Minnesota ex rel. Hatch v. U.S.

• Decision Date: 07 July 2000
• Docket Number: No. 99 CIV. 1831 DDA/FLN.,99 CIV. 1831 DDA/FLN.
• Citation: 102 F.Supp.2d 1115
• Parties: State of MINNESOTA, by its Attorney General, Mike HATCH; Minnesota Senior Federation—Metropolitan Region; and Mary Sarno, Plaintiffs, v. The UNITED STATES of America and Donna E. Shalala, Secretary of Health and Human Services, Defendants.
• Court: U.S. District Court — District of Minnesota

102 F.Supp.2d 1115

State of MINNESOTA, by its Attorney General, Mike HATCH; Minnesota Senior Federation—Metropolitan Region; and Mary Sarno, Plaintiffs, v. The UNITED STATES of America and Donna E. Shalala, Secretary of Health and Human Services, Defendants.

No. 99 CIV. 1831 DDA/FLN.

United States District Court, D. Minnesota.

July 7, 2000.

David Woodward, Assistant Attorney General of the State of Minnesota, St. Paul, Minnesota, appeared on behalf of Plaintiff the State of Minnesota.

Daniel E. Gustafson, Heins Mills & Olsen, P.L.C., Minneapolis, Minnesota, appeared on behalf of Plaintiffs Minnesota Senior Federation—Metropolitan Region and Mary Sarno.

Michelle B. Goodman, United States Department of Justice, Civil Division, Washington, D.C., appeared on behalf of Defendants.

ORDER

ALSOP, Senior District Judge.

The question presented in this case is whether the Medicare managed care payment formula set forth in the Balanced Budget Act ("BBA") of 1997, Pub.L. No. 105-33, violates the Constitution. The Court holds that it does not and therefore will grant Defendants' motion to dismiss.

I.

A.

Congress established Medicare in 1965 as part of the Social Security Act, 42 U.S.C. § 1395 et seq., to provide federally-funded medical insurance for the elderly and disabled. It is a massive program: in fiscal year 1997 approximately 38.8 million people were enrolled, Fischer v. United States, ___ U.S. ___, 120 S.Ct. 1780, 1783, 146 L.Ed.2d 707 (2000), making it the largest health insurance program in the United States.

Health care benefits covered under the Medicare program are divided into two parts, Part A and Part B. Medicare Part A covers hospital insurance, including inpatient hospital care, skilled nursing facility care, home health agency care, and hospice care. See 42 U.S.C. §§ 1395c-1395i-5. Part A is financed through a federal income tax on self-employment income (the Self-Employment Contributions Act) and federal employment taxes on wages paid to employees (primarily under the Federal Insurance Contributions Act, or FICA). Medicare Part B provides supplemental medical insurance for such things as physician services, laboratory and diagnostic tests, durable medical equipment, medical supplies, ambulance services, and prescription drugs that cannot be self-administered. See id. §§ 1395j-1395w-4. Part B is voluntary and requires payment of a monthly premium which is uniform throughout the country.

Persons enrolling under Parts A and B historically have had two basic coverage options. They can elect to obtain services through a fee-for-service system under which program payments are made for each service rendered. Or, they can participate in a managed care organization, like a health maintenance organization ("HMO"), which has entered into a payment agreement with Medicare. This suit challenges the method for reimbursing managed care organizations under the BBA, specifically the "Medicare+ Choice" program.

B.

Prior to the passage of the BBA, the payment methods for managed care organizations were set forth in section 1876 of the Social Security Act, 42 U.S.C. § 1395mm, under what was then Part C of the Medicare program. Section 1876 permitted managed care organizations to enter into either a cost contract or a risk contract, depending on certain statutory requirements. See 42 U.S.C. § 1395mm(a), (g), (h); see also 42 C.F.R. §§ 417.530-.576 (cost contract); id. §§ 417.580-.598 (risk contract). Basically, under a section 1876 cost contract, Medicare paid the actual cost the organization incurred in furnishing covered services. Under a section 1876 risk contract, Medicare paid the organization a single monthly capitation payment in advance for each of its enrollees, and, in return, the organization agreed to provide the full range of Medicare services through an organized system of affiliated physicians, hospitals, and other providers. See generally H. Conf. Rep. No. 105-217, at 582-83 (1997), reprinted in 1997 U.S.C.C.A.N. 176, 203-04.

Under section 1876 risk contracts, the monthly capitation payment paid to managed care organizations was based on the adjusted average per capita cost ("AAPCC"). 42 U.S.C. § 1395mm(a)(4); see 42 C.F.R. § 417.584. The AAPCC was Medicare's estimate of the average per capita amount it would cost to treat a given beneficiary under the fee-for-service system. This amount took into consideration the beneficiary's county of residence and certain other demographic characteristics, such as age, sex, and disability status. 42 U.S.C. § 1395mm(a)(4); see 42 C.F.R. § 417.588(c). For each Medicare beneficiary enrolled in a managed care organization, Medicare paid the organization 95% of the AAPCC rate corresponding to the demographic class to which each beneficiary was assigned. 42 U.S.C. § 1395mm(a)(1)(C); see 42 C.F.R. § 417.584(b)(1).

