885 F.2d 11 (3rd Cir. 1989), 89-5165, West Virginia University Hospitals, Inc. v. Casey

Docket Nº:89-5165.
Citation:885 F.2d 11
Party Name:27 Soc.Sec.Rep.Ser. 34, Medicare&Medicaid Gu 38,028 WEST VIRGINIA UNIVERSITY HOSPITALS, INC. v. Robert CASEY, Governor, Commonwealth of Pennsylvania; John White, Secretary, Department of Public Welfare; David S. Feinberg, Director, Office of Medical Assistance; the Department of Public Welfare, Appellants.
Case Date:September 05, 1989
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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885 F.2d 11 (3rd Cir. 1989)

27 Soc.Sec.Rep.Ser. 34,

Medicare&Medicaid Gu 38,028



Robert CASEY, Governor, Commonwealth of Pennsylvania; John

White, Secretary, Department of Public Welfare; David S.

Feinberg, Director, Office of Medical Assistance; the

Department of Public Welfare, Appellants.

No. 89-5165.

United States Court of Appeals, Third Circuit

September 5, 1989

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

Argued May 22, 1989.

Rehearing and Rehearing In Banc Denied Oct. 5, 1989.

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Ernest D. Preate, Jr., Atty. Gen., Jerome T. Foerster, Deputy Atty. Gen. (argued), Calvin R. Koons, Sr. Deputy Atty. Gen., John G. Knorr, III, Chief Deputy Atty. Gen., Chief, Litigation Section, Office of Atty. Gen., Litigation Section, Harrisburg, Pa., for appellants.

Robert T. Adams (argued), Julia Krebs-Markrich, Thomas J. Stallings, McGuire, Woods, Battle & Boothe, Richmond, Va., Jack M. Stover, Shearer, Mette, Evans & Woodside, Harrisburg, Pa., for appellees.

Before BECKER, STAPLETON, and ROSENN, Circuit Judges.


ROSENN, Circuit Judge.

This interesting and complex appeal arises from the cross-fire currently trapping many hospitals across our nation between rising operating costs, on the one hand, and federal legislation aimed at the sharp containment of health delivery costs, on the other. The plaintiff, West Virginia University Hospitals, Inc. (WVUH or the Hospital), brought this action against certain Pennsylvania state officials under the Civil Rights Act, 42 U.S.C. Sec. 1983, alleging that the Pennsylvania program for providing medicaid reimbursement to an out-of-state hospital such as WVUH violated federal medicaid standards encompassed by Title XIX of the federal Social Security Act and violated the equal protection clause of the fourteenth amendment to the United States Constitution. WVUH also claimed that Pennsylvania's administrative appeals system was legally inadequate. The Hospital sought injunctive and declaratory relief invalidating the out-of-state aspects of the State's hospital reimbursement program.

After a bench trial before the United States District Court for the Middle District of Pennsylvania, the district court, in a thoughtful and painstaking opinion published at 701 F.Supp. 496 (M.D.Pa.1988), granted WVUH's request for relief on all counts. District Judge Rambo concluded that Pennsylvania's reimbursement program as applied to WVUH violated both federal statutory law and the equal protection clause of the Constitution, and held that the state's administrative appeal system was legally inadequate. She ordered Pennsylvania to revise its reimbursement methodology for WVUH and to formulate an adequate and meaningful medicaid administrative appeals system for the Hospital. Additionally, the court held that the State must permit WVUH to avail itself of the new appeals system to challenge its reimbursements from the date the Hospital commenced this action, rather than from the date of judgment. Finally, in an unpublished memorandum and order also issued the day of judgment, the district court awarded attorneys fees to the plaintiff pursuant to 42 U.S.C. Sec. 1988 in the amount of $500,000, of which $104,133 was attributable to expert witness fees and costs.

Pennsylvania appeals, challenging the decision on the merits, the scope of relief, and the award of expert witness fees. We affirm in part and reverse in part.


  1. The parties.

    The plaintiff WVUH is a university-affiliated teaching hospital located six miles south of the border between West Virginia and Pennsylvania. As a "tertiary care" hospital, WVUH provides a complex level of hospital and medical services not generally found in community hospitals. WVUH is the closest source of tertiary care for many residents in the Pennsylvania counties of Fayette and Greene, and provides services as well to residents of the Pennsylvania county of Washington. Historically, the Hospital has provided significant numbers of Pennsylvania medicaid patients with hospital care. For the years 1984 to 1987, WVUH gave inpatient hospital care to more Pennsylvania medicaid patients than did over one-half of the hospitals located in Pennsylvania. Five percent of all WVUH inpatient admissions are attributable to Pennsylvania medicaid recipients, while overall medicaid patients at WVUH constitute twenty-three percent of all admissions. WVUH is by far the largest

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    out-of-state provider of medical services to Pennsylvania medicaid recipients.

