Department of Health and Social Services v. Alaska State Hosp. and Nursing Home Ass'n

• Decision Date: 16 July 1993
• Docket Number: S-4807
• Citation: 856 P.2d 755
• Parties: , 41 Soc.Sec.Rep.Ser. 665, Medicare & Medicaid Guide P 41,560 The DEPARTMENT OF HEALTH AND SOCIAL SERVICES, State of Alaska, et al., Appellants, Cross-Appellees, v. ALASKA STATE HOSPITAL AND NURSING HOME ASSOCIATION, an Alaska non-profit corp., acting on its own behalf and on behalf of its membership, et al., Appellees, Cross-Appellants.
• Court: Alaska Supreme Court

Page 755

856 P.2d 755

62 USLW 2100, 41 Soc.Sec.Rep.Ser. 665,

Medicare & Medicaid Guide P 41,560

The DEPARTMENT OF HEALTH AND SOCIAL SERVICES, State of

Alaska, et al., Appellants, Cross-Appellees, v. ALASKA STATE HOSPITAL AND NURSING HOME ASSOCIATION, an

Alaska non-profit corp., acting on its own behalf

and on behalf of its membership, et al.,

Appellees, Cross-Appellants.

S-4807.

Supreme Court of Alaska.

July 16, 1993.

Glenn M. Gustafson, Asst. Atty. Gen., Anchorage, and Charles E. Cole, Atty. Gen., Juneau, for appellants, cross-appellees.

Stephen D. Rose and John F. Sullivan, Inslee, Best, Doezie & Ryder, P.S., Bellevue, WA, for appellees, cross-appellants.

Before MOORE, C.J., and RABINOWITZ, BURKE, MATTHEWS and COMPTON, JJ.

COMPTON, Justice.

This case arises out of a dispute between the State of Alaska and the Alaska State Hospital and Nursing Home Association (ASHNHA) over rates paid to nursing homes under the Medicaid program. The superior court granted ASHNHA judgment on the basis that the State's plan violated the procedural requirements of the Boren Amendment. We affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

The federal Medicaid program is designed to provide medical assistance to low-income persons by granting federal matching funds to participating states. While participation in the Medicaid program is optional, a state that elects to participate must comply with federal statutory requirements. Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 2513, 110 L.Ed.2d 455 (1990); Colorado Health Care Ass'n v. Colorado Dep't of Social Servs., 842 F.2d 1158, 1164 (10th Cir.1988). One of these requirements, the Boren Amendment (Boren), governs the method by which states establish payment rates for facilities providing care under the Medicaid program. Boren provides in relevant part:

A State plan for medical assistance must--

....

(13) provide--

(A) for payment ... of the hospital services, nursing facility services, and services in an intermediate care facility for the mentally retarded provided under the plan through the use of rates (determined in accordance with methods and standards developed by the State ...) which the State finds, and makes assurances satisfactory to the Secretary, are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable State and Federal laws, regulations, and quality and safety standards....

42 U.S.C. § 1396a(a)(13)(A) (1988).

In August 1988 the State became concerned that it was in danger of losing its federal financial participation because state rates exceeded federal standards. In response to these concerns, the Alaska Medicaid Rate Commission (MRC) established an emergency regulation that provided for maximum limits on routine rates. 7 Alaska Administrative Code 43.685(g) (1988). In September 1989 thirteen long-term care facilities challenged this regulation in an administrative appeal to the Alaska Department of Health and Social Services (DHSS). While the administrative appeal was pending, eight of these facilities and ASHNHA filed suit in superior court, challenging the validity and application of section 685(g).

The superior court granted the State summary judgment as to all state law claims, based on ASHNHA's failure to exhaust its administrative remedies. ¹ However, the court denied the State's summary judgment motion as to ASHNHA's 42 U.S.C. § 1983 cause of action alleging that section 685(g) violated Boren. The superior court later granted ASHNHA summary judgment against the State on the basis that the State failed to satisfy the "findings" requirement of Boren. The court enjoined the State from giving effect to section 685(g), and remanded the case to the administrative agency to revise the Medicaid payment rates. ² The State appeals and ASHNHA cross-appeals on several related issues.

II. DISCUSSION

A. EXHAUSTION OF ADMINISTRATIVE REMEDIES

The State initially argues that ASHNHA was required to exhaust its administrative remedies prior to bringing suit under 42 U.S.C. § 1983, and that the superior court thus erred in not requiring exhaustion. In response, ASHNHA argues that Wilder v. Virginia Hospital Association, 496 U.S. 498, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990), disposes of this issue as it expressly holds that providers need not exhaust their state administrative remedies prior to bringing § 1983 actions to enforce Boren.

