Folden v. Washington State DSHS

• Decision Date: 05 April 1990
• Docket Number: No. C87-802TB.,C87-802TB.
• Citation: 744 F. Supp. 1507
• Parties: Henry B. FOLDEN and Jean Folden, husband and wife, dba Crestwood Convalescent Center, et al., Plaintiffs, v. WASHINGTON STATE DEPARTMENT OF SOCIAL AND HEALTH SERVICES, et al., Defendants.
• Court: U.S. District Court — Western District of Washington

744 F. Supp. 1507

Henry B. FOLDEN and Jean Folden, husband and wife, dba Crestwood Convalescent Center, et al., Plaintiffs, v. WASHINGTON STATE DEPARTMENT OF SOCIAL AND HEALTH SERVICES, et al., Defendants.

No. C87-802TB.

United States District Court, W.D. Washington, at Tacoma.

April 5, 1990.

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Thomas H. Grimm, John F. Sullivan and James R. Watt, Inslee, Best, Doezie & Ryder, P.S., Bellevue, Wash., for plaintiffs.

Charles F. Murphy and Susan Lomax, Office of the Atty. Gen., Olympia, Wash., Mark Lynch, Robert M. Thomas, Jr. and Steven G. Bradbury, Covington & Burling, Washington, D.C., for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BRYAN, District Judge.

THIS MATTER came before the Court for trial commencing September 25, 1989. On September 26, October 16 and October 20, 1989, the Court rendered oral rulings, which have been transcribed and filed and are incorporated herein as Findings of Fact and Conclusions of Law by this reference. On the basis of the testimony presented at trial, the documentary evidence admitted, and the trial briefs and oral argument from the parties, and its oral rulings, the Court now enters the following additional findings of fact and conclusions of law. If anything herein is inconsistent with the above-referenced oral rulings of the court, said oral rulings shall control.

FINDINGS OF FACT

I. INTRODUCTION

1. This action was brought by 14 corporations, partnerships and individuals that have contracted with the Washington Department of Social and Health Services (DSHS or the "Department") to provide nursing home care to Medicaid patients during all or part of the period from July 1, 1981, to the present.

2. The plaintiffs' principal federal law claim is that the Medicaid reimbursement rates paid by DSHS under state statutes and the Washington Plans for Medical Assistance (the "State Plans") in effect since July 1, 1981, have not been "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," as required by 42 U.S.C. § 1396a(a)(13)(A) (the "Boren Amendment"). The plaintiffs identify several subissues of both federal and state law related to this principal claim. These subissues involve challenges to particular aspects of the State's Medicaid reimbursement system. In addition, the plaintiffs claim that the assurances given by DSHS to the Health Care Financing Administration (HCFA) to gain federal approval for the State Plans did not comply with HCFA's regulations implementing the Boren Amendment and were not supported by adequate findings as required by 42 C.F.R. § 447.253.

3. The plaintiffs also have raised several claims that are not related to the Boren Amendment: 1) The plaintiffs claim that the State's statute and regulations implementing the federal Deficit Reduction Act of 1984 (DEFRA) violate the equal protection clause of the Fourteenth Amendment by treating providers who purchased their facilities on or after July 18, 1984, differently from those who purchased before that date. 2) The plaintiffs claim that the defendants have violated their authority under state law to amend the regulations that govern scope of audit procedures. 3) They claim that DSHS's implementation of the temporary "wage enhancement cost center" rate violated state law. 4) They claim that the defendants have exceeded their statutory authority by adopting and applying limits on new construction costs recognized for reimbursement. 5) Finally, the plaintiffs claim that DSHS's choice for the index of allowable nursing services cost increases recognized for rate-setting violates state law.

4. On the defendants' motion this action was removed from state court. In the interests of a full resolution of the issues before this Court, the defendants voluntarily waived in writing their Eleventh Amendment immunity in the present suit.

5. On February 19, 1988, the Court certified a class of plaintiffs in this action pursuant to Fed.R.Civ.P. 23(b)(3), described as:

All Skilled Nursing Facilities and Intermediate Care Facilities located in the State of Washington licensed by the Washington State Department of Social and Health Services and which have contracted with the Department to provide medical services to needy persons pursuant to Title XIX (Medicaid) program during the period from July 1, 1981, through the present.

