California Hospital Ass'n v. Obledo, 77-2220

• Decision Date: 27 August 1979
• Docket Number: No. 77-2220,77-2220
• Citation: 602 F.2d 1357
• Parties: CA 79-3227 CALIFORNIA HOSPITAL ASSOCIATION, a nonprofit California Corporation, and United Hospital Association, a nonprofit California Corporation, Lindsay District Hospital, a District Hospital, West Adams Community Hospital, a community nonprofit hospital corporation, Van Nuys Community Hospital, a general partnership, Anaheim General Hospital, a California Corporation, Fresno Community Hospital, a nonprofit California Corporation, John Muir Memorial Hospital, a nonprofit California Corporation, Samuel Merrit Hospital, a nonprofit California Corporation, Roseville Community Hospital, a nonprofit California Corporation, individually and on behalf of all similarly situated, Plaintiffs-Appellees, v. Mario OBLEDO, Secretary of Health and Welfare, State of California, Jerome A. Lackner, M.D., Director of Health, State Department of Health, State of California, and David Matthews, Secretary of Health, Education and Welfare, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1357

602 F.2d 1357

CA 79-3227 CALIFORNIA HOSPITAL ASSOCIATION, a nonprofit California Corporation, and United Hospital Association, a nonprofit California Corporation, Lindsay District Hospital a District Hospital, West Adams Community Hospital, a community nonprofit hospital corporation, Van Nuys Community Hospital, a general partnership, Anaheim General Hospital, a California Corporation, Fresno Community Hospital, a nonprofit California Corporation, John Muir Memorial Hospital, a nonprofit California Corporation, Samuel Merrit Hospital, a nonprofit California Corporation, Roseville Community Hospital, a nonprofit California Corporation individually and on behalf of all similarly situated Plaintiffs-Appellees, v. Mario OBLEDO, Secretary of Health and Welfare, State of California, Jerome A. Lackner, M.D., Director of Health State Department of Health, State of California, and David Matthews, Secretary of Health, Education and Welfare, Defendants-Appellants.

No. 77-2220.

United States Court of Appeals, Ninth Circuit.

Aug. 27, 1979.

Evelle J. Younger, Atty. Gen., Sacramento, Cal., Joseph Califano, Sec. HEW Dept. of Justice, Washington, D. C., Michael H. Cook, argued, Washington, D. C., Floyd D. Shimomura, argued, Deputy Atty. Gen., Sacramento, Cal., J. Mark Waxman, argued, Los Angeles, Cal., for defendants-appellants.

James B. Bertero, Los Angeles, Cal., Robert A. Klein, argued, James B. Bertero, argued, Los Angeles, Cal., for plaintiffs-appellees.

Appeal from the United States District Court for the Central District of California.

Before BROWNING and TANG, Circuit Judges, and CLAIBORNE, ^* District Judge.

BROWNING, Circuit Judge:

Two questions are presented: (1) whether under the Medicaid Act, Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., (which provides for federal funding of state programs to furnish medical assistance to people with low income) the Secretary of HEW may approve a provision of a state program that limits reimbursement of hospitals for inpatient care to a fixed percentage of the particular hospital's costs for the previous year; and (2) whether the procedures followed in adopting such a provision in California's Medi-Cal program satisfied the requirements of law. We hold that imposition of a ceiling on reimbursement is not barred by the Medicaid Act, but that the Secretary did not comply with the Act in approving the California provision.

Before 1972, states participating in the Medicaid program were required to reimburse hospitals for inpatient services in accordance with the regulations promulgated by the Secretary of HEW governing payment for such services under the Medicare Act, Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., (a federal health insurance program for the aged and disabled.) See Massachusetts General Hospital v. Weiner, 569 F.2d 1156, 1158 (1st Cir. 1978). In 1972, Congress amended the Medicaid Act to permit states to develop their own plans for payment of the reasonable cost of inpatient hospital services in lieu of the system used under Medicare. Social Security Amendments of 1972, Pub.L.No. 92-603, § 232, 86 Stat. 1329, 1410. These state plans must be approved by the Secretary of HEW, and payments under such plans cannot exceed the amounts that could be paid under the Medicare formula. ¹

On March 26, 1975, California submitted a proposed reimbursement plan to HEW. Although continuing to adhere to the Medicare reimbursement formula in most respects, the California plan imposed a percentage ceiling on increases in a hospital's reimbursable costs over those of the preceding year. The percentage change was to be updated annually "to reflect cost trends in the hospital industry and the general economic outlook." An "administrative adjustment procedure" was to be provided "for any hospital experiencing extraordinary, but necessary, inpatient costs exceeding the set percentage increase." In anticipation of HEW approval of its plan, California, on July 31, 1975, froze interim reimbursement at June 30, 1975 rates. HEW approved the California plan on March 31, 1976.

