Michigan Hosp. Ass'n v. Babcock

• Decision Date: 26 April 1990
• Docket Number: No. 5:89-CV-70.,5:89-CV-70.
• Citation: 736 F. Supp. 759
• Parties: MICHIGAN HOSPITAL ASSOCIATION, a Michigan nonprofit corporation, et al., Plaintiffs, v. C. Patrick BABCOCK, Director of The Department of Social Services, Defendant.
• Court: U.S. District Court — Western District of Michigan

736 F. Supp. 759

MICHIGAN HOSPITAL ASSOCIATION, a Michigan nonprofit corporation, et al., Plaintiffs, v. C. Patrick BABCOCK, Director of The Department of Social Services, Defendant.

No. 5:89-CV-70.

United States District Court, W.D. Michigan, S.D.

April 26, 1990.

David A. Ettinger, Frederick M. Baker, Jr. and Chris Rossman, Lansing, Mich., for plaintiffs.

Robert S. Welliver and Christopher D. Dobyns, Lansing, Mich., for defendant.

OPINION OF THE COURT

ROBERT HOLMES BELL, District Judge.

Now before the Court is plaintiffs' motion for summary judgment or, in the alternative, for preliminary injunction. Plaintiffs bring this action pursuant to 42 U.S.C. § 1983 alleging that defendant has deprived them of their rights secured by a law of the United States. In particular, plaintiffs allege that defendant has deprived them of their rights under the hospital reimbursement section of the Medicaid Act, being 42 U.S.C. § 1396a(a)(13)(A) (Section 1396a), by failing to comply with the federal statute. The Court agrees.

The Medicaid Act is a cooperative federal-state program designed to provide medical assistance to certain low-income persons through reimbursement to health care providers for services rendered to these persons. Participation by the State in the Medicaid program is entirely voluntary. However, once a State makes the decision to participate in the program, it must comply with the federal Medicaid laws and regulations. Amisub (PSL) v. State of Colorado, Dept. of Social Services, 879 F.2d 789, 794 (10th Cir.1989); Mississippi Hospital Ass'n v. Heckler, 701 F.2d 511, 515 (5th Cir.1983).

As part of a State's participation in the Medicaid program, it must submit its plan to the designated unit of the Department of Health and Human Services for approval. At present, the Health Care Financing Administration (HCFA) is charged with the responsibility of reviewing and approving state Medicaid plans and plan amendments. Amisub, supra; California Hospital Ass'n v. Schweiker, 559 F.Supp. 110, 112 (C.D.Calif.1982). The State plan must satisfy the requirement of section 1396a and any regulations promulgated pursuant to that statute.

Prior to the Omnibus Budget Reconciliation Act of 1981 (OBRA), Pub.L. No. 97-35 Stat. 808-809, the Medicaid Act required States to reimburse hospitals for the reasonable costs of inpatient services. Reimbursement on the reasonable cost basis was a retrospective payment system. West Virginia University Hospitals, Inc. v. Casey, 885 F.2d 11, 15 (3rd Cir.1989); Mary Washington Hospital, Inc. v. Fisher, 635 F.Supp. 891 (E.D.Va.1985); California Hosp. Ass'n, supra. With OBRA, as codified in the revised section 1396a(a)(13)(A), Congress changed the reimbursement standard in order to contain escalating hospital costs. West Virginia University Hospitals, supra. The revised statute gives the State more flexibility in their attempts to promote hospital efficiency and reduces the federal oversight of the methodology used by the States for reimbursement. West Virginia University Hosp., supra; Mary Washington Hosp., supra.

Section 1396a, in pertinent part, states:

(a) a State plan for medical assistance must—

....

