Indiana Dept. of Public Welfare v. Lifelines of Indianapolis Ltd. Partnership, 29A02-9110-CV-471

• Decision Date: 26 July 1994
• Docket Number: No. 29A02-9110-CV-471,29A02-9110-CV-471
• Citation: 637 N.E.2d 1349
• Court: Indiana Appellate Court
• Parties: INDIANA State DEPARTMENT OF PUBLIC WELFARE and the State Board of Public Welfare, Appellants-Respondents, v. LIFELINES OF INDIANAPOLIS LIMITED PARTNERSHIP, d/b/a Lifelines of Indianapolis, Appellees-Petitioners.

Page 1349

637 N.E.2d 1349

45 Soc.Sec.Rep.Ser. 288

INDIANA State DEPARTMENT OF PUBLIC WELFARE and the State Board of Public Welfare, Appellants-Respondents, v. LIFELINES OF INDIANAPOLIS LIMITED PARTNERSHIP, d/b/a Lifelines of Indianapolis, Appellees-Petitioners.

No. 29A02-9110-CV-471.

Court of Appeals of Indiana First District.

July 26, 1994.

Rehearing Denied Sept. 27, 1994.

Transfer Denied Dec. 30, 1994.

Linley E. Pearson, Atty. Gen., Gordon E. White, Jr., Deputy Atty. Gen., Indianapolis, for appellants.

Norman G. Tabler, Jr., Scott M. Kosnoff, Baker & Daniels, Indianapolis, for appellees.

ROBERTSON, Judge.

The Indiana State Department of Public Welfare appeals following judicial review of an initial interim Medicaid rate determination made by the State Board of Public Welfare at the request of Lifelines of Indianapolis Limited Partnership (Lifelines) for the period January, 1988, through September, 1988. The Department of Public Welfare determined that Lifelines would be prospectively reimbursed for that initial period at a rate of $66.16 per patient per day. Aggrieved by that decision, Lifelines appealed and, after hearing evidence, an administrative law judge agreed with Lifelines that it was not receiving a level of reimbursement which complied with federal and state statutory standards. The State Board of Public Welfare rejected the ALJ's recommendation and reinstated the original rate. On Lifelines' petition for judicial review, the Hamilton Circuit Court found the Board's decision and certain of its "implicit" findings to be arbitrary and capricious, an abuse of discretion, otherwise not in accordance with law, and unsupported by substantial evidence, and set the Board's decision aside. We now reverse.

The Medicaid program is the principle payor of nursing home care in the United States. Folden v. Washington State Department of Social & Health Services (W.D.Wash.1990), 744 F.Supp. 1507, 1513, affirmed, 981 F.2d 1054. Designed by Congress to enable participating states to obtain federal financial assistance in caring for the medical needs of the states' needy, the program is voluntary. But, once a state chooses to participate, it must comply with all federal Medicaid laws and regulations. Lett v. Magnant (7th Cir.1992), 965 F.2d 251, 252. To qualify for assistance, a state must devise a scheme for reimbursing health care providers and have that plan approved by the Secretary of Health & Human Services. Presently, the state plan must comply with Section 1902(a)(13) of the Medicaid Act, 42 U.S.C. § 1396a(a)(13)(A) as amended by the Omnibus Budget Reconciliation Act of 1980, Pub.L. 96-499, § 962(a), 94 Stat. 2650 (1980), the revision now commonly referred to as the Boren Amendment.

At its inception, the Medicaid Act was not specific in its regulation of allowable costs. However, in 1972, Congress moved to a standard used by the Medicare program which required payment on a reasonable cost-related basis. As a practical matter, the "reasonable cost" reimbursement method meant that the state paid for virtually all of the care provided Medicaid recipients. Mary Washington Hospital v. Fisher (E.D.Va.1985), 635 F.Supp. 891, 893. The states paid the actual costs incurred in providing care to Medicaid recipients, regardless of disparities in costs or inefficiencies among recipient providers. See Temple University v. White (3d Cir.1991), 941 F.2d 201, 207, cert. denied, 502 U.S. 1032, 112 S.Ct. 873, 116 L.Ed.2d 778.

Under the previous standard, a state's plan was subject to review by the Health Care Financing Administration (HCFA). Indiana Board of Public Welfare v. Tioga Pines (1993), Ind., 622 N.E.2d 935, 938, cert. denied, 510 U.S. 1195, 114 S.Ct. 1302, 127 L.Ed.2d 654. The Secretary's review focused on the State's payment method and standards, rather than on the rates paid to facilities, to determine whether the plan would result in a reasonable cost-related payment. Initial interim rule with comment period, 46 Fed.Reg. 47964, 47965 (1981). The Secretary assessed the appropriateness of each element of a state's system, e.g. the State's definition of allowable costs; its method of cost-finding; the State's system of classifying facilities into comparison groups for rate-setting purposes and its specific methods for relating payment rates to facilities' costs and for adjusting these rates for inflation. Id. Then, the Secretary would consider the appropriateness of these elements as they related to one another. This phase of review was crucial since an element of a payment system that would not meet the reasonable cost-related test when judged in isolation might be acceptable if it were compensated for by other elements of the system such that the system as a whole would result in a reasonable cost-related payment. Id.

