and Institutions Code requires as follows:

Any provider of service seeking payment for health
care services . . . under this chapter
[California Medi-Cal] shall first seek to obtain
payment from any private or public health
insurance coverage to which the person is
entitled, where the provider is aware of this
coverage and to the extent the coverage extends to
these services, prior to submitting a claim to the
department for the payment of any unpaid balance
for these services. In the event that a claim
submitted to a private or public health insurer
has not been paid within 90 days of billing by the
provider, a claim may be submitted to the
department.

Further, in Article 3.5 of the California Welfare and Institutions Code,
section 14124.90 provides:

It is the intent of the Legislature to comply with
federal law requiring that when a beneficiary has
third-party health coverage or insurance,
[Medi-Cal] shall be the payor of last resort. . .
. Providers shall seek reimbursement from
available third-party health coverage before
billing the Medi- Cal program.

Therefore, California had a pre-existing statutory mandate applicable to
providers of Medi-Cal services which required them to seek third party
reimbursement prior to billing Medi-Cal in cases in which there was a
probable existence of third party liability.


6. It appears that, while California intended to issue monthly lists
of claims with other health coverage to Regional Centers, it did not
initially do so for retroactive claims and did not identify all
retroactive claims until July 1991. State Ex. 53. However, there is no
evidence that California submitted any TCM claims to HCFA without first
rejecting the claims for recipients with other health coverage and
returning those to the providers. Id.

7. Prior to the approval of SPA 87-15, Regional Centers could not
bill third parties; TCM services were not a Medi-Cal service under State
law until HCFA approved SPA 87-15.

8. HCFA's findings actually provide some corroboration for this
assertion. HCFA found that the disallowance included claims for which
other health coverage had been identified only for services rendered by
one of the Regional Centers which HCFA found did have a functioning
billing system during the disallowance period.

9. In questions to the parties, the Board specifically asked HCFA
to identify any authority which addressed the issue of the time period
within which a provider must bill a third party source in a cost
avoidance system. HCFA responded that 42 C.F.R.  433.139(d)(2) imposed
time limits in a cost avoidance system where the state agency learns of
the existence of a liable third party after it pays a claim or where
benefits become available after it pays a claim. HCFA did not argue
that this provision applied to claims, such as these TCM claims, which
California rejected and returned to the providers for billing of other
health coverage.

10. HCFA did argue that the Board's preliminary analysis erred in
suggesting that "California could meet its responsibility for seeking
third party payment by simply delegating the task of establishing such a
system to the twenty-one regional centers . . . ." We do not view this
as a situation in which California improperly delegated responsibility
to the Regional Centers. California went to considerable effort to
develop and implement a cost avoidance system for TCM services.
California's policy of leaving the actual billing of some third parties
to the Regional Centers is fully adequate to meet Medicaid requirements.
The Medicaid regulations contemplate that the providers will do the
billing in a cost avoidance system. 42 C.F.R.  433.139.

11. California represented that for it to demonstrate that all the
Regional Centers did ultimately bill for all other health coverage would
be extremely burdensome and time-consuming, was not required, and would
merely show that the Regional Centers had performed a useless act since
the experience of the billing Regional Centers and the results of
California's insurance surveys indicated that no insurance company
covered TCM services. Based on discussions with the parties, we agreed
to first address the threshold issue of whether such documentation was
required. Based on our analysis here, we conclude that such
documentation was not required. We further note that there was no
finding here that the Regional Centers did not live up to their
assurances that they would bill third parties retroactively.

12. We note that California's claims for the period prior to July 1,
1988 included some claims for administrative costs associated with TCM
services. HCFA did not allege here that these administrative costs were
not necessary for the proper and efficient administration of the
Medicaid program. The mere fact that we have found that TCM services
prior to this date were provided "without charge" does not necessarily
mean that California did not properly incur some start-up costs for its
TCM program during this period. As noted above, however, nothing in
this decision precludes HCFA from examining the allowability of
individual cost items claimed by California.

13. In choosing what information to submit to HCFA initially,
California apparently relied on the fact that its third party recovery
systems (including its pay and recover system) had been reviewed by HCFA
in 1990 and 1991 and by the Office of the General Counsel in 1989. State
Ex. 37, at 1. California represented to the HCFA official responsible
for the remand review that these prior reviews had found California's
"third party efforts . . . complied with all applicable federal Medicaid
requirements." Further, California submitted and relied on section
14124.71 of the California Welfare and Institutions Code, the statutory
provision which authorizes recovery against tort-feasors.