Alabama Hosp. Ass'n v. Beasley

• Decision Date: 14 April 1983
• Docket Number: No. 81-7965,81-7965
• Citation: 702 F.2d 955
• Parties: ALABAMA HOSPITAL ASSOCIATION, a corporation; et al., Plaintiffs-Appellants v. Rebecca BEASLEY, Individually, and in her capacity as Commissioner of the Alabama Medicaid Agency, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 955

702 F.2d 955

1 Soc.Sec.Rep.Ser. 325

ALABAMA HOSPITAL ASSOCIATION, a corporation; et al Plaintiffs-Appellants v. Rebecca BEASLEY, Individually, and in her capacity as Commissioner of the Alabama Medicaid Agency, et al., Defendants-Appellees.

No. 81-7965.

United States Court of Appeals, Eleventh Circuit.

April 14, 1983.

Sidney Lavender, Johnston, Barton, Proctor, Swedlaw & Naff, Gilbert E. Johnston, Jr., Birmingham, Ala., for plaintiffs-appellants.

Herman H. Hamilton, Jr., Robert Harris, Montgomery, Ala., for Beasley.

Kenneth E. Vines, Asst. U.S. Atty., Montgomery, Ala., Amy Yourman, Jeffrey Golland, Dept. of Health and Human Services, Washington, D.C., for Schweiker.

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

Before GODBOLD, Chief Judge, FAY and SMITH ^*, Circuit Judges.

GODBOLD, Chief Judge:

This appeal concerns the validity of a plan that the Alabama Medical Services Administration has devised to reimburse Alabama hospitals for the services they provide under the Medicaid program.

The state became dissatisfied with the Medicare reimbursement principles it had previously used and developed an alternative reimbursement methodology, as permitted by the then effective code provision, 42 U.S.C. Sec. 1396a(a)(13)(D) (1976). The essential features of the complicated alternative plan can be summarized as follows. The plan sets "prospective" reimbursement rates, reimbursing hospitals for costs they expect to incur under the Medicaid program. ¹ After disallowing some types of costs, the plan distinguishes between educational, capital and operating costs. It departs from the Medicare methodology by inter alia limiting the amount of reimbursable capital and operating costs. Hospitals whose average unused capacity exceeds 50% of available licensed beds are reimbursed for less than all capital costs. The limitation on operating costs is achieved by dividing hospitals into classes according to their rural or urban locations and licensed bed sizes. Within each class the maximum amount of reimbursable operating costs is measured by the class's mean operating costs, plus one standard deviation.

Pursuant to the former code provision and accompanying regulations, the Department of Health and Human Services (HHS) formally approved the plan. See 42 U.S.C. Sec. 1396a(a)(13)(D) (1976); ² 42 C.F.R. Secs. 447.261-447.316 (1979). While HHS's formal approval of the plan was pending, however, Congress had revised the relevant code provision. See 42 U.S.C.A. Sec. 1396a(a)(13)(A) (West Supp.1982). ³

The new provision, in an attempt to discourage soaring medical costs and upgrade the role of the states, differs from its predecessor in several ways. First, Congress altered the general standard used to assess reimbursement rates devised by the states. Under the former code provision, states must reimburse hospitals for the reasonable costs of Medicaid services. Because Congress considered this reasonable cost standard inflationary, ⁴ it lowered the threshold of permissible reimbursement rates, requiring that states reimburse "the costs which must be incurred by efficiently and economically operated facilities...." 42 U.S.C.A. Sec. 1396a(a)(13)(A) (West Supp.1982). Second, Congress identified two special situations to which a state's reimbursement methodology must speak. The state's methods must "take into account the situation of hospitals which serve a disproportionate number of low income patients" and "provide, in the case of hospital patients receiving services at an inappropriate level of care ..., for lower reimbursement rates reflecting the level of care actually received...." Third, the new provision uses different language to describe the role of the Secretary in assessing methodologies proposed by the states. Whereas the former provision stated that state plans shall be "reviewed and approved by the Secretary," the new provision provides that the state must find and make "assurances satisfactory to the Secretary" that the methodology fulfills statutory requirements.

Shortly after the above changes became law, the Alabama Hospital Association and ten Alabama hospitals filed suit to enjoin implementation of the plan, alleging the invalidity of the plan under the revised statute. Based on HHS's failure to review the plan in light of the new statute, the district court temporarily enjoined implementation of the plan pending completion of proceedings before it. HHS subsequently approved the plan in light of the new statute, concluding that the state had given satisfactory assurances of compliance. Following a trial on the merits, the district court held that HHS had properly approved the plan under the new statute and dissolved the temporary injunction it had issued.

