(a) General rule. Except as provided in paragraphs (b) and (c) of this section, the provisions of this subpart apply to—

1. (1) Overpayments made to providers that are discovered by the State;
2. (2) Overpayments made to providers that are initially discovered by the provider and made known to the State agency; and
3. (3) Overpayments that are discovered through Federal reviews.

(b) Third party payments and probate collections. The requirements of this subpart do not apply to—

1. (1) Cases involving third party liability because, in these situations, recovery is sought for a Medicaid payment that would have been made had another party not been legally responsible for payment; and
2. (2) Probate collections from the estates of deceased Medicaid beneficiaries, as they represent the recovery of payments properly made from resources later determined to be available to the State.

(c) Unallowable costs paid under rate-setting systems.

1. (1) Unallowable costs for a prior year paid to an institutional provider under a rate-setting system that a State recovers through an adjustment to the per diem rate for a subsequent period do not constitute overpayments that are subject to the requirements of this subpart.

   In such cases, the State is not required to refund the Federal share explicitly related to the original overpayment in accordance with the regulations in this subpart. Refund of the Federal share occurs when the State claims future expenditures made to the provider at a reduced rate.

2. (2) Unallowable costs for a prior year paid to an institutional provider under a rate-setting system that a State seeks to recover in a lump sum, by an installment repayment plan, or through reduction of future payments to which the provider would otherwise be entitled constitute overpayments that are subject to the requirements of this subpart.