Lett v. Magnant, No. 91-1256

• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)
• Writing for the Court: Before BAUER, Chief Judge, and POSNER and FLAUM; FLAUM
• Citation: 965 F.2d 251
• Parties: , Medicare & Medicaid Guide P 40,322 Eric LETT, et al., Plaintiffs-Appellees, v. Suzanne MAGNANT, et al., Defendants-Appellants.
• Decision Date: 10 July 1992
• Docket Number: No. 91-1256

Page 251

965 F.2d 251 37 Soc.Sec.Rep.Ser. 362, Medicare & Medicaid Guide
P 40,322 Eric LETT, et al., Plaintiffs-Appellees,
v.
Suzanne MAGNANT, et al., Defendants-Appellants. No. 91-1256. United States Court of Appeals,
Seventh Circuit. Argued Oct. 15, 1991.
Decided June 1, 1992.
Rehearing and Rehearing In Banc Denied July 10, 1992.

Page 252

Scott E. Shockley, Asst. U.S. Atty., Defur, Voran, Hanley, Radcliff & Reed, Muncie, Ind., William P. Tedards, Jr. (argued), Tedards & Herman, Washington, D.C., for plaintiffs-appellees Eric Lett, Lloyd Higer, William Hogan, Elizabeth A. Marsh, Charles Stuart, Carma Bess and Community Care Centers, Inc.

Linley E. Pearson, Atty. Gen., Gordon E. White, Jr., Deputy Atty. Gen. (argued), Office of Atty. Gen., Federal Litigation, Indianapolis, Ind., for defendants-appellants Suzanne Magnant, Myrna Brown, Betty Herman, Ted Hughes, Jean P. Lushin, Mary Lou Reynolds, John Sefrin, Edna Smith, Indiana State Dept. of Public Welfare and Indiana State Bd. of Public Welfare.

Before BAUER, Chief Judge, and POSNER and FLAUM, Circuit Judges.

FLAUM, Circuit Judge.

Hamilton Heights Health Center and six Medicaid recipients who reside there brought this action under 42 U.S.C. § 1983 against the Indiana State Department of Public Welfare (DPW), the Indiana State Board of Public Welfare, and several state officials, alleging that Indiana's Medicaid reimbursement rates are inadequate under the substantive reimbursement standards of the Medicaid Act. See 42 U.S.C. § 1396a(a)(13)(A). The plaintiffs also brought a pendent state claim under Ind.Code § 12-1-7-17.2(b). We will, for simplicity's sake, refer to the plaintiffs collectively as "Hamilton Heights," and to the defendants as "the State." The district court granted summary judgment to Hamilton Heights, holding that the State had inadequately reimbursed it under both federal and state statutory requirements. We reverse.

I.

A.

The Medicaid Program, established pursuant to title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., authorizes federal grants to states for medical assistance to low-income persons. Under the program, the federal government contributes funds to cover between fifty and eighty-three percent of the cost of patient care, and the state kicks in the remainder. 42 U.S.C. § 1396d(b). Although participation is voluntary, once a state chooses to do so, it must comply with federal Medicaid laws and regulations. Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 2513, 110 L.Ed.2d 455 (1990); Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 2680, 65 L.Ed.2d 784 (1980). Each participating state is required to submit its Medicaid plan to the Health Care Financing Administration (HCFA), the agency within the Department of Health and Human Services that administers the Medicaid program. See 42 C.F.R. §§ 447.250-.257. The state plan must satisfy the substantive requirements of 42 U.S.C. § 1396a(a)(13)(A) and the relevant federal regulations governing the policy and methods for setting Medicaid payment rates. Id. § 447.200.

The original Medicaid Act required participating states to reimburse facilities for their "reasonable" costs in providing care to Medicaid recipients, regardless of disparities in operating costs or efficiencies; the upshot was that nursing facilities generally were paid the actual costs they incurred in providing care to Medicaid recipients. In 1980, however, Congress enacted the Boren Amendment, which replaced this "reasonable

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cost" reimbursement standard with the requirement that states pay rates that

the State finds, and makes assurances to the Secretary [of Health and Human Services] 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) (emphasis added). This new standard essentially replaced the retrospective "reasonable cost" reimbursement principles--in which providers were paid for the reasonable cost of the services actually provided--in favor of prospective rate-setting, under which rates for various types of services and procedures are fixed in advance. Initially applicable to nursing and intermediate care facilities, the new standard has since been expanded to apply to hospitals, see Omnibus Budget Reconciliation Act (OBRA) of 1981, Pub.L. 97-35, § 2173, and intermediate care facilities for the mentally retarded. See Pub.L. 100-203, § 4211(b)(2)(A); Wilder, 496 U.S. at 502 n. 2, 110 S.Ct. at 2513-14 n. 2.

