Appeal from the Superior Court of the State of Alaska, Third Judicial District, Anchorage, Sen K. Tan, Judge. Supreme Court No. S-13438 Superior Court No. 3AN-07-09827 CI
The opinion of the court was delivered by: Fabe, Justice.
Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER. Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, e-mail email@example.com.
Before: Carpeneti, Chief Justice, Fabe, Winfree, Christen, and Stowers, Justices.
The State of Alaska Department of Health and Social Services (DHSS) is authorized by regulation to use "statistically valid sampling methodologies" to calculate overpayments made to providers of Medicaid services who are subject to audit. DHSS created a protocol that details its auditing methodology, and an independent auditor used this protocol in the audit of Medicaid provider Keirsten Smart. At the conclusion of the audit process, DHSS sought to recoup overpayments made to Smart. Smart did not appeal the final audit results or recoupment decision to DHSS but instead brought a lawsuit in superior court, alleging that DHSS violated her due process rights and that the protocol used in her audit should have been promulgated as a regulation under the Alaska Administrative Procedure Act (APA). The superior court dismissed the lawsuit, concluding that Smart's due process challenges were barred because she had failed to exhaust her administrative remedies and that the protocol did not constitute a regulation under the APA.
Because DHSS failed as a matter of law to provide Smart with adequate notice of its recoupment decision and her right to appeal, we remand the case with instructions that the superior court order DHSS to provide Smart an opportunity to request administrative review of DHSS's recoupment decision. We also take this opportunity to affirm the superior court's holding that the protocol does not constitute a regulation and therefore need not have been promulgated under the APA.
II. FACTS AND PROCEEDINGS
A. Medicaid Auditing Procedures
As we recently explained:
The Medicaid program is "a cooperative federal-state partnership under which participating states provide federally-funded medical services to needy individuals." A state's participation in the Medicaid program is voluntary, but "once a state decides to participate, it must comply with federal statutory and regulatory requirements." Alaska participates in the Medicaid program, and DHSS promulgated regulations in 7 Alaska Administrative Code (AAC) 43 to implement and administer it.*fn1
Federal law requires that states receiving Medicaid funds audit payments to Medicaid providers.*fn2 The Alaska Legislature enacted a law in 2003 requiring DHSS to "annually contract for independent audits of a statewide sample of all medical assistance providers in order to identify overpayments and violations of criminal statutes."*fn3 When overpayments are identified, DHSS must begin procedures to recoup the overpayment amount.*fn4 A Medicaid provider that fails to refund overpayments to DHSS is subject to sanctions, including termination from participation in the Medicaid program.*fn5
In 2006 DHSS passed a regulation providing that it "may use statistically valid sampling methodologies to select Medicaid claims for review or audit and to calculate overpayment amounts to providers."*fn6 In promulgating this regulation under the APA, DHSS received several comments asking it to elaborate on the meaning of "statistically valid sampling methodologies." In response, DHSS stated that the "methodology is always open for inspection and conforms to industry standards. Providers are made aware of this at the beginning of the [auditing] process."
During discovery, DHSS provided Smart with a protocol governing audits (the "Protocol"). The Protocol details how auditors are to determine the universe of a Medicaid provider's claims; select sample claims from that universe; determine overall overpayments to the provider based on overpayments in the ...