Medicon Diagnostic Laboratories, Inc. v. Perales

OPINION OF THE COURT

Petitioners, two clinical medical laboratories enrolled as providers in the New York State Medical Assistance Program (Medicaid), challenge the constitutionality of 18 NYCRR 518.7,

A draft audit report was issued well within 90 days of the notice. The report estimated that there had been overpayment to Medicon of approximately $1,022,182. The final audit report determined that the actual value of the overpayments was $930,919. Medicon was advised of its entitlement under the regulations to object to the findings in the draft audit report (see, 18 NYCRR 515.6 [a]) and to an administrative hearing following the issuance of the final audit report (see, 18 NYCRR 518.8 [b]). Medicon neither filed objections to the draft report nor demanded a hearing; rather it instituted an article 78 proceeding in which it sought to annul respondent’s determination to withhold payment of its claims, to invalidate the regulations authorizing the withholding, to obtain injunctive relief and money damages, and challenged, on due process grounds, the constitutionality of 18 NYCRR 518.7. Supreme Court, after converting the article 78 proceeding to a declaratory judgment action, relying on ADL, Inc. v Perales (US Dist Ct, SD NY, Aug. 2, 1988, Keenan, J.), declared 18 NYCRR 518.7 unconstitutional, annulled respondent’s determination withholding reimbursement, and otherwise denied the petition.

On cross appeals, the Appellate Division modified Supreme Court’s order and judgment, declared 18 NYCRR 518.7 constitutional and validly promulgated, confirmed respondent’s determination, and otherwise affirmed the judgment as modified ( 145 AD2d 167 ). Petitioner’s appeal is before us as of right pursuant to CPLR 5601 (b) (1).

DSS auditors made two visits to FYM in May 1988. On the first visit, they reviewed certain records involving Medicaid claims, and photocopied a number of files. They returned about a week later, reviewed additional records and photocopied records of 10 physicians who purportedly had requested laboratory work from FYM.

FYM was notified that DSS was initiating "a partial withhold” of payments of its Medicaid claims pending "review and verification.” DSS’s investigation determined that various of the physicians whose records had been examined denied signing or authorizing various Medicaid billings claimed by FYM. Six physicians informed respondent that they had never ordered the tests FYM claimed to have performed at their

As Medicon had done, FYM instituted an article 78 proceeding, prior to receipt of the draft audit, challenging the constitutionality of 18 NYCRR 518.7, and seeking annulment of respondent’s determination, invalidation of the regulation, injunctive relief, and damages. Supreme Court dismissed the petition as failing to state a cause of action.

The Appellate Division determined that FYM had abandoned its damages claim, and sua sponte converted the article 78 proceeding to a declaratory judgment action (CPLR 103 [c]), modified the Supreme Court judgment by reversing the "dismissal” of FYM’s causes of actions challenging the constitutionality and validity of the promulgation of 18 NYCRR 518.7, declared that 18 NYCRR 518.7 had not been shown to be unconstitutional or invalidly promulgated, and otherwise affirmed the judgment ( 147 AD2d 840 ). FYM’s appeal is also before us as of right, pursuant to CPLR 5601 (b) (1).

In both cases, the Appellate Division concluded that petitioners enjoy no property interest in the prompt payment of Medicaid claims that would entitle them to due process safeguards. The court further determined that to the extent any such property right existed in claims for work performed, the regulations afforded all the process that petitioners were due. As to Medicon and FYM’s contention that the withholding was arbitrary and capricious, the Appellate Division concluded that these claims had become moot because the withheld funds had been released. In Medicon, the Appellate Division alternatively found that because the record demonstrated that reliable information of fraud, willful misrepresentation, program abuse, or unacceptable practice existed, the withholding was proper and not arbitrary and capricious.

