Kansas Health Care Ass'n v. KANSAS DSRS

Decision Date31 December 1990
Docket NumberCiv. A. No. 90-4207-S.
PartiesKANSAS HEALTH CARE ASSOCIATION, INC., and Kansas Association of Homes for the Aging, Inc., Plaintiffs, v. KANSAS DEPARTMENT OF SOCIAL AND REHABILITATION SERVICES, and Dennis R. Taylor, as Acting Secretary of the Department of Social and Rehabilitation Services, Defendants.
CourtU.S. District Court — District of Kansas

COPYRIGHT MATERIAL OMITTED

Richard D. Anderson, Jeffrey A. Chanay, Entz, Anderson & Chanay, William E. Enright, Scott, Quinlan & Hecht, Topeka, Kan., for plaintiffs.

Bruce A. Roby, Waggener & Arterburn, Topeka, Kan., Patrick D. Gaston, Bennett, Lytle, Wetzler, Winn & Martin, Prairie Village, Kan., for defendants.

MEMORANDUM AND ORDER

SAFFELS, District Judge.

This matter is before the court on motion of the plaintiffs for a preliminary injunction pursuant to Rule 65(a) of the Federal Rules of Civil Procedure. Also before the court is defendants' motion to dismiss for plaintiffs' alleged lack of standing. Plaintiffs Kansas Health Care Association, Inc. and Kansas Association of Homes for the Aging, Inc. (hereafter referred to jointly as "KHCA" or "plaintiffs") bring this action asserting the rights of members of their respective professional associations, i.e., nursing homes operating in the state of Kansas. This case involves a challenge to state Medicaid reimbursement plans and recently implemented state regulations which affect the current reimbursement schedule for nursing home providers who care for Medicaid recipients. Plaintiffs allege that the defendants have violated the Boren Amendment to the Medicaid Act, 42 U.S.C. 1396a(a)(13)(A), by failing to establish reasonable and adequate rates of reimbursement for Medicaid providers. Plaintiffs' motion for a preliminary injunction was tried to the court on December 18, 19 and 20, 1990.

FINDINGS OF FACT

Based upon the evidence before the court at this time, the court makes the following findings of fact.

1. Kansas Health Care Association, Inc. and Kansas Association of Homes for the Aging, Inc. are nonprofit trade associations representing both nonprofit and for-profit Kansas nursing facilities. The combined membership of the two associations includes 335 nursing facilities or 88% of all licensed nursing facilities in Kansas.

2. Members of the plaintiff associations are participants in the Kansas Medicaid program who receive reimbursement from the state and federal government for health care services provided to eligible Medicaid recipients.

3. Kansas has elected by statute, namely K.S.A. 39-708c, to participate in the Medicaid program contained in Title XIX of the Social Security Act, 42 U.S.C. §§ 1396, et seq.

4. The Department of Social and Rehabilitation Services is responsible for the administration of the Kansas Medicaid Plan. See K.S.A. 39-708c.

5. On August 30, 1990, the Department of Social and Rehabilitation Services published notices in the Kansas Register of proposed amendments to the Kansas state plan for reimbursement rates for Medicaid providers. 29 Kan.Reg. at 1296-97.

6. On October 1, 1990, the Department of Social and Rehabilitation Services (hereafter "SRS") implemented a Medicaid reimbursement rate freeze. This rate freeze, titled State Plan Amendment TN-90-44, is to be maintained until September 30, 1991. In addition to the rate freeze, SRS also implemented a plan, TN-90-06 under which health care providers would be reimbursed on a pass through basis as they come into compliance with federal mandates.

7. Under these amendments, Medicaid providers are reimbursed for costs incurred while providing for Medicaid recipients based upon information taken from the most recent cost reports on file with SRS as of August 31, 1990. A cost report is a report submitted by a provider at the end of its fiscal year. In a cost report, all costs of a provider are recorded on an SRS form referred to as a MS-2004. This report is then subject to a desk review and a full field audit by SRS. Upon completion of the review and audit, a prospective rate of reimbursement for care provided to Medicaid recipients is calculated. In order to provide a prospective rate of reimbursement, figures from cost reports are inflated using historical inflation. In addition, the rate of reimbursement is further adjusted to provide for future inflation (hereafter referred to as "estimated inflation"). Finally, the prospective rate of reimbursement is subject to certain rate-setting limitations known as "cost center limits." Under the former state plan, rates were adjusted at least two times during a facility's fiscal year, once in October (SRS Schedule A-1) and once at the facility's fiscal year-end (SRS Schedule A).

