Protestant Memorial Medical Center, Inc. v. Maram

• Decision Date: 06 December 2006
• Docket Number: No. 05-4193.,05-4193.
• Citation: 471 F.3d 724
• Parties: PROTESTANT MEMORIAL MEDICAL CENTER, INCORPORATED, doing business as Memorial Hospital, Plaintiff-Appellant, v. Barry S. MARAM, in his official capacity as the Director of the Illinois Department of Public Aid and Centers for Medicare and Medicaid Services, Defendants-Appellees, and Children's Memorial Hospital, Illinois Hospital Association, Kenneth Hall Regional Health Center, et al., Intervenors-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

471 F.3d 724

PROTESTANT MEMORIAL MEDICAL CENTER, INCORPORATED, doing business as Memorial Hospital, Plaintiff-Appellant, v. Barry S. MARAM, in his official capacity as the Director of the Illinois Department of Public Aid and Centers for Medicare and Medicaid Services, Defendants-Appellees, and Children's Memorial Hospital, Illinois Hospital Association, Kenneth Hall Regional Health Center, et al., Intervenors-Appellees.

No. 05-4193.

United States Court of Appeals, Seventh Circuit.

Argued June 7, 2006.

Decided December 6, 2006.

Terrance J. Good (argued), Lashly & Baer, St. Louis, MO, for Plaintiff-Appellant.

Mary E. Welsh (argued), Office of the Attorney General, Civil Appeals Division, Chicago, IL, for Defendant-Appellant Maram.

William Kanter (argued), Department of Justice, Civil Division, Appellate Section, Jeffrica Jenkins Lee, Department of Justice, Civil Division, Appellate Staff, Washington, DC, for Defendant-Appellee Centers for Medicare and Medicaid Services.

James C. Cook, Walker & Williams, Belleville, IL, Jeffrey D. Pariser (argued), Hogan & Hartson, Washington, DC, for Intervenors-Appellees.

Before EASTERBROOK, Chief Judge, and RIPPLE and WOOD, Circuit Judges.

RIPPLE, Circuit Judge.

Protestant Memorial Medical Center, Inc., doing business as Memorial Hospital ("Memorial"), brought this action against Barry S. Maram, the director of the Illinois Department of Public Aid (now known as the Illinois Department of Healthcare and Family Services) ("Department") and a federal agency, the Centers for Medicare and Medicaid Services ("CMS"). The complaint alleged that the defendants had violated the Constitution of the United States and the Medicaid statutes, 42 U.S.C. § 1396 et seq., when they approved and implemented a 2004 amendment to the State of Illinois' Medicaid plan. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I BACKGROUND

A. Facts

Memorial is a hospital located in Belleville, Illinois. It is licensed to provide health care services, including services to Medicare and Medicaid patients. The Medicaid program is a program jointly funded by the states and the federal government. It provides medical assistance to individuals and families whose resources are insufficient to meet the costs of necessary medical services. See 42 U.S.C. § 1396 et seq. To qualify for federal matching funds, a state must submit to the Secretary of Health and Human Services ("Secretary") a plan that describes the nature and scope of the state Medicaid program. See id. § 1396a(a). If a state's plan satisfies the requirements of the federal statute and regulations, the Secretary "shall approve" the state's plan. See id. § 1396a(b). The Secretary has delegated his authority to approve state Medicaid plans to the regional administrators of CMS, but has retained the final authority to disapprove a state's plan. See 42 C.F.R. § 430.15(b) & (c).

In the late 1980s and early 1990s, states began to take advantage of a "loophole" in the Medicaid program that allowed states to gain extra federal matching funds without spending more state money. States desiring to avail themselves of this statutory loophole would make payments to hospitals and collect the federal matching funds. The state would then recoup a portion of the state funding from the hospital, often in the form of a "tax." See generally Ashley County Med. Ctr. v. Thompson, 205 F.Supp.2d 1026, 1031-32 (E.D.Ark.2002) (noting that "[t]he result [of this] was that the state could draw additional federal matching funds without having to contribute additional state money").

Congress addressed this problem in the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991, Pub.L. No. 102-234, 105 Stat. 1793 (1991) (codified at 42 U.S.C. § 1396b(w)). Through this legislation, Congress instructed the Secretary to reduce federal matching funds to a state by the amount of any revenue received from a health care related tax that "hold[s] harmless" the health care provider upon whom the tax falls. 42 U.S.C. § 1396b(w)(1)(A)(iii). States still may fund their share of Medicaid expenses by assessing taxes on health care related items, services or providers, as long as the tax is uniform, i.e., "broad-based," and the tax contains no "hold harmless provision." See id. § 1396b(w)(1)(A)(ii)(iii) & (4).