6. There are approximately 275 private nursing homes currently operating in the State of Washington that participate in the Medicaid program, of which 23 have opted out of the class. In addition, there are a number of plaintiffs in the class who are former owners of nursing homes that have been closed or sold.

7. The Medicaid program is federally created and regulated pursuant to Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. The purpose of the program is to provide medical assistance to low income persons. The financing and administration of the Medicaid program are a cooperative effort between the federal and state governments. In Washington State, the federal share of Medicaid payments is approximately 53% and the State's share is approximately 47%. The State's program is administered by DSHS.

II. WASHINGTON'S REIMBURSEMENT SYSTEM

8. During the period covered by this lawsuit, DSHS has purchased nursing home care for Medicaid patients through a system of cost reimbursement set forth in RCW Chapter 74.46 (RCW Chapter 74.09 prior to July 1, 1983), WAC Chapter 388-96, and the State Plans. The WAC regulations implement the statute, and the State Plans describe the reimbursement system established by the statute. RCW Chapter 74.46 is quite detailed in setting forth the mechanism for calculating the Medicaid reimbursement rates and leaves little discretion to DSHS. To a large extent, therefore, the reimbursement system in Washington has been fashioned by the Legislature rather than the Department.

9. DSHS enters into a contract with each provider. (Exs. 112 & 113.) The State's contractual obligations are co-extensive with applicable law.

A. Overview of the System

10. DSHS reimburses each provider's Medicaid costs through the payment of a per-patient-day (PPD) reimbursement rate for each of the provider's Medicaid patients. The reimbursement system is specific to each provider and involves two steps: rate-setting and settlement.

11. An annual interim PPD rate is set prospectively for each provider by DSHS for the period July 1 through June 30 (the "rate year"). The interim rate is based on the provider's allowable costs for the prior calendar year (the "cost year") as reported in the provider's annual cost report, adjusted for inflation. Under the state statute, each nursing home provider must submit a cost report by March 31 of the year following the cost year. RCW 74.46.040. The cost report, which requires a great deal of very detailed information, serves two functions. It provides the data for setting the interim PPD rate for the coming rate year that begins July 1, and it provides the initial data for settlement of final reimbursement for Medicaid costs incurred by the provider during the cost year covered by the report.

12. In the rate-setting process, the interim PPD rate is based on four cost centers —nursing services, administration and operations (A & O), food, and property — and also contains a fifth component, return on investment (ROI). The ROI component became effective on January 1, 1985, and replaced a return on equity (ROE) component. In addition, for the period January 1, 1988, through June 30, 1990, the rate contains a sixth component, the wage enhancement cost center, which was created by the Legislature to bring all nursing home employees up to a minimum wage level.

13. The interim rate is established by rate analysts who perform a "desk review" of the provider's cost report. The desk review basically involves four steps. The rate analyst first determines whether the reported costs are "allowable," as prescribed in RCW 74.46.190 through .410 and corresponding regulations, and whether they are reported in conformance with DSHS's technical reporting requirements. Second, the analyst compares the provider's costs to the costs of the rest of the nursing homes in the State to flag unusually high costs. If the reported cost for a particular expense line item substantially deviates from the industry average for that item, the analyst may request additional information from the provider and may disallow the excess cost. Third, the analyst applies various lids and limitations, prescribed by statute, to the costs reported in certain cost centers. These lids and limitations are discussed in more detail below. Finally, after computing the costs on which the prospective interim rate will be based (the "rate base"), the analyst applies to certain cost centers an inflation adjustment factor (IAF), approved by the Legislature, in order to arrive at the rate that will become effective July 1. (Testimony of Denise S. Gaither.)

14. In the settlement process, the provider's final reimbursement rate is fixed for a prior cost year. Since interim rates cover the period between July 1 and June 30, each cost year is governed by two different interim rates, which are weighted and averaged for the cost year. As required by RCW 74.46.150(1), the final rate is the lower of the interim rates paid to the provider during the prior cost year or the audited allowable costs actually incurred by the provider during that year. Currently, about two-thirds of providers are audited before final settlement. For those not audited, their reported costs (subject to desk review but not subject to lids) become their audited allowable costs for settlement purposes.

15. Providers whose costs in the prior cost year were less than their...