Orthopaedic Hosp. v. Belshe

• Decision Date: 09 January 1997
• Docket Number: No. 95-55607,95-55607
• Citation: 103 F.3d 1491
• Parties: , Medicare & Medicaid Guide P 45,001, 97 Cal. Daily Op. Serv. 231, 97 Daily Journal D.A.R. 362, 97 Daily Journal D.A.R. 463 ORTHOPAEDIC HOSPITAL and the California Association of Hospitals and Health Systems, Plaintiffs-Appellants, v. Kimberly BELSHE, Director of the State Department of Health Services, State of California, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1491

103 F.3d 1491

52 Soc.Sec.Rep.Ser. 494, Medicare & Medicaid Guide

P 45,001,

97 Cal. Daily Op. Serv. 231,

97 Daily Journal D.A.R. 362,

97 Daily Journal D.A.R. 463

ORTHOPAEDIC HOSPITAL and the California Association of Hospitals and Health Systems, Plaintiffs-Appellants, v. Kimberly BELSHE, Director of the State Department of Health Services, State of California, Defendant-Appellee.

No. 95-55607.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Aug. 9, 1996.

Decided Jan. 9, 1997.

Lloyd A. Bookman and Jonathan P. Neustadter, Hooper, Lundy & Bookman, Los Angeles, California, for plaintiffs-appellants.

Laurie R. Pearlman, Los Angeles, California; Jonathan R. Davis, Los Angeles, California, for defendant-appellee.

Appeal from the United States District Court for the Central District of California, Stephen V. Wilson, District Judge, Presiding. D.C. No. CV-94-4764 SVW (JRx).

Before: FLETCHER and TASHIMA, Circuit Judges, and RESTANI, ^* Judge.

FLETCHER, Circuit Judge:

Plaintiffs-Appellants Orthopaedic Hospital and the California Association of Hospitals and Health Systems claim that Defendant-Appellee Director of the California Department of Health Services violated section 1396a(a)(30)(A) of the federal Medicaid Act, 42 U.S.C. §§ 1396a-1396v (West 1992 & Supp.1996) by setting reimbursement rates for hospital providers of outpatient services without proper consideration of the effect of hospital costs on the relevant statutory factors: efficiency, economy, quality of care, and access. The district court granted summary judgment in favor of the Director. We reverse and remand with direction.

FACTUAL BACKGROUND & PROCEDURAL HISTORY

I. The Medi-Cal Program

Title XIX of the Social Security Act, 42 U.S.C. §§ 1396a-1396v (the "Medicaid Act"), authorizes federal grants to states for medical assistance to low income persons who are aged, blind, disabled, or members of families with dependent children. The program is jointly financed by the federal and state governments and administered by the states. The states, in accordance with federal law, decide eligible beneficiary groups, types and ranges of service, payment levels for services, and administrative and operating procedures. Payment for services is made directly by the states to the individuals or entities that furnish the services. 42 C.F.R. § 430.0. To receive matching federal financial participation for such services, states must agree to comply with the applicable federal Medicaid law.

Among the health care services that must be provided by states participating in Medicaid are the medical services at issue in this case--hospital outpatient services. 42 U.S.C. §§ 1396a(a)(10)(A), 1396d(a)(2)(A). Hospital outpatient services are preventive, diagnostic, therapeutic, rehabilitative, or palliative services that are furnished to outpatients by an institution that is licensed as a hospital. 42 C.F.R. § 440.20(a).

Many procedures that once required a lengthy inpatient stay, can now be provided on an outpatient basis. This factor, and the desire to cut costs associated with inpatient stays, has led to a general shift towards outpatient care. This factor has also lead to an increase in the complexity of services provided on an outpatient basis.

Some of the services provided by hospital outpatient departments could be provided more economically by non-hospital providers such as freestanding clinics or doctors' offices because those providers have lower fixed costs than do hospitals. However, hospital outpatient departments are more widely available to Medi-Cal beneficiaries. Hospitals that accept any Medicare payments and operate emergency departments are required by law to examine and (if an emergency medical condition exists) to treat any patient who presents him or herself, regardless of the patient's ability to pay. 42 U.S.C. § 1395dd. In contrast, other outpatient service providers are free to deny care to Medi-Cal recipients and others who are unable to pay for care. With no incentive to use the most economical provider, Medi-Cal beneficiaries frequently choose the more accessible and convenient hospital outpatient departments over less costly facilities, some of which may be entirely unavailable or less available to them.