By nature of being a risk contract, if the actual costs associated with an enrollee were higher than the AAPCC rate, the managed care organization was at risk for the amount. If the costs were lower, the organization could keep the amount of the difference or return it to the Medicare program. Specifically, section 1876 provided that HMOs or other qualified organizations were required at the beginning of each year to determine their adjusted community rate ("ACR"). The ACR was essentially a calculation of the insurance premium the plan would charge a commercial customer for providing Medicare-covered services to the enrollee. 42 U.S.C. § 1395mm(e)(3); see 42 C.F.R. § 417.594. An HMO with an ACR that was less than the AAPCC had the option of passing the "savings" on to its enrollees in the form of reduced co-payments or additional health benefits not covered by Medicare, such as prescription drugs, eyeglasses and hearing aids. 42 U.S.C. § 1395mm(g)(2)-(3); see 42 C.F.R. § 417.592(b)(1), (c). Or, the HMO could elect to have its monthly payments reduced or contribute all or a portion of the excess into a stabilization fund. 42 U.S.C. § 1395mm(g)(2); see 42 C.F.R. § 417.592(b)(2)-(4). As alleged in the Complaint, most plans opted to pass the savings on to their enrollees in order to attract additional enrollees and increase profitability, name recognition, and market share.

C.

In the BBA of 1997, Congress added sections 1851 through 1859 to the Social Security Act, 42 U.S.C. §§ 1395w-21-1395w-28, to establish a new Part C of the Medicare program, known as the "Medicare + Choice" program.¹ The stated purpose of Medicare + Choice was to "allow beneficiaries to have access to a wide array of private health plan choices in addition to traditional fee-for-service Medicare ... [and to] enable the Medicare program to utilize innovations that have helped the private market contain costs and expand health care delivery options." H. Conf. Rep. No. 105-217, at 585 (1997), reprinted in 1997 U.S.C.C.A.N. 176, 205-06. In particular, Medicare + Choice was designed to increase the options for eligible individuals beyond a traditional managed care plan available under section 1876, such as an HMO, by providing three types of plans: "M + C coordinated care plans (including plans offered by health maintenance organizations, preferred provider organizations, and provider-sponsored organizations), M + C `MSA' plans, that is, a combination of a high deductible M + C health insurance plan and a contribution to an M + C medical savings account (MSA), and M + C medical private fee-for-service plans." 63 Fed.Reg. 34968, 34968 (1998).

In addition, Congress under the Medicare + Choice program sought to improve the method by which it calculates payment rates to risk contracting plans. See 42 U.S.C. § 1395w-23; see also 42 C.F.R. §§ 422.249-.268. As the Health Care Financing Administration recognized, "[t]he AAPCC had been legitimately criticized for its wide range of payment rates among geographic regions—in some cases it varied by over 20 percent between adjacent counties." 63 Fed.Reg. at 35004. Now, under Medicare + Choice, capitation rates are the greater of: (1) a "blended" capitation rate, taking into account both the local, area-specific Medicare costs on which the old AAPCC rates were based and the national costs,² (2) a minimum monthly payment, which in 1998 was $367, or (3) a minimum percentage increase of 2% over the previous year's capitation rate. 42 U.S.C. § 1395w-23(c)(1); see 42 C.F.R. § 422.252. Thus, while it did not abandon the old AAPCC rates entirely, Medicare + Choice attempted to narrow the amount of payment variation across the country through the use of a new reimbursement formula.

Geographic funding disparities nonetheless persist under the Medicare + Choice payment method. According to the Complaint:

• [I]n 1997 the reimbursement level for HMOs serving Hennepin County, Minnesota residents was $405.63 per member per month, while the reimbursement level for HMOs serving residents in Richmond County, New York, was $767.35 per member per month, a difference of $361.72. Under the BBA, both counties received a 2% increase for 1998. This increased the reimbursement rate in Hennepin County to $413.74 ... and increased the Richmond County, New York, reimbursement rate to $782.70. The result was to widen the gap between these illustrative counties to a $368.96 difference.

• [I]n 1999, the Medicare managed care monthly reimbursement rate for Dakota County, Minnesota, is $394.92. By comparison, the 1999 reimbursement rate for Broward County, Florida, is $676.64; for Los Angeles County, California, $647.70; and for Dade County, Florida, $778.45.

Complaint ¶ 27.

Under Medicare + Choice, moreover, like under section 1876 risk contracts, managed care organizations receiving more from Medicare than it costs them to provide coverage may pass on these savings to their enrollees. 42 U.S.C. § 1395w-24(f)(1); see 42 C.F.R. § 422.312. As under the old system, Medicare + Choice relies on participating plans to provide their ACR. It further requires them, when the ACR is...