Decision Date08 July 1994
Docket NumberCiv. No. 2:93-CV-357-RL.
Citation860 F. Supp. 1309
PartiesThe METHODIST HOSPITAL, David E. Ross, M.D., James Jones, M.D., Doug Barthelemy, M.D., Randall C. Morgan, M.D., Deborah McCullough, M.D., Plaintiffs, v. INDIANA FAMILY AND SOCIAL SERVICES ADMINISTRATION, Cheryl Sullivan, as Secretary of the Indiana Family and Social Services Administration, Indiana Office of Medicaid Policy and Planning, and James M. Verdier, as Assistant Secretary and Director of the Indiana Office of Medicaid Policy and Planning, Defendants.
CourtU.S. District Court — Northern District of Indiana





Earl F. Hites and Jill M. Madajczyk, Hodges and Davis P.C., Merrillville, IN, Raymond J. Kelly, Jr., Seyfarth, Shaw, Fairweather and Geraldson, Chicago, IL, for plaintiffs.

Matthew R. Gutwein and Richard E. Shevitz, Office of Indiana Atty. Gen., Indianapolis, IN, Joseph S. Van Bokkelen and Timothy G. Kline, Goodman, Ball & Van Bokkelen, Highland, IN, Mark H. Lynch, Vicki J. Larson, Covington & Burling, Washington, DC, for defendants.


LOZANO, District Judge.

This matter is before the Court on Defendants' Motion to Dismiss and for Summary Judgment, filed January 6, 1994. For the reasons set forth herein, this Motion is GRANTED IN PART and DENIED IN PART. Also pending before this Court is Plaintiffs' Motion to Strike the Declaration of James M. Verdier. For the reasons set forth herein, this Motion is DENIED.


On December 21, 1993, the Plaintiffs, the Methodist Hospitals, Inc. ("Methodist") and five doctors (collectively, "Plaintiffs"), who are all health care providers within the City of Gary, Indiana, instituted this action seeking to enjoin the implementation of new rules affecting Medicaid reimbursement for inpatient, outpatient, and physician services provided in the City of Gary to Medicaid recipients.

Methodist is an Indiana non-profit corporation which operates an acute care hospital facility with 410 licensed beds in Gary, Indiana, and an acute care hospital facility with 355 licensed beds in Merrillville, Indiana. Methodist/Northlake, located in Gary, primarily serves the medical needs of the residents of Gary, Indiana. Methodist/Northlake offers comprehensive medical services, and is the only hospital in the City of Gary offering obstetrical services, inpatient nursery services, and neonatal intensive care services. Methodist/Northlake has been designated by the Family and Social Services Administration of the State of Indiana ("FSSA") as a significant disproportionate share hospital. This classification indicates that Methodist/Northlake serves a significantly high number of Medicaid and indigent recipients.

The City of Gary has also been classified by the Health Care Financing Authority ("HCFA"), a division of the Department of Health & Human Services ("HHS"), as a medically underserved area with a critical shortage of primary care physicians.

The Plaintiffs, David E. Ross, M.D., James Jones, M.D., Doug Barthelemy, M.D., Randall C. Morgan, M.D., and Deborah McCullough, M.D., are all physicians who practice medicine in the City of Gary, Indiana, engage in the treatment of Medicaid recipients, and have provider agreements with the Indiana Medicaid Program.

The claims in this case relate to Indiana's decision to implement new rules changing the method by which it reimburses providers for physician services, inpatient hospital services, and outpatient hospital services furnished to Medicaid recipients. The new rules, approved by Governor Bayh, were to take effect on January 1, 1994. The State has agreed to postpone implementation of the new rules.

Medicaid is a cooperative federal/state program through which the federal government grants funds to participating states to provide health care services, including physician and hospital care, to low income individuals. 42 U.S.C.A. §§ 1396 et seq. (West 1992 and West Supp.1994); see also Wilder v. Virginia Hospital Ass'n, 496 U.S. 498, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990). A state's participation in Medicaid is voluntary. However, if states choose to participate, they must comply with certain requirements imposed by the Medicaid Act and regulations promulgated by the Secretary of Health and Human Services. Wilder, 496 U.S. at 502, 110 S.Ct. at 2513. To qualify for federal funds, a state must submit a plan for medical assistance to the Secretary of HHS which complies with the requirements outlined in 42 U.S.C. § 1396a(a). Among other obligations imposed by the Medicaid statute and its implementing regulations, a participating state must comply with the "equal access" provision of the Medicaid statute, which requires that a state's plan for medical assistance provide such methods and procedures:

as may be necessary to safeguard against unnecessary utilization of such care and services and to ensure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.