A health care related tax is either a tax that treats providers or purchasers of health care items or services differently from other individuals on whom the tax falls, or it is a tax in which at least eighty-five percent of the tax burden falls on those who provide or purchase health care items or services. See 42 U.S.C. § 1396b(w)(3)(A). A health care related tax contains a "hold harmless provision" when it provides some sort of payment to the taxpayer that is tied to the amount of the health related tax paid. See id. § 1396b(w)(4). One way a health care related tax will include a "hold harmless provision" is if the tax provides a direct payment to the taxpayer based on either the amount of the tax paid or the difference between the amount of the tax paid and the amount the taxpayer receives as payments under the state's Medicaid plan. See id. § 1396b(w)(4)(A). A health care related tax also will include a "hold harmless provision" if payments that the taxpayer receives under the state's Medicaid program are tied to the total health care related tax paid. See id. § 1396b(w)(4)(B). Lastly, if the state promises to hold the taxpayer harmless for a portion of the cost of the tax through a direct payment or exemption from the tax, that promise also constitutes a "hold harmless provision." See id. § 1396b(w)(4)(C).

On February 3, 2004, the Illinois General Assembly approved legislation that amended the state Medicaid program to impose a tax on health care providers. Under this legislation, hospitals were charged a tax equal to the product of $84.19 times the hospital's "occupied bed days," i.e., the total number of days each hospital bed was occupied by a patient during calendar year 2001. See 305 ILCS 5/5A-1, 5/5A-2(a) (West 2004). Another part of this legislation provided adjustments to payments from Illinois to certain hospitals. See 305 ILCS 5/5A-12 (West 2004). These adjustments provided payments to the hospitals above the basic rate for inpatient hospital services, including a "Medicaid inpatient utilization rate adjustment." See id. These payments were to be funded through the new tax imposed by the legislation.

On February 6, 2004, the Department submitted for approval to CMS a proposed amendment to its state Medicaid plan ("2004 plan amendment"). The object of the amendment was to permit Illinois to receive matching federal funds for the increased payments to certain hospitals anticipated by the 2004 legislation. The Department argued that the payments did not constitute a "hold harmless provision" for the new "occupied bed days" tax under the Medicaid statutes. The net effect of the legislation and the 2004 plan amendment would be to permit Illinois to collect the new tax imposed by the legislation while receiving full federal matching funds for its own increased payments. By its terms, the plan amendment would expire on June 30, 2005.

CMS approved the 2004 plan amendment on December 21, 2004 to cover retroactively the period from May 9, 2004 until June 30, 2005. Under this plan, Memorial would receive payment of $6.6 million, which exceeds the amount of tax it paid to the State of Illinois by $474,308. All payments under the 2004 plan amendment were distributed by April 15, 2005. As noted earlier, the 2004 plan amendment expired by its own terms on June 30, 2005.

B. District Court Proceedings

On January 5, 2005, Memorial filed this action against CMS and Barry S. Maram, Director of the Department ("Director").¹ It sought to block implementation of the 2004 plan amendment. The Second Amended Complaint, the operative pleading, alleges a number of claims. Memorial asserts that the 2004 plan amendment violates the "hold harmless" prohibitions of 42 U.S.C. § 1396a and 42 C.F.R. § 433.68(f) because the payments made to hospitals are correlated positively to the amount of tax paid by the hospitals. See R.39 at 5, 10. Memorial further asserts that the 2004 plan amendment provides: payments to hospitals to pay for services to non-Medicaid patients, in violation of 42 U.S.C. §§ 1396a and 1396b; payments to hospitals in excess of their Medicaid costs plus uninsured costs, in violation of 42 U.S.C. § 1396r; and some low-utilization Medicaid hospitals higher payments than high-volume hospitals, in violation of 42 U.S.C. §§ 1396(a)(13)(A), 1396r and sections 1092 and 1923 of the Social Security Act.² Id. at 10-13. Memorial further alleges violations of its rights to substantive due process, procedural due process and equal protection. Id. at 13-16. Memorial also claims that the Department and CMS had violated Memorial's Eleventh Amendment rights by failing to follow applicable federal statutes and regulations when the 2004 plan amendments were submitted and approved.³ Finally, Memorial alleges a violation of 42 U.S.C. § 1983 against both CMS and the Director. Id. at 17-18.

For each of these alleged violations, Memorial requested the following relief: an order declaring that the 2004 plan amendment submitted by the Department was invalid and void; an order declaring that CMS' approval of the 2004 plan amendment was invalid and void; an injunction preventing the Director from making payments under the amendment; an order that Memorial recover attorney's costs and fees; and "any further orders and relief which the Court deems just and proper." Id. at 10-18.

CMS, the Director and the intervenor-defendants moved to dismiss Memorial's complaint for lack of subject matter jurisdiction and, in the alternative, failure to state a claim upon which relief may be granted. R.84 at 1-2. The district court first...