E R Drugs v. Department of Health and Human Services

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
revision until final publication in the Michigan Appeals Reports.

STATE OF MICHIGAN

COURT OF APPEALS

ER DRUGS, FOR PUBLICATION
March 17, 2022
Appellant, 9:00 a.m.

v No. 355108
Ingham Circuit Court
DEPARTMENT OF HEALTH AND HUMAN LC No. 19-000770-AA
SERVICES,

Appellee.

Before: CAVANAGH, P.J., and MARKEY and SERVITTO, JJ.

PER CURIAM.

Appellant, ER Drugs, which is a pharmacy, appeals by leave granted1 a circuit court order
upholding a decision by the Department of Health and Human Services (DHHS) to require
repayment by the pharmacy of $1,205,426.23 in Medicaid overpayments. We affirm.

I. BASIC FACTS

This case involves a fiscal audit of ER Drugs by DHHS’s Office of Inspector General
(OIG). The audit, encompassing transactions from January 2010 to July 2016, resulted in a finding
by DHHS that ER Drugs owed $1,205,426.23 for Medicaid fee-for-service overpayments.2 The
audit method DHHS employed is referred to as an invoice/inventory reconciliation audit (IR audit).
It involves comparing wholesale quantities of drugs ordered to amounts billed; if fewer drugs were
ordered than were billed, the apparent excess in Medicaid billing is to be recovered by DHHS. To
arrive at a reimbursement amount, DHHS looked at discrepancies between wholesale drugs
supplied and total billings, and then applied to those discrepancies a factor to account for how

1
See ER Drugs v Dep’t of Health & Human Servs, unpublished order of the Court of Appeals,
entered December 18, 2020 (Docket No. 355108).
2
DHHS has presented evidence that Raad Kouza, the owner of ER Drugs, is facing a criminal
indictment for Medicaid fraud.

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much of each type of drug is generally paid for by Medicaid fee-for-service (as opposed to private
insurers or other payment sources).3 The average price paid by Medicaid fee-for-service during
the audit period for each particular drug was then applied.

ER Drugs contested the amount alleged to be owed, but after an evidentiary hearing, an
administrative law judge (ALJ) upheld the assessment in a lengthy and detailed proposal for
decision (PFD). The director of DHHS adopted the PFD without elaboration. The circuit court
concluded that the appeal of the final administrative decision by ER Drugs in that court was subject
to dismissal because ER Drugs had not filed any exceptions to the PFD before the director’s final
decision. In any event, the court concluded, no errors requiring reversal were apparent.

II. EXCEPTIONS REQUIREMENT

ER Drugs contends that the circuit court erred by concluding that the failure by ER Drugs
to file any exceptions to the PFD resulted in a waiver of ER Drugs’ objections. ER Drugs contends
that a proper interpretation of MCL 24.281 indicates that no exceptions needed to be filed to
preserve its objections in the present case, because the director of DHHS had read, and was
required to read, the record. We disagree.

In general, this Court reviews de novo issues of statutory construction. Elba Twp v Gratiot
Co Drain Comm’r, 493 Mich 265, 278; 831 NW2d 204 (2013). Also, “[t]his Court reviews a
lower court’s review of an administrative decision to determine whether the lower court applied
correct legal principles . . . .” Vanzandt v State Employees Retirement Sys, 266 Mich App 579,
585; 701 NW2d 214 (2005).

The ALJ stated, in its PFD, “Any party may, within ten (10) days from the date of mailing
this decision, file exceptions . . . .” It is not disputed that ER Drugs did not file any such
exceptions. Thereafter, the director of DHHS issued a final order, stating, “Having read and
considered the entire record in this matter, I find that the Administrative Law Judge’s Proposal for
Decision is correct.” The director explicitly adopted the PFD.

MCL 24.281 states:
(1) When the official or a majority of the officials of the agency who are to
make a final decision have not heard a contested case or read the record, the
decision, if adverse to a party to the proceeding other than the agency itself, shall
not be made until a proposal for decision is served on the parties, and an opportunity
is given to each party adversely affected to file exceptions and present written
arguments to the officials who are to make the decision. Oral argument may be
permitted with consent of the agency.

3
In other words, if 68% of the billings for “drug X” are Medicaid fee-for-service billings, then the
total of the inventory discrepancy for “drug X” would be multiplied by .68 to arrive at a repayment
quantity.

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 (2) The proposal for decision shall contain a statement of the reasons
therefor and of each issue of fact and law necessary to the proposed decision,
prepared by a person who conducted the hearing or who has read the record.

(3) The decision, without further proceedings, shall become the final
decision of the agency in the absence of the filing of exceptions or review by action
of the agency within the time provided by rule. On appeal from or review of a
proposal of decision the agency, except as it may limit the issue upon notice or by
rule, shall have all the powers which it would have if it had presided at the hearing.

