COM. OF PA., DPW v. DEPT. OF HEALTH & HUMAN SERV.

• Decision Date: 06 February 1990
• Docket Number: Civ. A. No. 88-2160.
• Citation: 729 F. Supp. 1518
• Court: U.S. District Court — Eastern District of Pennsylvania
• Parties: COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, Plaintiff, v. UNITED STATES of America, DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendant.

729 F. Supp. 1518

COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, Plaintiff, v. UNITED STATES of America, DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendant.

Civ. A. No. 88-2160.

United States District Court, W.D. Pennsylvania.

February 6, 1990.

Jason W. Manne, Dept. of Public Welfare, Pittsburgh, Pa., for plaintiff.

Terry M. Henry, U.S. Dept. of Justice, Civ. Div., Washington, D.C., for defendant.

OPINION

COHILL, Chief Judge.

This dispute over Medicaid funding and reimbursement arises from amendments to the Medicaid Act in the early 1980's which significantly reduced federal contributions to state administered programs. The Commonwealth challenged those reductions and also attempted to offset the loss of funds by implementing new fraud recovery programs to increase the reimbursement. After an unfavorable decision from the United States Department of Health and Human Services on both of these efforts, the Commonwealth appealed to this Court. The parties have now filed cross motions for summary judgment with briefs and the administrative record. There are no disputed issues of fact, and the matter is ripe for disposition.

Count I

In 1981, Congress passed the Omnibus Budget Reconciliation Act of 1981 ("OBRA"), P.L. 97-25, 95 Stat. 357. One component of the Act was a series of cuts in federal funding of the Medicaid program. Under OBRA, the federal government's contributions to Medicaid were to be cut by 3% in 1982, 4% in 1983, and 4.5% in 1984. 42 U.S.C. § 1396b(s)(1)(A). As a trade-off for these cuts, Congress further amended Medicaid to give states greater flexibility in determining what persons or categories of persons the state would serve under Medicaid.

The Medicaid statute has traditionally classified Medicaid eligible persons in three categories. The "categorically needy" are persons who qualify for and receive some form of cash assistance, such as Supplemental Security Income ("SSI"), or Aid to Families with Dependent Children ("AFDC"). 42 U.S.C. § 1396a(a)(10)(A). The "optional categorically needy" are persons who qualify for cash assistance programs but who have chosen not to receive such assistance. Id. Finally, the "medically needy" are persons with income or resources that take them out of the "categorically needy" category, but who would otherwise qualify. 42 U.S.C. § 1396a(a)(10)(C).

Before 1981, if a state chose to serve any "medically needy" persons under Medicaid, it was required to serve all persons in that category. A state could not cover a subclass of medically needy persons without providing coverage to all. The 1981 amendments enacted in OBRA gave states the power to serve only selected classes of the medically needy. Thus a state faced with the federal funding reductions could theoretically save the money by withdrawing Medicaid coverage from some portion of the medically needy.

To prevent states from completely gutting their coverage of the medically needy, and to protect the most vulnerable members of that category, by the same amendments Congress required any state choosing to serve some category of the medically needy to cover at a minimum all medically needy persons who were a) under 18 years of age, or b) pregnant. In this manner Congress provided states with greater flexibility by allowing them to cover some but not all in the medically needy category, but it still ensured coverage for children and pregnant women. These various alterations to the medically needy category were codified at 42 U.S.C. § 1396a(a)(10)(C).

Finally, in § 1396b(s)(1)(B), Congress made the funding cuts at § 1396b(s)(1)(A) conditional on the enactment of regulations to implement § 1396a(a)(10)(C). In other words, the funding cuts were effective only if the Secretary followed through with Congressional changes to the medically needy category. Shortly after passage of the 1981 amendments, the Secretary enacted regulations to implement § 1396a(a)(10)(C).

The Secretary's new regulations covered all aspects of the new § 1396a(a)(10)(C). In addition to the statutory changes wrought by Congress, the new regulations made two other significant changes in the way § 1396a(a)(10)(C) functioned. Prior to OBRA, the medically needy category had been defined by employing methodology associated with the SSI and AFDC programs. Although the 1981 statutory amendments did not address the matter, the Secretary's new regulations permitted states to use other, more restrictive, methodologies to determine who was medically needy. Secondly, although the 1981 amendments to § 1396a(a)(10)(C) appeared to require coverage of all medically needy persons under age 18, the Secretary's new regulations permitted states to cover some but not all medically needy children.

