701 F.2d 511 (5th Cir. 1983), 82-4305, Mississippi Hosp. Ass'n, Inc. v. Heckler

Docket Nº:82-4305.
Citation:701 F.2d 511
Party Name:MISSISSIPPI HOSPITAL ASSOCIATION, INC., et al., Plaintiffs-Appellants Cross-Appellees, v. Margaret M. HECKLER, Secretary of Health & Human Services, Defendant-Appellee, B.F. Simmons, etc., et al., Defendants-Appellees Cross-Appellants.
Case Date:March 28, 1983
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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701 F.2d 511 (5th Cir. 1983)


Plaintiffs-Appellants Cross-Appellees,


Margaret M. HECKLER, Secretary of Health & Human Services,


B.F. Simmons, etc., et al., Defendants-Appellees Cross-Appellants.

No. 82-4305.

United States Court of Appeals, Fifth Circuit

March 28, 1983

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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David W. Clark and George Q. Evans, Jackson, Miss., Ronald N. Sutter, Washington, D.C., for plaintiffs-appellants cross-appellees.

Mary Lawrence Gervin, Asst. Atty. Gen., Thomas E. Childs, Jr., Sp. Counsel to Atty. Gen., Fulton, Miss., William R. Phillips, Jackson, Miss., for Miss. Medicaid Com'n, et al.

Leila H. Carp, Office of Gen. Counsel, Baltimore, Md., for Heckler.

Appeals from the United States District Court for the Northern District of Mississippi.

Before WISDOM, REAVLEY and TATE, Circuit Judges.

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REAVLEY, Circuit Judge:

This action challenges the validity of the state reimbursement plan that governs payments to hospitals in Mississippi for inpatient services provided to Medicaid patients. It was brought by an association of Mississippi hospitals and several individual hospitals against the Mississippi Medicaid Commission and several state officials that developed the plan, and the Secretary of the federal Department of Health and Human Services that approved the plan. The district court granted a summary judgment, holding that the reimbursement plan was valid except for an amendment that removes legal costs and fees incurred by providers in suits against federal and state agencies administering the Medicaid program from the array of allowable costs.

The plaintiffs appealed the decision, claiming that the whole plan is invalid for numerous reasons. The state defendants filed a cross-appeal, claiming that the amendment disallowing recovery of legal costs is valid. We agree with the defendants on all issues, affirming the district court on the issues raised in the plaintiff's appeal, and reversing as to the issue raised in the cross-appeal.



The Medicaid program is a cooperative federal-state program set up to provide medical services to the poor. While the federal government provides funding, the program is administered by each state in accordance with a state plan that must be approved by the Secretary of Health and Human Services. The federal statutes governing the program comprise Title XIX of the Social Security Act, 42 U.S.C. Sec. 1396 et seq. While participation in the program is voluntary, once a state chooses to participate it must comply with federal statutory requirements. Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 2680, 65 L.Ed.2d 784, 794 (1980).

The statutory provision most relevant to this case requires that a state plan for medical reimbursement must provide

for payment ... of the hospital ... under the plan through the use of rates (determined in accordance with methods and standards developed by the State) and which, in the case of hospitals, take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs ... 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 ....

42 U.S.C. Sec. 1396a(a)(13)(A) (emphasis added). The italicized clauses are particularly in dispute.

Originally, states were required to reimburse hospitals for inpatient services provided to Medicaid patients on the basis of cost methodology used by the federal Medicare program. In response to concerns about spiraling costs, Congress amended Title XIX in 1972 to allow, and even encourage, each state to develop its own alternative reimbursement scheme. As explained in Alabama Nursing Home Association v. Harris, 617 F.2d 388, 392 (5th Cir.1980) [hereinafter Alabama Nursing Home ]:

Congress intended that state authorities in developing methodologies for reasonable cost related reimbursement have great flexibility in the areas of cost-finding and rate-setting. The legislative history indicates that states are to be free to experiment with methods and standards for payment that would be simpler and less expensive than the complex Medicare reasonable cost formula. See S.Rep. No. 92-1230, 92d Cong., 2d Sess. 287 (1972) .... Additionally, Congress intended that states have freedom both to define allowable cost items and to set a value on the reasonable cost of such items.

