In re Saint Joseph's Hosp.

• Decision Date: 21 August 1989
• Docket Number: Bankruptcy No. 88-14005S,Adv. No. 89-0319S.
• Parties: In re SAINT JOSEPH'S HOSPITAL, Debtor. SAINT JOSEPH'S HOSPITAL and Official Unsecured Creditors' Committee, Plaintiffs, v. DEPARTMENT OF PUBLIC WELFARE OF the COMMONWEALTH OF PENNSYLVANIA, John F. White, Jr., in his official capacity of Secretary of Public Welfare, Eileen M. Schoen, in her official capacity as Deputy Secretary for Medical Assistance, David S. Feinberg, in his official capacity as Director of the Bureau of Policy and Program Development of the Office of Medical Assistance, and David D. Ulsh, in his official capacity as Acting Director of the Division of Inpatient Programs of the Office of Medical Assistance, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

103 B.R. 643 (1989)

In re SAINT JOSEPH'S HOSPITAL, Debtor.

SAINT JOSEPH'S HOSPITAL and Official Unsecured Creditors' Committee, Plaintiffs, v. DEPARTMENT OF PUBLIC WELFARE OF the COMMONWEALTH OF PENNSYLVANIA, John F. White, Jr., in his official capacity of Secretary of Public Welfare, Eileen M. Schoen, in her official capacity as Deputy Secretary for Medical Assistance, David S. Feinberg, in his official capacity as Director of the Bureau of Policy and Program Development of the Office of Medical Assistance, and David D. Ulsh, in his official capacity as Acting Director of the Division of Inpatient Programs of the Office of Medical Assistance, Defendants.

Bankruptcy No. 88-14005S, Adv. No. 89-0319S.

United States Bankruptcy Court, E.D. Pennsylvania.

August 21, 1989.

Joseph A. Dworetzky, Amy L. Banse, Drinker Biddle & Reath, Philadelphia, Pa., for debtor/plaintiff.

Bruce G. Baron, Asst. Atty. Gen., Harrisburg, Pa., for defendants.

Andrew J. Napoli, Pincus, Bressler, Hahn, Reich & Weinberg, P.C., Philadelphia, Pa., for plaintiff/creditors' committee.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

A. INTRODUCTION.

This complex adversary proceeding challenges three aspects of the determinations of the Medicaid reimbursement due to Debtor-hospital by the applicable state agency in Funding Year (hereinafter "FY") 1987 and FY 1988 in five separate Counts. Presently before us in this proceeding are (1) The Debtor's motion for partial summary judgment as to three of the Counts; and (2) the Defendants' motion to dismiss, based upon the Eleventh Amendment.

We conclude that the motion to dismiss must be denied because the Commonwealth has abrogated its Eleventh Amendment protections by filing proof of claims, albeit through agencies different from that named as a defendant herein. We also conclude that the Debtor is entitled to relief, at this juncture, only as to one aspect of its Complaint, which the Defendants now concede in substance, but contend, contrary to our conclusions, need not be decided because it is moot. We also conclude that the Debtor could succeed only on its claims set forth in Counts IV and V of its Complaint, asserting violations of Title XIX of the Social Security Act and 42 U.S.C. § 1983. We reject and therefore dismiss the claim set forth in Count I, asserting violations of the parties' Provider Agreement. We also reject the Defendants' contention that the Debtor lacks standing to prosecute any aspects of its claims. However, we decline to provide any relief as to the remaining two aspects of the Debtor's claims on the instant record, believing that further evidence of the Debtor's circumstances, including the "efficiency" and "economy" of its operations, and of the process utilized by the Defendants in formulating its current Regulations and procedures, including consideration of available alternatives, is necessary before we can do so.

B. PROCEDURAL HISTORY AND BASIC UNDERLYING FACTS.

The Debtor, SAINT JOSEPH'S HOSPITAL, is a 178-bed full-service hospital owned and operated by the Catholic Order of Felician Sisters, located at 16th Street and Girard Avenue in north central Philadelphia. As the 1980's have resulted in the further deterioration of poor Black communities, north central Philadelphia has been one of the most severely-impacted of such areas. Despite the declining economic structure of its neighborhood, the Debtor opted to remain and rebuild in this area after a devastating fire to its facility in August, 1977. We have no reason to doubt the Debtor's contention that the decision to remain in this community was motivated by the Felician Sisters' perception of the presence of an overwhelming need in this community, particularly in light of the recent flight of the other hospitals formerly located there.

