DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid and State Operations 
   
                   
                    SHO #08-004  
       
October 28, 2008 
 
 
Dear State Health Official: 
 
This letter explains the Centers for Medicare & Medicaid Services (CMS) policy regarding the 
refunding of the Federal share of Medicaid overpayments, damages, fines, penalties, and any 
other component of a legal judgment or settlement when a State recovers pursuant to legal action 
under its State False Claims Act (SFCA).  Many States have enacted their own False Claims Act 
statutes modeled on the Federal False Claims Act.  Numerous questions have arisen regarding 
Medicaid overpayment identification, investigation, and refunds of the Federal share when that 
overpayment is attributable to fraud and abuse.  Additionally, this letter explains what amounts 
must be returned to the Federal Government on any recovery, the proper accounting of the 
relators share and litigation expenses, and the time frame for refunding the Federal share of any 
State FCA recovery.  
 
Refunding of Damages, Fines, and Penalties Assessed on Acts of Fraud 
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Section 1903(d)(2)(A) of the Act provides that [t]he Secretary shall . . . pay to the State, in such 
installments as he may determine, the amount so estimated, reduced or increased to the extent of 
any overpayment or underpayment which the Secretary determines was made under this section 
to such State for any prior quarter and with respect to which adjustment has not already been 
made under this subsection.  Section (d)(3)(A) of the Act provides that [t]he pro rata share to 
which the United States is equitably entitled, as determined by the Secretary, of the net amount 
recovered during any quarter by the State or any political subdivision thereof with respect to 
medical assistance furnished under the State plan shall be considered an overpayment to be 
adjusted under this subsection.   
 
The Act requires that the amounts recovered by a State through a State FCA action be refunded 
at the Federal Medical Assistance Percentage (FMAP) rate.  The Acts broad mandate demands 
that a State return not only the Federal amount originally paid attributable to fraud or abuse, but 
also an FMAP-rate proportionate share of any other recovery. 
 
Any State action taken as a result of harm to a States Medicaid program must seek to recover 
damages sustained by the Medicaid program as a whole, including both Federal and State  Page 2  State Health Official 
shares.1  A State may not seek to recover merely the State share of computed fraud damages 
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unless appropriate Federal and State authorities formally agree to sever the Federal and State 
portion of the overpayment and pursue them as separate actions.   If there is no formal agreement  
to sever, a State may not claim in a State FCA case that it is only recovering damages incurred 
by the State, but not the Federal Government.  Nor may a State return merely the Federal portion 
of single damages and retain all other amounts, such as double and treble damages.  The 
Federal Government is entitled to the applicable FMAP share of a States entire recovery.   
 
States are also required to return the FMAP percentage on State recoveries based upon actions 
brought against third parties, such as actions against pharmaceutical companies, alleging 
inappropriate Medicaid expenditures.  Though these third parties are not necessarily directly 
reimbursed by Medicaid, they may be liable under a State FCA for having caused false or 
fraudulent claims to be submitted by others.  A State may not avoid adhering to the requirements 
set forth in section 1903(d) of the Act by virtue of pursuing legal action against a person or entity 
that has caused false or fraudulent claims to be submitted rather than the party that directly 
submitted false or fraudulent claims.    
The FMAP proportionate share of State FCA-based fines, penalties, or assessments imposed 
against providers or entities are to be refunded.  The HHS Departmental Appeals Board has long 
recognized the Federal Governments entitlement to its proportionate share of civil penalties 
assessed by States against providers or other entities.   
Recently enacted Federal legislation supports CMS interpretation of section 1903(d) of the Act.  
Section 1909 of the Act (enacted through section 6031 of the Deficit Reduction Act of 2005 
(Pub. L. No. 109-171)) provides an incentive to States that have enacted compliant State FCAs.2  
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States compliant with section 1909 of the Act will have the Federal medical assistance 
percentage with respect to any amounts recovered under a State action brought under such      
law . . . decreased by 10 percentage points.  The statutes language, with respect to any 
amounts recovered provides that the full amount of any State FCA recovery serve as the basis 
for measuring the Federal share.  The statutory provision does not permit States to segregate any 
portion of a recovery as ineligible for Federal participation.   
Relator Costs and Attorneys Fees 
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Many State False Claims Act cases arise from actions filed by whistleblowers, also sometimes 
known as qui tam relators.  Once these cases reach either settlement or final judgment, relators 
may, pursuant to state statute, be entitled to receive a certain portion of recovery.  As discussed 
above, the federal government is entitled to receive the FMAP share of any recovery.  CMS 
recognizes, however, the critical role that relators play in effecting recoveries for the Medicaid 
program  were it not for these individuals, in many cases certain causes of action would never 
be identified.  
                                                 
