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Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
IN THE CASE OF  


SUBJECT:

California Department of Health Services,

DATE: June 28, 2000
                                

 

 

Docket No.A-99-110
Control No. CA/1999/001/MAP
Decision No. 1732
DECISION
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DECISION

The California Department of Health Services (DHS) appealed the July 6, 1999 determination of the Health Care Financing Administration (HCFA) disallowing $353,148 in federal financial participation (FFP) claimed under title XIX of the Social Security Act (Act). The disallowed costs were claimed for Medicaid payments made by DHS to Peninsula Plaza Health Care Center (Peninsula), a long-term care facility. DHS paid for items or services provided to new admissions after DHS had imposed a denial of payments for new Medicaid admissions effective August 24, 1996, and for items or services provided to all Medicaid recipients after DHS had terminated Peninsula's Medicaid provider agreement effective November 16, 1996. HCFA determined that these payments constituted overpayments under section 1903(d)(2) of the Act and that DHS was required to refund the federal share. DHS argued that the payments made for the 30-day period following the termination did not constitute overpayments because section 441.11 of 42 C.F.R. provides that such payments are allowable when the state agency is making reasonable efforts to transfer the Medicaid recipients to other facilities. DHS also argued that it was not required to refund any of the overpayments because it qualified for the exception in section 433.318 of 42 C.F.R. for overpayments to a provider who is out of business on the date of discovery of the overpayments.

For the reasons discussed below, we find that DHS failed to establish either that reasonable efforts were made to transfer Medicaid recipients during the 30-day period following termination or that the provider was out of business within the meaning of the regulations. Accordingly, we uphold the disallowance in full.

Statutory and Regulatory Background

Title XIX of the Social Security Act establishes a medical assistance program, Medicaid, which is administered by the states and partially funded by the federal government. Under this program, FFP is available in state Medicaid payments to a long-term care facility that has a valid provider agreement in effect. In order to have a provider agreement, the facility must be certified by the state survey agency as meeting the federal requirements for participation in the program. A state must terminate the Medicaid provider agreement of a facility that also participates in Medicare if HCFA terminates the facility's Medicare provider agreement. See 42 C.F.R. §§ 442.12, 442.30(a), 488.450 and 488.452.

Section 441.11 of 42 C.F.R. provides for an exception to the general rule that FFP is not available after a provider agreement has been terminated. As relevant here, this section provides:

(a) Basic conditions for continuation of FFP. FFP may be continued for up to 30 days after the effective date of termination or expiration of a provider agreement, if the following conditions are met:

* * * * *

(2) The State agency is making reasonable efforts to transfer those recipients to other facilities or to alternate care.

Pursuant to section 1903(d) of the Act, HHS funds a state's Medicaid program by quarterly advances of funds to the state, equal to the federal share of the estimated cost of the program. A state must submit 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. 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.

Further, section 1903(d)(2)(C) provides that-

. . . when an overpayment is discovered, . . . the State shall have a period of 60 days in which to recover or attempt to recover such overpayment before such adjustment is made in the Federal payment to such State on account of such overpayment. Except as otherwise provided in subparagraph (D), the adjustment in the Federal payment shall be made at the end of the 60 days, whether or not recovery was made.

Section 1903(d)(2)(D) creates an exception to the requirement to adjust for overpayments 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." HCFA issued detailed regulations implementing section 1903(d)(2)(D) which provide as follows:

(a) Basic rules. (1) The agency is not required to refund the Federal share of an overpayment made to a provider as required by § 433.312(a) to the extent that the State is unable to recover the overpayment because the provider has been determined bankrupt or out of business in accordance with the provisions of this section.

(2) The agency must notify the provider that an overpayment exists in any case involving a bankrupt or out-of-business provider and, if the debt has not been determined uncollectable, take reasonable actions to recover the overpayment during the 60-day recovery period in accordance with policies prescribed by applicable State law and administrative procedures.