Congress found the Medicare reasonable cost reimbursement principles to be inherently inflationary and to contain no incentives for efficient performance. 46 Fed.Reg. at 47966. Other provisions of OBRA strongly encouraged states to contain costs within fixed limits or suffer substantial financial penalties in the form of reduced federal contribution. Mary Washington, 635 F.Supp. at 894. Hence, the shift to more flexible reimbursement standards brought by the Boren Amendment had as its primary purpose the containment of cost. Lett, 965 F.2d at 256.

The Boren Amendment requires that a state plan provide for

payment ... of ... nursing facility services, and services in an intermediate care facility for the mentally retarded provided under the plan through the use of rates ... 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 ...

42 U.S.C. § 1396a(a)(13)(A). ¹

Under the amendment, states are permitted to adopt prospective reimbursement methodologies; instead of reimbursing health care providers for the actual cost of services already provided, a state can pay providers in advance for care based on the state's formula for what such services should cost, Illinois Health Care Association v. Bradley (7th Cir.1992), 983 F.2d 1460, 1462, and force providers to absorb the loss if their actual costs exceed that rate. Mary Washington, 635 F.Supp. at 894. Participating states are not required to make individual cost determinations for skilled nursing facilities and are free to establish rates on a state-wide or other geographic basis, on an institution by institution basis, 46 Fed.Reg. at 47966, or by formulating class-wide reimbursement regulations based on costs of rational groupings of provider facilities, Friedman v. Perales (S.D.N.Y.1987), 668 F.Supp. 216, 222, affirmed, 841 F.2d 47, without regard to Medicare reimbursement principles. 46 Fed.Reg. at 47966; Thomas v. Johnston (W.D.Tex.1983), 557 F.Supp. 879. Moreover, the drafters of the amendment contemplated that the rates fixed in compliance with its provisions might not be sufficient to keep every facility participating in the program. Lett, 965 F.2d at 257. Hence, the State's inadequate reimbursement of one efficient and economically operated facility does not necessarily constitute a Boren Amendment violation. Id. at 256.

In short, Congress gave the states considerable latitude in meeting the new substantive standard, subject only to the requirement that the state "find" its rates meet the Act's standard, and to review by the Secretary of the reasonableness of each state's assurances that its rates meet the standard. Wilder v. Virginia Hospital Association (1990), 496 U.S. 498, 110 S.Ct. 2510, 110 L.Ed.2d 455. A state's findings, however, must be correct. Id.; Bradley, 983 F.2d at 1462; Pinnacle Nursing Home v. Axelrod (2d Cir.1991), 928 F.2d 1306, 1314.

Indiana's long-term health care facilities operate under a state health care regime in which separate agencies have distinct but interrelated roles. Lett, 965 F.2d at 254. The State Board of Health is responsible for licensing and certification while the Department of Public Welfare (hereinafter referred to as the State) administers the Medicaid program and establishes Medicaid reimbursement rates for these facilities. Id.

The State has never approached Medicaid reimbursement by setting out initially to define an efficient and economically operated facility or to discern the necessary costs of a desired level of care. Instead, the model of an "efficient and economically operated facility" is implicit in the state's prospective payment program. It varies from provider to provider and is dependent ultimately on how the particular provider's projected expenditures compare with its own historical costs adjusted for inflation, the adjusted historical and projected costs of other providers in the region, and the average rate of change of prices within the nation. ² At the time in question, initial interim rates were calculated based upon a provider's projected costs of operating for the first nine months, and were subject to the tests of reasonableness. 470 I.A.C. 5-4.1-5(a). The methodology beginning at 470 I.A.C. 5-4.1-6 was used to compute initial interim rates for new providers, except that historical data was not available, and the annual rate increase limitation did not apply. 470 I.A.C. 5-4.1-5(b).

The record reflects that Indiana's Medicaid reimbursement system does not pay for the care of a hospitalized patient when that patient's condition reaches a point of stabilization, even though in the physician's eyes, the patient may still need the kind of care provided exclusively by facilities licensed as hospitals in Indiana, or something less than this care, what Lifelines' characterizes as sub-acute care. Because of its legal and ethical duties to its patients, the facility providing these services...