Abbeville General Hosp. v. Ramsey, 92-3995

Decision Date22 September 1993
Docket NumberNo. 92-3995,92-3995
Citation3 F.3d 797
Parties, Medicare&Medicaid Gu 41,767 ABBEVILLE GENERAL HOSPITAL, et al., Plaintiffs-Appellants, v. David L. RAMSEY, Secretary, Department of Health and Hospitals, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Normand F. Pizza, Nyda Brook Zelenka, Samson Livingstone Sempasa, Michael Allyn Stroud, Fred J. Cassibry, Brook, Morial, Cassibry, Pizza & Adcock, et al., New Orleans, LA, for plaintiffs-appellants.

S. William Livingston, Jr., Mark Elliott Plotkin, Covington & Burling, Washington, DC, P. Bruce Waters, TA Dept. of Health & Hospitals, Jerry L. Phillips, Mary Dozier O'Brien, Baton Rouge, LA, for defendants-appellees.

Appeal from the United States District Court for the Middle District of Louisiana.

Before EMILIO M. GARZA and DeMOSS, Circuit Judges and Zagel 1, District Judge.

ZAGEL, District Judge.

A penny saved is a penny earned. That is the formula for federal Medicaid law--hospitals that save dollars by operating efficiently and economically earn state and federal dollars to cover all operating costs. The Medicaid Act, 2 specifically the Boren Amendment, provides that hospitals in participating states that operate "efficiently and economically" are entitled to reimbursement of costs which must be incurred. 42 U.S.C.

Sec. 1396a(a)(13)(A) (1991). Louisiana's Medicaid plan adopts the same formula since Louisiana elected to participate in the joint federal-state Medicaid program and receive matching federal funds. Louisiana's Department of Health and Hospitals ("LDHH"), under the direction of its secretary, administers its Medicaid plan.

As a participating state, Louisiana must comply with the Medicaid Act and implementing regulations promulgated by the Health Care Financing Administration (HCFA). Amisub, (PSL), Inc. v. Colorado Dep't of Social Servs., 879 F.2d 789, 794 (10th Cir.1989), cert. denied, 496 U.S. 935, 110 S.Ct. 3212, 110 L.Ed.2d 660 (1990). The federal structure gives each state Medicare agency a certain degree of flexibility in developing its Medicaid plan. Each plan, however, must provide for the reimbursement of inpatient hospital services:

through the use of rates ... which the State finds, and makes assurances satisfactory to the Secretary, are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable State and federal laws, regulations and quality and safety standards.

42 U.S.C. Sec. 1396a(a)(13)(A). In fact, the Supreme Court in Wilder v. Virginia Hosp. Assoc., 496 U.S. 498, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990), held that the leeway in adopting a method of computing rates does not relieve States of their obligation to pay reasonable rates. Id. at 2520. Once developed, each state must submit its plan to HCFA for approval. 42 U.S.C. Sec. 1396. To secure HCFA approval, each state Medicare Agency must make findings and submit assurances to HCFA that: (1) the payment rates "are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers"; (2) the methods and standards employed "take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs"; and (3) the payment rates "are adequate to assure that recipients have reasonable access, taking into account geographic location and reasonable travel time, to inpatient hospital services of adequate quality." 42 C.F.R. Sec. 447.253(b)(1)(i), (ii)(A), (ii)(C) (1992). Such findings must be made and assurances filed with every amendment to established plans; findings must be made at least annually. 42 C.F.R. Sec. 447.253(a), (b) (1992).

LDHH first developed its Medicaid plan for inpatient hospital services in 1983. Under the plan, LDHH reimburses hospitals 100 percent of all capital costs, educational expenses, and malpractice expenses. The remaining operating costs are reimbursed either on a 100 percent basis or at a maximum level predetermined by each hospital's "target rate." LDHH set each hospital's initial "target rate" as the higher of its 1980 and 1981 average operating costs per Medicaid discharge. The plan allowed LDHH to increase these target rates in 1982, 1983, and 1984 in accordance with HCFA's inflation index published periodically. In 1985 and 1986, LDHH submitted proposed amendments to freeze the target rates for cost reporting periods beginning July 1, 1985 through June 30, 1987. HCFA approved this freeze. In 1987, LDHH resumed its plan and increased target rates up to 2.3% under the HCFA index. In 1988, LDHH again froze target rates until July 1, 1990, despite HCFA's disapproval of the proposed amendment. 3 Since then, target rates have increased annually by the amount of the applicable HCFA indices.

