In a prior audit report we found that Healthwin Hospital had received Medicaid overpayments based on a reimbursement system patterned after the Medicare Tax Equity Financial Responsibility Act of 1982 (TEFRA). Final settlement of reimbursement levels under this system depended on the number of discharges made during the year. The TEFRA payment system was unsuitable for Healthwin because the hospital served mainly long term patients and had few discharges. Despite the lack of discharges, Healthwin received numerous interim payments from Medicaid and was paid approximately $800,000 over actual costs in 1991. We recommended that the State agency in Indiana confer with the Health Care Financing Administration in negotiating a settlement with Healthwin on all outstanding overpayments. The Indiana State agency concurred and has proposed a settlement of $3.1 million ($2.0 million Federal share) to resolve all overpayment issues for the years 1988 through 1995. We reviewed the proposed settlement and related documentation and concluded the settlement amount was reasonable.