State of Ga., Dept. of Human Resources v. Califano

• Decision Date: 19 December 1977
• Docket Number: No. C76-543A.,C76-543A.
• Citation: 446 F. Supp. 404
• Parties: STATE OF GEORGIA, By and Through the DEPARTMENT OF HUMAN RESOURCES v. Joseph A. CALIFANO, Jr., in his Official Capacity as Secretary of Health, Education and Welfare.
• Court: U.S. District Court — Northern District of Georgia

446 F. Supp. 404

STATE OF GEORGIA, By and Through the DEPARTMENT OF HUMAN RESOURCES v. Joseph A. CALIFANO, Jr., in his Official Capacity as Secretary of Health, Education and Welfare.

No. C76-543A.

United States District Court, N. D. Georgia, Atlanta Division.

December 19, 1977.

Arthur Bolton, State's Atty. Gen., Stephen L. Cotter, Asst. Atty. Gen., Atlanta, Ga., for plaintiff.

Carl A. Harper, Regional Atty., Dept. of HEW, William E. Turnipseed, Asst. U. S. Atty., Northern Dist. of Georgia, Atlanta, for defendant.

ORDER OF COURT

MOYE, District Judge.

This is an action under Title XIX of the Social Security Act of 1935, as amended, 42 U.S.C. § 1396 et seq., and the Administrative Procedure Act, 5 U.S.C. §§ 705 and 706. The case arises from a dispute between the State of Georgia Department of Human Resources (DHR) and the United States Department of Health, Education and Welfare (HEW). The center of the controversy is HEW's refusal to reimburse Georgia for some $3.5 million which was paid by DHR to doctors who had provided services to Georgia Medicaid recipients in the years 1972 through 1975. The case is presently before this Court on cross motions for summary judgment.

I. Factual Background

Pursuant to Title XIX, any state which administers a medical assistance (Medicaid) plan that has been approved by the Secretary of HEW pursuant to the provisions of 42 U.S.C. § 1396a is entitled to federal financial participation in its Medicaid program. This federal financial participation is in the form of a reimbursement for a percentage¹ of the total amounts spent by the state for medical assistance pursuant to the approved state plan. Although such state plans are designed by the state, they must meet certain federal standards in order to receive federal approval and funding. One such standard provides that payments to individuals by the state for Medicaid services are not to exceed the amounts determined by application of the guidelines established by 45 C.F.R. § 250.30.

The architects of Title XIX were aware that many states would be unable to finance the cost of an effective Medicaid program even if the state would ultimately be reimbursed for such costs. To alleviate this problem, Congress provided a program whereby the Secretary of HEW "shall estimate the amount to which a State will be entitled . . ." and then the Secretary "shall pay to the State, in such installments as he may determine, the amount so estimated, reduced or increased to the extent of any overpayment or underpayment which the Secretary determines was made under this section to such State for any prior quarter . . ." 42 U.S.C. § 1396b (d)(1), (2).

In January 1973, HEW, through its Social Rehabilitation Services (SRS), which administers the funding to state Medicaid programs, contracted with a public accounting firm to conduct a financial management review of the administration of the Georgia Medicaid program by the Georgia DHR. The purpose of the audit was to review the five-quarter period beginning January 1, 1972, and ending March 30, 1973, in an effort to determine whether any federal funds paid to Georgia had been used for expenses not covered by the Georgia Medicaid plan. The audit was conducted on the basis of random statistical samples of claims paid during the five-quarter period. The audit revealed that Georgia had paid some claims in excess of the ceilings imposed by 45 C.F.R. § 250.30. These claims fell into four areas: drug charges; nursing home reimbursement; inpatient hospital reimbursement; and physician fees. The overpayment of claims by Georgia resulted in an inflated cost of the Medicaid program. As a result the Regional Commissioner of SRS disallowed $2,857,303 in matching federal funds² and made a demand for the refund of that money.

Georgia pursued its right to have the disallowance reconsidered by the Administrator of SRS pursuant to 45 C.F.R. 201.14. A final decision was released January 16, 1976. The disputes concerning inpatient hospital reimbursement had been resolved at the regional level. Upon reconsideration, the Administrator found that all of the drug charges and nursing home claims were allowable but he upheld the disallowance of physicians' fees at an adjusted amount of $1,449,963.46. The Administrator's decision is set forth in a letter to DHR dated January 16, 1976. Georgia commenced this action to challenge the final disallowance by HEW³ and this Court enjoined HEW from collecting the amount pending the outcome of this action. This challenge has become the controversy of Count I of Georgia's complaint.