(4) The parties, by written stipulation or at the hearing, may waive
compliance with this section.

“The primary goal of statutory interpretation is to give effect to the Legislature’s intent,
focusing first on the statute’s plain language.” Klooster v Charlevoix, 488 Mich 289, 296; 795
NW2d 578 (2011). The words of a statute are the most reliable evidence of its intent, and statutes
should be read as a whole. Id.

At the time the ALJ issued its PFD, the “official” who was to “make a final decision”—
i.e., the director of DHHS—had not heard the contested case and had not yet read the record.
While the director was going to read the record and eventually did read the record, he had not done
so at the time of the ALJ’s ruling. MCL 24.281(1) refers to an action to be undertaken in the future
(“officials of the agency who are to make a final decision”). And one must keep in mind the maxim
that statutes are to be read as a whole. “[S]tatutes must be construed as a whole with the provisions
read in the context of the entire statute so as to produce a harmonious whole.” Estate of Romig by
Kooman v Boulder Bluff Condos Units 73-123, 125-146, Inc, 334 Mich App 188, 196; 964 NW2d
133 (2020). MCL 24.281(2) refers to the preparation by the person who has conducted the hearing
or read the record of a detailed proposal. Viewing MCL 24.281(1) and (2) together indicates that
the statutory scheme is referring to exactly the type of situation that took place in the present case,
wherein an ALJ undertook the initial review (conducting a hearing or reading the record) and a
final decisionmaker, who had not yet read the record, was to make a final decision. This conclusion
is reinforced by the fact that MCL 24.281(3) states that an agency, on review of a PFD, “shall have
all the powers which it would have if it had presided at the hearing.”

In Attorney General v Pub Serv Comm, 136 Mich App 52, 56; 355 NW2d 640 (1984), the
Court, citing MCL 24.281, indicated that the failure to file exceptions to a PFD constitutes a waiver
of objections not raised. See also Robertson v Local Division 26, Amalgamated Transit Union, 91
Mich App 429, 432-433; 283 NW2d 766 (1979). ER Drugs states that these decisions are not
binding because they predate November 1, 1990. See MCR 7.215(J)(1) (“A panel of the Court of
Appeals must follow the rule of law established by a prior published decision of the Court of
Appeals issued on or after November 1, 1990, that has not been reversed or modified by the
Supreme Court, or by a special panel of the Court of Appeals as provided in this rule.”). We note,
however, that published cases predating November 1, 1990, still hold value. Woodring v Phoenix
Ins Co, 325 Mich App 108, 114; 923 NW2d 607 (2018) (“[T]his Court may not be strictly bound
to follow older published cases, but traditionally regards them as retaining some authority, at least
if they were not disputed by some other contemporaneous case.”).

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 In addition, in In re MCI Telecom Corp Complaint, 240 Mich App 292, 310; 612 NW2d
826 (2000), the Court stated:
Next, Ameritech argues that the [Michigan Public Service Commission] should
have excluded Gerdes’ testimony because (1) it constituted hearsay and (2) Gerdes
did not preserve his notes regarding the substance of the testimony. We conclude
that Ameritech failed to preserve this issue for appeal, because it failed to raise the
issue of the admissibility of Gerdes’ testimony in its exceptions to the hearing
officer’s proposal for decision.

Given the statutory language and the existing caselaw, the circuit court did, in fact, apply
correct legal principles by concluding that ER Drugs waived its arguments. See Vanzandt, 266
Mich App at 585.

In light of the above analyses and in light of the language from MCL 24.281(3) that “[t]he
decision, without further proceedings, shall become the final decision of the agency in the absence
of the filing of exceptions”—language that emphasizes the importance of filing exceptions—we
reaffirm the pertinent principle from the Attorney General v Pub Serv Comm case decided in 1984.4
Although our affirmance of the circuit court’s dismissal of the case on the basis of the “exceptions”
issue technically renders unnecessary a resolution of the remainder of the issues on appeal, we
nevertheless, for the sake of completeness, choose to address them.

III. RES JUDICATA

ER Drugs contends that an earlier audit of ER Drugs by DHHS—referred to by the parties
as “the Xerox audit”—that occurred for the period from March 2, 2011 to April 9, 2012, should
have barred certain of the present overpayment assessments on the basis of res judicata. We
disagree.

In general, whether res judicata applies is a question of law reviewed de novo. Ditmore v
Michalik, 244 Mich App 569, 574; 625 NW2d 462 (2001). Also, as previously noted, “[t]his Court
reviews a lower court’s review of an administrative decision to determine whether the lower court
applied correct legal principles . . . .” Vanzandt, 266 Mich App at 585.