(13) provide—

(A) for payment (except where the State agency is subject to an order under section 1396m of this title) of the hospital, skilled nursing facility, and intermediate care facility services provided under the plan through the use of rates (determined in accordance with methods and standards developed by the State and which, in the case of hospitals, take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs and provide, in the case of hospital patients receiving services at an inappropriate level of care (under conditions similar to those described in section 1395x(v)(1)(G) of this title)) 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 and to assure that individuals eligible for medical assistance have reasonable access (taking into account geographic location and reasonable travel time) to inpatient hospital services of adequate quality; and such State makes further assurances, satisfactory to the Secretary, for the filing of uniform cost reports by each hospital, skilled nursing facility, and intermediate care facility and periodic audits by the State of such reports;

(Emphasis added). The Secretary of the Department for Health and Human Services has promulgated regulations to guide the States in meeting the requirements of section 1396a. 42 C.F.R. § 447.250, et seq. 42 C.F.R. § 447.250(a) requires the State to make findings and submit assurances to the HCFA that the rates are "reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities." 42 C.F.R. § 447.253(b) requires the State to make findings whenever it "makes a change in its methods and standards, but not less often than annually ..." 42 C.F.R. § 447.253(b)(1)(i) provides that the State must make findings that their rates "are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers ..."

In summary, the revised section 1396a and the regulations significantly reduce the federal agency's oversight of State Medicaid Plans. The HCFA's responsibility is to review the "assurances" which are expected to be based on the required findings made by the State agency. The findings must show that the proposed rates are (1) reasonable and adequate to (2) meet the costs which must be incurred by (3) economically and efficiently operated hospitals. Absent a specific request, the HCFA does not review the findings of the State agency.

In 1984, the State legislature commanded the State agency to prepare a prospective payment plan for inpatient hospital services based on diagnostic related group (DRG) methodology. 1984 P.A. 246 § 120a. In the MA-85-5 plan submitted by the State to the HCFA, the State indicated that the inflation factor would be based on a market basket approach. In 1986 P.A. 266, the legislature directed the agency to refigure the rates based on 1985-86 costs (base year). The statute gave an inflation up-date effective April 1, 1987 for the rebased costs of 1.725%. As part of the recalibration of costs, the State agency instituted a Standard of Payment Factor which reduced each hospital's base year costs by approximately 9%. In plan amendment transmittal number 89-9 to the HCFA, the State indicated it would use a price update factor of .5%. In a letter dated May 12, 1989, the HCFA found the State's assurances inadequate. The agency stated:

The regulation at 42 CFR 447.253(b)(1)(i) requires that the State must provide an assurance and finding that the resulting rates 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 accordance with Federal and State quality and safety standards. In addition, the legislative history for this provision makes it clear that the State's rates must take into account economic conditions (i.e., inflation) that will occur during the period for which the rates have been established.

Although the State has provided an assurance that the rates are reasonable and adequate, we do not believe that the State's assurance is as yet satisfactory. Michigan is proposing a rate year inflation of .005 percent when in actuality the inflation costs that hospitals are experiencing might warrant a higher update factor. Therefore, we would request the State to provide additional information to support the assurance concerning the reasonableness and adequacy of its proposed rates.

Specifically, the State would be expected to demonstrate that its increase is sufficient to assure that efficiently and economically operated facilities will receive their costs, considering the impact of inflation estimated to occur during the rate year.

The State has not yet responded to the HCFA's request. Eileen Ellis, an employee in the State Agency, said that the State had not responded because it did not want to start the 90-day clock running. Apparently, once a State responds to an HCFA request, the HCFA has 90 days to either accept or reject the plan amendment. Defendant did not present any evidence that the State agency made any findings prior to submitting its assurances to the HCFA.

Plaintiffs' arguments, although broken down into many subparts, are that defendant did not make the findings required by the federal Medicaid Act and that the payments made to hospitals do not comply with the statutory mandate. Defendant argues that summary judgment is premature because the hospitals have not answered defendant's interrogatories which are designed to show whether the plaintiff hospitals are economically and efficiently operated and because defendant has not completed its revision of the 1989 plan amendment.

On a motion for summary judgment, the Court reviews the evidence in a light most favorable to the nonmoving party. The moving party has the burden of showing the Court that "there is an absence of evidence to support the nonmoving party's case." Celotex v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265, 275 (1986). The nonmoving party must present the Court with specific facts which demonstrate that there is a genuine issue for trial. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538, 552 (1986). Summary judgment is precluded if there is a dispute with regard to a fact "that might affect the outcome of the suit." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106...