Saint Anthony Hosp. v. Eagleson

Decision Date05 July 2022
Docket Number21-2325
Citation40 F.4th 492
Parties SAINT ANTHONY HOSPITAL, Plaintiff-Appellant, v. Theresa A. EAGLESON, in her official capacity as Director of the Illinois Department of Healthcare and Family Services, Defendant-Appellee, and Meridian Health Plan of Illinois, Inc., et al., Intervening Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Edward W. Feldman, Attorney, Michael L. Shakman, Attorney, Mary Eileen Cunniff Wells, Attorney, William J. Katt, Attorney, Rachel Ellen Simon, Attorney, MILLER, SHAKMAN LEVINE & FELDMAN LLP, Chicago, IL, for Plaintiff - Appellant.

Richard S. Huszagh, Attorney, OFFICE OF THE ATTORNEY GENERAL, Civil Appeals Division, Chicago, IL, for THERESA A. EAGLESON, in her official capacity as Director of the Illinois Department of Healthcare and Family Services.

Hugh S. Balsam, Ashlee Marie Knuckey, Attorney, Steven T. Whitmer, Attorney, LOCKE LORD LLP, Chicago, IL, for Intervenor - Appellee MERIDIAN HEALTH PLAN OF ILLINOIS, INC.

Kirstin Beth Ives, Attorney, FALKENBERG IVES LLP, Chicago, IL, for Intervenor - Appellee ILLINICARE HEALTH PLAN.

Martin J. Bishop, Attorney, Kevin D. Tessier, Attorney, REED SMITH LLP, Chicago, IL, for Intervenor - Appellee BLUE CROSS AND BLUE SHIELD OF ILLINOIS, a Division of Health Care Service Corporation.

Silvia Mercado Masters, Attorney, OFFICE OF THE COOK COUNTY STATE'S ATTORNEY, Chicago, IL, for Intervenor - Appellee COOK COUNTY, ILLINOIS, through its Cook County Health & Hospitals System doing business as COOK COUNTY HEALTH.

Martha Jane Perkins, Attorney, National Health Law Program, Chapel Hill, NC, Amicus Curiae.

Before Wood, Hamilton, and Brennan, Circuit Judges.

Hamilton, Circuit Judge.

In recent years, Illinois has moved its Medicaid program from a fee-for-service model, where a state agency pays providers' medical bills, to one dominated by managed care, where private insurers pay medical bills. Most patients of plaintiff Saint Anthony Hospital are covered by Medicaid, so Saint Anthony depends on Medicaid payments to provide care to patients. Saint Anthony says it is now in a dire financial state. Over the last four years, it has lost roughly 98% of its cash reserves, allegedly because managed-care organizations (MCOs) have repeatedly and systematically delayed and reduced Medicaid payments to it.

Saint Anthony contends in this lawsuit that Illinois officials owe it a duty under the federal Medicaid Act to remedy the late and short payments. In a thoughtful opinion, the district court dismissed the suit for failure to state a claim for relief. Saint Anthony Hospital v. Eagleson , 548 F. Supp. 3d 721 (N.D. Ill. 2021). We see the case differently, however, especially at the pleadings stage. We conclude that Saint Anthony has alleged a viable claim for relief under 42 U.S.C. § 1396u-2(f) and may seek injunctive relief under 42 U.S.C. § 1983 against the state official who administers the Medicaid program in Illinois. We appreciate the potential magnitude of the case and the challenges it may present. Like the district judge and Judge Brennan, we can imagine forms of judicial relief that would be hard to justify. We can also imagine some poor ways to handle this case going forward in the district court. But we need not and should not decide this case by assuming that the worst-case scenarios are inevitable.

The State has tools available to remedy systemic slow payment problems—problems alleged to be so serious that they threaten the viability of a major hospital and even of the managed-care Medicaid program as administered in Illinois. If Saint Anthony can prove its claims, the chief state official could be ordered to use some of those tools to remedy systemic problems that threaten this literally vital health care program. We therefore reverse in part the dismissal of the case and remand for further proceedings.

I. Factual and Procedural Background

In reviewing the grant of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, we accept all well-pleaded allegations as true and draw all reasonable inferences in Saint Anthony's favor. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). We are not vouching for the truth of Saint Anthony's account of the facts at this point. Rather, because the defense chose to move to dismiss on the pleadings, it chose to accept for now the truth of Saint Anthony's factual allegations.