The Defendant-Appellee's agency, the Department of Health Services of the State of California, is the state agency responsible for the administration of California's version of Medicaid, the Medi-Cal program. Medi-Cal has a prospective reimbursement system that sets reimbursement rates for specific services, regardless of where those services are performed (e.g., in hospitals, doctors' offices, or freestanding outpatient clinics). Cal.Code Regs. tit. 22, §§ 51501-51557.

Hospital outpatient departments receive an additional reimbursement for room charges, not received by non-hospital providers. Cal.Code Regs. tit. 22, § 51509(g). However, this additional payment is offset by a 20% reduction in the reimbursement rate for physician services furnished in hospital outpatient departments. Cal.Code Regs. tit. 22, § 51503(i). All other outpatient reimbursement rates are the same as those applicable to non-hospital providers. Cal Code Regs. tit. 22, § 51509.

Hospitals which serve a disproportionate share of Medi-Cal beneficiaries ¹ and small and rural hospitals are eligible for additional reimbursement from Medi-Cal. However, there are relatively few funds available for these additional payments: $14 million annually. 3 A.R. at 242. In 1991, the total payments for outpatient services were approximately $355 million. 3 A.R. at 436.

The Medicaid Act requires a participating state to develop a state plan which describes the policy and methods to be used to set payment rates for each type of service included in the program. 42 C.F.R. § 447.201(b). California's state plan requires the Department to develop an evidentiary base or rate study, have a public hearing on the proposed rates, determine final rates based on the evidentiary base including public input, and adopt final rates through regulations. However, the state plan also allows the legislature to adjust the rates so long as the requirements of 42 C.F.R. Part 447 are met. Before any rate changes are made, the Department must consult with representatives of concerned provider groups.

In 1982 the California legislature reduced the outpatient reimbursement rates by 10%, and the rates for laboratory services by 25%. In 1984 and 1985 the Department made across the board rate increases resulting in a net increase of 2% over the rates in effect prior to the 1982 reduction. Since 1985 the Department has modified the rates for certain services and has provided additional reimbursement for disproportionate share and small and rural hospitals.

II. Prior Litigation

The Hospitals challenge the adequacy of certain of the reimbursement rates the State of California has set for hospitals that provide outpatient services to Medi-Cal beneficiaries. The reimbursement rates currently in effect were set by the Director upon the district court's remand in Orthopaedic Hosp. and the Cal. Ass'n of Hosp. and Health Sys. v. Kenneth Kizer, M.D., Director of the Cal. Dep't of Health Serv., No. CV 90-4209 SVW (JRx), 1992 WL 345652 (C.D.Cal.) ("Orthopaedic I"). The district court reviewed seven specific rate adjustments and found that the Director had acted arbitrarily and capriciously in setting six out of seven of the disputed rates.

It found that (1) efficiency, economy, and quality of care are "relevant factors" under 42 U.S.C. § 1396a(a)(30)(A) and must be considered by the Department when making any rate adjustments; (2) there must be a "rational connection" between the relevant factors and the rates set; and (3) the Department did not consider the relevant factors in six of the seven rate adjustments at issue.

The district court revised its judgment twice. In its Order Amending the Revised Judgment, it clarified that "[t]he Court has not made any ruling on the validity of the rates themselves and cannot comment on whether the defendant will be able to set similar or identical rates once it conducts a proper inquiry and considers 'efficiency, economy and ... quality of care.' " In its Second Revised Judgment, the district court ordered that the six improperly promulgated rates would remain in effect until the Department set new rates upon proper consideration of the relevant factors. However, to discourage the Department from delaying reconsideration of its rates, the district court ordered that the new rates were to be applied retroactively from the date of its original summary judgment order.

III. The Remand

Upon remand, the Department conducted a rate study as required by the decision in Orthopaedic I. In September 1993, the Department published the results of that study entitled "Consideration of Efficiency, Economy, and Quality of Care and Access with Respect to Changes in Medi-Cal Reimbursement for Hospital Outpatient Services." The Department also issued a Statement of Administrative Decision in which it stated that the Department "does not feel that it is necessary to change Medi-Cal reimbursement for hospital outpatient services from current levels. Having considered efficiency, economy, quality of care and access, the Department has therefore decided to readopt the [existing] reimbursement levels...."

In December 1993 the Department held a public hearing regarding the outpatient rates. The California Association of Public Hospitals and the Plaintiff California Association of Hospitals and Health Systems submitted public comments and voluminous materials. The Department summarized the public input into an addendum to its rate study.

After the close of public comment and in response to criticism that Medi-Cal outpatient reimbursement rates failed to cover hospitals' costs adequately, the Department commissioned a study by Peterson Consulting. The Peterson study compared...