E R Drugs v. Department of Health and Human Services, 355108

Background

DHHS audited ER Drugs (pharmacy) for Jan 2010–July 2016 using an invoice/inventory reconciliation (IR) audit and assessed $1,205,426.23 in Medicaid overpayments.
The IR audit compared wholesale purchases to Medicaid billings, applied the Medicaid fee-for-service share factor, and used average Medicaid unit prices to compute recoveries.
ER Drugs contested the assessment at an administrative hearing; the ALJ issued a detailed Proposal for Decision (PFD) upholding the assessment.
ER Drugs did not file exceptions to the PFD; the DHHS director adopted the PFD as the final agency decision.
The Ingham Circuit Court affirmed the agency decision (and treated ER Drugs’ appeal as waived for failure to file exceptions); ER Drugs obtained leave to appeal to the Court of Appeals.
On appeal ER Drugs raised multiple challenges: that exceptions were not required under MCL 24.281, res judicata based on an earlier “Xerox” audit, that the IR methodology (DUR use, average pricing, inventory assumptions, missing wholesaler invoices) lacked substantial evidence, that signature logs should have been credited, and that MPM subsection 19.2 was applied retroactively.

Issues

Issue	Plaintiff's Argument (ER Drugs)	Defendant's Argument (DHHS)	Held
Whether failure to file exceptions to the ALJ PFD waived objections	No exceptions required because director read/was required to read the record (MCL 24.281)	MCL 24.281 contemplates an ALJ PFD and affords parties the opportunity to file exceptions; failure to do so waives objections	Waiver: failure to file exceptions bars new objections; director adopted PFD and ER Drugs waived issues
Whether prior “Xerox” audit precludes the IR audit findings (res judicata)	Xerox audit should bar certain overpayment assessments	Xerox audited different subject matter (prescription form compliance) and overpayments were not identical	Res judicata does not apply; different facts/proofs and issues were involved
Whether IR audit methodology (DUR, average pricing, inventory assumptions, wholesaler gaps) lacked substantial evidence	DUR is not a billing/dispensing report; average pricing and inventory assumptions distort recoveries; missing Cumberland invoices undermine findings	DUR can be used absent specific demonstrated errors; DHHS used Medicaid-paid averages; provider had burden to produce invoices/records	Substantial-evidence: DHHS methodology supported; ER Drugs failed to identify specific errors or produce invoices; findings upheld
Whether signature logs and consultant audit should reduce recovery	Signature logs and expert report showed beneficiaries received prescriptions and reduced liability	Signature logs are not financial records and are irrelevant to IR audit comparing wholesale purchases to billings	DHHS reasonably excluded them for IR audit purposes; agency decision not arbitrary or capricious
Whether application of MPM subsection 19.2 was impermissibly retroactive	Subsection 19.2 (invoice/inventory records) cannot be applied to period before its effective date	DHHS has longstanding statutory authority and recordkeeping requirements that support IR audits; subsection 19.2 clarified, not created, obligations	No improper retroactivity; IR audit authority existed pre-19.2 and DHHS did not require new, specific subsection-19.2 documents

Key Cases Cited

Klooster v Charlevoix, 488 Mich 289 (statutory interpretation: focus on plain language)
Elba Twp v Gratiot Co Drain Comm’r, 493 Mich 265 (de novo review of statutory construction)
Adair v State, 470 Mich 105 (elements and breadth of res judicata)
In re MCI Telecom Corp Complaint, 240 Mich App 292 (failure to raise objections in exceptions waives issues)
Prechel v Dep’t of Social Servs, 186 Mich App 547 (extrapolation/rebuttable presumption and burden to rebut overpayment calculations)
Attorney General v Pub Serv Comm, 136 Mich App 52 (failure to file exceptions to PFD constitutes waiver of objections)