Minnesota v. Centers for Medicare and Medicaid

• Decision Date: 31 July 2007
• Docket Number: No. 06-3263.,06-3263.
• Citation: 495 F.3d 991
• Parties: State of MINNESOTA, Petitioner, v. CENTERS FOR MEDICARE AND MEDICAID SERVICES; Leslie V. Norwalk, in her official capacity as Deputy Administrator for the Centers for Medicare & Medicaid Services; Michael O. Leavitt, in his official capacity as Secretary of the United States Department of Health and Human Services, Respondents.
• Court: U.S. Court of Appeals — Eighth Circuit

495 F.3d 991

State of MINNESOTA, Petitioner, v. CENTERS FOR MEDICARE AND MEDICAID SERVICES; Leslie V. Norwalk, in her official capacity as Deputy Administrator for the Centers for Medicare & Medicaid Services; Michael O. Leavitt, in his official capacity as Secretary of the United States Department of Health and Human Services, Respondents.

No. 06-3263.

United States Court of Appeals, Eighth Circuit.

Submitted: May 16, 2007.

Filed: July 31, 2007.

Counsel who presented argument on behalf of the petitioner was Patricia A. Sonnenberg, Assistant Attorney General, of St. Paul, Minnesota. Also appearing on the brief was Mike Hatch.

Counsel who presented argument on behalf of the respondent was Gerald Keating of Washington, D.C. Also appearing on the brief were Peter D. Keisler, Daniel Meron, Kathleen H. McGuan, and Mark D. Polston.

Before WOLLMAN, BRIGHT, and JOHN R. GIBSON, Circuit Judges.

BRIGHT, Circuit Judge.

In March 2003, the state of Minnesota submitted a state plan amendment ("2003 plan amendment") to the Centers for Medicare and Medicaid Services ("Medicaid Services" or "CMS"), seeking a $1,529,000 increase in the annual supplemental Medical Assistance payments made by the federal Medicaid program to fourteen county-owned nursing homes. After requesting additional information from the state, Medicaid Services disapproved the 2003 plan amendment and denied Minnesota's request for reconsideration. The state now petitions this court to review and reject the final determination of the Secretary of Health and Human Services ("HHS") adverse to Minnesota. We deny the petition.

I.

The Medicaid program, authorized by Title XIX of the Social Security Act, 42 U.S.C. §§ 1396-1396v, benefits children, the poor, and the elderly. We have observed that "[a]lthough a state's participation in the Medicaid program is optional, participating states in compliance with the applicable federal rules and regulations are given matching funds by the federal government." Bowlin v. Montanez, 446 F.3d 817, 818 (8th Cir.2006); see 42 U.S.C. § 1396 (requiring participating states to submit for approval "plans for medical assistance"). Minnesota's petition centers on three rules. A state's plan must: (1) "provide for financial participation by the State equal to not less than 40 per centum of the non-Federal share of the expenditures under the plan," 42 U.S.C. § 1396a(a)(2); (2) "provide such safeguards as may be necessary to assure that eligibility for care and services under the plan will be determined, and such care and services will be provided, in a manner consistent with simplicity of administration and the best interests of the recipients," 42 U.S.C. § 1396a(a)(19); and (3) "assure that payments are consistent with efficiency, economy, and quality of care," 42 U.S.C. § 1396a(a)(30)(A).

Minnesota's 2003 plan amendment requested additional federal funds to match the state's decision to increase supplemental payments to county-owned nursing homes. See 2003 Minn. Laws ch. 9, sec. 2 (codified at Minn.Stat. § 256B.431, subd. 23(d) (2004)).¹ The state legislation allocated $1,529,000 from the state's general fund, see 2003 Minn. Laws ch. 9, sec. 3, and simultaneously increased the intergovernmental transfer payments paid by the counties to the state, see Minn.Stat. § 256B.19, subd. 1d(d) (2004).² Intergovernmental transfers move funds from localities to the state. The increased intergovernmental transfers, according to the state, represented the counties' share of Medicaid expenses funded through local property taxes.

Minnesota requested federal Medicaid funds to match the state's allocation from its general fund:

C. Beginning in 2003, in addition to the payments in items A and B, on May 31 the Department [of Health and Human Services] shall pay to a nursing facility described in item A a disproportionate share nursing facility payment adjustment in an amount equal to $12.32 per calendar day multiplied by the number of beds licensed in the nursing facility on May 31, multiplied by 181 days....

Minn. SPA No. 03-06, attach. 4.19-D (NF), sec. 20.080(C.).

