State of Wis., Dept. of Health and Social Services v. Bowen

• Decision Date: 21 July 1986
• Docket Number: No. 85-1207,85-1207
• Citation: 797 F.2d 391
• Parties: , 14 Soc.Sec.Rep.Ser. 312, Medicare&Medicaid Gu 35,511 STATE of WISCONSIN, DEPARTMENT of HEALTH and SOCIAL SERVICES, Plaintiff- Appellee, v. Otis R. BOWEN, Secretary of Health and Human Services, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 391

797 F.2d 391

55 USLW 2086, 14 Soc.Sec.Rep.Ser. 312,

Medicare&Medicaid Gu 35,511

STATE of WISCONSIN, DEPARTMENT of HEALTH and SOCIAL SERVICES, Plaintiff- Appellee, v. Otis R. BOWEN, Secretary of Health and Human Services Defendant-Appellant.

No. 85-1207.

United States Court of Appeals Seventh Circuit.

Argued Oct. 23, 1985.

Decided July 21, 1986.

Laurence Gilbert, Asst. Regional Atty., Dept. of Health and Human Services, Chicago, Ill., for defendant-appellant.

Jody Melms, Wisconsin Dept. of Justice, Madison, Wis., for plaintiff-appellee.

Before CUDAHY, ESCHBACH, and COFFEY, Circuit Judges.

CUDAHY, Circuit Judge.

We are asked in this appeal to decide whether the Secretary of Health and Human Services (the "Secretary") abused his discretion by interpreting the "utilization control" provisions of the Medicaid statute, 42 U.S.C. Secs. 1396a(a)(30), 1396b(g)(1), and accompanying regulations, 42 C.F.R. Parts 442 & 456, in an arbitrary and capricious manner. ¹ The district court ruled that he had and remanded the case to the HHS Grant Appeals Board. We reverse.

I.

Medicaid, a cooperative federal-state program established by Title XIX of the Social Security Act, 42 U.S.C. Sec. 1396 et seq., provides federal financial assistance to those states that choose to reimburse health care providers for certain costs of medical care given to needy persons. A state need not participate in Medicaid, but if it chooses to accept federal funds it must comply with the federal Medicaid statute and regulations, including the requirement that a state plan, describing the state's program and assuring conformity with federal prescriptions, be submitted for approval by the Secretary. 42 U.S.C. Sec. 1396a(b).

A state plan must provide for patient care in "skilled nursing facilities" (SNFs), 42 U.S.C. Secs. 1396d(a)(4)(A); it may also at its option provide for care in "intermediate care facilities" (ICFs), 42 U.S.C. Sec. 1396d(a)(15). A SNF is appropriate for patients who require constant care and the services of skilled nursing or rehabilitation personnel, 42 U.S.C. Sec. 1396d(f); 42 C.F.R. Sec. 440.40; an ICF provides a lower level of services for patients who nonetheless require institutional care, 42 U.S.C. Sec. 1396d(c); 42 C.F.R. Sec. 440.150. Both sorts of facilities must be licensed by the state and certified by the state Medicaid agency as conforming to federal requirements. 42 C.F.R. Secs. 442.12, 442.200-202, 442.250-254.

Services provided in SNFs and ICFs are subject to Medicaid's "utilization control" requirements. Section 1902(a)(30) of the statute, 42 U.S.C. Sec. 1396a(a)(30), requires that

[a] State plan for medical assistance ... provide such methods and procedures relating to the utilization of, and the payment for, care and services ... as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency, economy and quality of care.

Towards this end, each state must demonstrate to the Secretary that it has an "effective program" of utilization control. Such a program should ensure inter alia that whenever a Medicaid patient is admitted to a nursing home or hospital "a physician certifies ... [and] recertifies, where such services are furnished over a period of time ... at least every 60 days ... that such services are or were required to be given on an inpatient basis because the individual needs or needed such services...." 42 U.S.C. Sec. 1396b(g)(1)(A) (1983). ² If a state cannot make this demonstration, federal reimbursement for that quarter, called the federal medical assistance percentage (FMAP), is decreased according to a statutory formula. 42 U.S.C. Sec. 1396b(g)(1). The Health Care Financing Administration (HCFA), an agency within HHS, periodically checks a state's utilization control showing and, if it determines that a state is not in compliance, imposes as a penalty a reduction in FMAP. 42 U.S.C. Secs. 1396b(g)(2), 1396b(g)(5).