In Adair v State, 470 Mich 105, 121; 680 NW2d 386 (2004), the Court stated:
The doctrine of res judicata is employed to prevent multiple suits litigating
the same cause of action. The doctrine bars a second, subsequent action when (1)
the prior action was decided on the merits, (2) both actions involve the same parties
or their privies, and (3) the matter in the second case was, or could have been,
resolved in the first. This Court has taken a broad approach to the doctrine of res
judicata, holding that it bars not only claims already litigated, but also every claim

4
The argument ER Drugs raises on appeal about the use of the word “may” in the PFD does not
require an extended discussion. Clearly, no party was obligated by law to file any exceptions, and
the use of the word “may” merely indicates as much. But the fact that no party was required to
file exceptions does not obviate the consequences of choosing not to file exceptions.

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 arising from the same transaction that the parties, exercising reasonable diligence,
could have raised but did not. [Citations omitted.]

In William Beaumont Hosp v Wass, 315 Mich App 392, 399; 889 NW2d 745 (2016), the Court
stated that the preclusion doctrines (such as res judicata) “are applicable to administrative decisions
(1) that are adjudicatory in nature, (2) when a method of appeal is provided, and (3) when it is
clear that the Legislature intended to make the decision final absent an appeal.” (Quotation marks
and citations omitted).

It is not necessary to get into detail regarding whether res judicata applies, in a general
sense, to the present case under the rubric of William Beaumont Hosp, because even assuming that
it does, no error would be apparent. Indeed, in PT Today, Inc v Comm’r of Office of Fin and Ins
Servs, 270 Mich App 110, 146-147; 715 NW2d 398 (2006), this Court stated:
In this case, plaintiffs correctly argue that, while their causes of action have
the same name in PT Today I and the instant case, they have distinct factual bases.
Plaintiffs’ tortious interference claims in PT Today I were based on BCBSM’s
differential reimbursement of hospital physical therapists and independent physical
therapists. In the instant case, however, plaintiffs argue that BCBSM is violating
its own reimbursement scheme . . . . These transactions and occurrences are
removed from each other in time, subject matter, and legal basis. Moreover, they
require different factual proofs. In PT Today I, plaintiffs would have to have proved
that the [provider class plan] was discriminatory, that the Act proscribed
discriminatory reimbursements, and that this discrimination reduced plaintiffs’
market share; in the instant case, plaintiffs must prove that BCBSM knowingly
promoted the mischaracterization of claims, that this mischaracterization was
unlawful, and that this mischaracterization reduced plaintiffs’ market share. If
different facts or proofs would be required, res judicata does not apply;
consequently, res judicata does not apply to the instant case.

DHHS’s auditing witness, Michael Melvin, testified that the Xerox audit was concerned
with whether prescriptions contained required information. He stated that prescription reviews
were of a different character than fiscal reviews. He noted that whether drugs were paid for by
Medicaid but not actually dispensed (i.e., a pertinent question for an IR audit) was an irrelevant
question for a prescription review. Melvin indicated that a prescription could be in a proper form
even if the associated drug was never dispensed. And, apparently, overpayment charges associated
with the Xerox audit were credited to ER Drugs in connection with the present IR audit.

The testimony established that the Xerox audit was concerned with an entirely different
issue than the fiscal IR audit. Whether prescriptions contained required information is a different
question from whether wholesale purchases did not match with billings. Different facts and proofs
were at issue, and therefore no error is apparent with regard to the doctrine of res judicata. See id.

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 IV. UNDERPINNINGS OF THE IR AUDIT

ER Drugs contends that the results of the IR audit were not supported by competent,
material, and substantial evidence because of various errors made by DHHS in conducting the
audit. We disagree.

“A final agency decision is subject to court review but it must generally be upheld if it is
not contrary to law, is not arbitrary, capricious, or a clear abuse of discretion, and is supported by
competent, material and substantial evidence on the whole record.” Vanzandt, 266 Mich App at
583. “Substantial evidence is that which a reasonable mind would accept as adequate to support a
decision, being more than a mere scintilla, but less than a preponderance of the evidence.” Id. at
584 (quotation marks and citation omitted). “If there is sufficient evidence, the circuit court may
not substitute its judgment for that of the agency, even if the court might have reached a different
result.” Id.

“This Court reviews a lower court’s review of an administrative decision to determine
whether the lower court applied correct legal principles and whether it misapprehended or
misapplied the substantial evidence test to the agency’s factual findings, which is essentially a
clearly erroneous standard of review.” Id. at 585. “A finding is clearly erroneous where, after
reviewing the record, this Court is left with the definite and firm conviction that a mistake has been
made.” Id. “Thus, the circuit court’s decision will only be overturned if this Court is left with a
definite and firm conviction that a mistake was made.” Id.5

A. MISCELLANEOUS ARGUMENTS

ER Drugs alleges an error regarding DHHS’s use of average prices to reach a final
overpayment amount for each drug. Melvin testified, “[O]ur pricing methodology just takes the
Medicaid fee for service portion of that discrepancy during the time frame.” He said, “It’s an
average price per unit for the audit period in question. And this is arrived at taking the total amount
paid by fee for service Medicaid for that time period, dividing it by the total number of units, and
you get the average price per unit as paid out.”