(b) Overpayment debts that the State need not refund. Overpayments are considered debts that the State is unable to recover within the 60-day period following discovery if the following criteria are met:

(1) The provider has filed for bankruptcy, as specified in paragraph (c) of this section; or

(2) The provider has gone out of business and the State is unable to locate the provider and its assets, as specified in paragraph (d) of this section.

(c) Bankruptcy. The agency is not required to refund to HCFA the Federal share of an overpayment at the end of the 60-day period following discovery, if-

(1) The provider has filed for bankruptcy in Federal court at the time of discovery of the overpayment or the provider files a bankruptcy petition in Federal court before the end of the 60-day period following discovery; and

(2) The State is on record with the court as a creditor of the petitioner in the amount of the Medicaid overpayment.

(d) Out of business. (1) The agency is not required to refund to HCFA the Federal share of an overpayment at the end of the 60-day period following discovery if the provider is out of business on the date of discovery of the overpayment or if the provider goes out of business before the end of the 60-day period following discovery.

(2) A provider is considered to be out of business on the effective date of a determination to that effect under State law. The agency must--

(i) Document its efforts to locate the party and its assets. These efforts must be consistent with applicable State policies and procedures; and

(ii) Make available an affidavit or certification from the appropriate State legal authority establishing that the provider is out of business and that the overpayment cannot be collected under State law and procedures and citing the effective date of that determination under State law.

(3) A provider is not out of business when ownership is transferred within the State unless State law and procedures deem a provider that has transferred ownership to be out of business and preclude collection of the overpayment from the provider.

(e) Circumstances requiring refunds. If the 60-day recovery period has expired before an overpayment is found to be uncollectable under the provisions of this section, if the State recovers an overpayment amount under a court-approved discharge of bankruptcy, or if a bankruptcy petition is denied, the agency must refund the Federal share of the overpayment in accordance with the procedures specified in § 433.320.

42 C.F.R. § 433.318.

Factual Background

Peninsula was a skilled nursing facility owned and operated by International Long Term Care, Inc. (International), a California corporation. DHS Ex. 4, Att. B, 1st unnumbered page. On August 9, 1996, HCFA notified Peninsula that its Medicare provider agreement would terminate on January 14, 1997 because the state survey agency had found that Peninsula was not in substantial compliance with federal participation requirements. HCFA Ex. A. HCFA also notified Peninsula that it would deny payment for new Medicare admissions effective August 24, 1996. Id.; HCFA Ex. B. On August 19, 1996, DHS notified Peninsula that its participation in the Medi-Cal (California Medicaid) program was being terminated, and payments for new Medi-Cal admissions denied, effective on the same dates as the federal actions with respect to Medicare (of which DHS had been separately notified). DHS Ex. 5. On October 29, 1996, HCFA notified Peninsula that a resurvey had found that Peninsula still had not achieved substantial compliance with the participation requirements and that HCFA would therefore terminate Peninsula's Medicare provider agreement effective November 16, 1996. DHS Ex. 14, Att. A. On February 4, 1997, DHS notified Peninsula that, since its participation in Medi-Cal was contingent on its meeting Medicare requirements, "there will be no Medi-Cal payment for services rendered beyond December 15, 1996." DHS Ex. 6.

Notwithstanding its denial of payment for new admissions and termination actions, DHS paid Peninsula for new Medi-Cal admissions after August 24, 1996, and for all Medi-Cal recipients from November 16, 1996 until several months after the beginning of 1997. According to DHS, all of these payments, except those for the first 30 days after termination, were made "due to clerical and/or computer error." DHS Ex. 4, at 1. HCFA paid DHS's claims for FFP in these payments.

On October 30, 1997, DHS's Licensing and Certification Program requested that its Audits and Investigations Division perform an audit of the overpayments to Peninsula. On January 13, 1998, DHS issued its audit report and a repayment demand letter. The DHS auditors calculated that there had been a total overpayment of $466,138: $65,060 for payments for new admissions after August 24, 1996, and the balance for payments made after December 15, 1996. The auditors did not calculate any overpayment for the 30-day period beginning on the effective date of the termination (November 16, 1996) based on their understanding that, under section 441.11 of 42 C.F.R., a nursing facility terminated from participation in Medi-Cal is permitted 30 days to relocate patients to a new nursing facility. DHS Ex. 9, Att. B.


