Erie County Geriatric Center v. Sullivan, 91-3218

• Decision Date: 26 December 1991
• Docket Number: No. 91-3218,91-3218
• Citation: 952 F.2d 71
• Parties: , Medicare & Medicaid Guide P 39,760, 2 NDLR P 190 ERIE COUNTY GERIATRIC CENTER, a Pennsylvania non-profit corporation; County of Erie; J. Robert Baldwin, individually and on behalf of all other similarly situated real estate taxpayers of Erie County, Pennsylvania, Appellants, v. Louis W. SULLIVAN, M.D., Secretary of U.S. Department of Health and Human Services; and Walter W. Cohen, Secretary of the Commonwealth of Pennsylvania, Department of Public Welfare.
• Court: U.S. Court of Appeals — Third Circuit

Page 71

952 F.2d 71

36 Soc.Sec.Rep.Ser. 3, Medicare & Medicaid Guide P 39,760,

2 NDLR P 190

ERIE COUNTY GERIATRIC CENTER, a Pennsylvania non-profit

corporation; County of Erie; J. Robert Baldwin,

individually and on behalf of all other similarly situated

real estate taxpayers of Erie County, Pennsylvania, Appellants, v. Louis W. SULLIVAN, M.D., Secretary of U.S. Department of

Health and Human Services; and Walter W. Cohen,

Secretary of the Commonwealth of

Pennsylvania, Department of

Public Welfare.

No. 91-3218.

United States Court of Appeals, Third Circuit.

Argued Oct. 1, 1991.

Decided Dec. 26, 1991.

James K. McNamara (argued), Kenneth W. Wargo, Quinn, Gent, Buseck and Leemhuis, Inc., Erie, Pa., for appellants.

Eileen Bradley, Chief Counsel, James C. Newman, Supervisory Asst. Regional Counsel, Javier A. Arrastia, Asst. Regional Counsel (argued), Office of Gen. Counsel, Dept. of Health and Human Services, Philadelphia, Pa., Thomas W. Corbett, Jr., U.S. Atty., Pamela J. Grimm, Asst. U.S. Atty., W.D.Pa., Pittsburgh, Pa., for appellees.

Before SLOVITER, Chief Judge, COWEN and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal raises issues emanating from the ongoing struggle of the Federal Government and the Commonwealth of Pennsylvania to contain costs in the delivery of health care services under the cooperative federal-state Medicaid program, Title XIX of the Social Security Act, 42 U.S.C.A. § 1396 et seq. (1983 and West Supp.1991). Plaintiff-appellants, the Erie County Geriatric Center (ECGC or the Center), a non-profit corporation providing long-term health care to aged indigent under Medicaid, and the County of Erie, a guarantor of all of the Center's indebtedness, challenged the validity of the approval by the Secretary of the United States Department of Health and Human Services (the Secretary or HHS) of the 1980 and 1982 amendments to the Pennsylvania medical assistance plan.

As a participant in the Medicaid program, Pennsylvania must comply with the federal statutory and regulatory scheme which requires, inter alia, that it establish a medical assistance program designed to pay skilled nursing facilities (SNFs) and intermediate care facilities (ICFs) rates "which are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities [providing] 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). Plaintiffs filed a complaint against the Secretary and the Pennsylvania Department of Public Welfare (DPW) in 1984 seeking declaratory relief in the United States District Court for the Western District of Pennsylvania on the ground that the Secretary's approval and the State's application of the 1980 and 1982 plan amendments violated the Medicaid law. The district court dismissed the claims against DPW on eleventh amendment sovereign immunity grounds under Green v. Mansour, 474 U.S. 64, 106 S.Ct. 423, 88 L.Ed.2d 371 (1985), and DPW is not a party to this appeal. ¹

The plaintiffs and the Secretary filed cross-motions for summary judgment. The district court granted the plaintiffs relief with respect to the 1980 amendment, but denied their motion as to the 1982 amendment and entered summary judgment for the Secretary. ECGC and the County of Erie appealed from that portion of the judgment denying relief. We reverse.

I. FACTS

A. The Parties and Pennsylvania's Medicaid Program

ECGC is a non-profit, long-term care nursing home providing both skilled nursing and intermediate care services to approximately 550 elderly indigent patients in Erie, Pennsylvania. The Center maintains close ties with the plaintiff, Erie County, from whom it receives financial support. The County guarantees all of ECGC's indebtedness and is required to make up any shortfall in the Center's operating costs.

