Bath Memorial Hosp. v. Maine Health Care Finance Com'n

• Decision Date: 05 May 1988
• Docket Number: Nos. 87-2103,88-1168,s. 87-2103
• Citation: 853 F.2d 1007
• Parties: , Medicare&Medicaid Gu 37,243, Medicare&Medicaid Gu 37,406 BATH MEMORIAL HOSPITAL, et al., Plaintiffs, Appellants, v. MAINE HEALTH CARE FINANCE COMMISSION, et al., Defendants, Appellees. BATH MEMORIAL HOSPITAL, et al., Plaintiffs, Appellees, v. MAINE HEALTH CARE FINANCE COMMISSION, et al., Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1007

853 F.2d 1007

22 Soc.Sec.Rep.Ser. 567, Medicare&Medicaid Gu 37,243,

Medicare&Medicaid Gu 37,406

BATH MEMORIAL HOSPITAL, et al., Plaintiffs, Appellants, v. MAINE HEALTH CARE FINANCE COMMISSION, et al., Defendants, Appellees.

BATH MEMORIAL HOSPITAL, et al., Plaintiffs, Appellees, v. MAINE HEALTH CARE FINANCE COMMISSION, et al., Defendants, Appellants.

Nos. 87-2103, 88-1168.

United States Court of Appeals First Circuit.

Heard May 5, 1988.

Decided Aug. 8, 1988.

Joseph M. Kozak with whom Jay H. Krall and Pierce, Atwood, Scribner, Allen, Smith & Lancaster, Portland, Me., were on brief, for plaintiffs, appellants.

William F. Julavits, Gen. Counsel, John P. Doyle, Jr., and Preti, Flaherty, Beliveau & Pachios, Portland, Me., on brief, for Maine Hosp. Ass'n, amicus curiae.

Charles F. Dingman with whom Lucinda E. White, Augusta, Me., Suzanne M. Gresser, Richmond, Me., and Gail Drake Wright, Augusta, Me., were on brief, for Maine Health Care Finance Com'n.

T. Christopher Beach, Asst. Atty. Gen., with whom James E. Tierney, Atty. Gen., Augusta, Me., was on brief, for defendant, appellee Maine Dept. of Human Services.

Before BREYER and TORRUELLA, Circuit Judges, and FUSTE, ^* District Judge.

BREYER, Circuit Judge.

Several Maine hospitals asked the federal district court to declare unconstitutional, and to enjoin the application of, certain specific provisions of a Maine statute that regulates hospital charges. 28 U.S.C. Secs. 2201, 1331 and 42 U.S.C. Sec. 1983 (1982); Me.Rev.Stat.Ann. tit. 22, Secs. 381-99 (Supp.1987). The district court decided to "abstain" from deciding the federal questions that the hospitals presented, in part because the court feared that to decide them would significantly interfere with Maine's ability to operate its regulatory system, Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), and in part because it believed the hospitals could raise (or had raised) the same issues in ongoing state litigation. See Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). Accordingly, the court dismissed the Hospitals' complaint. Bath Memorial Hospital v. Maine Health Care Finance Commission, 673 F.Supp. 628 (D.Me.1987). They have appealed. Mindful of the Supreme Court's admonition that "abstention from the exercise of federal jurisdiction is the exception, not the rule," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 14, 103 S.Ct. 927, 936, 74 L.Ed.2d 765 (1983) (quoting Colorado River, 424 U.S. at 813, 96 S.Ct. at 1244), we have determined that (with two exceptions) the law does not permit the district court to "abstain" from deciding the federal questions at issue in this case.

I Background

A The Statute

Maine's hospital charge regulatory scheme is similar to traditional rate setting systems in that the legislature created a Commission (the Maine Health Care Finance Commission), which determines the regulated firm's "revenue requirement" (based on costs) and sets rates designed to yield that "revenue requirement." Maine's system is somewhat special, however, in that the Commission is required, after finding a hospital's costs, to determine what revenue the hospital will likely receive from sources the Commission does not directly control. The statute assumes the use of these unregulated funds to meet a portion of the hospital's costs. The Commission then sets rates to raise enough money from other sources to meet the rest of the hospital's revenue needs. Sec. 396-H. Moreover, in setting those rates, the Commission takes account of the fact that third-party payors (e.g., insurance companies) will likely pay something less than the rates the Commission sets, i.e., they will pay rates that have been reduced by discounts or "differentials." Sec. 396-G. The Commission takes particular account of the fact that one third-party payor, Medicare, will reimburse hospitals according to its own rates, which the Commission cannot easily change. Secs. 396-A(1), 396-D(9-A) (A) (1), 396-E, 396-G(4), 396-M.

On the basis of a stipulation in the record, we have developed a simplified version of how we believe the rate setting process works, a process that we break down into three basic parts: (1) determining the hospital's total costs and consequent revenue need; (2) determining how much of that global revenue need the hospital can fill with, e.g., non-Commission controlled revenue sources; (3) determining what rates to set to fill the remaining revenue gap.