DHS attempted to recover the overpayments identified by its auditors, but was informed that Peninsula's owner and operator, International, had sold Peninsula in March 1997 and was no longer in business. DHS was unable to locate any assets owned by International, and closed the collections file sometime after September 3, 1998.(1) DHS Ex. 9 (Declaration of Diana Dong); DHS Ex. 11 (Declaration of Grace Ballesteros).

HCFA later reviewed DHS's audit report and disallowed the costs identified by the auditors as overpayments. In addition, HCFA determined that the payments for the 30 days following termination were not allowable in the absence of evidence that DHS made reasonable efforts to transfer Medicaid recipients from Peninsula. HCFA therefore disallowed an additional $236,949 in payments made for this period.(2) DHS Ex. 1.

Conclusion

Based on the foregoing analysis, we uphold the disallowance in full.

ANALYSIS
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1. Payments made for Medi-Cal recipients during the 30-day period following termination were not allowable because DHS failed to establish that reasonable efforts were made to transfer the recipients to other facilities during that period as required by 42 C.F.R. § 441.11.

DHS took the position that the disallowance of the payments for the 30-day period following termination was "contrary to longstanding practice of both HCFA and DHS to allow 30 days payment post-termination." DHS Br. dated 4/18/00, at 4. DHS also stated that HCFA paid Medicare claims for that period and argued that HCFA's different treatment of Medi-Cal payments "defies logic." DHS Br. dated 3/1/00, at 7. In addition, DHS appeared to challenge HCFA's finding that it failed to show that reasonable efforts were made to transfer Medi-Cal recipients during the 30 days following termination, noting that--

by California statute, the obligation is on the terminated facility "to take reasonable steps to transfer affected patients safely," and to give at least 30 days notice in advance of the transfer of alternative facilities that are available and adequate to meet patients' needs.

DHS Br. dated 4/18/00, at 5, citing California Health and Safety Code, section 1336.2 (State Ex. 13).(3)

DHS's arguments have no merit. DHS provided no evidence that HCFA had a longstanding practice of allowing Medicaid payments made for a 30-day period following termination regardless of whether reasonable efforts were made to transfer Medicaid recipients. Such a practice would be contrary to the plain language of the regulation. Moreover, DHS's allegation regarding HCFA's longstanding practice is contradicted by the preamble to original version of the final rule, which states in pertinent part:

The purpose of this new regulation is to provide for a period, not to exceed 30 days from the effective date on which an institution or facility is determined not in compliance with Federally-defined qualifying standards for accreditation or certification, in which Federal matching may continue. However, there must be a bona fide effort on the part of the State to make other arrangements for care of these institutionalized recipients. The basis for this new regulation is the Secretary's determination that States should be allowed a reasonable period in which to provide for the orderly transfer of such individuals to other fully qualified institutions and facilities.

42 Fed. Reg. 4125 (Jan. 24, 1977) (emphasis added).(4) This language leaves no room for doubt that HCFA interpreted the regulation from its inception to require reasonable efforts to transfer Medicaid recipients.(5)

DHS's understanding of HCFA's longstanding practice may reflect only that HCFA pays Medicare claims for the 30-day period following termination without requiring reasonable efforts to transfer Medicare recipients. As HCFA pointed out, however, the Medicare regulations at 42 C.F.R. § 489.55 do not contain the same limitation as the Medicaid regulations at 42 C.F.R. § 441.11. Since the Board is bound by the applicable Medicaid regulations (45 C.F.R. § 16.14), HCFA's differing treatment of Medicare and Medicaid payments is simply irrelevant.