The argument being made by ER Drugs on appeal in connection with average pricing is
not entirely clear. If it is taking issue with fluctuations in the prices paid by ER Drugs to
wholesalers, such fluctuations were irrelevant to the IR audit because DHHS was looking to the
average price paid by Medicaid. Melvin explicitly stated that the price paid by ER Drugs was not
pertinent to the audit. If ER Drugs is taking issue with fluctuations in Medicaid pricing, it cannot
be said that the circuit court misapplied the substantial evidence test to the agency’s findings. See
Vanzandt, 266 Mich App at 585. The average-price model spread the reimbursement amount
throughout the entire audit period, therefore “evening out” fluctuations in Medicaid pricing.

ER Drugs also takes issue with the fact that DHHS did not interview Medicaid beneficiaries
who filled prescriptions at ER Drugs, but such interviews would not be pertinent for an IR audit.

5
These standards of review are also applicable to Part V of this opinion.

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Beneficiary interviews, for example, would provide no insight regarding whether there may be
trafficking in black-market drugs.

ER Drugs also states that DHHS’s “starting premise that the inventory levels remained
constant throughout the audit period was a faulty assumption. ER Drugs’ owner testified that ER
Drugs generally did not stock name brand medications after a generic equivalent became
available.” But ER Drugs utterly fails to indicate how this assumption regarding inventory levels
affected the outcome of the IR audit and the assessed repayment amount.6 “It is not sufficient for
a party simply to announce a position or assert an error and then leave it up to this Court to discover
and rationalize the basis for his claims, or unravel and elaborate for him his arguments, and then
search for authority either to sustain or reject his position.” Wilson v Taylor, 457 Mich 232, 243;
577 NW2d 100 (1998) (quotation marks and citation omitted). ER Drugs is, in some respects,
tying its “inventory” argument to its argument about average pricing. It states, “The Department’s
use of an average price ignored seasonal variations in inventory levels that were the result of ER
Drugs’ legitimate efforts to reduce its tax liability at the end of each year and its desire to stock up
on medications before prices increased, which tended to occur in January of each year.” As noted,
however, the price paid by ER Drugs for a medication was not relevant for the IR audit.7

ER Drugs also makes an argument about a wholesaler referred to as “Cumberland.” Melvin
stated that DHHS tried to reach Cumberland, but it had gone out of business. He said that
Cumberland’s wholesaler license had expired in June 2010, so DHHS had no way to reach the
company. He testified:
And again, this information was conveyed to the pharmacy. So if there were
specific purchases that they had, they could’ve sent in paper documentation to
substantiate this. And this goes for any wholesaler with which there could’ve been
issues with contact. It is the pharmacy’s responsibility to furnish those invoices if
they have them.

Melvin said that ER Drugs did not provide any invoices regarding Cumberland. The owner of ER
Drugs, for his part, stated that he had had no luck reaching Cumberland.

Melvin explained that it was unlikely that Cumberland had been supplying “substantial
amounts of psychotic medications to ER Drugs” in 2010. He said:
So an expired license would generally mean that the entity has been out of
business for quite some time. The renewal process associated with that you would
want to keep that up to date and renew it far ahead of when it actually expired. And
given that it lapsed in—on June 30th of 2010, Cumberland was likely out of
business before 2010 and therefore, was out of business outside of the audit period
in question.

6
Indeed, it seems that the wholesale orders would have reflected the different “stock” levels
referred to by Raad Kouza. He referred to “not stock[ing] the brand once it goes generic.”
7
The “steady inventory” issue is discussed further in Part VI of this opinion.

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In addition, MCL 400.111b(6) states:
A provider shall maintain records necessary to document fully the extent
and cost of services, supplies, or equipment provided to a medically indigent
individual and to substantiate each claim and, in accordance with professionally
accepted standards, the medical necessity, appropriateness, and quality of service
rendered for which a claim is made.

Also, Medicaid providers are advised that “fiscal records must be maintained,” including, among
other records, “[c]opies of purchase invoices for items offered or supplied to the beneficiary.”
Medicaid Provider Manual, General Information for Providers, Subsection 14.6.