The standard of review applicable to this question is de novo: This court is not bound by a lower court's resolution of questions of law, and has the duty to adopt the rule of law most persuasive in light of precedent, reason and policy. Guin v. Ha, 591 P.2d 1281, 1284 n. 6 (Alaska 1979).

We find that ASHNHA's reliance on Wilder is misplaced. Wilder holds only that the availability of state administrative remedies does not absolutely foreclose resort to § 1983. ³ The Court did not address the question of whether plaintiffs must exhaust available remedies before commencing a § 1983 action.

The Supreme Court has, however, addressed this issue in another case and ruled that exhaustion is not required. In Patsy v. Florida Board of Regents, 457 U.S. 496, 102 S.Ct. 2557, 73 L.Ed.2d 172 (1982), the Court held that "exhaustion of state administrative remedies should not be required as a prerequisite to bringing an action pursuant to § 1983." Id. at 516, 102 S.Ct. at 2568. Accordingly, exhaustion is not required in this case, and the decision of the trial court is affirmed.

B. COMPLIANCE WITH PROCEDURAL REQUIREMENTS OF THE BOREN AMENDMENT

The central dispute in this case is whether the State complied with one of the procedural requirements of Boren--whether it made sufficient findings before setting maximum limits on certain rates. In addressing this issue, it is useful to briefly examine the history of the Medicaid reimbursement scheme and Boren.

As originally enacted in 1965, the Medicaid Act required states to reimburse facilities for their "reasonable costs" in providing care to Medicaid patients. Pub.L. 89-97, § 1902(a)(13)(B), 79 Stat. 286, 346 (1965). Because of rapidly escalating Medicaid costs, Congress reevaluated this approach in the early 1980s. Congress eventually concluded that the complexity, rigidity and "inflationary nature" of the reasonable cost reimbursement system was to blame for the program's rising costs. Wilder, 496 U.S. at 506, 110 S.Ct. at 2515. Accordingly, Congress enacted Boren in 1981, replacing the reasonable cost provision with "a provision requiring States to reimburse hospitals at rates ... that are reasonable and adequate to meet the cost which must be incurred by efficiently and economically operated facilities...." S.Rep. No. 139, 97th Cong., 1st Sess. 478 (1981), reprinted in 1981 U.S.C.C.A.N. 396, 744.

In shifting to this new, more flexible approach, Boren expressly delegated authority to the states to alter their Medicaid plans and to establish the rates under which providers will be paid. For example, states are free "to establish statewide or classwide rates, establish rates based on a prospective cost, or include incentive provisions to encourage efficient operation." Wilder, 496 U.S. at 506-07, 110 S.Ct. at 2515-16 (footnote omitted). Commenting on Congress's intent in enacting Boren, one federal appeals court noted that:

The Boren Amendment was enacted with two specific purposes in mind: (1) to provide the states with greater flexibility in developing methods of reimbursing skilled nursing facilities, intermediate care facilities, and inpatient hospital services; and (2) to increase the economy and efficiency of all plans.

Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1309-10 (2d Cir.1991).

While states have considerable flexibility in establishing rates under Boren, it is clear that this flexibility is not absolute. As the United States Supreme Court noted, "[i]n passing the Boren Amendment, Congress sought to decentralize the method for determining rates, but not to eliminate a State's fundamental obligation to pay reasonable rates." Wilder, 496 U.S. at 515, 110 S.Ct. at 2520. Accordingly, states must still comply with certain procedural and substantive requirements. Boren requires states to make findings and give assurances to the federal government that the rates they set "are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities." 42 U.S.C. § 1396(a)(13)(A) (1988). In addition to these procedural requirements, the Supreme Court has held that the rates adopted must be actually reasonable and adequate. ⁴ Wilder, 496 U.S. at 514-15, 110 S.Ct. at 2519-21.

Boren therefore creates a tension between the need to creatively cut costs and stimulate the efficiency of providers, and the obligation to provide adequate care to Medicaid patients. The difficulty in resolving this tension is exacerbated by the failure of Boren to define any of its terms (such as "reasonable and adequate," or "efficiently and economically operated facilities"), and the refusal of the Health Care Financing Administration (HCFA) to require the states to define the terms. See Lett v. Magnant, 965 F.2d 251, 253 (7th Cir.1992); 48 Fed.Reg. 56049 (December 19, 1983). Not surprisingly, the ambiguity of these terms, as well as the conflicting goals of increasing efficiency and providing adequate care, has created considerable litigation between providers and state agencies. See, e.g., James J. Kennedy III, The Medicaid Program: Vague Standards Breed Litigation, 28 St. Louis U.L.J. 351 (1984).

1. Standard of Review

The standard applicable to our review of the superior court's summary judgment order is de novo. McGrath v. University of Alaska, 813 P.2d 1370, 1371 n. 1 (Alaska 1991). We must determine whether a material issue of fact exists, and whether the moving party was entitled to judgment as a matter of...