Moreover, DHS's apparent reliance on section 1336.2 of the California Health and Safety Code to show that reasonable efforts were made to transfer Medicaid recipients is misplaced. Even assuming that that statute requires reasonable efforts to transfer patients, it does not necessarily follow that such efforts were actually made. DHS did not even allege that such efforts were in fact made, much less provide any evidence to support such an allegation. Thus, DHS did not provide any basis for finding that it met the requirements of the regulation for the continuation of FFP for 30 days following termination. As the Board stated in DAB No. 513:

Under the regulations, the State must demonstrate that reasonable transfer efforts were made, in order to be eligible for the additional funds. There is nothing in the regulations that indicates that, in the absence of evidence to the contrary, there is an assumption that reasonable transfer efforts were made. The State has the burden to demonstrate its efforts, especially since transfer effort information would be more likely to be in the custody of the State (Medicaid is a state-run program).

At 9.

Accordingly, we conclude that HCFA properly disallowed FFP claimed for payments made for the 30-day period following termination.

2. DHS failed to establish that it qualified for the exception in 42 C.F.R. § 433.318 for payments to out-of-business providers because DHS did not provide a certification from the appropriate state legal authority that the provider was out of business.

DHS took the position that it need not adjust for overpayments because International, the owner and operator of Peninsula, was out of business prior to the date of discovery of the overpayments (which the parties agreed was January 13, 1998, when DHS sent the repayment demand letter to International(6)).(7) See DHS Br. dated 3/1/00, at 5; HCFA Br. dated 4/3/00, at 6, n.3. DHS asserted that International went out of business when it sold Peninsula in March 1997. DHS relied on the written declaration of its Chief, Provider Certification, which concludes that International was out of business as of that date based on documentation obtained by DHS (and submitted with the declaration) showing that: (1) International's sole business was owning and operating Peninsula; (2) ownership of Peninsula was transferred to the Hillsdale Group in March 1997; (3) International had no other assets; and (4) International did not make any income tax filings for 1998 and 1999. DHS Ex. 4 (Declaration of Michael Gaddy dated 2/29/00). Mr. Gaddy's declaration also refers to a January 28, 2000 letter from the President of International stating that, since International ceased operating Peninsula in March 1997, International has had no assets or income, but that International has remained a corporation in good standing so that it may have standing to defend claims against it. Id.(8)

In addition, counsel for DHS represented in DHS's briefing that "California case law defines being out of business as ceasing operations." DHS Br. dated 4/18/00, at 2, citing Nash v. City of Santa Monica, 143 Cal.App.3d 251, 191 Cal.Rptr. 717 (1983); see also DHS Br. dated 3/1/00, at 5. Counsel further represented that a "defunct, shell corporation" such as International "can maintain active corporate status in California for years," so that the fact that International maintained active corporate status in California did not mean that it was not out of business. Id. Counsel also represented that the overpayment could not be collected under California law and procedures because International itself no longer had any income or assets and the circumstances under which California law would permit recovery against the individual owners of International were not present here. Id. at 6-7.

HCFA took the position that the foregoing was insufficient to establish that the exception for out-of-business providers applied here. We agree. Section 433.318(d)(2) states that "[a] provider is considered to be out of business on the effective date of a determination to that effect under State law." Emphasis added. Section 433.318(d)(2)(ii) specifies that the state must "[m]ake available an affidavit or certification from the appropriate State legal authority establishing that the provider is out of business and that the overpayment cannot be collected under State law and procedures and citing the effective date of that determination under State law." Emphasis added. DHS contended that "the appropriate State legal authority to certify that International is out of business and that the overpayment cannot be collected under State law and procedures is DHS" and that Mr. Gaddy's declaration constituted the requisite certification. DHS Br. dated 4/18/00, at 2-3. It is arguable that Mr. Gaddy was qualified to address at least some of the underlying facts that might support a determination that the provider was out of business. However, there is no indication in the record that Mr. Gaddy, as DHS's Chief of Provider Certification, was authorized to make such a determination on behalf of the state. Moreover, Mr. Gaddy's declaration simply assumes that a provider that exists only as a shell corporation or has transferred ownership has out-of-business status, an issue of state law specifically identified in the preamble to the final regulations. See 54 Fed. Reg. 5452, 5458-5459 (Feb. 3, 1989). Furthermore, DHS counsel's attempt to address the status of a shell corporation under California law in the briefing submitted in this case does not satisfy the regulatory requirement for a certification from an appropriate state legal authority. Since counsel was acting as DHS's advocate, she was not in a position to provide an authoritative interpretation of state law. (After the close of briefing in this case, the Board gave DHS an opportunity to provide a certification from an appropriate legal authority such as the State Attorney General. Board's letter to parties dated 4/28/00. However, DHS later advised the Board that it had decided not to provide any additional documentation.)