The dispute in Louisiana concerns whether LDHH made findings and submitted assurances as required by the Boren Amendment. The Hospitals 4 here complain that LDHH LDHH followed suit and filed a cross motion for partial summary judgment declaring that it complied with the findings process mandated in the Medicaid Act and its regulations. The district judge granted LDHH's motion for partial summary judgment, concomitantly denied the Hospitals' motion for summary judgement, dismissed the case in its entirety, and subsequently denied the Hospital's motion for a new trial, but amended his prior ruling. 5 The Hospitals now appeal. This Court has jurisdiction to hear their appeal under 28 U.S.C. Sec. 1291.

did not apply the "penny saved, penny earned" formula outlined in the Medicaid Act in deriving the reimbursement rates set under Louisiana's initial Medicaid plan and amendments for the years 1985, 1986, 1988, 1989 and 1990. The Hospitals filed a Sec. 1983 action against the Secretary of LDHH and other agency officials, claiming their actions deprived them of rights secured under the Boren Amendment. The Hospitals eventually moved for partial summary judgment declaring that LDHH failed, as a matter of law, to comply with the Boren Amendment when it established reimbursement rates and other payment schedules under Louisiana's Medicaid plan. In the motion, the Hospitals challenged LDHH's assurances submitted to HCFA, insisting that LDHH failed to make any "findings" that the rates set were reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated hospitals.

On appeal, the Hospitals seek review of the district court's grant of summary judgment and other adverse rulings. The Hospitals maintain that the district court erred when it: (1) applied the highly deferential "arbitrary and capricious" standard of judicial review to the procedural issue of whether the LDHH complied with federal law; (2) determined that, as a matter of law, LDHH complied with the Boren Amendment and was entitled to summary judgment; and (3) dismissed the entire case, including the substantive issues on the reasonableness and adequacy of the reimbursement rates, after ruling only on the preliminary issue of procedural compliance with the Boren Amendment.

STANDARD OF REVIEW

We review a district court's grant of summary judgment de novo, employing the same standard as a district court would employ under Federal Rule of Civil Procedure 56(c). Harbor Ins. Co. v. Urban Constr. Co., 990 F.2d 195, 199 (5th Cir.1993). Summary judgment is proper only if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). All reasonable inferences are drawn in favor of the nonmoving party. Harbor, 990 F.2d at 199. The parties here do not dispute the material facts. They argue whether the facts of record support a judgment as a matter of law that LDHH made appropriate findings and assurances in compliance with the Boren Amendment. LDHH says "yes"; the Hospitals say "no."

LDHH has made its findings and submitted assurances to HCFA for approval of its initial Medicaid plan in 1984 and all subsequent amendments to the plan's reimbursement rates. HCFA approved the plan and amendments to "freeze" reimbursement rates until 1988. LDHH contends that this federal agency action entitles Louisiana's plan to a presumption of regularity and warrants application of the arbitrary and capricious standard for reviewing the record to determine whether LDHH complied with federal law. LDHH cites a litany of cases for the indisputable proposition that a state agency's rate-setting action is entitled to considerable deference and is reviewable only under the arbitrary and capricious standard. 6 But this rule does not resolve the specific question presented here.

There is a fundamental difference under the Medicaid Act between an agency's discretion to set reimbursement rates and an agency's mandatory compliance with the findings and assurances requirements. It is LDHH's compliance or noncompliance with the findings requirement that is subject to cross motions for partial summary judgment. The findings requirement is both a procedural and a substantive requirement--LDHH must find that the rates are reasonable and adequate and the plan must adopt rates that are actually reasonable and adequate. Wilder, 496 U.S. at 512, 110 S.Ct. at 2519; Illinois Health Care Assoc. v. Bradley, 983 F.2d 1460, 1463 (7th Cir.1993) (distinguishing between the Boren Amendment's procedural component that the agency make findings and assurances and its substantive component that the plan implemented result in adequate payments). The Hospitals complained below of LDHH's noncompliance in practice with the findings requirement and the plan's noncompliance with the substantive findings requirement. 42 C.F.R. Sec. 430.35(C) (1992) ("A...

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