8. While calculating prospective rates of reimbursement for the amended state plan, SRS considered a recommendation made by its contractor, the accounting firm of Myers and Stauffer, CPA (hereafter "Myers and Stauffer"). Myers and Stauffer derived a recommended rate of estimated inflation after conducting a review of recent articles which discuss inflation and economic trends. Among factors which are considered are the gross national product and the consumer price index. Bruce Myers of Myers and Stauffer, CPA recommended a rate within the range of 4.8% to 6.0%. (Defendants' Exh. 405, at 285). SRS subsequently adopted a 4.8% estimated rate of inflation.

9. The rate of reimbursement for nursing facilities depends upon when that nursing facility last filed a cost report. Thus, the present rate of reimbursement for some facilities is calculated using cost reports filed as of August 31, 1989, which reflect the provider's actual audited approved costs incurred between September 1, 1988, and August 31, 1989.

10. To update the older cost reports on file, SRS adjusted the older cost reports by applying historical inflation factors, namely the consumer price index, in an attempt to make the older cost reports more current.

11. The "cost report effect" is the difference between the rates of reimbursement and the actual costs incurred by health care providers at the time of reimbursement.

12. For Kansas fiscal year 1991, SRS received approximately $30,000,000.00 less in allocated funding for reimbursement for nursing facilities than it had originally estimated that it needed to be in compliance with applicable state and federal laws concerning reimbursement for providers of Medicaid care.

13. Defendant Dennis Taylor, Acting Secretary of the Department of Social and Rehabilitation Services (hereafter "Secretary Taylor"), testified that the information contained in "Narrative Information — DA 400" prepared for the Division of the Budget, Department of Administration for the State of Kansas (Plaintiffs' Exh. 2) is an estimate of the amount of funds which would be needed by SRS in order to comply with federal mandates required by the federal Nursing Home Reform Act and the Omnibus Budget Reform Act of 1987. In this narrative, Narrative Information — DA 400, SRS originally estimated that it needed $21,553,000.00 to comply with the federal mandates.

14. Under the Nursing Home Reform Act and the Omnibus Reform Act of 1987 (hereafter "OBRA '87"), Medicaid providers must satisfy the following federal mandates in order to qualify for Medicaid reimbursement:

a. combine intermediate care facilities and skilled nursing facilities by bringing the level of care of intermediate care facilities up to that of skilled nursing facilities;
b. provide 24 hour nursing coverage;
c. employ physicians as designated medical directors for each facility;
d. employ a social worker for each nursing facility with more than 120 beds; and
e. provide standardized assessments of residents.

Accordingly, reimbursement rates are to include the estimated costs of compliance with these requirements mandated by OBRA '87.

15. Despite SRS's earlier determination that it needed in excess of $20 million to satisfy federal mandates, on August 30, 1990, Secretary Taylor submitted a letter to the Associate Regional Administrator for Medicaid, Richard P. Brummel, that "this state plan TN-90-06 is a comprehensive package to meet all OBRA requirements." (Defendants' Exh. 404, at 132). These assurances were made despite the fact that the total amount of additional funds allocated for satisfying the OBRA '87 requirements were $18,814,000 less than those contained in the Narrative Information-DA 400 summary. Accordingly, SRS's estimated costs of compliance with federal mandates had been reduced from $21,553,000 to $2,739,000.

16. Secretary Taylor testified that it was not uncommon for a budget request to be off by more than $18,000,000.

17. Plaintiffs' Exh. 29 was prepared at Secretary Taylor's request. This document, titled "Summary and Economic Impact Statement Concerning Certain Permanent Administrative Regulations Adopted by the Acting Secretary of Social and Rehabilitation Services At an Open Meeting on September 18, 1990," indicates at page 9 that the impact of the Kansas regulations which implement the disputed rate freeze, namely K.A.R. 30-10-19, will "save the agency up to $10 million in staying within limited budget appropriations while attempting to meet payment requirements."

18. This document further reflects that the bearer of the loss will be the nursing facility providers who "will absorb these limitations through economic and efficient operations." (Plaintiffs' Exh. 29).

19. This document further states that resident care may be most affected by operation changes necessitated by the reimbursement freeze. "Resident care may ultimately be affected based on management decisions made by the individual providers." (Plaintiffs' Exh. 29).

20. Secretary Taylor testified that SRS felt that a rate freeze would be better than another option considered by SRS, i.e., a flat rate increase.

21. Since the commencement of this litigation, SRS has requested additional funds from the Kansas legislature on grounds that the rate freeze...

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