State of NC v. Heckler
| Decision Date | 26 March 1984 |
| Docket Number | No. 83-85-CIV-5.,83-85-CIV-5. |
| Citation | 584 F. Supp. 179 |
| Court | U.S. District Court — Eastern District of North Carolina |
| Parties | The STATE OF NORTH CAROLINA and The North Carolina Department of Human Resources, ex rel. Sarah T. Morrow, Secretary of Human Resources, Plaintiffs, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendants. |
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Steven M. Shaber, Asst. Atty. Gen., North Carolina Dept. of Justice, Raleigh, N.C., for plaintiffs.
James S. Perry, Asst. U.S. Atty., Raleigh, N.C., for defendants; Carl H. Harper, Regional Atty., Dept. of Health and Human Services, Atlanta, Ga., of counsel.
North Carolina brought this action to review a final decision of the Secretary of Health and Human Services (Secretary) requiring the state to repay $788,016 which represents interest earned on the federal government's share of recovered overpayments to health care providers. The action is before the court on the parties' cross-motions for judgment on the pleadings.
By enacting Title XIX of the Social Security Act of 1965, 42 U.S.C. § 1396, et seq., Congress created "Medicaid" which was designed to help states furnish medical assistance to the needy. Schweiker v. Hogan, 457 U.S. 569, 571, 102 S.Ct. 2597, 2600, 73 L.Ed.2d 227 (1982). State participation in the Medicaid program is voluntary, Smith v. Miller, 665 F.2d 172 (7th Cir.1981); however, should a state decide to participate, federal financial assistance is available for those states which submit to and have approved by the Secretary medical assistance plans which conform to the requirements of 42 U.S.C. § 1396a. Illinois Department of Public Aid v. Schweiker, 707 F.2d 273 (7th Cir.1983). Of course, "once a state elects to participate, it must comply with the requirements of Title XIX." Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 2680, 65 L.Ed.2d 784.
Upon approval of the plan by the Secretary, the state is entitled to share in federal funds as specified in 42 U.S.C. § 1396b(a). To share in these funds, the state must submit a report estimating the total expenditure on Medicaid services for the upcoming quarter. 42 U.S.C. § 1396b(d)(1). Based upon this report, and any other investigations the Secretary may undertake, id. at Section 1396b(d)(1)(B), the Secretary shall pay to the state the amount she determines appropriate. Id. at Section 1396b(d)(2). Where the Secretary has determined that overpayments have been made, she can adjust the upcoming expenditure accordingly. Id. Should the state disagree with the Secretary's determination, reconsideration is available. Id. at Section 1316(d). Judicial review of this determination is available in the district courts, Illinois Department of Public Aid v. Schweiker, 707 F.2d at 277; County of Alameda v. Weinberger, 520 F.2d 344 (9th Cir.1975); Colorado Department of Social Services v. Department of Health and Human Services, 558 F.Supp. 337 (D.Colo. 1983), though the issue is not free from doubt. Massachusetts v. Departmental Grant Appeals Board, 698 F.2d 22, 26 (1983) (cases cited).
On the other hand, if after notice and an opportunity to be heard, the Secretary determines that in the administration of the plan there is a failure by the state to comply substantially with any provision of 42 U.S.C. § 1396a, funding may be terminated until compliance is obtained. 42 U.S.C. § 1396c. If a state is dissatisfied with the Secretary's determination under Section 1396c, review may be had in the United States Court of Appeals for the circuit in which the state is located. Id. at § 1316(a)(3).
North Carolina has an approved Medicaid plan administered by the Department of Human Resources (DHR) and accordingly receives federal financial assistance. To help administer the program, DHR employs a fiscal agent, EDS Federal (EDSF) which processes claims and pays health care providers. Both DHR and EDSF recover funds erroneously paid to providers. These funds, called overpayments, are recovered in two ways.
First, recovery of overpayments can be through refunds which occur when a Medicaid health care provider voluntarily returns money to EDSF. Upon receipt of this money, EDSF deposits it in its own interest-earning account, and at regular intervals, returns both the original overpayment and any interest earned to DHR. DHR then deposits the refunded amount, both interest and principal, with the state treasurer in Account No. 64445, where it continues to draw interest.
Overpayments are also recovered through a recoupment process. Rather than a provider voluntarily repaying the state, through EDSF, recoupment occurs when either DHR or EDSF learns that an overpayment to a provider has been made. To compensate, the amount of the overpayment is deducted from the provider's next check. Accordingly, EDSF, which writes the checks to the providers, pays what would otherwise be the appropriate amount less the overpayment. Because EDSF does not require the otherwise appropriate amount, it is provided only enough money from DHR to cover the actual payment to the provider.
