Hathaway v. Mathews

• Decision Date: 21 December 1976
• Docket Number: No. 76-1370,76-1370
• Citation: 546 F.2d 227
• Parties: Laura HATHAWAY, d/b/a R.N. Nursing Home, Plaintiff-Appellant, v. David MATHEWS, Secretary, United States Department of Health, Education& Welfare, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 227

546 F.2d 227

37 A.L.R.Fed. 672

Laura HATHAWAY, d/b/a R.N. Nursing Home, Plaintiff-Appellant, v. David MATHEWS, Secretary, United States Department of

Health, Education& Welfare, et al., Defendants-Appellees.

No. 76-1370.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 20, 1976.

Decided Dec. 21, 1976.

David F. McNamar, Indianapolis, Ind., for plaintiff-appellant.

James B. Young, U. S. Atty., John Daniel Tinder, Asst. U. S. Atty., Theodore L. Sendak, Atty. Gen., Arthur T. Perry, Deputy Atty. Gen., Indianapolis, Ind., for defendants-appellees.

Before CLARK, Associate Justice (Retired), ^* and SWYGERT and CUMMINGS, Circuit Judges.

SWYGERT, Circuit Judge.

In this case appellant challenges the decision of the Department of Health, Education and Welfare (HEW) to terminate Medicaid benefits allocated for patients in the nursing home that she operates because the home allegedly does not comply with federal standards. She contends that HEW may not cut off Medicaid payments without first granting her notice of the alleged violations and a hearing in which she can attempt to demonstrate that the home is in fact in compliance with federal standards. We agree, and reverse the judgment of the district court.

I

Appellant Laura Hathaway owns and operates the R.N. Nursing Home in Walkerton, Indiana. The Home has approximately 36 residents, all of whom rely on Medicaid to pay their bills. These payments are made pursuant to a provider agreement, required under the federal Social Security Act, between the Home and the State of Indiana. The Home has for some time been licensed as an intermediate health care facility by the State of Indiana. This license was renewed for a period of one year on December 17, 1975, indicating that the State found the Home to be in compliance with state and federal standards.

In December 1975, HEW, acting on complaints that the R.N. Nursing Home failed to satisfy federal regulations for intermediate care facilities, sent an inspection team to examine the premises of the Home. Further inspections were made in February 1976. On the basis of these investigations, HEW concluded that the Home was not in compliance with federal law. In accordance with established procedures, the Department on March 17, 1976 sent a letter to Wayne Stanton, the Administrator of the Indiana Department of Public Welfare, notifying him that federal Medicaid payments on behalf of the residents of the Home would cease after April 20, 1976.

On March 18, 1976, Stanton sent a letter to appellant informing her that because of the federal action, the State had no alternative but to decertify the R.N. Nursing Home as a provider of intermediate services. A copy of the letter from HEW was enclosed.

On March 26, 1976, Hathaway filed suit in the United States District Court for the Southern District of Indiana, seeking damages, injunctive relief, and a temporary restraining order. She contended that she had a property interest, cognizable under the due process clause of the fourteenth amendment, in the continuation of Medicaid payments to the Home and that the payments therefore could not be terminated without notice of the specific areas in which the Home was deficient under federal law and a hearing in which she could have an opportunity to rebut HEW's allegations. The district court, in denying the motion for a temporary restraining order and granting the defendants' motion to dismiss, relied on three factors. First, it held that because Hathaway's relationship was with the State alone, she could not seek a remedy against the federal government. Second, it found that any requirements of due process could be satisfied by a post-termination hearing. Finally, it held that Hathaway had failed to exhaust administrative remedies available under state law. Hathaway appeals from the district court's decision.

II

The correct resolution of this case depends upon an understanding of the mechanics of the Medicaid program. Under Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., Medicaid is a cooperative arrangement between the states and the federal government. Both the states and HEW provide a portion of the funds to pay claims, with the exact percentage determined by the applicable State plan. 42 U.S.C. § 1396a(a)(2). Under the Indiana State plan, Indiana pays 47.1 percent of each claim, with the remainder paid for by the federal government.