In June 1982, March 1983 and September 1983 the HCFA surveyed the utilization control performance of the Wisconsin Department of Health and Social Services (Wisconsin) for the quarters ending March 1982, December 1982 and June 1983 and determined that Wisconsin was not in compliance with federal requirements. In each of the three surveys, the HCFA examined state records and found that a number of ICFs were treating at least one Medicaid patient certified for SNF care. ³ In the second survey, the HCFA found that two SNFs were providing Medicaid services to patients certified as needing only ICF care. HCFA therefore disallowed a portion of Wisconsin's FMAP for the relevant quarters, on grounds that Wisconsin did not have an effective program of utilization control. ⁴

Wisconsin appealed each of these disallowances to the HHS Grant Appeals Board separately. In the first administrative proceeding, the Board issued a decision upholding the federal disallowance. In the two subsequent proceedings, Wisconsin relied solely upon the arguments it had briefed for the first, and the Board also upheld these disallowances, incorporating its reasoning from the first decision.

Wisconsin's position before the Board was that it did have an effective program of utilization control, as defined by Medicaid and the federal regulations, because the state had approved a system of "variances," under which a SNF-certified patient might remain in an ICF, or an ICF-certified patient in a SNF, upon a request from and supporting materials submitted by a patient's family, physician, the facility administrator and a state evaluator. ⁵ It argued that the primary goal of utilization control is cost efficiency and that the Secretary's authority over placement decisions is limited to that aspect of patient placement. Since it actually saves money to keep SNF-certified patients in ICFs, which charge less for services, ⁶ Wisconsin asserted, the variance program complied with Medicaid utilization control requirements. In the alternative, Wisconsin argued that its variance program was in the best medical interest of the patients because of the risk that a patient might suffer "transfer trauma," that is, "trauma brought about by being separated from a spouse residing in the same facility and not needing the different level of care, or by being removed from familiar surroundings after living for a length of time in a particular facility." Appellee's Brief at 6. Wisconsin did not present any medical evidence supporting the existence of "transfer trauma," instead relying on judicial recognition of the phenomenon. See Appellant's Brief, Wisconsin Department of Health and Social Services, No. 83-20 (Grant Appeals Board November 30, 1983), at 6.

The HCFA contended that a state variance system was irrelevant to the question of compliance with federal law because the Secretary had interpreted the statute and regulations as justifying a prophylactic rule that SNF-certified patients be treated only in SNFs and ICF-certified patients only in ICFs. It argued that the Secretary had the discretion to read the statute and regulations in this way because the utilization control provisions have a dual purpose--saving money and ensuring quality of care. Allowing SNF-certified patients to remain in ICFs jeopardizes quality of care. And allowing ICF-certified patients to remain in SNFs, which charge higher rates, is not cost efficient. Finally, the HCFA argued that Wisconsin had notice of the Secretary's interpretation of the recertification requirement through two "action transmittals," sent to state Medicaid agencies to clarify the matter. See HCFA, Medicaid Action Transmittal No. 75-122 (November 1975); HCFA, Medicaid Action Transmittal No. 80-68 (September 1980); infra note 9. The Board agreed with the HCFA and ruled that the variances did not cure the state's lack of compliance; in dicta, it expressed doubt about whether Wisconsin had in fact followed its own variance system in each case.

The three cases were consolidated for review by the district court, which reversed the Grant Appeals Board. It found that, in administering the utilization control provisions of Medicaid, "the Secretary's concern should be primarily focused on financial rather than medical matters," Wisconsin Department of Health and Social Services v. Heckler, Nos. 84-C-75-S, 84-C-334-S, 84-C-682-S (W.D.Wis. December 11, 1984), at 9-10, and that "in penalizing the State for a nursing home placement decision based on patient treatment considerations, the Secretary is overstepping the boundary between Federal and State responsibility that has been understood since the institution of this program," id. at 7. It noted that Wisconsin defended the legitimacy of its variances on the basis of transfer trauma, which it ruled had "enough logical force" to

justify requiring the Secretary to point to more specific legislative authorization for rejecting the State's position than she has shown. It would seem rational and reasonable to suggest that, at the margin between the arbitrary line separating patients who belong in facilities denominated ICF's from those who belong in SNF's, transfer trauma may provide sufficient justification to grant a variance for legitimate medical reasons. The State's policy has the added benefit of saving both State and Federal dollars which ... is the primary purpose of the very statutes and regulations on which the Secretary depends for her decision in this matter.

Id. at 6-7. Because there was insufficient evidence before it to rule on the question of transfer trauma, the district court remanded the case to the Board for fact-finding. The Secretary has appealed from this order.

II.

In his appeal to this court, the Secretary contends that the district court erred in three different aspects of its analysis: (1) in finding that the Secretary lacks the statutory authority to address quality of care concerns arising out of nursing home...