Ruling Favors City Over State in $23 Million Medicaid Feud

New York Law Journal -

By Tom Perrotta, New York Law Journal

The State Department of Health acted irrationally when it decided to take back $23
million paid to New York City to cover Medicaid services for the mentally disabled, a
state Supreme Court justice has ruled.

Manhattan Supreme Court Justice Nicholas Figueroa faulted the health department for an arbitrary review of the city's collection of state reimbursement funds and ordered the agency to reconsider its position.

The money, which has not been refunded by the city, derives from a 1974 law passed to help manage a crisis caused by the 1970s policy of deinstitutionalizing mentally ill
patients. Under Chapter 621 of the laws of 1974, the state Legislature earmarked funds to cover expenses that localities incurred for providing assistance and medical care to patients discharged from facilities run by the State Office of Mental Health. In order to claim Medicaid for a patient at the state's expense, localities had to show that the patient had resided in a state-run mental facility for at least five continuous years.

Since 1986, the city has requested and received reimbursement for $23 million in
Medicaid expenses, citing documents of patients who were eligible under Chapter 621.
After reviewing the city's claims over two fiscal quarters for 1997, the health
department found that the city was unable to document 9 percent of those claims as
eligible for Chapter 621 funds. The city disputed the errors, but the state agency
eventually determined that due to the extent of the errors, all the city's claims from
1986 to 1997 - more than $23 million - should be invalidated.

The city brought an Article 78 proceeding against the health department, arguing that
the agency's decision was arbitrary and capricious.
Writing in In the Matter of the City of New York, 405995/01, Justice Figueroa agreed,
saying the Department of Health had reviewed only a small sample of claims and
unreasonably disallowed those it knew were valid.

"There is little room for doubt that SDOH's determination effectively constitutes a
penalty," the judge said. "Judicial acceptance of it, with its unnecessarily severe
financial sanction based on its disallowance of the City's valid claims, would go
against the legislative intent underlying Social Services Law §365.5 that local
districts be spared the expense of Medicaid services for covered individuals, and that
these costs be borne by the State."

Justice Figueroa did, however, reject three allegations made by the city in defense of
its position. The judge said the state agency did not have a duty to provide data on
eligible patients to the city; did not fail to follow auditing standards, since its
review was not classified as a full audit; and did not lack the authority to conduct a
review.

Corporation Counsel Michael A. Cardozo said in a statement: "We are very pleased with the decision, because it provides for a substantial recovery and requires the State Department of Health to act in a more reasonable manner in reviewing the City's claims."

A spokesman for the Attorney General's Office, which represented the Health Department, did not return a phone call seeking comment by press time.
Assistant Corporation Counsel James A. Aldag represented the city. Assistant Attorney
General Ivan Rubin represented the state.