The statute calls for the states to administer the program, and to evaluate whether a particular institution is qualified to receive payments for services which it renders to Medicaid recipients. 42 U.S.C. § 1396a(a)(33)(B). Before a state can certify an institution as qualified, it must find that that institution meets all requirements for licensure under state law, see 45 C.F.R. § 249.10(b)(15)(i)(A), as well as the criteria laid down by federal regulations. See 45 C.F.R. § 249.12. After certification, the state and the institution enter into a provider agreement that formalizes the arrangements for the provision of services by the institution and the payment of claims by the state. 45 C.F.R. § 249.10(b)(15)(i)(E). HEW pays the state for the portion of each claim for which it is responsible. The state in turns pays those funds, as well as its share of each claim, directly to the institution. ¹

HEW, however, retains the power to independently verify through its own inspection that the institution complies with federal requirements. If HEW determines that the institution is out of compliance, it can refuse to pay the federal share of Medicaid payments. 45 C.F.R. § 249.10(b)(15)(vi).

HEW therefore followed the procedure contemplated by the regulations promulgated under the Social Security Act in refusing to continue Medicaid payments on behalf of residents of the R.N. Nursing Home because it found that the Home did not comply with federal standards. Moreover, the regulations do not provide for notice or a hearing before funds are cut off. Appellant's only claim is that such a summary termination of funds is unconstitutional under the due process clause.

III

A.

HEW argues that because it has no legal relationship with the appellant, she cannot seek any legal remedy against it with respect to the termination of funds. Under the Social Security Act and the regulations promulgated under it, HEW asserts, the federal government's only function is to pay the states on behalf of eligible recipients of Medicaid. It claims that it has obligations to the states and the individuals for whom the payments are made, but not to a provider of health care. HEW further contends that because the provider contract was solely between Hathaway and Indiana, she should seek her remedy against the State.

To accept this argument would be to exalt legal formalism over reality. Simply because HEW makes payments to the states, rather than directly to the provider, does not mean that there is not an important relationship between the provider and the federal government. We were informed at oral argument that all 36 residents of the R.N. Nursing Home depend on Medicaid to pay their bills. If HEW cuts off Medicaid payments, these residents will have to leave and Hathaway will be forced out of business. Such a result would be justified if the R.N. Nursing Home in fact is substantially out of compliance with federal regulations designed to protect the health of its residents. But to deny Hathaway the right to bring an action against the federal government simply because federal funds come to her through the conduit of the State is to deny that it is the federal government, and not the State, which threatens to cause her injury. We will not subscribe to such a palpable fiction.

Moreover, HEW's suggestion that Hathaway should properly seek relief against the State is totally disingenuous. As the State has pointed out, there is no remedy within its power to grant that will relieve Hathaway's plight. By renewing the Home's license, the State has already indicated that in its opinion the Home does comply with both state and federal requirements. The State has further indicated that it is prepared to continue paying its share of Medicaid claims to the Home. ² What the State cannot do is to compel HEW to halt its planned termination of the federal share of these payments.

B.

The gravamen of appellant's case is that her expectation of continuing to receive Medicaid payments on behalf of residents of the Home, as long as the Home complies with state and federal requirements, is a protected property right under the due process clause. She argues that she cannot be deprived of such a property right without due process of law, which requires at a minimum notice and a hearing.

A long line of cases supports the validity of this claim, as HEW appears to concede. Title XIX of the Social Security Act created expectations on the part of both consumers and providers of health care. While Congress need not have enacted Title XIX in the first place, once it did so the federal government cannot terminate Medicaid payments without providing notice of the reasons for termination to the person who is to be deprived of the statutory entitlement and a hearing before an impartial factfinder in which that person can attempt to rebut the charges against him. See, e.g., Goss v. Lopez, 419 U.S. 565, 572-573, 95 S.Ct. 729, 42 L.Ed.2d 725 (1975); Arnett v. Kennedy,416 U.S. 134, 164, 94 S.Ct. 1633, 40 L.Ed.2d 15 (1974) (Powell, J., concurring); Board of Regents v. Roth, 408 U.S. 564, 576-578, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972); Goldberg v. Kelly, 397 U.S. 254, 261, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970). The Second Circuit has recently reached the identical conclusion with respect to the termination of Medicaid payments to the proprietor of a nursing home. Case v. Weinberger, 523 F.2d 602, 606 (2d Cir. 1975). See also Ross v. Wisconsin Dept. of Health & Social Services,369 F.Supp. 570 (E.D.Wis.1973) (three-judge court) ...