As explained further below, federal oversight of Medicaid reimbursement has diminished still further since the Alabama Nursing Home decision.

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In 1981, Mississippi implemented an alternative reimbursement plan for inpatient hospital services. The plan establishes prospective per diem rates for each participating hospital which are based on each hospital's Medicaid costs for the previous year, adjusted to exclude costs disallowed under the Medicare program. The costs are divided into three components--capital costs, educational costs and operating costs--and the hospitals are divided into classes based on the number of beds in the facility.

The capital cost component is calculated by dividing total allowable capital costs from the prior year attributable to treatment of Medicaid patients by the number of Medicaid inpatient days, subject to an occupancy penalty if the hospital has an occupancy level less than a level specified for its class. The specified occupancy level varies with each bed-size class; for example, the level is 60% for the 0-50 bed class, and 75% for the 151-200 bed class.

The educational cost component is calculated by dividing the Medicaid share of the prior year's education cost, adjusted for hospital industry inflation, by the actual number of Medicaid inpatient days.

The operating cost component is determined by first apportioning Medicaid's share of the previous year's operating costs, adjusting for hospital industry inflation, separating the costs into labor and non-labor categories, and dividing by the number of actual Medicaid inpatient days. The labor cost per diem is adjusted by the SMSA Wage Index published in the Federal Register to account for variation in labor costs among urban and rural locations in the state. The most controversial part of the plan is that the adjusted labor cost per diem plus the non-labor cost per diem for each hospital is arrayed with the comparable cost figure for other hospitals in the same bed-size class from the least expensive to the most expensive, and the 80th percentile figure is then calculated. The 80th percentile of per diem operating cost rates acts as a ceiling on operating cost reimbursements within each class. In other words, hospitals whose per diem operating cost rate falls below the 80th percentile receive their actual allowable cost, while hospitals with operating costs in excess of the ceiling are paid the 80th percentile rate. The purpose of this ceiling is to encourage cost containment under the Medicaid program.


Mississippi's reimbursement plan is the product of research and policy decisions by federal and state agencies. These agencies are authorized by statute to develop Medicaid's payment schemes. The function and expertise of the federal courts in this sphere is limited, and our role does not extend to reweighing or rethinking the political and financial concerns behind a particular payment plan. A district court can, of course, decide whether federal law has been violated. Otherwise its review of non-adjudicatory federal agency action is limited to deciding whether the action is arbitrary or capricious. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971); 5 U.S.C. Sec. 706(2)(A). A presumption of validity attaches to agency action, and the burden of proof rests with the party challenging such action. Alabama Nursing Home, 617 F.2d at 393. Although the answer is far from clear, we assume without deciding that by force of statutory or constitutional requirements, a district court is entitled to review the actions of a state agency administering federal Medicaid funding as it would review the actions of a federal agency. In reviewing an order of summary judgment, the court of appeals views the case in the same manner as the district court, asking whether there is any genuine issue as to any material fact and whether the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Bank of Commerce of Laredo v. City National Bank of Laredo, 484 F.2d 284, 289 (5th Cir.1973), cert. denied, 416 U.S. 905, 94 S.Ct. 1609, 40 L.Ed.2d 109 (1974).


  1. The Requirement of Findings

    The plaintiffs argue that the state has failed to make findings or to provide a

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    reasoned explanation for the rates established in the Medicaid plan. In particular, they allege a lack of findings or supporting reasons to justify the 80th percentile ceiling and occupancy level penalties.

    There is some authority for the proposition that agencies are required to make findings sufficient for a court to decide whether agency action is valid. Generally, "[a] finding is a statement that summarizes what facts the agency is taking into account and a finding usually is not required for notice and comment rulemaking ...." 1 K. Davis, Administrative Law Treatise Sec. 6:13 at 506 (1978). Nevertheless, "the courts have begun to...

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