Given Melvin’s testimony and given the recordkeeping requirement that ER Drugs did not
8
follow, we cannot conclude that the circuit court misapplied the substantial evidence test to the
agency’s findings with regard to the Cumberland issue. See Vanzandt, 266 Mich App at 585.9

B. DRUG-UTILIZATION REPORT

ER Drugs takes issue with DHHS’s reliance on a drug-utilization report (DUR) for billing
information. Wayne Seiler, a pharmacy-software developer who testified for ER Drugs, stated
that a DUR “is certainly not a billing report or a dispensing report.” He stated that the DUR
contains prescription requests that might not be billed, such as requests for prior authorizations or
requests for drugs that might interact with other drugs a patient is taking. Seiler stated that he had
become aware that OIG was using DURs improperly and had tried multiple times to get the office
to understand that the methodology was improper, but he kept getting put off. Also, DHHS’s own
witness, Melvin, admitted that he did not know the difference between a DUR and a billing report.
He also said that the DUR might contain drugs that needed prior authorizations but that were never
actually billed.

However, the case of Prechel v Dep’t of Social Servs, 186 Mich App 547; 465 NW2d 337
(1990), is instructive in considering DHHS’s use of the DUR. In that case, the petitioner, a
physician, appealed a circuit court opinion upholding a “final decision and order by the Department
of Social Services [DSS, the predecessor to DHHS] requiring petitioner to repay the department
$120,000 in medicaid overpayments.” Id. at 548. This Court stated:

8
Interestingly, ER Drugs does not mention any alleged fire or flood in the context of this issue.
See footnote 11.
9
The argument ER Drugs makes about the Xerox audit in the context of this issue is misplaced.
ER Drugs apparently believes that it should be credited for every “clean” prescription found during
the Xerox audit. Evidently, Medicaid overpayment charges associated with the Xerox audit and
paid by ER Drugs were credited to ER Drugs in connection with the present IR audit, but there is
no basis for crediting ER Drugs for every proper prescription found during the Xerox audit, which
was not a fiscal audit.

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 The overpayment was computed through the use of a statistical random-sampling
extrapolation formula wherein the DSS would examine a certain percentage of
cases within the two-year period, make a determination of the percentage of those
cases that were overcharged, and apply that percentage to the total number of cases
during the two-year period. On appeal, petitioner alleges that the hearing referee
incorrectly applied the burden of proof to petitioner[.] [Id.]

The Prechel Court resolved the issue as follows:
The hearing procedures involved in assessing overpayments to a medicaid
provider have been upheld by this Court and were determined not to be a violation
of due process where the provider is given an opportunity to rebut the initial
determination of overpayment. Quality Clinical Laboratories, Inc v Dep't of Social
Servs, 141 Mich App 597, 601; 367 NW2d 390 (1985). The extrapolation process
used by the DSS creates a rebuttable presumption placing the burden on the
physician to demonstrate that the department’s calculations are inaccurate. At all
times the burden is on the physician to prove entitlement to welfare monies. Illinois
Physicians Union v Miller, 675 F2d 151, 154 (CA 7, 1982). On appeal, petitioner
objects to the hearing referee’s imposing on him the burden of proof on the issue
of his entitlement to the disputed payments by requiring that he demonstrate that
the department’s calculations are inaccurate. The Miller court specifically allowed
the state to place the burden on the physician to demonstrate that the department’s
calculations were inaccurate. Id. Further, this Court in Zenith Industrial Corp v
Dep't of Treasury, 130 Mich App 464, 468; 343 NW2d 495 (1983), held that an
administrative agency may allocate the burden of proof by ad hoc decision so long
as the allocation is consistent with the legislative scheme being administered.
Considering the legislative scheme underlying the joint federal-state medicaid
program as announced in Miller, we find that the hearing referee did not err in
placing the burden of proof on petitioner to establish his entitlement to payment.
[Id. at 548-549.]

While ER Drugs contended that the DUR was not a billing report, it never pointed to
specific instances in which the DUR was not an accurate representation of billing. The ALJ
emphasized this point. The ALJ said, “[D]espite testimony . . . regarding work-product that could
lead to a prescription being identified in the DUR despite never being dispensed or billed,
Petitioner did not identify any specific examples of actual errors in the DUR.” The ALJ added,
“The developer of the software Petitioner uses also expressly testified that it is not difficult to
generate a billing report or a dispensing report, but Petitioner never provided such a report despite
ample opportunity to do so.” And indeed, Seiler admitted that it was not difficult to generate a
billing report with the software. In light of Prechel and in light of the failure of ER Drugs to
produce an apparently easy-to-generate billing report, we cannot conclude that the circuit court
misapplied the substantial evidence test to the agency’s findings with regard to the DUR issue.
See Vanzandt, 266 Mich App at 585.

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 V. SIGNATURE LOGS

ER Drugs contends that DHHS’s decision was arbitrary and capricious because it refused
to consider signature logs, and an associated expert report, presented by ER Drugs. We disagree.