1  This applies irrespective of whether the State action is pursuant to a State FCA or other State statutory or common 
law cause of action. 
2  As determined by the HHS OIG and the U.S. Department of Justice; see 71 Fed. Reg. 48552. 
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For State FCA legal actions neither the relator's share, nor legal expenses (whether borne by the 
State or the relator) or other administrative costs arising from such litigation, may be deducted 
from the Federal portion of the entire proceeds of the litigation.3  A state must return the Federal 
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portion of such recoveries at its applicable FMAP rate for medical services in recognition of the 
overpayment that resulted from a payment for Medicaid services.  Historically, costs that are in 
support of the proper and efficient administration of a States Medicaid program are recognized 
as administrative costs and not service costs.  To the extent attributable to Medicaid recoveries, 
these costs may be the basis for claims for reimbursement as an administrative cost that benefits 
the Medicaid program and reimbursed at the regular administrative percentage rate. Federal 
reimbursement is not available for administrative costs that are not directly related to Medicaid 
recoveries.  
 
Timing for Returning  the Federal share 
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Section 1903(d)(2)(C) of the Social Security Act (the Act) states that: 
 
when an overpayment is discovered, which was made by a State to a person or 
other entity, the State shall have a period of 60 days in which to recover or 
attempt to recover such overpayment before adjustment is made in the Federal 
payment to such State on account of such overpayment.  Except as otherwise 
provided in subparagraph (D), the adjustment in the Federal payment shall be 
made at the end of the 60 days, whether or not recovery was made. 
   
The Act establishes a 60-day period, beginning at the date of discovery, for the Federal share of 
an overpayment to be returned to the Government.  The Federal regulation implementing this 
requirement, 42 CFR section 433.316, distinguishes between discovery of an overpayment 
attributable to fraud or abuse as compared with other overpayment situations.  While in most 
situations, discovery of an overpayment is deemed to occur when any State official first notifies 
a provider in writing of an overpayment and specifies an overpayment amount, the regulations at 
42 CFR section 433.316(d) state that [a]n overpayment that results from fraud or abuse is 
discovered on the date of the final written notice of the States overpayment determination that a 
Medicaid agency official or other State official sends to the provider.   
 
Moreover, CMS has previously explained that in fraud or abuse cases, discovery does not occur 
until final written notification . . . in order to permit State officials adequate time to conduct the 
necessary investigations and to resolve the legal issues peculiar to these situations.  54 Fed. 
Reg. 5452, 5454 (Feb. 3, 1989).   
Process for Reporting the Return of the Federal Share 
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The CMS is entitled to the FMAP-proportionate share of a States entire settlement or final 
judgment amount.  Pursuant to Federal cost principles, a State must apply all applicable credits  
                                                 
3 Under Federal False Claims Act, if the Federal government intervenes in the action, the relator is generally entitled 
to at least 15 percent but not more than 25 percent of the proceeds.  See 31 U.S.C. section 3730(d).    Page 4  State Health Official 
to its reported quarterly expenditures.  See OMB Circular A-87, Cost Principles for State, Local, 
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and Indian Tribal Governments; 45 CFR sections 92.20(b)(5), 92.21(f), and 92.22.  When a 
settlement occurs or judgment is rendered, the State must report the refund of the Federal share 
on the next quarterly expenditure report (Form CMS-64), less any Federal repayment already 
made prior to date of the final action.  While the timeframes for the quarterly expenditure reports 
and the timeframe for the statutorily mandated 60-day period do not match exactly, the Quarterly 
Expenditure Report that embraces the 60-day period must reflect the return of the Federal share. 
If you have any questions please contact Mr. Jim Frizzera, Director, Financial Management 
Group, at (410) 786-9535, or Mr. Edgar Davies, at (410) 786-3280. 
 
          Sincerely, 
 
               /s/ 
 
          Herb B. Kuhn 
          Deputy Administrator 
          Acting Director, Center for Medicaid and State Operations 
 
cc: 
CMS Regional Administrator 
 
CMS Associate Regional Administrators, 
   Division of Medicaid and Childrens Health 
 
Ann C. Kohler 
NASMD Executive Director 
American Public Human Services Association 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Barbara W. Levine  
Chief, Government Relations and Legal Affairs  
Association of State and Territorial Health Officials 
 
Christie Raniszweski Herrera 
Director, Health and Human Services Task Force 
American Legislative Exchange Council 
 
  Page 5  State Health Official 
Debra Miller 
Director of Health Policy 
Council of State Governments