Multicare Medical Center v. State of Wash.

Decision Date03 July 1991
Docket NumberNo. C88-421Z.,C88-421Z.
Citation768 F. Supp. 1349
PartiesMULTICARE MEDICAL CENTER, a Washington nonprofit corporation, d/b/a Tacoma General Hospital, et al., Plaintiffs, v. STATE OF WASHINGTON, et al., Defendants.
CourtU.S. District Court — Western District of Washington
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David A. Bennett, Bennett & Bigelow, Seattle, Wash., for plaintiffs.

Sara J. Finlay, Atty. General's Office, Social & Health Services, Olympia, Wash., S. William Livingston, Phyllis D. Thompson, Covington & Burling, Washington, D.C., for defendants State of Wash., Dept. of Social and Health Services and Richard Thompson.

Christopher Lee Pickrell, U.S. Attorney's Office, Seattle, Wash., William J. McIntyre, Office of the Gen. Counsel, U.S. Dept. of Health and Human Services, Seattle, Wash., for defendants U.S. Dept. of Health and Human Services and Louis W. Sullivan, M.D.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

ZILLY, District Judge.

THIS MATTER came before the Court for trial commencing April 10, 1991. Trial to the Court, sitting without a jury, concluded on May 13, 1991. At the conclusion of trial, the Court took the case under advisement. The Court, having reviewed the testimony presented at trial and the exhibits, having considered the trial briefs and oral argument, and being fully advised, now makes and enters its Findings of Fact and Conclusions of Law.

FINDINGS OF FACT
I. INTRODUCTION

1. Plaintiffs Multicare Medical Center d/b/a Tacoma General Hospital; Central Washington Health Services Association d/b/a Central Washington Hospital; Public Hospital District No. 2, Snohomish County, Washington d/b/a Stevens Memorial Hospital; St. Joseph Hospital and Health Care Center; Good Samaritan Hospital; Sisters of Providence in Washington d/b/a Providence Hospital of Everett; Lakewood General Hospital; Sisters of Providence in Washington d/b/a St. Peter Hospital; and Health Resources Northwest d/b/a Northwest Hospital, are not-for-profit corporations or Public Hospital Districts organized and operated under the laws of the State of Washington, and licensed under Chapter 70.41 of the Revised Code of Washington ("RCW"), as acute care hospitals providing inpatient services. Plaintiff Legacy Health System does business as Emanuel Hospital and Health Center ("Emanuel Hospital") and is a not-for-profit corporation organized and operating under the laws of the State of Oregon. Emanuel Hospital is located in Portland, Oregon, where it operates as an acute care hospital providing inpatient services to residents of Oregon and Washington.

2. State defendants are the State of Washington, Department of Social and Health Services ("DSHS"), and Richard Thompson, the Secretary of DSHS (collectively, the "State").

3. Federal defendants are the United States of America, Department of Health and Human Services ("HHS"), and Louis Sullivan, M.D., Secretary of HHS (collectively, the "federal defendants").

4. The State of Washington participates in the federal Medicaid program established by the Medicaid Act, Title XIX of the Social Security Act, 42 U.S.C. §§ 1396-1396q. Defendant DSHS, under the direction of Richard Thompson, is the state agency responsible for administering the Medicaid program in the State of Washington. Defendant HHS is the federal agency charged with administering the federal Medicaid program and has delegated much of this responsibility to the federal Health Care Financing Administration ("HCFA").

5. Plaintiffs bring this action pursuant to 42 U.S.C. § 1983, alleging that State defendants deprived them of their rights secured under the Medicaid Act. Plaintiffs challenge the State of Washington's new second generation Diagnosis Related Groups (DRG) based reimbursement system for inpatient hospital services for Medicaid recipients which became effective April 1, 1988. Plaintiffs specifically challenge the State's compliance with the reimbursement standards set forth in 42 U.S.C. § 1396a(a)(13)(A). Plaintiffs' action against the federal defendants challenges HCFA's conduct under 5 U.S.C. § 702 as being arbitrary and capricious and otherwise not in accordance with law.