In Vanzandt, 266 Mich App at 584-585, this Court quoted Romulus v Dep't of
Environmental Quality, 260 Mich App 54, 63-64; 678 NW2d 444 (2003), which stated:
To determine whether an agency’s decision is “arbitrary,” the circuit court
must determine if it is “ ‘ “without adequate determining principle[,] . . . fixed or
arrived at through an exercise of will or by caprice, without consideration or
adjustment with reference to principles, circumstances, or significance, . . . decisive
but unreasoned.” ’ ” St Louis v Mich Underground Storage Tank Fin Assurance
Policy Bd, 215 Mich App 69, 75; 544 NW2d 705 (1996), quoting Bundo v Walled
Lake, 395 Mich 679, 703 n 17; 238 NW2d 154 (1976), quoting United States v
Carmack, 329 US 230, 243; 67 S Ct 252; 91 L Ed 209 (1946). “Capricious” has
been defined as: “ ‘ “Apt to change suddenly; freakish; whimsical; humorsome.” ’ ”
St Louis, supra at 75; 544 NW2d 705, quoting Bundo, supra at 703 n 17; 238 NW2d
154, quoting Carmack, supra at 243; 67 S Ct 252.

It was elicited at the administrative hearing that ER Drugs sent DHHS a review of signature
logs undertaken by a consultant, Dale Howe. Melvin explained that this review was not taken into
account by DHHS because it was irrelevant to an IR audit. He said, “[S]ignature logs are not
financial records and are irrelevant to an invoice reconciliation.” Melvin stated that signature logs
do not contain financial information. Given this testimony by Melvin, the circuit court did not err
by concluding that DHHS’s final decision was not arbitrary or capricious.

An IR audit involves comparing drugs purchased at wholesale with drugs billed. As for
signature logs, the portion of the Medicaid Provider Manual (MPM) specifically applicable to
pharmacies states, in part:
Pharmacy providers must document receipt or delivery of new or refilled
medications to the intended Medicaid beneficiary. This documentation serves as
verification of the beneficiary receiving the prescription billed. The absence of the
appropriate verification indicates the beneficiary did not receive the prescription,
and funds will be recouped from the pharmacy. Documentation described below
must be retained for review by MDHHS or the MDHHS agent for seven years and
is subject to audit. Any method of reproducing past signatures is not acceptable.
[Medicaid Provider Manual, Pharmacy, Subsection 5.1.]

It continues:

Pharmacy providers must maintain a log containing the following
information:

 Beneficiary’s name;

 The signature of the beneficiary or that of his representative; and

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  The date of receipt of the prescription.

The log must effectively differentiate between prescriptions received by a
beneficiary for which counseling was accepted and provided, and those for which
counseling was offered and was declined. [Medicaid Provider Manual, Pharmacy,
Subsection 5.1.A.]

It seems that signature logs could be one potential manner in which to audit Medicaid
billings, because billings could be compared against signature logs, which serve, according to the
manual, as “verification of the beneficiary receiving the prescription billed.” Apparently, Howe
undertook such a comparison and reached a recovery amount of $71,529.58. But this is not the
type of audit that DHHS undertook. It undertook an IR audit, and the agency was presented with
testimony that signature logs are not relevant to an IR audit.10 Accordingly, ER Drugs has not
established an entitlement to reversal with respect to this issue.11

VI. RETROACTIVE APPLICATION OF SUBSECTION 19.2 OF THE MEDICAID
PROVIDER MANUAL

ER Drugs contends that DHHS, in conducting the IR audit, improperly retroactively
applied subsection 19.2 of the Pharmacy chapter of the MPM. We disagree.

This issue concerns a question of law, and questions of law are reviewed de novo. Harbour
v Correctional Med Servs, Inc, 266 Mich App 452, 455; 702 NW2d 671 (2005). And again, “[t]his

10
It seems that an IR audit would encompass a situation in which “false” signatures had been
employed to obtain Medicaid funds, in addition to situations involving drugs obtained on the black
market.
11
ER Drugs states that Howe pointed out that a handful of Medicaid claims were paid at zero
dollars. ER Drugs states that this “would ultimately inflate the amount that ER Drugs would have
to repay if the Department’s audit was accepted without adjustment.” But Howe was issuing a
report about his own signature-log audit and does not, in his report, explain how and to what degree
DHHS’s repayment figure should have been adjusted on the basis of this alleged oversight. Again,
“It is not sufficient for a party simply to announce a position or assert an error and then leave it up
to this Court to discover and rationalize the basis for his claims, or unravel and elaborate for him
his arguments, and then search for authority either to sustain or reject his position.” Wilson, 457
Mich at 243 (quotation marks and citation omitted). In the context of the present issue, ER Drugs
also argues about an alleged fire and flood at the pharmacy. The ALJ and DHHS acted within
their rights in not relying on any information about the fire and flood, seeing as this information
was not communicated to the auditors during the back-and-forth correspondence about the
repayment amount but was only brought out at the administrative hearing. In addition, and more
importantly, nobody testified that the billing figures derived from the DUR were somehow
impacted by this alleged fire and flood, and DHHS obtained the wholesale/invoice information
directly from the wholesalers.