Medicaid Services, however, requested additional information from the state. See 42 U.S.C. § 1396n(f)(2) (permitting Secretary to request in writing "any additional information which is needed in order to make a final determination with respect to the request"). In a June 2003 letter, Medicaid Services asked Minnesota to explain: (1) whether the services funded by the 2003 plan amendment complied with 42 U.S.C. § 1396a(a)(30)(A) (the "efficiency, economy, and quality of care" rule); (2) how the services were funded; (3) whether counties funded the non-federal portion of the Medicaid payment; (4) the role of intergovernmental transfers in the funding mechanism; (5) whether the nursing homes retained all of the Medicaid payments; and (6) whether the payments were below the upper payment limit.

Before the state could respond Medicaid Services sent a second request in August 2003 asking: (1) whether the nursing facilities retained all of the Medicaid funds paid to them or whether they returned funds to the state or their local governments; (2) if the state complied with the 40 percent state-share requirement of 42 U.S.C. § 1396a(a)(2) and how the state provided its share (through legislative appropriations, intergovernmental transfers, or other means); (3) if the payments complied with 42 U.S.C. § 1396a(a)(30)(A)'s "efficiency, economy, and quality of care" rule; (4) for a detailed upper payment limit calculation; and (5) whether the state recoups any payments to facilities that exceed the cost of services.

Minnesota responded to the requests in August 2003. Notably, the state equated Medicaid's upper payment limit with § 1396a(a)(30)(A)'s efficiency requirement and observed that:

[i]f CMS [Medicaid Services] now finds that the upper payment limit ... is set so high that it allows payment rates that are inefficient and not economical, then the proper response should be to amend the upper payment limit regulation, not to impose new, burdensome requirements on states to justify payment rates that are below the upper payment limit, especially against an unspecified standard.

J.A. at 60.

Consistent with its reliance on the upper payment limit, Minnesota also responded that "[n]one of the funds are `returned.' Once the Medical Assistance program pays a provider, the funds are not tracked." J.A. at 63. As a result, the state could not "calculate a ratio between the state and local share of the nonfederal share of Medicaid," though it assured Medicaid Services that the state's share exceeded the 40 percent required by § 1396a(a)(2). J.A. at 65.

Finally, the state made the claim that "a rate can comply with the efficiency and economy requirement ... without a comparison to cost, or even be above cost, as long as the rates are under the required limits .... Because there is no cost limit, a payment is not necessarily excessive simply because it may be greater than cost." J.A. at 66.

II.

To understand Minnesota's responses to Medicaid Services, it is necessary to briefly explain Medicaid's upper payment limit. To help control rising Medicaid expenses HHS established the upper payment limit, which created a Medicaid payment ceiling based on expenses that would be allowed under Medicare payment rules. See Indep. Acceptance Co. v. California, 204 F.3d 1247, 1250 n. 5 (9th Cir.2000) (citing 42 C.F.R. § 447.253(a), (b)(2)). A state must assure Medicaid Services that the payments requested through a plan amendment do not exceed the upper payment limit before Medicaid Services may approve the plan. But, prompted by ever rising Medicaid reimbursements, the Government Accountability Office ("GAO") and the Office of the Inspector General determined in 2001 that even the upper payment limit lead to "misuse and excessive federal Medicaid spending."³ Alaska Dep't of Health & Soc. Servs. v. Ctrs. for Medicare and Medicaid Servs., 424 F.3d 931, 936 (9th Cir.2005).

HHS amended the upper payment limit regulations in 2001, see Revision to the Medicaid Upper Payment Limit Requirements, 66 Fed.Reg. 3148 (Jan. 12, 2001), but the problem continued. In 2003 the GAO identified Medicaid as a high-risk program, concluding that "[l]imited oversight has afforded states and health care providers the opportunity to increase federal funding inappropriately." GAO, Performance & Accountability Series: Dep't of Health & Human Servs., "Highlights" (2003). One concern in particular provoked Medicaid Services's scrutiny of Minnesota's 2003 plan amendment. The GAO reported that:

For more than a decade, states have used various financing schemes to inappropriately generate excessive federal Medicaid matching funds while their own share of expenditures has remained unchanged or decreased. Using statutory and regulatory loopholes, some states have created the illusion that they have made large Medicaid payments to certain providers, such as county health facilities, in order to generate federal matching payments. In reality, generally through electronic funds transfers, the states have only momentarily made payments to these providers, as states have required the payments to be returned.

....

Although the Congress and CMS [Medicaid Services] have repeatedly acted to curtail abusive financing schemes when they have come to light, states have consistently developed new variations to this basic approach. Each variant has the same result: the state's share of program expenditures is shifted to the federal government, while federal Medicaid payments escalate, with no assurances that the excessive federal payments are used for valid Medicaid expenditures for covered beneficiaries.

Id. at 27-28 (emphasis added). Minnesota's responses did not distinguish the 2003 plan amendment from the scheme described by the GAO.

Medicaid Services initially disapproved the 2003 plan amendment in June 2004. The state sought...