DHS nevertheless argued that HCFA was "attempting to set the bar so high that no state could attain the level of proof necessary to be exempted from refunding an overpayment in a case such as this." DHS Br. dated 4/18/00, at 4. DHS cited language in the preamble to the final regulations indicating HCFA's intent to "allow[] States to define out-of-business situations using State law . . . ." 54 Fed. Reg. 5452, 5459 (Feb. 3, 1989). However, both the plain language of the regulation and other statements in the preamble clearly indicate that HCFA intended to defer only to a state's official interpretation of its own law.

Accordingly, we conclude that DHS did not establish that it qualified for the exception in 42 C.F.R. § 433.318 to the requirement to adjust for overpayments.

JUDGE
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Donald F. Garrett

M. Terry Johnson

Marc R. Hillson
Presiding Board Member

FOOTNOTES
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1. This was the date of an agreement settling International's appeal of the audit findings. The agreement provided that it would become null and void if any attempt were made by DHS to collect the debt against any principal of International. DHS Ex. 10.

2. HCFA did not separately identify the federal share of this amount. The total overpayment identified by HCFA was $703,087, with a federal share equal to $353,148.

3. Section 1336.2(a) states in part that "[w]hen patients are transferred due to any change in the status of the license or operation of a facility, including voluntary or involuntary termination of a facility's Medi-Cal or Medicare certification, the facility shall take reasonable steps to transfer affected patients safely and minimize possible transfer trauma . . . ." DHS Ex. 13.

4. The original provision on reasonable efforts, which was designated as 45 C.F.R. § 249.10(d)(3)(iii)(B), was substantially the same as the current provision.

5. There are also several Board decisions that indicate that HCFA has taken disallowances on the basis that the state failed to make reasonable efforts to transfer Medicaid recipients during this 30-day period. See Kansas Dept. of Rehabilitation Services, DAB No. 1118 (1989); New York State Dept. of Social Services, DAB No. 678 (1985); New Jersey Dept. of Human Services, DAB No. 513 (1984); and Missouri Dept. of Social Services-Carlson Towers Geriatric Center, DAB No. 247 (1982).

6. The date of discovery is defined as "the date on which any Medicaid agency official or other State official first notifies a provider in writing of an overpayment and specifies a dollar amount that is subject to recovery." 42 C.F.R. § 433.316(c)(1).

7. Although DHS twice noted that International filed for bankruptcy on February 21, 1997 (Notice of appeal dated 8/6/99, at 2; DHS Br. dated 3/1/00, at 3, citing DHS Ex. 8), DHS did not pursue the argument, suggested in its notice of appeal, that it qualified for the exception for bankrupt providers. That exception would not have applied if the bankruptcy petition was denied or if the state was not "on record with the court as a creditor of the petitioner in the amount of the Medicaid overpayment." See 42 C.F.R. §§ 433.318(c)(2) and 433.318(e). The relevant facts are not developed in the record.

8. DHS also provided, but did not specifically rely on, the written declaration (with supporting documentation) of its Chief, Centralized Applications Unit. DHS Ex. 12 (Declaration of Glenda Lee). This declaration, like that of Mr. Gaddy, concludes that International "went out of business in California in March 1997 when it transferred ownership of Peninsula . . . ."

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