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Court reviews a lower court’s review of an administrative decision to determine whether the lower
court applied correct legal principles . . . .” Vanzandt, 266 Mich App at 585.

In Dearborn Hts Pharmacy v Dep’t of Health & Human Servs, ___ Mich App ___, ___;
___ NW2d ___ (2021) (Docket No. 354008); slip op at 2-3, the petitioner argued that DHHS did
not have the authority to conduct IR audits pertaining to the period before the implementation of
subsection 19.2 of the Pharmacy chapter of the MPM. This Court set forth the following
background information:
On June 1, 2015, DHHS issued a “bulletin” informing Medicaid pharmacies
of efforts to clarify the documentation requirements for pharmacy providers.
Specifically, the bulletin notified the pharmacies they must maintain particular
documents “to support the size and quantity of the goods paid for by Medicaid.”
The bulletin stated the effective date was July 1, 2015—and, it was later
incorporated into the Pharmacy chapter of the Michigan Medicaid Provider Manual
(“MPM”) at Subsection 19.2, Invoice and Inventory Records. [Id. at ___; slip op
at 1-2.]

The Court then stated, “Though petitioner disputes the applicability of Subsection 19.2 of the
MPM to the audit at issue, there are a number of authorities that predate and authorize the conduct
of this audit.” Id. at ___; slip op at 3. The Court set forth a substantial number of laws referring
to DHHS’s investigative powers and to recordkeeping obligations of Medicaid providers and
indicated that these laws allowed for an IR audit to be conducted. Id. at ___; slip op at 3-7. The
Court said that “DHHS-OIG clearly has long had broad authority to investigate possible fraud by
the unambiguous terms of these provisions. Thus, the trial court failed to consider the plain
language of other authority granting DHHS the authority to conduct investigations by focusing its
conclusion of the effective date of Subsection 19.2.” Id. at ___; slip op at 8. The Court stated,
“[W]e reverse the holding of the trial court finding that OIG’s authority to conduct inventory
reconciliation audits is derived from and limited to Subsection 19.2.” Id. at ___; slip op at 8.

ER Drugs states that “[t]his Court should not [sic] remand with instructions that the
Department must conduct its invoice reconciliation prospectively only,” but Dearborn Hts
Pharmacy indicates that a prospective-only IR audit is not required.

The Dearborn Hts Pharmacy Court undertook a separate analysis regarding an argument
the petitioner in that case made about specific document-retention requirements of subsection 19.2
(as opposed to the general authority to conduct IR audits). Id. at ___; slip op at 9. The Court
stated:
DHHS also argues the enactment of Subsection 19.2 was within the scope
of its statutory authority, and it acted within that authority when it demanded
petitioner produce documentation to support its Medicaid billings. We agree in
part, and disagree in part. . . .

Initially, we must clarify the issue at hand. Rather than asking whether
Subsection 19.2 exceeded the scope of DHHS’s statutory authority, the more
pertinent question is whether the trial court correctly applied its review authority
over the administrative law judge’s opinion. The trial court held “that conducting

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 an inventory audit and requiring all of the documents set forth in subsection 19.2
of the Pharmacy Chapter of the Michigan [MPM] be maintained or be subject to
recoupment prior to July 1, 2015 is not authorized by law.” Again, the starting
place for our limited review is to determine whether the lower court applied correct
legal principles and whether it misapprehended or grossly misapplied the
substantial evidence test to the agency’s factual findings. Indeed, this latter
standard is indistinguishable from the clearly erroneous standard of review that has
been widely adopted in Michigan jurisprudence.

Using the applicable standard, we find the trial court misapprehended . . .
the substantial evidence test to the agency’s factual findings. Absent from the
administrative law judge’s factual findings was any determination that OIG
“require[d] all of the documents set forth in subsection 19.2.” In fact, the record
from the administrative review shows that OIG’s only requirement of petitioner
was that the records it produced must be “reliable.” Because there is no evidence
the administrative law judge’s factual findings required the use of Subsection 19.2
documents, and because the record shows that OIG did not specifically require
Subsection 19.2 documents, the trial court erred in reversing DHHS’s decision.
Consequently, we reverse the trial court. [Id. at ___; slip op at 9 (quotation marks,
citations, and brackets omitted).]

