American Health Care Ass'n, Inc. v. Califano

• Decision Date: 07 December 1977
• Docket Number: Civ. A. No. 77-250.
• Citation: 443 F. Supp. 612
• Parties: AMERICAN HEALTH CARE ASSOCIATION, INC., Plaintiff, v. Joseph A. CALIFANO, Jr., Secretary, United States Department of Health, Education and Welfare, Defendant.
• Court: U.S. District Court — District of Columbia

443 F. Supp. 612

AMERICAN HEALTH CARE ASSOCIATION, INC., Plaintiff, v. Joseph A. CALIFANO, Jr., Secretary, United States Department of Health, Education and Welfare, Defendant.

Civ. A. No. 77-250.

United States District Court, District of Columbia, Civil Division.

December 7, 1977.

COPYRIGHT MATERIAL OMITTED

William A. Geoghegan, Thomas C. Fox, Washington, D.C., for plaintiff.

Karen I. Ward, Asst. U. S. Atty., Washington, D.C., for defendant.

MEMORANDUM OPINION

JOHN H. PRATT, District Judge.

This action constitutes a challenge to the activities of defendant Secretary of Department of Health, Education and Welfare in his imposition of restrictions upon the methods by which states may pay skilled nursing and intermediate care facilities for their services under the Medicaid Act, 42 U.S.C. § 1396 et seq. Plaintiff American Health Care Association, a non-profit corporation which seeks to promote high standards of professional care in licensed health care facilities, argues that the Secretary has illegally restricted the ability of states to include profit or similar incentives in its payments to health care institutions for services rendered.

Jurisdiction is vested in this Court pursuant to 5 U.S.C. § 702 and 28 U.S.C. §§ 1331, and 2201-02.^* The complaint presents substantive challenges to the Secretary's disapproval of state Medicaid plans which included profits as reasonable costs, as both arbitrary and capricious and in excess of statutory authority; and procedural challenges centered upon the Secretary's failure to adhere to provisions of the Administrative Procedure Act (APA) in the establishment of rules related to profit incentives. We will address these challenges consecutively.

A. Factual Background. In an effort to supply Congressional guidance for states in their development of mechanisms for reimbursement of skilled and intermediate nursing care facilities for services rendered to Medicaid recipients, Congress in 1972 by Public Law 92-603, § 249(a), amended existing Medicaid legislation and required that states provide for payment to these facilities on a "reasonable cost related basis." 42 U.S.C. § 1396a(a)(13)(E). The section was apparently a result of Congressional displeasure with widespread state endorsement of flat rate payment systems which were perceived as failing to bring about quality care and the efficient, economical provision of such service. See Plaintiff's Statement of Material Facts Not in Dispute, ¶ 12. The Court is not oblivious of the widespread complaints, reported in the public press, of the burgeoning costs of Medicaid resulting from lack of proper cost criteria. The amendment has as one of its functions the encouragement of state flexibility in the development of cost related reimbursement schemes. See Plaintiff's Statement of Material Facts Not in Dispute, ¶ 14. In an effort to implement these provisions, draft regulations were compiled and circulated for comment in April 1976. The final regulations, issued in July of that year, deleted portions of the draft regulations which had provided for profit and incentive payments to be applied on an inverse percentage basis related to the cost of providing services; in addition, a previously undisclosed preamble provided that "return of proprietary owners' net equity is the only item of profit that may be included as an allowable cost. . . ."¹

The Secretary, through agents, has since July 1976 attempted the difficult task of evaluating state payment programs in an effort to implement the Congressional statute and regulatory provisions. While plaintiff has effectively demonstrated the uncertain and vacillatory record of the Department in its application of the provisions to various state proposals, this Court is only concerned with the present posture of the case.² The Secretary maintains that the final regulations do contain a mechanism for profit compensation: consistent with the proposed regulations, a state, in establishing a reasonable cost related rate for compensating providers of services, may endorse a rate of facility-by-facility or classwide application of sufficient magnitude that providers who minimize expenses may realize a profit in an amount by which those expenses undercut the applicable rate.³ The Secretary objects to the inclusion of profit as an item of cost in favor of prospective rate setting which he believes establishes a better incentive for the efficient supply of services.⁴

B. Substantive Challenge. Does the Secretary's limit on the possible methods of profit calculation conflict with the statutory language controlling state reimbursement programs? The existing statutory and regulatory program does allow states to build a profit mechanism into the reimbursement scheme. State flexibility may not be as extensive as plaintiff desires, but we are satisfied that it was the overriding intent of Congress to place restrictions on the recovery of profits, particularly by non-proprietary owners of such facilities. Upon determining that the regulations have been implemented in furtherance of the statutory directive, this Court may not substitute its own judgment or plaintiff's judgment for that of the Secretary in determining which method is preferable; the Court should not intrude into areas of administrative discretion and must protect the Secretary's right to select among effective options. We find the Secretary's regulatory scheme to be a reasonable one: it endorses a profit concept for efficient providers of services while establishing a ceiling upon the total reimbursement. We are unpersuaded by plaintiff's protestations that a reimbursement ceiling contradicts congressional desires to provide states maximum flexibility in establishing reimbursement schemes. Indeed the ceiling is required by the underlying statute which § 249(a) sought to amend. 42 U.S.C. § 1396a(a)(30).

Plaintiff's final pleading in this action defenses a possible mootness issue underlying the controversy as currently presented. Insofar as the substantive challenge is concerned, we find plaintiff's arguments lacking in merit. In addition to the challenge to the rulemaking procedures (addressed infra), plaintiff complains of being "substantially prejudiced" by the Secretary's promulgation of a vague regulation and improper interpretations of the regulation. See Plaintiff's Reply to Defendant's Opposition to Plaintiff's Motion for Summary Judgment (Plaintiff's Reply) at 2. Plaintiff seeks to enjoin the Secretary from making improper interpretations of the regulations in the future. Plaintiff's Reply at 9. This Court cannot fashion relief for these grievances. Inconvenience from past interpretations is not a proper subject for judicial relief in this setting and the...