Kean v. Heckler, 85-5663

• Citation: 799 F.2d 895
• Decision Date: 28 August 1986
• Docket Number: No. 85-5663,85-5663
• Parties: , Medicare&Medicaid Gu 35,812 Thomas H. KEAN, Governor of the State of New Jersey, and J. Richard Goldstein, M.D., New Jersey State Commissioner of Health, Appellees, v. Margaret HECKLER, Secretary of Health and Human Services, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 895

799 F.2d 895

15 Soc.Sec.Rep.Ser. 4, Medicare&Medicaid Gu 35,812

Thomas H. KEAN, Governor of the State of New Jersey, and J Richard Goldstein, M.D., New Jersey State Commissioner of Health, Appellees, v. Margaret HECKLER, Secretary of Health and Human Services, Appellant.

No. 85-5663.

United States Court of Appeals Third Circuit.

Argued April 17, 1986.

Decided Aug. 28, 1986.

Richard K. Willard, Asst. Atty. Gen., Thomas W. Greelish, U.S. Atty., John F. Cordes, John F. Daly (argued), Attys., Appellate Staff, Civ. Div., Dept. of Justice, Washington, D.C., Ronald E. Robertson, Gen. Counsel, Ann T. Hunsaker, Asst. Gen. Counsel, Thomas W. Coons, Atty., Dept. of Health and Human Services, for appellant.

Irwin I. Kimmelman, Atty. Gen. of N.J., James J. Ciancia, Asst. Atty. Gen., Charlotte Kitler, Deputy Atty. Gen. (argued), Trenton, N.J., for appellees.

Giordano, Halleran & Ciesla, Frank R. Ciesla, Middletown, N.J., for amicus curiae, New Jersey Hosp. Assn.

Before SEITZ, HIGGINBOTHAM, and BECKER, Circuit Judges.

OPINION OF THE COURT

SEITZ, Circuit Judge.

Appellant, the Secretary of Health and Human Services (Secretary), appeals from an order granting summary judgment in favor of appellees. We have jurisdiction under 28 U.S.C. Sec. 1291.

I.

This case stems from a disagreement between the State of New Jersey and the Secretary over the method by which hospitals in New Jersey will be reimbursed for services they perform on an outpatient basis under Title XVIII of the Social Security Act, 42 U.S.C. Sec. 1395 et seq. (1982) (commonly known, and hereinafter referred to as Medicare). New Jersey sought from the Secretary a "waiver" under Sec. 1886(c) of the Act, 42 U.S.C. Sec. 1395ww(c), whereby such reimbursements would be made under a plan devised by the State. The Secretary granted the State's request for a waiver with respect to inpatient services, but denied it with respect to outpatient services. In the absence of a waiver, reimbursing payments are made on the basis of the scheme set forth in the Medicare statute. Although the precise issue raised is narrow, it can be fully understood only against a fairly detailed background of the Medicare statute and its history.

A. The Medicare Statute

The Medicare program, originally established in 1965, provides federal health insurance to the aged and disabled. The program has two components. Coverage under Part A, 42 U.S.C. Secs. 1395c to 1395i-2, is generally available automatically to all persons over the age of 64 and to the disabled. Id. Sec. 1395c. Part A principally covers inpatient hospital services, as well as related post-hospital care, home health services, and hospice care. Id. Sec. 1395d. Payments under Part A are made from the Hospital Insurance Trust Fund, which is funded by a wage tax. Id. Sec. 1395i.

Part B of Medicare is a program of "supplementary" medical insurance, also for the aged and disabled. Participation in Part B, unlike Part A, is elective. Services covered by Part B include outpatient hospital services, and others listed in 42 U.S.C. Secs. 1395k and 1395x(s). Payments under Part B are made from the Supplementary Medical Insurance Trust Fund, id. Sec. 1395t, which is funded by premiums paid by enrollees and by money appropriated by the Federal government, id. Sec. 1395j. Both Parts A and B are administered by the Health Care Financing Administration (HCFA), under authority delegated by the Secretary.

Payments under both parts of Medicare are made directly to providers of reimbursable services (e.g., hospitals) by the appropriate trust fund. Payments under Part B for outpatient services are generally based on "reasonable charges" for services provided. Id. Sec. 1395l. As originally enacted, Part A also provided for payments based on the reasonable costs of services to the provider. Id. Sec. 1395f(b)(1). This approach to calculating reimbursements is considered "retroactive," because the amount paid by Medicare is largely a function of the costs actually incurred by the provider. In 1983, however, Congress adopted a prospective reimbursement system for inpatient services and other services reimbursable under Part A. Social Security Amendments of 1983, Pub.L. No. 98-21, Sec. 601, 97 Stat. 65, 152-62 (codified at 42 U.S.C. Secs. 1395ww(d)-(e)) (hereinafter cited as 1983 Amendments). Under this system, reimbursing payments are calculated on the basis of a predetermined fee schedule, irrespective of the provider's actual costs.