In the present case, there is no indication that DHHS required all documents mentioned in
subsection 19.2, which states:
In addition to all other documentation required under state law, federal law,
and MDHHS policy, pharmacy providers must maintain invoices, manufacturer
and/or wholesaler sales records, distributor delivery records to the provider,
inventory transfer records, provider payment records, and all other records
necessary to support the size and quantity of the goods paid for by Medicaid during
the audit/review period. Failure to do so will result in the recoupment of pharmacy
funds related to unsupported Medicaid claims. In the event inventory for any such
product cannot be substantiated through reliable documentation for the beginning
of the audit/review period, MDHHS may assume that the beginning and ending
inventory quantities are the same for that product. For the purposes of this policy,
the “audit/review period” shall be a period defined by MDHHS. [Medicaid
Provider Manual, Pharmacy, Subsection 19.2.]

Also, while the ALJ in the present case did refer to subsection 19.2 and its recordkeeping
requirements, the ALJ went on to spend considerable time setting forth how other portions of the
MPM, as well as statutory law, allowed DHHS to require the documentation that was used in this
case. The ALJ stated, for example:
Additionally, while not specifically cited in the notices sent to Petitioner,
other statutes and policies similarly required that Petitioner maintain the applicable
records in this case throughout the audit period. For example, MCL 400.111b(6)
and MCL 400.111b(8) require that a pharmacy maintain the records necessary to
both fully document the extent of costs of services, supplies, or equipment provided
to beneficiaries and to substantiate each claim for a period of 7 years after the date

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 of service. Likewise, Section 15.6 [sic, 14.6] of the General Information for
Providers Chapter expressly stated at all times relevant to this matter that providers
must maintain “[c]opies of purchase invoices for items offered or supplied to the
beneficiary.”12

The ALJ added:

In only clarifying the requirements for pharmacy providers, the Department
was not identifying new policy and, instead, was only making its past policy clearer.
As discussed above, that past policy generally requires that providers maintain
fiscal records, including fiscal records and copies of invoices for items supplied to
beneficiaries, that fully disclose and document the extent of the services provided
to beneficiaries, and, as such, the Department did not retroactively apply policy.

The ALJ properly noted that the IR audit and its conclusions in the present case were based
on documentation requirements already in existence, and the circuit court did not err by making
the general statement that the agency’s decision was not arbitrary or capricious or otherwise
infirm.13 No retroactivity problem is apparent.

ER Drugs, at various points in its brief, takes issue with the statement in subsection 19.2
that DHHS can assume that beginning and ending inventory is the same in the absence of evidence
to the contrary. But ER Drugs fails to delineate how this assumption resulted in a higher repayment
amount. It argues that it tended to “stock up” on certain drugs in December. This is, apparently,
an attempt to argue that there would be a higher-than-normal inventory level in January (the
commencement month for the audit period), but ER Drugs provided no evidence regarding the
extent of this stock-up. It only offered the extremely general allegation about “stock[ing] up,”
particularly on unspecified “fast-moving” drugs.14 The upshot is that ER Drugs does not make a
coherent argument, supported with concrete evidence, about how the inventory levels should have
been used to alter the amount DHHS determined was owed in accordance with the allowed IR

12
As noted, providers are advised that “fiscal records must be maintained,” including, among other
records, “[c]opies of purchase invoices for items offered or supplied to the beneficiary.” Medicaid
Provider Manual, General Information for Providers, Subsection 14.6.
13
The circuit court did not expressly address the retroactivity argument.
14
As noted, the audit period ended at the end of July 2016. ER Drugs did not indicate how quickly
its December “stock up” of drugs tended to get depleted. ER Drugs also makes a general allegation
that the inventory of certain drugs had decreased throughout the years because of a switch from
brand-name to generic drugs. As stated earlier, however, it seems that the wholesale orders would
have reflected the different “stock” levels referred to by Raad Kouza.

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audit. In other words, ER Drugs, despite having had the chance to do so, has not adequately
demonstrated how the assumption about inventory levels affected the ultimate amount owed.15

In conclusion, the circuit court did not err by upholding the decision of the DHHS that
ER Drugs was required to repay $1,205,426.23 in Medicaid overpayments.

Affirmed.

/s/ Mark J. Cavanagh
/s/ Jane E. Markey
/s/ Deborah A. Servitto

15
As for the argument ER Drugs makes regarding the alleged impossibility of performing under
an alleged “contract” because of a fire and a flood, the ALJ and DHHS acted within their rights by
not relying on any information about the fire and flood, as noted above in footnote 11. And there
was not, contrary to the argument by ER Drugs, substantial compliance of any “contract” as a
result of the provision of signature logs, seeing as signature logs were not relevant to the allowable
IR audit (see, generally, Part V of this opinion).

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