A. The Illinois Medicaid Program

The federal Medicaid Act established a cooperative arrangement between the federal government and states to provide medical services to poor residents. 42 U.S.C. § 1396 et seq. ; Bria Health Services, LLC v. Eagleson , 950 F.3d 378, 380 (7th Cir. 2020) ; see also National Federation of Independent Business v. Sebelius , 567 U.S. 519, 541–42, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012). By agreeing to participate in Medicaid, a state receives financial assistance to help administer the program in exchange for complying with detailed statutory and regulatory requirements. Bria Health Services , 950 F.3d at 380. Those requirements are found in the Medicaid Act itself (Title XIX of the Social Security Act) and in regulations promulgated by the Secretary of the Department of Health and Human Services (HHS). See id. at 382 ; Rock River Health Care, LLC v. Eagleson , 14 F.4th 768, 771 (7th Cir. 2021).

Before discussing the relevant statutory requirements at issue here, it is important to understand how Illinois, specifically the Department of Healthcare and Family Services (HFS), administers its Medicaid program. There are two major ways for states to pay providers for services provided to patients covered by Medicaid: fee for service or managed care. In a fee-for-service program, the state pays providers directly based on a set fee for a particular service. See § 1396a(a)(30)(A); Medicaid Program; Medicaid Managed Care: New Provisions, 67 Fed. Reg. 40,989 (June 14, 2002). Under a managed-care program, by contrast, HFS contracts with MCOs (which are private health insurance companies) to deliver Medicaid health benefits to beneficiaries. See 42 U.S.C. § 1396u-2 ; see also § 1396b(m); 42 C.F.R. § 438 (2020). The state pays the MCO a flat fee per patient per month. The MCO then pays providers for services actually provided to covered Medicaid patients. Bria Health Services , 950 F.3d at 381, citing 305 ILCS 5/5-30.1 ; see also 42 U.S.C. §§ 1396u-2, 1396b(m). Like insurance companies, MCOs are generally entitled to keep the difference between the money they receive from the state and the amounts they pay providers for care of covered patients.

In recent years, Illinois has changed from a fee-for-service system to a system dominated by managed care. Illinois introduced managed care in its Medicaid program in 2006. In 2010, the State spent just $251 million on managed care. By 2019, that number had grown to $12.73 billion. In the meantime, the number of MCOs in Illinois has fallen from twelve to seven.

Federal law establishes requirements for timely Medicaid payments for health care providers. When a state pays claims directly, it must pay 90% of so-called "clean claims" within 30 days and 99% within 90 days. See 42 U.S.C. § 1396a(a)(37)(A). (A "clean claim" is one where the provider has given the payor all information needed to determine the proper payments. Id. ) When a state relies on MCOs to pay providers, federal law requires that the state's contract with an MCO contain a provision that requires the same 30/90 pay schedule for MCO reimbursements to providers. § 1396u-2(f). (MCOs and providers can opt for a different pay schedule, but Saint Anthony has not agreed to a different schedule with any MCOs.)

The focus of this case is the payment schedule provision, § 1396u-2(f). Saint Anthony contends it is also entitled to relief under a separate Medicaid statute requiring a participating state to "provide that all individuals wishing to make application for medical assistance under the plan shall have opportunity to do so, and that such assistance shall be furnished with reasonable promptness to all eligible individuals." § 1396a(a)(8). As we explain below, however, Saint Anthony is not entitled to relief under that clause.

B. Plaintiff Saint Anthony Hospital

Saint Anthony is a so-called "safety-net hospital" on the southwest side of Chicago. It provides health care regardless of patients' financial means. See 305 ILCS 5/5-5e.1. Most Saint Anthony patients are on Medicaid. As the Illinois Medicaid system has shifted from fee for service to managed care, the hospital has become ever more dependent on timely payments from MCOs. In recent years, according to Saint Anthony, those payments have repeatedly arrived late, if they arrived at all. As of February 2020, payments of at least $20 million were past due. The impact of late payments can be dramatic. In 2015, Saint Anthony had more than $20 million in cash on hand, which was enough to fund 72 days of operation. As the State increased its reliance on managed care, Saint Anthony saw its cash reserves dwindle. By 2019, Saint Anthony had less than $500,000 cash on hand, enough to cover just two days of operation. Saint Anthony's net revenue per patient also dropped more than 20%.

The MCO payments that eventually arrive are often for less than is owed. Making matters even worse from Saint Anthony's perspective, the payment forms it receives from the MCOs lack the details needed to determine just what is being paid and what is not. The delays and lack of clarity benefit the MCOs: since the State pays the MCOs flat fees per patient and permits them to keep the funds they do not pay out to providers, MCOs have a powerful profit incentive to delay and underpay hospitals like Saint Anthony.

Saint Anthony may not be alone in its experience. Mercyhealth is a regional health-care system and the largest Medicaid provider in Illinois outside of Cook County. Illustrating the potential...

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