These two aspects of the Secretary's implementing regulations brought a hailstorm of protest from Congress. Additional amendments to the Medicaid Act were passed in 1983 as part of the Tax Equity and Fiscal Responsibility Act ("TEFRA"), P.L. 97-248. Section 1396a(a)(10)(C) was further amended to return states to the SSI and AFDC methodology, and to make clear that coverage was to be provided to all medically needy persons under age 18. In short, Congress rejected the two controversial aspects of the Secretary's regulations. The 1983 amendments were made retroactive to the date of the original 1981 amendments, and the Medicaid program was to be administered as if the Secretary's regulations on these two points had never been enacted.

In essence the 1983 amendments made a nullity of the Secretary's regulations on two points. The Commonwealth reminds us that the funding cuts in OBRA were made conditional on passage of implementing regulations. Thus, plaintiff argues, the Secretary's failure to enact appropriate regulations constitutes a failure of the precondition to the funding cuts. Therefore the Secretary could not impose the funding cuts and the Commonwealth is entitled to additional reimbursement of $118,000,000.

But the simple fact is that the Secretary did enact a timely and complete set of regulations to implement § 1396a(a)(10)(C), thereby satisfying in a basic sense the precondition of § 1396b(s)(1)(B). Although Congress disagreed with two of those provisions and ultimately overrode them in TEFRA, they were enacted as required.

In this context it is important to remember that the implementing regulations covered more ground than the two controversial items. Those other provisions were not materially affected by the 1983 TEFRA amendments. TEFRA did not negate the entire regulatory scheme, but only two discrete provisions. Thus the bulk of the implementing regulations survived unaffected, and so the Secretary substantially satisfied the precondition in § 1396b(s)(1)(B).

Furthermore the Secretary cannot be said to have acted entirely without justification with respect to the two controversial provisions. The Secretary's approach to medically needy children under § 1396a(a)(10)(C) mirrors a sister provision of the Medicaid Act at § 1396d(a)(i), a provision specifically referred to in the amended § 1396a(a)(10)(C). The Secretary's new approach to eligibility methodology was arguably consistent with Congress' desire to provide states with greater flexibility in determining scope of coverage. The circumstances surrounding this provision were muddied considerably by a printing error. The published copy of an important Conference Report inadvertently omitted a critical passage in which congressional leaders made clear that Congress did not intend to alter the methodology for defining the medically needy.

In enacting TEFRA to correct these two wayward provisions, Congress made clear that it did not expect or intend to defeat the Medicaid cuts enacted in OBRA in 1981. To the contrary, Congress strongly indicated its expectation that the cuts were valid and would continue. TEFRA made adjustments to provisions permitting offsets to reduce the funding cuts. Such adjustments would have been unnecessary if Congress believed that the Secretary's faulty regulations had prevented the cuts under § 1396b(s)(1)(B).

Congress designed these portions of TEFRA to correct any problems caused by the Secretary's two erroneous provisions. Applied retroactively as commanded by Congress, TEFRA not only overrode the two regulatory provisions at issue, it also eliminated the need for regulations on those points by dealing with them directly in the statute. Thus the remaining regulations, unaffected by TEFRA, alone satisfied the precondition of § 1396b(s)(1)(B).

It is also clear that by enacting TEFRA, Congress gave states the benefit of the original 1981 bargain. The federal government achieved its funding cuts while states were given greater flexibility under the Medicaid Act, within certain limits. Certainly Congress and the states neither intended nor expected that states would be granted the desired flexibility without being subjected to the cuts.

In the face of Congress' clear intent to enact and enforce the funding cuts, despite disagreements with the Secretary over implementing regulations, we are loathe to hold otherwise. For the reasons stated we conclude that the Secretary substantially satisfied the precondition of § 1396b(s)(1)(B) under both the 1981 OBRA amendments and the 1983 TEFRA amendments. Summary judgment will therefore be entered in favor of defendant on Count I.

Count II — Jurisdiction

In Count II of its Complaint the Commonwealth appeals from the Department's denial of the 1% reimbursement under 42 U.S.C. § 1396b(s)(2) for qualifying fraud recovery programs. The Department concluded that Pennsylvania's two new fraud recovery programs did not satisfy the Department's regulations and therefore did not qualify Pennsylvania for the bonus reimbursement.

The Department challenges Count II on jurisdictional grounds. 42 U.S.C. § 1316. The Department argues that Count II is not a "disallowance" dispute permitting appeal to the District Court unde...