The decline of its neighborhood has caused the Debtor's patients to be increasingly dependent on Medicare, a program specially designed to cushion medical costs of the aged and disabled which is administered directly by the federal government; and Medicaid, a program designed to assist other medically-needy, low-income persons. The Medicaid program, as described in more detail in the following paragraph, is largely financed with federal funds, but is partially funded and administered by state agencies, in this state by the Defendant COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF PUBLIC WELFARE (hereinafter "DPW"). On July 1, 1977, the Debtor and DPW executed a form MEDICAL ASSISTANCE PROGRAM INPATIENT HOSPITAL CARE AGREEMENT (herein "the Provider Agreement"). The Provider Agreement states, inter alia, as follows:

C. DEPARTMENT\'S RESPONSIBILITIES

The Department agrees to:

. . . . .

4. Pay to the Hospital the reasonable costs for services rendered under this Agreement as determined by the regulations adopted under Title XIX of the Federal Social Security Act and in accordance with regulations of the Department.

This lawsuit involves a dispute as to the Debtor's reimbursement from Medicaid funds, as opposed to Medicare funds. Compare, e.g., In re University Medical Center, 93 B.R. 412 (Bankr.E.D.Pa.1988); and In re St. Mary Hospital, 89 B.R. 503 (Bankr.E.D.Pa.1988) (involving only setoff procedures of the federal government in administration of the Medicare program). Some further description of the Medicaid program and the changes in its administration relevant to this proceeding must be set forth to provide an understanding of this lawsuit.

Medicaid is a program established by the federal government to provide adequate health care to eligible low-income persons and to alleviate the formation of a two-tier system of health care in this country. It is "a cooperative endeavor in which the Federal Government provides financial assistance to participating states to aid them in furnishing health care to needy persons." Harris v. McRae, 448 U.S. 297, 308, 100 S.Ct. 2671, 2683, 65 L.Ed.2d 784 (1980). The program is jointly funded by the federal and state governments, with the federal share for each state dependent on its per capita income. 42 U.S.C. § 1396d(b). States participating in Medicaid must provide "medical assistance plans," which must conform to federal law and federal regulations. Title XIX of the Social Security Act, 42 U.S.C.A. § 1396a; and 45 C.F.R. § 302.0, et seq. Pennsylvania has elected to participate in Medicaid and has adopted a medical assistance plan, by statute, Public Welfare Code, Art. IV(f), 62 P.S. § 441, et seq.; and by regulation, 55 PA.CODE § 1101, et seq.

Execution of a Provider Agreement is a prerequisite for participation in the Medicaid program by any provider. Through the mid-1980's, DPW reimbursed the reasonable costs of provider hospitals on a hospital-specific basis. That is, the "reasonableness" of each hospital's costs was determined by reference only to that hospital, and hospitals were generally reimbursed in accordance with their actual costs. Subsequently, Congress enacted the Medicare and Medicaid Amendments of 1980, including the Boren Amendment, codified at 42 U.S.C.A. 1396a(a)(13)(A), which reads as follows:

§ 1396a. State plans for medical assistance

(a) Contents

A State plan for medical assistance must —

. . . . .

(13) provide —

(A) for payment (except where the State agency is subject to an order under section 1396m of this title) of the hospital, 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 and which, in the case of hospitals, take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs and provide, in the case of hospital patients receiving services at an inappropriate level of care (under conditions similar to those described in section 1395x(v)(1)(G) of this title), for lower reimbursement rates reflecting the level of care actually received (in a manner consistent with section 1395x(v)(1)(G) of this title) 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 and to assure that individuals eligible for medical assistance have reasonable access (taking into account geographic location and reasonable travel time) to inpatient hospital services of adequate quality; and such State makes further assurances, satisfactory to the secretary, for the filing of uniform cost reports by each hospital, skilled nursing facility, and intermediate care facility and periodic audits by the State of such reports; . . . (emphasis added).

The Boren Amendment was thus intended to control ever-increasing health care costs by penalizing hospitals that operated inefficiently and rewarding those that operated efficiently and economically and, as indicated, requires that State plans "take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs." 42 U.S.C. § 1396a(a)(13)(A).

In an attempt to comply with the Boren Amendment, DPW changed its medical assistance program so that hospitals were assigned to groups of similarly situated hospitals, and each hospital was reimbursed only for the reasonable costs incurred by the average hospital in its group. This method, known as a prospective payment system, was designed to reward "efficient" hospitals with more Medicaid reimbursements than they actually expended and to cause "inefficient" hospitals to incur a deficit. In that way, "inefficient" hospitals would have an incentive to become more efficient and economical, thus accomplishing Congress's purpose. Hospitals which were forced to spend more on health care than they received in Medicaid reimbursements would have to...