On appeal plaintiffs argue that viewed in light of the new code provision HHS's approval of the plan cannot stand because (1) HHS failed to promulgate standards defining the efficient cost standard; (2) the state did not submit to HHS the information required by 42 C.F.R. Sec. 447.255(b) (1981); (3) the plan does not take into account the situation of hospitals serving a disproportionate number of indigent patients; and (4) the plan does not reduce rates for patients receiving an inappropriate level of care. We reject the first three arguments and accept the fourth.

I. Standards

The current statute provides that the state must find and make "assurances satisfactory to the Secretary" that its reimbursement rates "are 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.1982). Citing Alabama Nursing Home Association v. Harris, 617 F.2d 388 (5th Cir.1980), ⁵ appellants argue that HHS's approval of the plan is invalid because neither the Secretary nor the state has defined "the costs which must be incurred by efficiently and economically operated facilities." We find it unnecessary to decide the merits of appellants' contentions because, assuming arguendo that the contested phrase requires further definition, the failure to formulate such a definition constitutes harmless error.

Courts have not hesitated to apply a harmless error rule where the agency has committed an error that clearly had no bearing on its substantive decision. ⁶ See, e.g., 5 U.S.C. Sec. 706 (1976) (court reviewing agency action shall take "due account ... of the rule of prejudicial error"); ⁷ U.S. Steel Corp. v. EPA, 595 F.2d 207, 215 (5th Cir.1979); EEOC v. Exchange Security Bank, 529 F.2d 1214, 1216-17 (5th Cir.1976); Dodson v. National Transportation Safety Board, 644 F.2d 647, 652 (7th Cir.1981); Consolidated Gas Supply v. Federal Energy Regulatory Commission, 606 F.2d 323, 328-29 (D.C.Cir.1979). ⁸ Here it is clear that the plan's reimbursement levels will satisfy whatever standards the Secretary adopts to define "costs which must be incurred by efficiently and economically operated facilities."

HHS approved the plan under the "reasonable cost" standard contained in the former code provision, a standard which is more generous from the appellants' perspective. Congress, in replacing the reasonable cost standard with one based on considerations of efficiency and economy, intended to give the states flexibility to lower reimbursement levels below those required by the reasonable cost standard. Because the new "efficient cost" standard is designed to lower the threshold of permissible reimbursement rates, ⁹ rates properly approved under the reasonable cost standard will satisfy the new efficient cost standard. Appellants, however, do not contend that HHS's approval of the plan's reimbursement rates under the reasonable cost standard was based on flawed regulations or an inadequate application of its regulations. ¹⁰ In fact, they offer no plausible reason why the agency, after approving the plan under the more restrictive reasonable cost standard, might reach a different result under a suitably defined efficient cost standard.

Appellants, for instance, dispute the reasonableness of the plan's low occupancy penalty and its rural/urban and bed size classifications. In approving the plan under the reasonable cost standard, however, HHS, after explicitly analyzing these issues, specifically found the low occupancy penalty and the challenged classifications reasonable. See Memorandum from Robert Streiner, Director of HHS Division of Alternative Reimbursement Systems, to George R. Holland, HHS Regional Administrator (Aug. 7, 1981) (recommending plan's approval). Yet appellants do not explain why the agency's presumptively valid conclusion, see Johnson's Professional Nursing Home v. Weinberger, 490 F.2d 841, 844 (5th Cir.1974), is invalid under the reasonable cost standard or, more to the point, the efficient cost standard.

Appellants also object to the plan's failure to allow reimbursement for bad debts and telephone services, costs which the appellants argue must be incurred by an efficiently and economically operated hospital. This argument is devoid of merit. The Medicare reimbursement methodology that serves as the absolute upper limit on repayment under the former reasonable cost standard generally disallows both types of costs. See 42 C.F.R. Secs. 405.420, 405.451 (1979). In revising the statute Congress sought to move away from the inflationary Medicare reimbursement methodology. Appellants' argument ignores the intent underlying the recent enactment. Congress intended the efficient cost standard to reduce, not increase, the permissible level of reimbursement below that available under Medicare principles.

Appellants thus make no colorable argument that HHS improperly approved the plan's general structure under the reasonable cost standard and that HHS, had it properly applied the new efficient cost standard would not have approved this structure. In this context, we hold that HHS's alleged error in failing adequately to...