Mercy Hosp. of Watertown v. New York State Dept. of Social Services

• Citation: 581 N.Y.S.2d 628,79 N.Y.2d 197,590 N.E.2d 213
• Parties: , 590 N.E.2d 213, Medicare & Medicaid Guide P 40,061 In the Matter of MERCY HOSPITAL OF WATERTOWN, Respondent, v. NEW YORK STATE DEPARTMENT OF SOCIAL SERVICES, Appellant.
• Decision Date: 20 February 1992
• Court: New York Court of Appeals

Page 628

581 N.Y.S.2d 628

79 N.Y.2d 197, 590 N.E.2d 213,

Medicare & Medicaid Guide P 40,061

In the Matter of MERCY HOSPITAL OF WATERTOWN, Respondent, v. NEW YORK STATE DEPARTMENT OF SOCIAL SERVICES, Appellant.

Court of Appeals of New York.

Feb. 20, 1992.

[79 N.Y.2d 198] [590 N.E.2d 214] Robert Abrams, Atty. Gen. (Clifford A. Royael, Jerry Boone and Peter H. Schiff, Albany, of counsel), for appellant.

[79 N.Y.2d 199] Michael J. McNeil, Robert H. Iseman and Carol A. Hyde, Albany, for respondent.

OPINION OF THE COURT

WACHTLER, Chief Judge.

Petitioner, a hospital authorized to provide Medicaid services, challenges the method by which respondent, the agency charged with administering the Medicaid program in New York State, has determined that overpayments in the amount of $113,771.24 were made to the hospital for Medicaid services provided during a two-year period. At issue is whether respondent was authorized to calculate the amount of overpayment by means of statistical sampling rather than by an individual review of all the cases in the audit period, without a showing that petitioner's records were inadequate to conduct a case-by-case review. We conclude that it was neither arbitrary and capricious nor in excess of respondent's authority to employ a statistical sampling method in these circumstances.

I.

Medicaid is a joint Federal-State medical assistance program which reimburses medical providers for services provided to eligible individuals (see, Social Security Act tit. XIX, 42 U.S.C. § 1396 et seq.; Social Services Law § 363 et seq.). Federal funds are available to pay a percentage of the total amounts spent by states for medical assistance (see, 42 U.S.C. § 1396b). To participate in the program and receive Federal funds, states are required to submit for Federal approval a medical assistance plan which conforms to standards set forth in Federal statutes and regulations (42 U.S.C. § 1396a). States are required, among other things, to adopt procedures to prevent fraud, abuse, unnecessary or inappropriate use of Medicaid services and excess payments (42 CFR 447.45, 455.13, 456.3, 456.23).

New York State opted to participate in the Medicaid program and the Legislature delegated to respondent, the State Department of Social Services (DSS), the task of developing a plan to submit for Federal approval. To that end, Social Services Law § 363-a(1) provides that DSS "shall submit a plan for medical assistance, as required by title XIX of the federal social security act, to the federal department of health, education and welfare. ¹ for approval * * * and shall act as the single state agency to supervise the administration of the plan in this state. [DSS] shall act for the state in any negotiations relative to the submission and approval of such plan and it may make such arrangements, not inconsistent with law, as may be required by or pursuant to federal law to obtain and retain such approval and to secure for the state the benefits of the provisions of such law." In addition, section 363-a(2) provides that DSS "shall make such regulations, not inconsistent with law, as may be necessary to implement this title."

Pursuant to this grant of authority from the State Legislature, and in accordance with Federal regulations requiring such procedures as part of the State plan, DSS administers a plan which includes mechanisms for detecting and recouping payments to providers for unnecessary or inappropriate services or in excess of the authorized amount (see generally, 18 NYCRR parts 517 [audit procedures], 518 [recoupment procedures], 519 [hearing procedures]. Regulations promulgated by DSS require providers to prepare and maintain detailed records reflecting the nature and extent of services furnished and to make them available to DSS for audit (18 NYCRR 504.3[a], [g]. Audits are conducted on notice to the provider, who may discuss and lodge objections to the audit procedures, audit findings and any proposed action prior to the issuance of a final audit report (18 NYCRR 517.3, 517.5, 517.6). Upon the issuance of a final audit report, the provider is entitled to a hearing to challenge any determination that overpayments have been made (18 NYCRR 517.6, 519.4). The regulation governing hearing procedure provides, in part, that "[a]n extrapolation based upon an audit utilizing a statistical sampling method certified as valid will be presumed, in the absence of expert testimony and evidence to the contrary, to be an accurate determination of the total overpayments made or penalty to be imposed. The [provider] may submit expert testimony challenging the extrapolation by the department or an actual accounting of all claims paid in rebuttal to the department's proof" (18 NYCRR 519.18[g]. ²

II.