In addition to the normally applicable Medicare reimbursement rules, however, Medicare also contains a number of provisions whereby individual states may obtain waivers. Under such waivers, Medicare reimbursements to the hospitals in a state are made on the basis of a state reimbursement scheme, rather than the otherwise applicable federal system.

The first of these waiver provisions to be enacted authorized the Secretary to engage in "experiments and demonstration projects," which might include state waivers. See Social Security Amendments of 1967, Pub.L. No. 90-248, Sec. 402, 81 Stat. 821, 930-31 (hereinafter cited as 1967 Amendments); Social Security Amendments of 1972, Pub.L. No. 92-603, Sec. 222, 86 Stat. 1329, 1390-93 (hereinafter cited as 1972 Amendments) (both codified as amended at 42 U.S.C. Sec. 1395b-1). The purpose of these provisions was to discover ways of controlling costs, see generally H.R.Rep. No. 231, 92d Cong., 2d Sess. (1971), reprinted in 1972 U.S.Code Cong. & Ad.News 4989, 5066-67 (hereinafter cited as H.R.Rep. No. 231), and waivers are available with respect to both inpatient and outpatient costs. Such waivers (hereinafter referred to as demonstration-project waivers) are entirely discretionary with the Secretary.

Congress enacted a second waiver provision in 1982. Medicare Sec. 1886(c)(1), 42 U.S.C. Sec. 1395ww(c)(1). In that section, Congress authorized the Secretary to "provide, in his discretion, that payment with respect to services provided by a hospital in a State may be made in accordance with a hospital reimbursement control system in a State, rather than in accordance with the other provisions of this title," if the State's system met each of five conditions set forth in the statute. Among these conditions is that the state plan be no more costly than the otherwise applicable Medicare system. Medicare Sec. 1886(c)(1)(C), 42 U.S.C. Sec. 1395ww(c)(1)(C).

Finally, in 1983, Congress adopted two further waiver provisions; unlike the earlier provisions, however, these mandate that a waiver be granted as long as certain statutorily-specified criteria are met. First, Congress provided for a mandatory waiver for state reimbursement plans that had previously been granted a demonstration-project waiver, and that met the criteria for a discretionary waiver in section 1886(c)(1). Medicare Sec. 1886(c)(4), 42 U.S.C. Sec. 1395ww(c)(4). Second, Congress provided for a mandatory waiver for any state meeting both the requirements of section 1886(c)(1) and an additional six requirements. Medicare Sec. 1886(c)(5), 42 U.S.C. Sec. 1395ww(c)(5).

B. The New Jersey Hospital Reimbursement Control System

New Jersey's hospital reimbursement system was initially developed under a 1976 contract between the State Department of Health and HCFA, pursuant to the Secretary's demonstration-project authority. In 1979, the State Department of Health adopted regulations for applying the system to all third-party payers and to all general acute-care hospitals in the State. See N.J.Admin.Code tit. 8, Sec. 31B-3.19(a)(3); N.J.Stat.Ann. Sec. 26:2H-1 et seq. The State thereafter obtained a demonstration-project waiver from HCFA, covering reimbursements for both inpatient and outpatient services.

The New Jersey system has four salient features. First, the system is a prospective one. Rates are set on the basis of "diagnosis-related groups" (DRGs)--generally illnesses and courses of treatment. ¹ Second, as noted above, the system applies to all third-party payers, both commercial and governmental, and to all health-care providers. Third, it covers both inpatient and outpatient services. Finally, the system reimburses hospitals for "uncompensated care"--largely care provided to indigents--by including in the DRG rate base an estimate of the cost of such care. Thus, all third-party payers under the system, including Medicare, subsidize indigent care, although such care is not normally reimbursable under Medicare.

C. The Controversy

Following enactment of the 1983 Amendments, HCFA determined that existing demonstration-project waivers would be withdrawn, and that states desiring continued waivers would be required to reapply under section 1886(c). The agency accordingly notified New Jersey that its current waiver would only be extended until 90 days after the promulgation of final regulations under 1886(c). Several months later, however, HCFA had a change of mind, and--although no regulations had yet been promulgated--informed the State that the waiver would be revoked at the end of 1984. Accordingly, the State submitted an application under section 1886(c)(1), (c)(4), and (c)(5); the application covered both outpatient and inpatient services.

The Secretary initially rejected the application, in part on the ground that it did not provide separate treatment of inpatient and outpatient services. The Secretary took the position that although New Jersey's demonstration-project waiver covered both inpatient and outpatient services, section 1886(c) authorized only waivers for inpatient services. She indicated, however, that she had discretionary authority to grant a waiver with respect to outpatient services, ² but that such a waiver could only be granted if the outpatient side of the state's plan, considered on its own, met criteria similar to those in section 1886(c)(1) and (c)(5).

While expressing disagreement with the Secretary's interpretation as to the scope of a section 1886(c) waiver and the requirement of...