HHS Upholds $2.5 Million Disallowance to State Medicaid Program

This client alert may be of interest to state, local, and tribal governments that receive federal grant funds, particularly under the Medicaid program.

In a written opinion published on August 5, 2010, the U.S. Department of Health and Human Services Departmental Appeals Board (“DAB”) upheld a $2.5 million disallowance by the Center for Medicare and Medicaid Services (“CMS”) in Medicaid funding to the New Jersey Department of Human Services (“DHS”), the State’s Medicaid agency.

The costs disallowed had been incurred over a six-year period by New Jersey’s Office of the Ombudsman for the Institutionalized Elderly (“OOIE”), which is not a component of DHS but an office with which DHS had previously agreed to allocate to Medicaid certain costs incurred by OOIE. Specifically, OOIE and DHS entered into an agreement whereby DHS would submit claims for federal Medicaid reimbursement for OOIE “Medicaid eligible activities,” including the cost of investigations of suspected abuse, exploitation and/or poor care of elderly Medicaid patients. Under that agreement, DHS claimed Medicaid funding for each quarter from October 1, 2001 through September 30, 2007 based upon a methodology that calculated a percentage of investigations conducted by OOIE (the number of OOIE investigations “in Medicaid cases” divided by the total number of all investigations conducted by OOIE), and applied the percentage to OOIE’s total costs for the quarter. CMS disallowed $2,513,951 in Medicaid federal financial participation funding on the basis that DHS did “not identif[y] any activities provided by the Office of the Ombudsman that would be considered allowable costs associated with the administration of the Medicaid program nor [did] New Jersey provid[e] documentation requested by CMS to support its claim.”

The DAB upheld CMS’s disallowance on three grounds: (1) DHS’s methodology was not included in its approved cost allocation plan as required of states pursuant to federal Medicaid regulations; (2) the methodology DHS used to allocate OOIE costs to Medicaid was inconsistent with the requirements of Office of Management and Budget Circular A-87 (“Cost Principles for State, Local and Indian Tribal Governments”) (“OMB A-87”); and (3) DHS did not provide adequate supporting documentation for its claims as required by applicable regulations. The DAB noted that each of these grounds was an independent basis for the disallowance.

As a threshold matter, DAB articulated the well-established principle that recipients of federal grant funds, including Medicaid funds, carry the burden of documenting the allowability and allocability of costs charged to federal funds, and showing that claims for reimbursement are proper. It held that DHS did not meet this burden for any of the three grounds summarized above. Of note, the DAB concluded that the “percentage of investigations” methodology that DHS used to calculate the claims was not a valid basis for allocating costs to Medicaid because it did not identify, as required by OMB A-87, “the extent to which Medicaid benefited from the OOIE activities,” and demonstrated “no logical correlation between the percentage of investigations in Medicaid cases and any benefit to Medicaid costs not related to investigations.” Further, at least some of the OOIE activities that benefited Medicaid necessarily benefitted New Jersey’s long-term care ombudsman program; the costs benefitting both programs should have been further allocated between them instead of being allocated solely to Medicaid.

The DAB also found—as it commonly does in disallowance cases—that DHS failed to provide adequate supporting documentation for the OOIE activities for which the claims were submitted. Under OMB A-87, DHS was required to maintain accounting records, supported by source documentation, to show the allowability of costs claimed under Medicaid. The DAB found that it failed to meet this requirement because it provided no documentation demonstrating how OOIE determined which costs were incurred for investigations or other activities that DHS had identified as benefiting Medicaid. The DAB pointed to OMB A-87’s provision mandating that “[w]here employees work on multiple activities or cost objectives, a distribution of their salaries and wages will be supported by personnel activity reports or equivalent documentation.” The DAB went on to note that, in contravention of OMB A-87’s requirements, DHS had not provided any evidence of a time study or other documentation relating to the time spent by OOIE employees on various activities. In sum, the documentation failed to show that DHS took into account OOIE investigations that benefited New Jersey’s long-term ombudsman program, or again that there was any proper allocation of costs between the respective programs.

The DAB upheld the $2,513,951 disallowance in full. The opinion is New Jersey Dep’t of Human Servs., DAB No. 2328, 2010 WL 3184364 (Aug. 5, 2010).

For questions about this opinion, or about other legal issues affecting governmental recipients of federal grant funds, contact Ted Waters at ewaters@ftlf.com.

This Client Alert is provided solely for educational and informational purposes. It is not intended to constitute legal advice or to create an attorney-client relationship. Readers should obtain legal advice specific to their enterprise and circumstances in connection with each of the topics addressed.