Respondent's audit of petitioner's Medicaid billings covered the period from December 1, 1982 through November 30, 1984, and concerned billings for outpatient services only. These services fell into three categories--emergency room services, ordered ambulatory services (tests and procedures ordered by an outside physician), and laboratory services. The hospital's Medicaid billings for the audit period consisted of 5,047 emergency room cases, 1,860 ordered ambulatory cases and 2,979 laboratory cases, for a total of 9,886 cases.

Although it is not disputed that the hospital had adequate records for all of the cases subject to the audit, the auditors reviewed only 400 randomly selected cases: 200 emergency room cases, 100 ordered ambulatory cases, and 100 laboratory cases. Based upon a review of the hospital's medical records for the sampled cases, the auditors determined that the hospital had been overpaid a total of $4,256.76 for the 200 emergency room cases sampled (an average of $21.2838 per case) and a total of $341.50 for the 100 ordered ambulatory cases sampled (an average of $3.415 per case). No significant overpayments were found in the laboratory cases. By multiplying the average overpayment by the total number of cases in each category, DSS projected overpayments of $107,419.34 for the 5,047 emergency room cases and $6,351.90 for the 1,860 ordered ambulatory cases--a total of $113,771.24.

After being notified of DSS's intention to recoup the alleged overpayments, the hospital requested a hearing, asserting, among other things, that the use of statistical sampling was improper. At the hearing, DSS presented expert testimony from a statistician that the random sample reviewed was representative of the universe of cases subject to the audit. He explained the method by which the results of the sample were extrapolated to determine the total amount of overpayments and testified that, in his opinion, the result achieved by this method was the amount that the auditors most likely would have found if they had reviewed the entire universe of cases.

Other witnesses for DSS explained the reasons that claims were disallowed. In the emergency room cases, for example, claims for services rendered during prescheduled visits were disallowed pursuant to regulations defining emergency services as those provided "to the ill and injured who require immediate medical or surgical care on an unscheduled basis" (10 NYCRR 444.19[a][1].

The hospital's expert did not challenge the validity of the sample used in this case, or the efficacy of sampling techniques in general. He asserted, however, that the audit in this case was flawed because the criteria applied by the auditors were not sufficiently specific and because the auditors' lack of a medical background did not qualify them to determine whether a given case involved a medical emergency as defined in the regulations.

Following the hearing, the Administrative Law Judge upheld the determination that the hospital had received overpayments, holding that the use of statistical sampling techniques was authorized and that the audit in this case was properly conducted. The ALJ initially reduced the amount of the overpayment by allowing the hospital to offset each disallowance for prescheduled emergency room cases by the amount billable for a routine physician's office visit. Following a request from DSS's hearing counsel for clarification of the basis for the offset, the ALJ issued a corrected decision eliminating the offset, which he stated was the product of a proofreading mistake in the original decision.

This CPLR article 78 proceeding ensued. Upon transfer from Supreme Court (see, CPLR 7804[g], the Appellate Division, Third Department, annulled the determination and remitted the matter to DSS for further proceedings. The Appellate Division held that DSS's use of the random sample audit was arbitrary and capricious because adequate records were available to conduct a case-by-case review (169 A.D.2d 1009, 565 N.Y.S.2d 284). In light of this holding, the Appellate Division did not address the other issues raised by the hospital, including its arguments with respect to the issuance of the corrected decision, and its objections to the criteria used and the qualifications of the auditors. We granted the motion of DSS for leave to appeal ³ and now reverse.

III.

Petitioner contends first that DSS exceeded its authority in conducting the random sample audit, notwithstanding the existence of regulations purporting to authorize such methods, because the legislation delegating to DSS the authority to administer the Medicaid program does not expressly or impliedly authorize the use of random sample audits.

It is true, of course, that the Social Services Law does not expressly refer to such audits, but that observation does not materially advance the analysis. The legislation makes no express reference to audits of any kind, but there can be no doubt that, to administer a Medicaid program in conformance with Federal requirements regarding the prevention of fraud and abuse, DSS must have the authority to audit the medical records maintained by providers to determine the legitimacy of claims...