Counts II and III of plaintiff's complaint involve similar disallowances which SRS has offset against future reimbursements for Georgia Medicaid expenses. Therefore, no recovery is sought from Georgia; rather, Georgia seeks release of those funds by HEW. The refusal to pay the funds that are the subject of controversy in Counts II and III resulted from a finding in subsequent audits that Georgia had continued to exceed the limits of 45 C.F.R. 250.30 when reimbursing physicians' costs. One audit tested payments made during the first quarter of 1974 and revealed that Georgia had paid $372,632 in claims which were not authorized by its Medicaid plan. SRS deferred payment of this amount until it had reviewed the legitimacy of the claims. The amount deferred was later reduced to $290,175. On February 18, 1976, Georgia was formally informed by the Regional Commissioner, pursuant to the procedures set forth in 45 C.F.R. § 201.15, that the claims would be disallowed and payment refused. Pursuant to the provisions of 45 C.F.R. § 201.14, the State requested reconsideration of the Regional Commissioner's decision. The decision was affirmed by the Administrator of SRS on June 27, 1977. This disallowance has become the controversy of Count II of the complaint.

In light of the fact that two previous audits had established that DHR was overpaying physicians, and in light of the fact that Georgia had not yet implemented a system to correct the problem, the Regional Commissioner deferred a portion of federal financial participation claimed by the State for each quarter between April 1, 1974, and June 30, 1975. The total amount deferred was $1,818,146. During this period, members of the staff of the Regional Commissioner conducted an audit based on random sample claims. The audit revealed that Georgia had overpaid doctors some $2,411,571, including $1,614,788 of federal funds. This latter amount was disallowed by the Regional Commissioner and offset against future reimbursements to Georgia. The difference between the amount initially deferred and the amount ultimately disallowed was released to the State. Georgia requested a reconsideration of this disallowance. The Administrator, after much delay, received evidence submitted by both parties and upheld the disallowance on the basis of findings of fact and conclusions of law set forth in a letter to the State dated June 27, 1977. The State's challenge to that disallowance is the controversy of Count III of the complaint.

II. Count I

In Count I of the complaint Georgia challenges the findings of fact which supported the Administrator's decision to disallow certain Medicaid claims for reimbursement. Georgia moves this Court to set aside the agency findings and defendant seeks an order affirming the decisions. Section 10(e) of the Administrative Procedure Act, 5 U.S.C. § 706, governs the scope of judicial review of administrative actions and decisions. Pursuant to the statutory language which states: "the court shall review the whole record or those parts of it cited by a party . . .", courts have held that the "focal point for judicial review should be the administrative record already in existence, not some new record made initially in the reviewing court." Camp v. Pitts, 411 U.S. 138, 142, 93 S.Ct. 1241, 1244, 36 L.Ed.2d 106 (1973). While it is true that de novo review is authorized under 5 U.S.C. § 706(2), that section has been limited to two narrow situations: first where the proceeding is brought to enforce certain administrative actions; and second where there are inadequate fact finding procedures in an adjudicatory proceeding. Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). Clearly this action was not brought to enforce the decision by HEW. Rather, plaintiff argues that this Court should ignore the findings by the agency because the procedure used in making the disallowance was fundamentally unfair. The Administrative Procedure Act, 5 U.S.C. 706(2)(D), provides that a reviewing court may set aside the agency's findings of fact and conclusions of law if they were made without observance of procedure required by law. However, section 706 also allows the Court to take into account the rule of prejudicial error.

Georgia argues that SRS ignored the procedures for disallowance which it was required to follow pursuant to 45 C.F.R. § 201.14. SRS argues that it was not bound by the provisions of section 201.14 because that section was not formally promulgated until after the disallowance had been made. The Court finds that HEW bound itself to those provisions when it sent a letter to Georgia, dated July 15, 1975, in which HEW agreed to conduct the reconsideration in accordance with then proposed regulation 45 C.F.R. § 201.14.

Georgia specifically challenges the Administrator's alleged failure to "forward to the State a list of all items currently in the record, including those received from the Regional Commissioner, and make available for examination . . . such items not previously received by the State." 45 C.F.R. § 201.14(d)(3). Georgia contends that numerous ex parte communications took place between the Regional Commissioner and the Administrator which never became part of the record and to which Georgia had no opportunity to respond. Georgia suggests that four letters came to the Administrator's attention...