Hospital Ass'n of New York State v. Toia, 76 Civ. 2027.

• Citation: 473 F. Supp. 917
• Decision Date: 25 April 1979
• Docket Number: No. 76 Civ. 2027.,76 Civ. 2027.
• Parties: HOSPITAL ASSOCIATION OF NEW YORK STATE, INC., Misericordia Hospital Medical Center, Buffalo General Hospital, the Genesee Hospital, and the Mount Sinai Hospital on behalf of themselves and all other nonprofit hospitals which are members of the Hospital Association of New York State, Inc. and which are reimbursed for Medicaid services rendered to hospital patients, Plaintiffs, v. Philip L. TOIA, as Commissioner of Social Services of the State of New York, Robert P. Whalen, as Commissioner of Health of the State of New York, Peter Goldmark, as Director of the Budget of the State of New York, Hugh L. Carey, as Governor of the State of New York, and David Mathews, as Secretary of the U. S. Department of Health, Education & Welfare, Defendants.
• Court: U.S. District Court — Southern District of New York

473 F. Supp. 917

HOSPITAL ASSOCIATION OF NEW YORK STATE, INC., Misericordia Hospital Medical Center, Buffalo General Hospital, the Genesee Hospital, and the Mount Sinai Hospital on behalf of themselves and all other nonprofit hospitals which are members of the Hospital Association of New York State, Inc. and which are reimbursed for Medicaid services rendered to hospital patients, Plaintiffs, v. Philip L. TOIA, as Commissioner of Social Services of the State of New York, Robert P. Whalen, as Commissioner of Health of the State of New York, Peter Goldmark, as Director of the Budget of the State of New York, Hugh L. Carey, as Governor of the State of New York, and David Mathews, as Secretary of the U. S. Department of Health, Education & Welfare, Defendants.

No. 76 Civ. 2027.

United States District Court, S. D. New York.

April 25, 1979.

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Proskauer, Rose, Goetz & Mendelsohn, New York City, for plaintiffs; Jacob Imberman, Robert M. Kaufman, Steven S. Miller, Susan C. Rosenfeld, M. William Scherer, New York City, of counsel.

Rosenman, Colin, Freund, Lewis & Cohen, New York City, for the New York City Health and Hospitals Corp.; Peter F. Nadel, New York City, of counsel.

Louis J. Lefkowitz, Atty. Gen. of the State of New York, New York City, for State defendants; Covington & Burling, Washington, D. C., of counsel.

Robert B. Fiske, Jr., U. S. Atty., S. D. of New York, New York City, for U. S. Dept. of Health, Ed. and Welfare; John M. O'Connor, Asst. U. S. Atty., New York City, of counsel.

LASKER, District Judge.

One of the results of the explosion of medical knowledge in the past century has been a radical increase in the expenditure of resources for cure, prevention and research. At least in part because increasingly sophisticated medical processes and techniques are more costly, and because this is an age of developing social programs, a wide variety of regulated plans now exist to finance the care of the sick. In some countries the plans provide comprehensive care of all sickness regardless of the age or economic circumstances of the patient. In this country, the two governmentally financed plans are Medicare (Pub.L. 89-97, Title I, July 30, 1965, which provides health insurance for the aged) and Medicaid (42 U.S.C. § 1396 et seq.) intended to assist the medically indigent, who are defined by statute as "families with dependent children and . . . aged, blind or disabled individuals, whose income and resources are insufficient to meet the costs of necessary medical services."

This case deals with significant questions arising under the Medicaid statute. To put the issues in perspective a review of the checkered history of the case is necessary.

THE BACKGROUND

Congress enacted the Medicaid statute in 1966 as Title XIX of the Social Security Act (42 U.S.C. § 1396 et seq.). The program is administered by the states pursuant to statute and regulations of the federal Department of Health, Education and Welfare (HEW). Under § 1396a(a)(13)(D) providers of inpatient hospital services, such as the plaintiffs here, are entitled to reimbursement by the states for the "reasonable cost" of their services, "as determined in accordance with methods and standards . . . reviewed and approved by the Secretary and . . . included in the state Medicaid plan." The ultimate cost of Medicaid reimbursement to hospitals is shared equally between the state and the federal government.

Since 1970, New York State has used a prospective methodology to compute the reimbursable "reasonable costs" of hospitals. The system attempts to predict costs for a forthcoming year and is part of the State Medicaid plan. Normally, at the end of each calendar year, the State publishes reimbursement rates for each hospital group¹ for the forthcoming year. However, at the end of 1975, faced with rising hospital costs and its own financial instability, New York took action, by issuance of interim rates which in essence froze the 1975 rates.

In May, 1976, the plaintiffs, a class consisting of 270 voluntary and public hospitals in New York State, brought this suit claiming that the freeze was illegal because it 1) amended the State plan without approval by the Secretary of HEW as required by 42 U.S.C. § 1396a(a)(13)(D) and 2) deprived them of reimbursement of their "reasonable costs."