Under normal circumstances, the difference between the amount otherwise due the provider and the actual payment, i.e., the overpayment, would have previously been credited to the federal and local governments as outlined above. However, between 1977 and 1979 DHR had difficulty determining how much of the overpayment represented the federal government's share. Rather than deduct the government's share of the overpayment from the federal allotment to be received for the upcoming quarter, see 42 U.S.C. § 1396b; 45 C.F.R. § 201.5(3), DHR would draw its entire share of federal funds. These funds were then divided, with the amount necessary to actually pay providers going to EDSF and the remainder, i.e., the overpayments which otherwise should have been credited prior to the draw, deposited with the state treasurer. These deposited funds, both refunds and recoupments, are the funds which earned interest over the two-year period.
As a result of an audit by the Secretary, it was determined that North Carolina had accumulated twelve million dollars on refund balances between January, 1977 and December, 1979. The auditors concluded that because federal funds were contained in this account, interest earned on the federal share in the amount of $788,016 belonged to the federal government. Accordingly, North Carolina was notified of a disallowance so the federal government could recoup this money.
North Carolina disputed the government's entitlement to an amount of the interest. Accordingly the government proceeded through administrative channels, 45 C.F.R. § 201.14, though jurisdiction for administrative review was challenged. After an adverse determination by the Departmental Grant Appeals Board, North Carolina brought the present action seeking both declaratory and injunctive relief to prevent the government from collecting the interest earned on the overpayments.
North Carolina advances two primary arguments in support of its motion for judgment on the pleadings. First, it contends that the interest earned on overpayments is not itself an overpayment subject to disallowance under 42 U.S.C. §§ 1396b(d) & 1316(d). Second, even assuming the interest earned is a disallowance within the Act, the government has waived its right to collect it under the Intergovernmental Cooperation Act, 42 U.S.C. § 4213, repealed and recodified at 31 U.S.C. § 6503(a). For the reasons which follow, the court finds neither argument persuasive.
The basic issue regarding North Carolina's first argument is whether the Secretary erred in treating the interest earned on overpayments made to the state as an overpayment under 42 U.S.C. § 1396b(d)(2) and therefore subject to "disallowance" under 42 U.S.C. § 1316(d). A discussion of whether the Secretary has properly classified the dispute as one involving a disallowance is incomplete without discussing whether, instead of being a disallowance, the dispute is one involving compliance with the Act. See 42 U.S.C. § 1396c(2).1 The distinction between disallowance or non-compliance is important because the Medicaid system was not intended to provide for profit-making on the part of the state at the expense of the government. See former Appendix C, 45 C.F.R. § 74 App. C.2
Correctly distinguishing between disallowance and non-compliance is no easy matter. There is considerable overlap between the two categories, Massachusetts v. Departmental Grant Appeals Board, 698 F.2d 22 (1st Cir.1983), with some determinations having characteristics of each. See Georgia Department of Medical Assistance v. United States Department of Health and Human Services, 708 F.2d 627 (11th Cir.1983). Moreover, nowhere in the Medicaid Act or its regulations is the term "disallowance" defined, Massachusetts v. Departmental Grant Appeals Board, 698 F.2d at 25, and it appears only once in the statute. See 42 U.S.C. § 1316(d) which provides:
Whenever the Secretary determines that any item or class of items on account of which Federal financial participation is claimed under subchapter ... XIX of this chapter ... shall be disallowed for such participation, the State shall be entitled to and upon request shall receive a reconsideration of the disallowance.
Given the language of the statute, a disallowance has been construed to involve a denial of federal funds for a narrow item or class of items not affecting the overall working of the program or federal-state relations, Massachusetts v. Departmental Grant Appeals Board, 698 F.2d at 25, and "arises from a routine audit, is clerical in nature, or focuses upon only a few aid recipients or providers...." Id. at 26-27. On the other hand, a finding of non-compliance occurs where the state fails to follow the federal requirements, Georgia Department of Medical Assistance v. United States Department of Health and Human Services, 708 F.2d at 629. Non-compliance involves...
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...forum in which such reconsideration may be had. This question has yet to be decided in the Fourth Circuit. State of North Carolina v. Heckler, 584 F.Supp. 179, 181 (E.D.N.C. 1984); see also Georgia Department of Medical Assistance v. United States Department of Health and Human Services, 70......
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