6. The Medicaid Act is a cooperative federal-state program designed to provide medical services to certain low-income persons. Participation by the State of Washington is voluntary. However, once the State makes the decision to participate in the program, it must comply with the federal Medicaid laws and regulations. Amisub, (PSL), Inc. v. Colorado Dept. of Social Services, 879 F.2d 789, 794 (10th Cir.1989), cert. denied, ___ U.S. ___, 110 S.Ct. 3212, 110 L.Ed.2d 660 (1990); Mississippi Hospital Ass'n. v. Heckler, 701 F.2d 511, 515 (5th Cir.1983).

7. The Medicaid Act requires each State to submit its Medicaid plan to the federal government, specifically HCFA, for approval. 42 U.S.C. § 1396. In 1981, Congress amended section 1396a(a)(13)(A) (the "Boren Amendment") to require each State to "find" and make "assurances" satisfactory to HCFA that its inpatient hospital rates: (1) 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" (the "economy and efficiency requirement"); (2) are reasonable and adequate "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" (the "access requirement"); and (3) take into account "the situation of hospitals which serve a disproportionate number of low income patients with special needs" (the "disproportionate share requirement").

8. In implementing the Boren Amendment, HCFA promulgated regulations requiring state Medicaid agencies to obtain HCFA approval of any State plan change in payment methods and standards. 42 C.F.R. § 447.253. In order to receive HCFA approval, the State must submit "assurances" satisfactory to HCFA that the requirements of federal law are being met. Whenever the State makes a change in its methods and standards, but not less often than annually, the State is required to make findings and assurances, satisfactory to HCFA, that the rates satisfy all requirements of federal law.

9. To make changes in its State Plan's methods and standards, DSHS submits plan amendments using Transmittal Number ("TN") designations. Under HCFA regulations, DSHS can, with proper public notice, implement a change in methods and standards without transmitting the state plan amendment and the required assurances, provided the Transmittal is dated before the end of the quarter in which implementation occurred. 42 C.F.R. § 447.256(c).

10. The Division of Medical Assistance is the division within DSHS which is directly responsible for administering the state's Medical Assistance programs, including the Medicaid program and the state-only funded Medically Indigent and General Assistance-Unemployable programs (collectively, "MI/GAU"). At all times material hereto, the director of the Division of Medical Assistance was Ron Kero. The Rates Analysis Unit of the Division of Medical Assistance is responsible for developing and implementing medical assistance programs, including Medicaid. Prior to early 1989, Roger Gantz was the Manager of the Rates Analysis Unit. Since early 1989, Thomas Johnson has been the Manager of the Rates Analysis Unit.

11. The plaintiffs claim that DSHS violated the procedural and substantive requirements of the Boren Amendment with respect to the economy and efficiency requirement, the access requirement, and the disproportionate share requirement.

II. ROLE OF THE WASHINGTON STATE HOSPITAL COMMISSION

12. From 1973 until 1989 the hospital industry in Washington State was regulated by the Washington State Hospital Commission ("Hospital Commission"), a state agency which established rates that hospitals could charge for health care services.1 From 1984 until its sunset in 1989, the Washington State Hospital Commission was comprised of nine members, one of whom was the Secretary of DSHS, or his or her designee, for the purpose of "representing the interests of the state as a major purchaser of health care services." RCW 70.39.030(1)(g).

13. The Hospital Commission was charged with ensuring that hospital costs did not exceed those "necessary for prudently and reasonably managed hospitals." RCW 70.39.140. The Hospital Commission required submission of an annual budget with budgeted volumes and expenses. To assist it in analyzing and ruling upon hospital budget requests, the Hospital Commission engaged a professional staff of employees. The staff had knowledge of and expertise in hospital cost analysis.

14. The Hospital Commission regulated Washington hospitals' budgetary processes. It established by regulation an accounting and reporting manual ("the Manual") containing a detailed uniform system of hospital cost accounting and reporting. WAC 261-20-020. Annually, each hospital filed a detailed report with the Hospital Commission pursuant to the Manual, which required expenses to be broken down into nine natural classifications. The Hospital Commission required hospitals to submit detailed cost reports each year. Pursuant to statutory requirements, the Hospital Commission held public hearings on, among other things, each hospital's operating expenses, capital allowance, and deductions from revenue. The sum of these three components became the hospital's total rate setting revenue. Revenue was not allowed for cost items disapproved by the Hospital Commission. The staff made recommendations to the Hospital Commission as to whether or not budgeted expenses, capital allowance and deductions from revenue met the statutory...

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