In July, 1976, the State promulgated a revised formula for determining the 1976 rates. The revision included significant changes in the earlier method of computation. In particular, 1) it lowered the ceiling on reimbursable costs for "routine" inpatient services from 110% to 100% of the average of the costs for the group of hospitals to which the hospital being reimbursed belonged; 2) for the first time it imposed a ceiling (of 100% of average) on reimbursement for "ancillary" inpatient costs; and 3) it reduced to 90% the earlier 100% reimbursement of salaries of interns and residents.

On July 16, 1976, the plaintiffs amended their complaint to specify objections to the new formula and moved to restrain the defendants from implementing the amendments until they were approved by HEW. An injunction granting that relief was issued August 2, 1976.

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Effective January 1, 1976, Congress had required states participating in the Medicaid program to consent to suits in federal court by hospitals which claimed that the state was not in compliance with the reimbursement requirements of the statute (see 42 U.S.C. § 1396a(g)). Pursuant to this statute, but under protest, New York had executed a consent to suit. On October 18, 1976, the mandatory waiver of immunity provisions were repealed "effective January 1, 1976." (Pub.L. 95-452) Upon the enactment of the repealing statute, the State moved, under the Eleventh Amendment, to dismiss the suit as to itself. The motion was granted by this court, Hospital Association of New York State, Inc. v. Toia, 435 F.Supp. 819 (S.D.N.Y.1977) aff'd, 577 F.2d 790 (2d Cir. 1978). The Secretary of HEW concurrently moved to dismiss on the grounds of mootness but that motion was denied since HEW's role in the approval process was found to be "capable of repetition, yet evading review," within the rule of Southern Pacific Terminal Co. v. Interstate Commerce Commission, 219 U.S. 498, 515, 31 S.Ct. 279, 283, 55 L.Ed. 310 (1911); United States v. W. T. Grant Co., 345 U.S. 629, 632, 73 S.Ct. 894, 97 L.Ed. 1303 (1953); and Moore v. Ogilvie, 394 U.S. 814, 816, 89 S.Ct. 1493, 23 L.Ed.2d 1 (1969).

Governing Law

42 U.S.C. § 1396a(a)(13) provides that:

"A State plan for Medical assistance must . . . provide . . . for payment of the reasonable cost of inpatient hospital services . . . in accordance with methods and standards . . . developed by the State and reviewed and approved by the Secretary . . ."

The Secretary has specified criteria by which the approvability of a state plan is to be determined:

". . . criteria for approval will include:

(a) Incentives for efficiency and economy;

(b) Reimbursement on a reasonable basis: . . .

(d) Assurance of adequate participation of hospitals and availability of hospitals services of high quality to title XIX recipients . . ."

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"(a) State plan requirements: A State plan for medical assistance under title XIX of the Social Security Act must: . . .

(2) Provide for payment of the reasonable cost of inpatient hospital services as determined in accordance with methods and standards, consistent with the provisions of section 1122 of the Social Security Act for participating States which shall be developed by the State . ." (45 C.F.R. 250.30 (1976).

The hospitals contend that HEW's review and approval of the State plan were arbitrary and capricious in giving inadequate attention to the statutory and regulatory criteria for approval and that HEW's conclusions that the criteria were satisfied were based on clear errors of judgment. See Hospital Association of New York State, Inc. v. Toia, 438 F.Supp. 866 at 879 et seq. (S.D.N.Y.1977). To understand how the regulatory criteria were applied in reviewing the New York State system, it is necessary to describe how the State computed reimbursement rates in 1976, and how HEW went about reviewing the validity of the plan.

How the Plan Works

The prospective reimbursement system works in the following manner.² In the "base" year, which is two years prior to the payment, or "rate," year, the State compiles the actual inpatient costs for all of its Medicaid hospitals. On the basis of this compilation, the State computes allowable costs (described below), and these are used to determine how much hospitals will be paid at the beginning of the rate year.

The first step in the derivation of allowable costs is the computation of the average costs (routine and ancillary) that each hospital incurs in treating a Medicaid patient. To obtain this average, the state divides each hospital's total routine costs by its total patient days, and divides each hospital's total ancillary costs³ by total patient discharges.

Every hospital's average cost is then compared with the average cost of other hospitals in its peer group.⁴ The comparison yields an average for the entire group, the "group average" (sometimes referred to as the "ceiling"). After the disallowance of costs in excess of the group average, if any, each hospital's allowable costs (routine and ancillary) are, with some additions, "trended forward" to compensate for inflation, and, with the addition of allowable capital costs and the conversion of the total costs to per diem amounts, become the hospital's Medicaid reimbursement rate in the rate year.⁵

As stated above, in 1976 the amount of the prospective ceiling was set exactly at the average. That is, every hospital was to receive no more than 100% of the trended, base year group average. This marked a substantial change over 1975, when hospitals' rate year maximum reimbursement was set at 110% of their peer group's average per diem...