Step one: Global Revenue Need

a. The Commission determines the hospital's costs in a particular base year. Secs. 396-A, 396-B.

b. The Commission adjusts the base year costs to reflect likely future costs, in light of, e.g., inflation. Secs. 396-C, 396-D.

c. We can call the resulting figure "global financial requirements" or "GFR."

Step two: Meeting Global Needs With "Unregulated" Revenues

a. The Commission calculates the money the hospital will receive from government grants, certain earmarked gifts, and certain interest the hospital receives on funds it has set aside to pay off bonds. It calls these funds "available resources," or "AR." Sec. 396-E b. The Commission subtracts "available resources" from "global financial requirements" and arrives at a figure representing revenue the hospital must find elsewhere. It calls this remaining amount "financial requirements net of available resources" which the Commission labels "N." (N = GFR - AR) The hospital must collect N from its patients (or from third-party payors) in order to balance its budget.

c. The Commission subtracts another kind of revenue (over which it has no control) namely, Medicare payments, (which it labels "A"). We can call the result (N - A) "remaining N." "Remaining N" is the amount the hospital must collect from non-Medicare patients (or their insurers) in order to balance its budget. "Remaining N" plus "A" plus "AR" will equal the hospital's "global financial requirement." The significance of "remaining N" is that it represents the area of revenue in respect to which the Commission has direct power to fix rates. Secs. 396-A(1), 396-H(A).

Step three: Setting Rates Sufficient To Yield "Remaining N"

a. The Commission set rates that, when multiplied by the services used by non-Medicare patients, will yield revenues in an amount equal to "remaining N." These rates are somewhat higher than what many of the patients (or insurers) actually pay because (1) some patients are charity cases and pay nothing, and (2) hospitals typically offer a discount (or subtract a "differential" from standard rates) to certain third-party payors, such as Blue Cross/Blue Shield. Were there no such charity cases or discounts, the Commission-set rates would yield (on paper) a figure greater than "remaining N." The Commission calls this larger figure the "gross patient service revenue limit" or G. Secs. 396-F, 396-G, 396-H, 398.

b. The Commission divides G among non-Medicare hospital service buyers, roughly in proportion to their use. It directs the hospital to charge Blue Cross/Blue Shield, Medicaid, other insurance companies, and uninsured persons, rates, such that, were all fully paid, they would yield G, but, because they are not all fully paid, they yield "remaining N," or "N-A." As we have said, "remaining N" ("N - A") when added together with the Medicare payments the hospital will receive ("A") and likely receipts from special revenue sources such as gifts and interest on debt retirement sinking funds ("AR"), will provide the hospital's global financial requirements ("GFR").

Sec. 396-I(2).

The basic point that the reader must remember is the statute instructs the Commission to set rates that will fill a certain revenue gap--the gap between the hospital's total financial need and the revenues that it will receive from Medicare and from certain "available resources" (such as gifts and government grants). Secs. 396-A(1), 396-H.

The reader should also be aware that the Commission, in determining revenue needs, must determine costs, and, in doing so, it must consider one particularly difficult matter, namely new investment. The statute says that the Commission will permit the hospital to cover the cost of a new investment only if the Maine Department of Human Services has issued a "Certificate of Need" and the Commission finds that the investment expenses do not exceed annual limits (previously set through Commission rulemaking) on the statewide costs of new hospital projects. Sec. 396-K(3)(A), (C).

With this background, the reader should be able to understand the Hospitals' legal claims.

B The Hospitals' Legal Claims

In this complaint, the Hospitals basically assert the following claims:

1. Medicare. The Hospitals point out that Congress, in 1983, enacted a new Medicare statute that requires Medicare to pay fixed sums to hospitals for performing a particular service under a "prospective payment system." If, in any individual case, the hospital performs that service at a lower actual cost, it can keep the difference; if it performs the service at a higher actual cost, it must swallow the loss. 42 U.S.C. Sec. 1395ww(d) (Supp. I 1983 & Supp. V 1987). The "prospective payment system" is "intended to create incentives for hospitals to operate in a more efficient manner." Sen Rep. No. 23, 98th Cong., 1st Sess. 47, reprinted in 1983 U.S. Code Cong. & Admin. News, 143, 187. The statute adds that a state that wants to regulate hospitals in a manner "not in accord with the other provisions of" the Medicare statute may apply to the Secretary of Health and Human Services to secure a waiver. 42 U.S.C. Sec. 1395ww(c) (Supp I 1983, Supp. V 1987). Under some circumstances, the Secretary has discretion whether to grant approval, Sec. 1395ww(c)(1), and under other circumstances the Secretary must grant approval to a state program. Sec. 1395ww(c)(4), (c)(5).

The Hospitals argue that Maine's statutory system is ...