42 U.S.C.A. § 1396a(a)(30)(A) (West Supp. 1994); see also 42 C.F.R. § 447.204.

The new administrative rules ("new rules") affect Medicaid hospital reimbursement for inpatient and outpatient services, and reimbursement for physician services. The new Rules, 405 I.A.C. § 1-10 (LSA Doc. # 93-116, Inpatient Hospital Services), 405 I.A.C. § 1-8-2, 405 I.A.C. § 1-8-3, and 405 I.A.C. § 1-8-4 (LSA Doc. # 93-115, Outpatient Hospital Services), and 405 I.A.C. § 1-11 (LSA Doc. # 93-115, Physicians Services), establish a methodology for reimbursement for hospital and physician services provided under the Indiana Medicaid program. The new rules were announced by Governor Bayh on July 14, 1993. Notice of the new rules was published in the Indiana Daily Star on July 19, 1993, and notice of a public hearing to be held on August 25 and 27, 1993, was published in the August 1, 1993, Indiana Register. Public hearings on the new rules were held on August 25 and 27, 1993. The public hearings were adjourned by the state and resumed on September 7, 1993.

FSSA forwarded LSA Doc. # 93-115 and LSA Doc. # 93-116 to the Attorney General as final rules. The Attorney General approved LSA Doc. # 93-115 and LSA Doc. # 93-116 and forwarded these documents to the Governor. The final rules were approved by Governor Bayh and filed with the Indiana Secretary of State on December 2, 1993. The new rules were to become effective January 1, 1994.

Under the Indiana Medicaid plan in force prior to implementation of the new rules, participating inpatient hospital facilities were reimbursed on the basis of reasonable, allowable costs subject to an aggregate payment ceiling. The reimbursement system provided for reimbursement of hospital services on an interim basis throughout the course of the year based on an estimate of allowable costs and submitted claimed charges. After a hospital's year end, a cost settlement occurred using a predetermined reimbursement allowance per Medicaid discharge. This allowance was calculated using the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") limit. The TEFRA limit was multiplied against the hospital's Medicaid discharges to determine a hospital's specific, aggregate Medicaid upper payment limit for the year. A settlement amount, either owing to the Medicaid program or to the health care provider, was identified and costs settled when the aggregate Medicaid upper payment was compared to the total of the interim payments made for a given year.

New Rule 405 I.A.C. § 1-10 (LSA Doc. # 93-116, Inpatient Hospital Services) changes this methodology. The new rule establishes per diem payment rates for payment of each facility. The per diem payment rate is an all-inclusive rate for each patient-day of service. Payment rates are established by assigning each facility to a group of facilities with defined related characteristics. A per diem base year payment rate for each peer group is established, based on the facilities' allowable costs for fiscal year 1990, and inflated to mid-point of fiscal year 1994, using a published hospital market basket inflation index.

Facilities with per diem base year costs below the per diem base year rate for the applicable peer group will be reimbursed at the facilities' base year per diem costs, as inflated from the facilities' fiscal year 1990 reporting period to the mid-point of fiscal year 1994 based upon the hospital market basket inflation index. There is no cost settlement under the revised reimbursement methodology. The state estimates that the aggregate Medicaid expenditures for inpatient hospital services will be reduced by 5%, which will result in a reduction of $30.1 million in the Medicaid budget.

Outpatient hospital facilities participating in the Indiana Medicaid program prior to implementation of the new rules were reimbursed based on a predetermined percentage of the provider's customary billing amount for services rendered, not to exceed 100% of the provider's reported cost of the services. The plan required no year end settlement of charges to costs, although a provider could request an appeal of the amounts paid.

The revised reimbursement methodology for outpatient hospital services establishes fixed-fee schedule allowances. Reimbursement for outpatient services is limited to the lower of the submitted charges for the procedures or the established fee schedule allowance for the procedures. Outpatient surgical procedures will be classified into nine groups corresponding to the Medicare ambulatory surgical center ("ASC") methodology. Outpatient surgeries not classified into the nine Medicare designated groups will be classified by OMPP into one of the ASC groups or additional payment groups....

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