Connecticut Hosp. Ass'n v. Weicker

• Decision Date: 30 January 1995
• Docket Number: D,Nos. 608,609,s. 608
• Citation: 46 F.3d 211
• Court: U.S. Court of Appeals — Second Circuit
• Parties: , Medicare & Medicaid Guide P 43,063 CONNECTICUT HOSPITAL ASSOCIATION, William W. Backus Hospital, Bradley Memorial Hospital & Health Care Center, Bridgeport Hospital, Bristol Hospital, Danbury Hospital, Day Kimball Hospital, Greenwich Hospital Association, Griffin Hospital, Hartford Hospital, Charlotte Hungerford Hospital, Johnson Memorial Hospital, Lawrence & Memorial Hospital, Manchester Memorial Hospital, Milford Hospital, Mount Sinai Hospital, New Britain General Hospital, New Milford Hospital, Norwalk Hospital, Park City Hospital, Rockville General Hospital, Saint Francis Hospital & Medical Center, St. Joseph's Medical Center, St. Mary's Hospital, Hospital of St. Raphael, St. Vincent's Medical Center, Sharon Hospital, Stamford Hospital, The Waterbury Hospital, Winsted Memorial Hospital, World War II Veterans Memorial Hospital, Yale-New Haven Hospital, Plaintiffs-Appellees, v. Lowell P. WEICKER, Jr., Governor of the State of Connecticut, Audrey Rowe, Commissioner of the Department of Social Services of the State of Connecticut, Donna Shalala, Secretary of the Department of Health & Human Services, Defendants-Appellants. ockets 94-6112, 94-6150.

Page 211

46 F.3d 211

46 Soc.Sec.Rep.Ser. 503, Medicare & Medicaid Guide

P 43,063

CONNECTICUT HOSPITAL ASSOCIATION, William W. Backus Hospital, Bradley Memorial Hospital & Health Care Center Bridgeport Hospital, Bristol Hospital, Danbury Hospital, Day Kimball Hospital, Greenwich Hospital Association, Griffin Hospital, Hartford Hospital, Charlotte Hungerford Hospital Johnson Memorial Hospital, Lawrence & Memorial Hospital Manchester Memorial Hospital, Milford Hospital, Mount Sinai Hospital, New Britain General Hospital, New Milford Hospital, Norwalk Hospital, Park City Hospital, Rockville General Hospital, Saint Francis Hospital & Medical Center St. Joseph's Medical Center, St. Mary's Hospital, Hospital of St. Raphael, St. Vincent's Medical Center, Sharon Hospital, Stamford Hospital, The Waterbury Hospital, Winsted Memorial Hospital, World War II Veterans Memorial Hospital, Yale-New Haven Hospital, Plaintiffs-Appellees, v. Lowell P. WEICKER, Jr., Governor of the State of Connecticut, Audrey Rowe, Commissioner of the Department of Social Services of the State of Connecticut, Donna Shalala, Secretary of the Department of Health & Human Services, Defendants-Appellants.

Nos. 608, 609, Dockets 94-6112, 94-6150.

United States Court of Appeals, Second Circuit.

Argued Dec. 23, 1994.

Decided Jan. 30, 1995.

Mark R. Kravitz, New Haven, CT (Alan G. Schwartz, Maureen Weaver, Wiggen & Dana, New Haven, CT, of counsel), for plaintiffs-appellees.

Arnold I. Menchel, Asst. Atty. Gen. (Richard Blumenthal, Atty. Gen., Richard J. Lynch, Asst. Atty. Gen., Phyllis E. Hyman, Asst. Atty. Gen., Hartford, CT, of counsel), for defendants-appellants Lowell P. Weicker, Jr. & Audrey Rowe.

Matthew M. Collette, Atty., Appellate Staff, Civil Div., U.S. Dept. of Justice (Frank W. Hunger, Asst. Atty. Gen., Christopher F. Droney, U.S. Atty., Anthony J. Steinmeyer, Atty. Appellate Staff, Civil Div., U.S. Dept. of Justice, Washington, DC, of counsel), for defendant-appellant Donna E. Shalala.

Before: PRATT, ALTIMARI, and JACOBS, Circuit Judges.

JACOBS, Circuit Judge:

Plaintiffs Connecticut Hospital Association and 33 of its member hospitals, all acute care facilities (collectively "the hospitals"), allege that Connecticut's program for reimbursement of Medicaid hospital charges violates a provision in the Medicaid Act (the "Act"), and thereby short-changes them. The United States District Court for the District of Connecticut (Eginton, J.) bifurcated the proceedings, hearing first the hospitals' allegation that the state's program violates a procedural requirement of the Act, and reserving for later proceedings the various substantive claims involved in this suit. After briefing and a hearing on cross-motions for summary judgment, the district court concluded that Connecticut was in violation of the Boren Amendment to the Act, which requires that state payments for hospital services be made at rates that "the State finds" reasonable and adequate to meet costs that "efficiently and economically operated facilities" would necessarily incur. Holding that Connecticut had failed to make the "findings" required by the Boren Amendment, the district court granted partial summary judgment to the hospitals, declared Connecticut's program "null and void," and ordered remedial relief. The district court denied the various parties' motions for summary judgment on all other claims and defenses. This appeal from the order of partial summary judgment and the ensuing preliminary injunction is taken by defendants Weicker and Rowe (collectively "Connecticut"), and Shalala, the Secretary of the United States Department of Health and Human Services (the "Secretary"). We now reverse the grant of summary judgment, vacate the preliminary injunction and remand for the proceedings contemplated by the district court's bifurcation order.