    The defendants in this action are Pennsylvania Governor Robert Casey, John F. White, the Secretary of Pennsylvania's Department of Public Welfare (DPW), and David Feinberg, the DPW official responsible for developing the Pennsylvania hospital reimbursement program at issue in this case. Although technically incorrect, for simplicity's sake this opinion may occasionally use the words "Pennsylvania" or "the State" when referring to the defendants.

  2. The federal medicaid act.

    In 1965 Congress enacted Title XIX of the Social Security Act (known as Medicaid or The Medicaid Act) to provide medical assistance to needy persons. 42 U.S.C. Sec. 1396 et seq. The purpose of the act was to provide a nationwide program of medical assistance for low income families and individuals. Medicaid became the primary source of health care coverage for the poor in America. The program is jointly financed with federal and state funds "and is basically administered by each state within certain broad requirements and guidelines." House Subcomm. on Health and the Environment, Data on the Medicaid Program: Eligibility, Services, Expenditures Fiscal Years 1967-77, H.R.Rep. No. 10, 95th Cong., 1st Sess. 1. The federal unit currently responsible for overseeing the medicaid program is the Health Care Financing Administration (HCFA). Federal law requires that one state agency must be designated as the single state agency responsible for the administration of the program. The state determines the scope of the services offered and generally determines the eligibility level for the programs. Id. at 1-2. Thus, the Act implemented a federal-state joint venture in which participating states receive federal medicaid funds in return for administering a medicaid program developed by the state within the parameters established by federal law and regulations.

    Before 1980, Title XIX required states to pay hospitals the "reasonable cost" of rendering inpatient hospital services to medicaid recipients. This requirement translated into a retrospective form of reimbursement based on the actual costs incurred by the hospitals in providing medicaid services. In 1981, however, Congress, hoping to contain escalating medicaid costs, enacted as part of the 1981 Omnibus Budget Reconciliation Act (OBRA), P.L. 97-35, a new standard of hospital reimbursement. The OBRA replaced the "reasonable cost" standard with the current standard of "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities." 42 U.S.C.A. Sec. 1396a(a)(13)(A) (West Supp.1989).

    The 1981 OBRA also reduced federal oversight of states' reimbursement methodologies. Pursuant to section 1396a(a)(13)(A), the HCFA will approve a state reimbursement plan based on the state's satisfactory "assurances" that the plan is in compliance with federal requirements. These requirements are reflected both in the statute itself and in its implementing regulations published by the HCFA in interim form in 1981 and in final form in 1983. 42 C.F.R. Secs. 447.250-447.280.

  3. The Pennsylvania medicaid program: operating cost,

    direct medical education cost, and capital cost


    In Pennsylvania, DPW is the state agency responsible for administering medicaid. The medicaid program developed by DPW for the state is called the "Medicaid Assistance Program" or "MAP."

    Consistent with the 1981 federal policy change with respect to hospital reimbursement, Pennsylvania developed a "prospective payment system" (PPS) for reimbursement of hospitals to contain escalating costs associated with medicaid services. This system, effective beginning fiscal year 1984-1985, replaced the retrospective method of reimbursement with a prospective method. Under this system, each hospital admission is classified according to the patient's illness diagnosis into 1 of 477 categories

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    known as Diagnostic Related Groups (DRGs). 53 Fed.Reg. 38,576-89 (1988). A hospital is reimbursed in accordance with the flat fee fixed for the applicable category--regardless of the number of services used or the patient's length of stay. The DRG system, being prospective in nature, will sometimes undercompensate for a given service and will sometimes overcompensate. The expectation, however, is that in the aggregate an efficiently operated hospital will receive an appropriate amount to reimburse it for medicaid services.

    Unquestionably, Pennsylvania's PPS treats in-state hospitals differently than out-of-state hospitals. Rate calculation for in-state hospitals depends on the type of hospital seeking reimbursement and the average cost for that type of hospital. Under the PPS, all participating in-state hospitals, approximately 233 in number, are assigned to one of seven groups. Grouping for in-state hospitals takes into account four concepts: teaching status, medicaid volume, environmental characteristics, and hospital costs. These four concepts are measured by a total of thirteen variables, including such things as the number of resident and intern programs, total number of patients, area wage index, and so on. The actual grouping of in-state hospitals is accomplished by a computer program.


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