Construing the Medicaid Act is made difficult by its failure to define "reasonable and adequate," "efficiently and economically operated facilities," or "costs which must be incurred." Moreover, although the statute requires that a state, in making its findings, must judge the reasonableness of its rates against the objective benchmark of an "efficiently and economically operated facility" providing care in compliance with federal and state standards, see Wilder, 496 U.S. at 519, 110 S.Ct. at 2523, HCFA has specifically rejected the suggestion that states should be required to define efficient and economically operated facilities, because "the State's methods and standards implicitly act as the State's definition...." Folden v. Washington State Dep't of Social & Health Servs., 744 F.Supp. 1507, 1532 (W.D.Wash.1990) (quoting 48 Fed.Reg. 56,049 (Dec. 19, 1983)). It comes as no great surprise that this definitional abyss has spawned considerable litigation--see, e.g., Temple Univ. v. White, 941 F.2d 201 (3d Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 873, 116 L.Ed.2d 778 (1992); Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306 (2d Cir.1991); Multicare Medical Center v. Washington, 768 F.Supp. 1349 (W.D.Wash.1991); Folden, 744 F.Supp. 1507; Michigan Hosp. Ass'n v. Babcock, 736 F.Supp. 759 (W.D.Mich.1990), for a sampling of recent cases; see generally James J. Kennedy III, The Medicaid Program: Vague Standards Breed Litigation, 28 St. Louis U.L.J. 351 (1984)--including this action.

B.

As an initial matter, we summarize the facts and prior proceedings relevant to this appeal. Hamilton Heights, owned by Community Care Centers, Inc., a subchapter "S" Corporation which owns numerous nursing facilities in Indiana, is a private long-term care facility located in Arcadia, Indiana. Approximately 90 mentally retarded and developmentally disabled individuals, including the six individual plaintiffs, currently reside at the facility.

At the time Hamilton Heights brought this action, the Medicaid program classified long-term care facilities into three categories: intermediate care facility (ICF); skilled nursing facility (SNF); and intermediate care facility for the mentally retarded (ICF/MR). (The ICF and SNF categories have since been consolidated into a new category, nursing facility (NF), effective October 1, 1990. See 42 U.S.C. § 1396d(a)(14), 1396d(f). ICF/MRs remain a distinct category. See id. § 1396d(a)(15); 1396d(d). For simplicity's sake, we refer to ICFs in the present tense.) ICF/MRs provide 24-hour care, habilitative services, and supervision to individuals who are mentally retarded or have related conditions, require an institutional-type setting, and are receiving active treatment. See id. § 1396d(d); Thomas v. Johnston, 557 F.Supp. 879, 883 (W.D.Tex.1983). ICF care and treatment standards are less rigorous than those for ICF/MRs; unlike ICF/MRs, for example, ICFs are not required to provide each client with active treatment. See 42 C.F.R. § 483.440(a)(1) ("Each [ICF/MR] client must receive a continuous active treatment

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program...."). As a result, ICFs receive a lower reimbursement rate than ICF/MRs. To take just one example, costs related to staffing are limited in Indiana to 3.75 hours per patient day in ICFs, and to 4.5 in ICF/MRs. See Ind.Admin.Code tit. 470 r. 5-4.1-21, -25.

In 1984, the Indiana State Board of Health (SBH) established what might be viewed as an "intermediate ICF" in the State of Indiana--a level of care between ICF and ICF/MR. This level of care, labelled "Rule 7," applies to any Indiana ICF (i.e., any facility licensed under Ind.Code 16-10-4) that serves three or more developmentally disabled individuals. See Ind.Admin.Code tit. 410 r. 16.2-7-1. It is in this middle ground that Hamilton Heights currently operates. Providers, such as Hamilton Heights, designated as Rule 7 ICFs, must meet more stringent requirements than ordinary ICFs; among other things, they must develop written program statements, provide in-service training, require staff working with developmentally disabled residents to attend staff development programs, and provide a program for developmentally disabled residents which satisfies various requirements. See generally id. tit. 410 r. 16.2.7-2 to -5. Should a Rule 7 facility fail to satisfy these standards, the SBH can hold it in noncompliance and the DPW can subject it to decertification as a Medicaid facility. See, e.g., id. tit. 410 r. 16.2-7-1(b).

As the Rule 7 enforcement procedures indicate, Indiana's long-term care facilities operate under a state health care regime in which separate agencies have distinct but interrelated roles. The SBH is responsible for licensing and certification of Indiana health care facilities, while the DPW administers the Medicaid program and establishes Medicaid reimbursement rates for these licensed facilities. See Ind.Code § 12-1-7-17.6. The DPW can reimburse a facility at a given level only if the facility has been certified and licensed at that level by the SBH--so, for example, the DPW can reimburse a facility at an ICF/MR rate only if the SBH has licensed and certified that facility as an ICF/MR. And therein lies the problem. Because Hamilton Heights houses approximately 90 developmentally disabled residents, the SBH...