Background

A. Statutory Background.

The Medicaid Act, 42 U.S.C. Secs. 1396 et seq., enacted in 1965, created a joint federal and state cost-sharing program to finance medical services to indigent people. Participation by a state in this program is voluntary; however, states that elect to participate must abide by the mandates and restrictions of the Act and the regulations promulgated thereunder by the Secretary. See Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 2513, 110 L.Ed.2d 455 (1990).

To qualify for participation in the Medicaid program, a state must formulate a plan, and submit it to the Secretary for her approval. 42 U.S.C. Sec. 1396a(b). After the plan is approved, the federal government then reimburses the state for a percentage of the program's expenses, including administrative costs and other program-related expenses. 42 U.S.C. Sec. 1396b(a); 42 C.F.R. Secs. 433.151(b), 431.250(b)(2).

Until 1980, the Act required all participating states to formulate plans that would reimburse providers for the "reasonable cost" of services actually provided to Medicaid patients. See Wilder, 496 U.S. at 505-06, 110 S.Ct. at 2515-16. This process of paying bills that are rendered--called a "retrospective" standard in social services argot--proved over time to be "inherently inflationary," containing "no incentives for efficient performance." S.Rep. No. 139, 97th Cong., 1st Sess. 478 (1981). In order to give states more flexibility to rein in costs through alternative reimbursement strategies not permitted under the existing Act, Congress enacted the Boren Amendment. Pub.L. No. 96-499, Sec. 962(a), 94 Stat. 2599, 2650 (1980). The Amendment, which was applicable initially to nursing and intermediate care facilities only, was made applicable to hospitals in 1981. Pub.L. No. 97-35, Sec. 2173, 95 Stat. 357, 808 (1981). Although the states thereby achieved some latitude in devising reimbursement plans, the Boren Amendment requires that a state's Medicaid plan provide reimbursement to providers at rates which the state finds "are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities...." 42 U.S.C. Sec. 1396a(a)(13)(A). The Supreme Court has held that this language creates "a substantive right to reasonable and adequate rates." Wilder, 496 U.S. at 510, 110 S.Ct. at 2517.

After enactment of the Boren Amendment, many states adopted new Medicaid programs that were based upon prospective reimbursement systems, whereby providers are paid in advance based on estimates of what medical care should cost "efficiently and economically operated facilities." See Wilder, 496 U.S. at 507 & n. 7, 110 S.Ct. at 2516 & n. 7. Connecticut is one of the few states that continue to use the retrospective "reasonable cost" system for Medicaid reimbursement. This "reasonable cost" system, which had been the sole method allowed prior to the Boren Amendment, is based upon the federal Medicare program (the "Medicare principles"). The Secretary has promulgated an upper limit regulation, which provides that "aggregate payments by an agency to each group of health care facilities ... may not exceed the amount that can reasonably be estimated would have been paid for those services under Medicare payment principles." 42 C.F.R. Sec. 447.272. Because the Medicare principles are used to compute the upper limit for payments to any particular group of providers, and because Medicaid plans approved under these principles were "subjected to a more rigorous statutory standard," the Secretary has determined that a state Medicaid plan that was previously approved under the old "reasonable cost" system, or one which expressly adopts Medicare principles of reimbursement, would be in compliance with the mandates of the Boren Amendment. See 48 Fed.Reg. 56046, 56047 (1983).

Certain other regulations promulgated under the Boren Amendment are implicated in this appeal as well. Each participating state must make certain findings "[w]henever the Medicaid agency makes a change in its methods and standards, but not less often than annually...." 42 C.F.R. Sec. 447.253(b). Among other things, the state must find that its payment rates "are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers...." 42 C.F.R. Sec. 447.253(b)(1)(i). In addition, public notice must be provided in respect of "any significant proposed change in its methods and standards for setting payment rates...." 42 C.F.R. Sec. 447.205(a). No such notice is required, however, if "[t]he change is being made to conform to Medicare methods or levels of reimbursement." 42 C.F.R. Sec. 447.205(b)(1).

Among other wheels within these wheels: in 1982, Congress enacted the Tax Equity and Fiscal Responsibility Act, Pub.L. No. 97-248, 96 Stat. 324 (1982) ("TEFRA"). Without altering the retrospective "reasonable cost" structure of the Medicare principles, TEFRA imposed a cap on the annual percentage rate of increase in payments authorized pursuant to that formula. See Episcopal Hosp. v. Shalala, 994 F.2d 879, 881 (D.C.Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 876, 127 L.Ed.2d 73 (1994). TEFRA assigns each hospital a "target amount" computed by reference to that hospital's allowable costs in the "base year" of 1982, as adjusted by limited payment increases for each succeeding year. 42 U.S.C. Sec. 1395ww(b)(3). The "target amount" is enforced by incentives: hospitals that fail to keep costs within the "target amount" for a given year are denied full reimbursement, while hospitals that reduce costs below the "target amount" become eligible for bonuses. Id. at Sec. 1395ww(b)(1). TEFRA also creates a mechanism for hospitals to seek an adjustment to its rates to account for such exigencies as a change in patient population (that, for example, brings a larger number of indigent patients to its doors), an increase in costs due to treatment of larger numbers of patients suffering from debilitating diseases, or a significant increase in labor costs. See id. Sec. 1395ww(b)(4); 42 C.F.R. Sec....