On their appeals to us, both Medicon and FYM contend that the withholding of payment of the Medicaid claims without giving them prior notice and a meaningful opportunity to

The requirements of procedural due process apply to preclude the deprivation of interests encompassed by the Fourteenth Amendment’s protection of liberty and property (Board of Regents v Roth, 408 US 564 ). The Supreme Court has established, however, that "the range of interests protected by procedural due process is not infinite.” (Id., at 570.) Property interests are not created by the Constitution, but rather "by existing rules or understandings that stem from an independent source such as state law” (Cleveland Bd. of Educ. v Loudermill, 470 US 532 , 538, quoting Board of Regents v Roth, 408 US 564 , 577, supra). In considering whether a right is granted by State law, the focus is on the relevant statute, regulation, or contract establishing eligibility for the benefit at issue (Plaza Health Labs. v Perales, 878 F2d 577 , 581; see, e.g., Board of Regents v Roth, 408 US 564 , 577-578, supra; Goldberg v Kelly, 397 US 254 , 261-262).

The Medicaid program uses public funds to provide medical services to needy people (Matter of Camperlengo v Blum, 56 NY2d 251 , 255). Under that program, the State, assisted by the Federal Government ( 42 USC § 1396 et seq.), reimburses providers enrolled in the program for the cost of rendering medical care to qualified patients.

We have recognized that "the public must be assured that the funds which have been set aside (for providing medical services to the needy) will not be fraudulently diverted into the hands of an untrustworthy provider of services” (Schaubman v Blum, 49 NY2d 375 , 379). To that end, the agency charged with the responsibility of administering the medicaid program has inherent authority to protect the quality and value of services rendered by providers in that program (Matter of Siddiqui v New York State Dept. of Social Servs., 116 AD2d 909 ; see also, Matter of Rubin v Campbell, 48 NY2d 805 ; Matter of Brown v New York State Dept. of Social Servs., 106 AD2d 740 , lv denied 65 NY2d 604 ).

Procedures for investigating the validity of claims for reim

Petitioners acknowledge the State’s interest in the integrity of the Medicaid program and its right to conduct audits of reimbursement claims but contend that withholding reimbursement funds without prior notice and an opportunity to be heard constitutes a "seizure” of property in violation of due process. Contrary to these assertions, we conclude that the regulations properly balance and adequately protect any property interest petitioners have in reimbursement of their claims.

We have said that "due process is a flexible constitutional concept calling for such procedural protections as a particular situation may demand” (LaRossa, Axenfeld & Mitchell v Abrams, 62 NY2d 583 , 588, citing Morrissey v Brewer, 408 US 471 , 481). In determining whether due process standards have been met, "we look to the three distinct factors that form the balancing test enunciated by the Supreme Court in Mathews v Eldridge ( 424 US 319 , 335): 'First, the private interest that will be affected by the official action; second, the risk of erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirements would entail’ ” (Morgenthau v Citisource, Inc., 68 NY2d 211 , 221; see also, People ex rel. Vega v Smith, 66 NY2d 130 , 141; Matter of Tammie Z., 66 NY2d 1 , 4; LaRossa, Axenfeld & Mitchell v Abrams, 62 NY2d 583 , supra).

The procedures for withholding payment of Medicaid reimbursement claims set forth in section 518.7 of the regulations satisfy the Mathews test. They adequately safeguard the private interests of petitioners, and minimize the risk of errone

Significantly, petitioners do not challenge the facial adequacy of these regulations. Rather, they contend that they were entitled to notice prior to the withholding of their reimbursement claims and that the notice they were provided failed adequately to inform them of the reasons for the withholding, failed to summarize the evidence supporting the withholding, and failed to describe the process by which they could obtain relief. These contentions are without merit. The record in each case demonstrates that Medicon and FYM were timely informed that certain named physicians denied having requested tests for which petitioners had submitted reimbursement claims, that petitioners were accorded an opportunity to respond to those claims and were fully informed as to the processes by which they could obtain relief.

Finally, petitioners’ contention that the decision to withhold payment was arbitrary and capricious is without merit. Respondent’s decision to withhold payment pending the audit was based on "reliable information” — written statements of several physicians indicating that some of petitioners’ claims were improper. This provided an adequate basis for the withholding of payment pending audit and review.

Accordingly, the orders of the Appellate Division should be affirmed.

Chief Judge Wachtler and Judges Simons, Kaye, Titone, Hancock, Jr., and Bellacosa concur.

In each case: Order affirmed, with costs.