ECGC relies substantially on reimbursements provided by the State through the Medicaid program. See 42 U.S.C.A. § 1396 et seq. States are not required to participate in the Medicaid program but if a state chooses to do so, it must comply with applicable federal law. Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 2680, 65 L.Ed.2d 784 (1980). The Medicaid statute requires each participating state to submit a state plan containing a comprehensive description of the nature and scope of the state's Medicaid program for approval by the Secretary. 42 U.S.C.A. § 1396a(a). A state submits its plan to the Health Care Financing Administration (HCFA), the agency within HHS that Congress has designated to administer the Secretary's Medicaid responsibilities at the federal government level. Upon HCFA's approval of the plan, a state is entitled to federal government reimbursement for a percentage of the funds it has paid to health care facilities servicing Medicaid recipients. 42 U.S.C.A. § 1396b(a). Medicaid programs are administered by states, not the federal government, and so long as a state complies with the requirements of the Medicaid Act, "it has wide discretion in administering its local program." Lewis v. Hegstrom, 767 F.2d 1371, 1373 (9th Cir.1985).

In Pennsylvania, the Department of Public Welfare is the agency charged with administering the Medicaid program. Under Medicaid, the State reimburses county nursing homes for their actual allowable costs on a per diem basis up to a ceiling set by DPW. The method that DPW selects for calculating payment rate ceilings can have a substantial financial impact upon nursing home facilities; if the payment rate for a particular facility is less than its actual costs, the facility loses money. In turn, in the case of ECGC, Erie County must make up the fiscal shortfall.

B. The 1980 Amendment and the "Rule of Three"

Prior to 1980, the Medicaid statute required that a state plan provide reimbursement to SNFs and ICFs "on a reasonable-cost related basis," as determined in accordance with methods and standards developed by a state and cost-funding methods approved and certified by the Secretary. Under this standard, Pennsylvania reimbursed county nursing homes for their actual allowable costs subject to a ceiling based on the statewide weighted average of daily allowable costs for all county homes.

In 1980, in response to rapidly rising medical costs, Congress enacted section 962 of the Omnibus Budget Reconciliation Act, Pub.L. No. 96-499, § 962(a), 94 Stat. 2650 (1980), commonly referred to as to the Boren Amendment, amending 42 U.S.C. § 1396a(a)(13)(A) to provide:

for payment of the skilled nursing facility and intermediate care facility services 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....

In enacting the Boren Amendment, Congress had two 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. S.Rep. No. 139, 97th Cong., 1st Sess. 478, reprinted in 1981 U.S.Code Cong. & Admin.News 396, 744.

Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1310 (2d Cir.1991). The Amendment also introduced into the eligibility requirement for payment that the provider's facility be "effectively and economically operated" and that the provider's care services be "in conformity with applicable State and Federal laws, regulations, and quality ... standards."

Pennsylvania amended its medical assistance plan in 1980 to group county facilities for reimbursement purposes according to Standard Metropolitan Statistical Areas (SMSAs), borrowing a concept from the system employed by the United States Census Bureau for classifying, according to population size, metropolitan and rural areas throughout the nation. The Census Bureau classified the most populous regions in Pennsylvania as SMSAs II, less populous areas as SMSAs III through SMSAs V. Rural areas were classified as non-SMSAs. The state plan under the 1980 amendment called for dividing the 41 county facilities into SMSAs and then calculating the per diem payment rate ceiling by finding the average of the daily allowable costs of the facilities in each SMSA group. Thus, instead of establishing a single statewide payment rate ceiling applicable to all county nursing homes, the State established separate rate ceilings for each SMSA group.

When DPW first submitted the 1980 proposed amendment to the state plan for approval to HCFA, the federal agency denied approval and sent DPW a memorandum discussing the problems with the proposal. In particular, for purposes of this case, HCFA questioned the change from statewide to SMSA grouping:

The State must ... explain why it feels the new rate represents a more reasonable definition of the level of cost at which efficient and economical facility services are deliverable. Further, we note the limited number (41) of county facilities. The State should be advised that a change in the ceiling level of reimbursement based on SMSA may be unreasonable unless there are sufficient facilities within the group to establish valid measures of central tendency. ²

DPW responded that it had anticipated HCFA's concern with central tendency in the SMSA grouping plan, and had met the problem by amending its plan so that the ceiling rate for any SMSA group containing fewer than three facilities would be computed in combination with a more populous SMSA group. Evidence shows, however, that there would be no groups containing less than three members...