New York Law Review

Tag: Medicaid Audit

  • Mercy Hospital of Watertown v. New York State Department of Social Services, 79 N.Y.2d 197 (1992): Statistical Sampling in Medicaid Audits

    Mercy Hospital of Watertown v. New York State Department of Social Services, 79 N.Y.2d 197 (1992)

    A state agency can use statistical sampling to determine Medicaid overpayments even if the provider’s records are adequate for a full audit, provided the methodology is reasonable and the provider has an opportunity to challenge the findings.

    Summary

    Mercy Hospital challenged the New York State Department of Social Services’ (DSS) determination that it had received $113,771.24 in Medicaid overpayments. DSS calculated the overpayment using statistical sampling of a subset of cases rather than reviewing all cases. The New York Court of Appeals held that DSS was authorized to use statistical sampling, even though the hospital’s records were adequate for a full audit. The court reasoned that such authority was implicit in DSS’s broad mandate to administer the Medicaid program and prevent fraud and abuse, and that the use of statistical sampling was a reasonable method for auditing a large volume of claims.

    Facts

    DSS audited Mercy Hospital’s Medicaid billings for outpatient services from December 1, 1982, through November 30, 1984. The audit covered 5,047 emergency room cases, 1,860 ordered ambulatory cases, and 2,979 laboratory cases, totaling 9,886 cases. Instead of reviewing all cases, auditors statistically sampled 400 cases (200 emergency room, 100 ordered ambulatory, and 100 laboratory). Based on the sample, DSS projected overpayments of $107,419.34 for emergency room cases and $6,351.90 for ordered ambulatory cases, totaling $113,771.24. The hospital maintained adequate records for all cases.

    Procedural History

    After DSS notified Mercy Hospital of its intent to recoup the overpayments, the hospital requested a hearing, arguing that the use of statistical sampling was improper. An Administrative Law Judge (ALJ) upheld the overpayment determination, finding the sampling authorized and the audit properly conducted. The ALJ initially allowed an offset for prescheduled emergency room visits but later corrected the decision to eliminate the offset. Mercy Hospital then initiated a CPLR article 78 proceeding. The Appellate Division reversed the determination, holding that the statistical sampling audit was arbitrary and capricious because adequate records were available for a case-by-case review. DSS appealed to the New York Court of Appeals.

    Issue(s)

    Whether DSS exceeded its authority by using statistical sampling to calculate Medicaid overpayments when the hospital’s records were adequate for a complete audit.

    Holding

    No, because the authority to conduct Medicaid audits based on statistical sampling is implicit in the general grant of authority to supervise the administration of the Medicaid program, and such authority is not limited to cases where a provider’s records preclude a complete audit.

    Court’s Reasoning

    The Court of Appeals reasoned that the Social Services Law delegates broad authority to DSS to supervise the Medicaid program, including the power to audit medical records to ensure the legitimacy of claims. This authority necessarily includes the power to employ methods like statistical sampling, which is reasonably designed to further the regulatory scheme. The court distinguished cases interpreting Tax Law § 1138 (a), which might preclude test period audits when complete audits are possible, stating that this provision reflects a legislative preference specific to sales tax audits, not a generally applicable rule. The court emphasized that the regulation governing statistical sampling allows providers to challenge the accuracy of the estimates. The court stated: “Even when an item-by-item audit is possible, and it was not here, there is no inflexible requirement that the comptroller resort to it. * * * It is sufficient if the method adopted is reasonably calculated to reflect the taxes due.” The court concluded that using statistical sampling to detect and valuate overpayments falls within the agency’s power to implement legislative policy, not to make it. The court held, “the authority for DSS to conduct Medicaid audits based upon statistical sampling is implicit in the general grant of authority to supervise the administration of the Medicaid program in this State and that such authority is not limited to cases in which the inadequacy of a provider’s records preclude a complete audit.”