Two hospital associations and a number of individual hospitals filed this action seeking a declaration that the California plan violated both federal and state law, and an injunction barring implementation of the plan. After trial, the district court held the plan invalid on the grounds, among others, that the Medicaid Act and its implementing regulations do not permit a ceiling on reimbursable costs, and that the particular plan proposed by California had not been properly approved by HEW. The court enjoined implementation of this plan or any other that included a fixed percentage limit on the amount of cost increase. ²

I.

We consider first whether the Medicare Act and implementing regulations bar imposition of ceilings on reimbursable inpatient costs.

It is clear that the 1972 amendment to the Medicare Act authorized the Secretary to impose ceilings on reimbursable inpatient costs under the Medicare program. We are persuaded that the Secretary correctly concluded that the 1972 amendment to the Medicaid Act also authorized the Secretary to approve state reimbursement plans imposing such ceilings under the Medicaid program.

Under the provisions of the Medicare Act both before and after the 1972 amendment, hospitals were to be reimbursed for the "reasonable cost" of inpatient services. See 42 U.S.C. § 1395x(v)(1) (1970) and 42 U.S.C. § 1395x(v)(1)(A) (1976). Under Medicare regulation applicable before 1972 costs could not be disallowed until after the service had been rendered, and in practice hospitals were reimbursed for whatever cost they had incurred. There was little incentive to contain cost or produce needed services efficiently. See H.R.Rep. 231, 92d Cong., 1st Sess. 80, 83 (1971), Reprinted in 1972 U.S.Code Cong. & Admin.News, pp. 4989, 5066. To meet this problem, Congress redefined "reasonable cost" as "the cost actually incurred" but with a specific exclusion of "any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1) (A). Moreover, the Secretary was expressly authorized to issue regulations providing "for the establishment of limits on the direct or indirect overall incurred costs or incurred costs of specific items or services or groups of items or services to be recognized as reasonable based on estimates of the costs necessary in the efficient delivery of needed health services." Id.

The Medicaid Act does not explicitly permit a state plan to place limits on inpatient hospital costs. Rather as noted, the 1972 amendment to the Medicaid Act authorizes the states to develop, and with HEW approval to implement, plans for the payment of "reasonable cost" for such services. 42 U.S.C. § 1396a(a) (13)(D). Congress did provide, however, that "reasonable cost" as determined under a state plan "shall not exceed the amount which would be determined (under the Medicare Act) as the reasonable cost of such services." Id. This provision incorporates into the Medicaid Act the authority, discussed above, expressly granted the Secretary under the Medicare Act to exclude "any part of incurred cost found to be unnecessary in the efficient delivery of needed health services" by setting "limits on the direct or indirect overall incurred costs or incurred costs of specific items or services or groups of items of services." Limits on the cost of general routine inpatient services established by the Secretary under the Medicare Act, See 20 C.F.R. § 405.460 (1976); 39 Fed.Reg. 20168 (1974); 40 Fed.Reg. 17190, 23622 (1975); 41 Fed.Reg. 26992 (1976); 42 Fed.Reg. 35496, 53675 (1977), serve simultaneously as limits on the cost of those services reimbursable under Medicaid. Rhode Island Hospital v. Califano, 585 F.2d 1153, 1155-56 (1st Cir. 1978).

It is unlikely that Congress would have authorized the Secretary to indirectly set limits on Medicaid cost by establishing cost limits under the Medicare Act, yet deny him the authority to approve provisions of a Medicaid state plan that set limits on reimbursable cost. The problem with the two health care programs was the same. Prior to the 1972 amendment, payments under both programs were made on the basis of reimbursement of costs already incurred; as the House Report noted, "(E)xperience under the medicare, Medicaid, maternal and child health, and other third party programs has clearly demonstrated there is little incentive to contain costs or to produce the services in the most efficient and effective manner." H.R.Rep. 231, 92d Cong., 1st Sess. 80 (1971), Reprinted in 1972 U.S.Code Cong. & Admin.News, p. 5066 (emphasis added). The same report expressly referred to costs under Medicaid in justifying the amendment to the Medicare Act authorizing the Secretary to limit Medicare reimbursement to costs necessary to the efficient delivery of needed health services:

Where the high costs do in fact flow from the provision of services in excess of or more expensive than generally considered necessary to the efficient provision of appropriate patient care, patients may nevertheless desire such services. It is not the committee's view that if patients desire unusually expensive service they should be denied the service. However, it is unreasonable for medicare or Medicaid (which are financed by almost all people in the country rather than the patient or community that wants the expensive services) to pay for it.

Id. at 83, Reprinted in 1972 U.S.Code Cong. & Admin.News, p. 5069 (emphasis added). ³

In short, the language and legislative history support HEW's interpretation of the Medicaid Act as authorizing the Secretary to approve provisions in state plans placing a ceiling on reimbursable costs. ⁴ Some limits might be so arbitrary or restrictive as to preclude the payment of "reasonable cost" as required by law, but the district court erred in concluding that...