Seneca Nursing Home v. Kansas State Bd. of Social Welf.

• Decision Date: 18 January 1974
• Docket Number: No. 72-1242.,72-1242.
• Citation: 490 F.2d 1324
• Parties: SENECA NURSING HOME et al., Plaintiffs-Appellees, v. The KANSAS STATE BOARD OF SOCIAL WELFARE et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

490 F.2d 1324 (1974)

SENECA NURSING HOME et al.,^* Plaintiffs-Appellees, v. The KANSAS STATE BOARD OF SOCIAL WELFARE et al.,^** Defendants-Appellants.

No. 72-1242.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted January 9, 1973.

Decided January 18, 1974.

COPYRIGHT MATERIAL OMITTED

J. J. B. Wigglesworth, Topeka, Kan. (Charles V. Hamm, Topeka, Kan., on the brief), for defendant-appellant Kansas State Bd. of Social Welfare.

T. Richard Liebert, Coffeyville, Kan. (Liebert & Liebert, Coffeyville, Kan., Jack A. Quinlan, Scott, Quinlan & Hecht, Topeka, Kan., and William A. Geoghegan, Pierson, Ball & Dowd, Washington, D. C., on the brief), for plaintiffs-appellees.

Before SETH, HOLLOWAY and DOYLE, Circuit Judges.

HOLLOWAY, Circuit Judge.

This case involves a dispute between a group of licensed nursing homes in Kansas and the State Board of Social Welfare (the Board) over payment for nursing services provided under state and federal welfare programs. The nursing homes seek to recover unspecified sums claimed for "reasonable, usual and customary charges" which they say they are entitled to by law and by contract and are unlawfully denied by a pay structure, essentially based on a formula of allowable cost plus a limited profit, that the Board claims is proper under controlling law and regulations, there being no contract. The trial court upheld the principal contention of the plaintiffs for the period prior to July 1, 1971, and we agree.

The court allowed the case to be maintained as a class action by named plaintiffs, who are appellees here, on behalf of themselves and the class of nursing homes similarly situated. Under licenses issued by the Kansas State Board of Health (the Board of Health), some plaintiffs are homes providing "skilled nursing care" as "nursing homes" and others are homes providing "simple nursing care" as "personal care homes," as defined under Kansas law.

Under Kansas law, K.S.A. Chap. 39, Art. 7, the State Board of Social Welfare, defendant-appellant here, is charged with developing state plans to provide care and assistance to chronically ill and infirm aged persons qualified for assistance under the federal Social Security law and with determining state policy and supervising such programs under a plan not inconsistent with federal or state law.

This action was commenced in the state court and removed subsequently by the defendants, who were all then state officers and agencies, to the federal district court on the basis that the case involved the construction and interpretation of federal law and regulations.¹

After trial the district court made detailed findings and conclusions. A declaratory judgment was entered sustaining the plaintiffs' main contention and deciding that they were entitled to payment on the standard of "reasonable, usual and customary charges" for the period before amendment of the Kansas Statutes in July, 1971. The damage claims for exact amounts of recovery were reserved. The state defendants appealed from the declaratory judgment in favor of the plaintiffs and no cross-appeal is being prosecuted by the plaintiffs on findings favorable to the defendants.

On this appeal the following questions are presented:

(1) Whether the action could properly have been brought in the federal court as one arising under federal law within 28 U.S.C.A. § 1331 and was thereby properly removed;² and

(2) whether the plaintiffs were entitled to payment for services under K.S.A. 39-708(x) on the standard of "reasonable, usual and customary" charges rather than on the cost plus basis provided by a manual of the State Department of Social Welfare and regulations of the Board; and

(3) whether there was a contractual basis for suit by plaintiffs entitling them to maintain the action against the State agencies; and

(4) whether the manual was required to be promulgated in accordance with the notice, hearing and other procedural requirements of K.S.A. 77-415 et seq., which was not done; and

(5) whether the finding that all members of the plaintiffs\' class were "medical providers" within the meaning of K.S.A. 39-708(x) was proper.

The trial court's opinion made a thorough statement of all the background facts, numerous contentions made and its rulings. We limit our statement to the facts necessary to treat the principal issues the appeal presents. These facts will be detailed in discussing the issues, to which we now turn.

(1) Federal court jurisdiction.

As stated above, this Court has raised the question of subject matter jurisdiction on its own motion. We were concerned whether the action was one arising under federal law within the meaning of 28 U.S.C.A. § 1331 and therefore properly removable under 28 U.S.C.A. § 1441. Supplemental briefs were requested and have been filed by the parties. They both take the position that subject matter jurisdiction was proper in the trial court for the reason that the action is one arising under the Constitution and laws of the United States.

We will focus on the amended and supplemental complaint filed in the federal court after removal since the removing defendants went to trial on that pleading without objecting to federal jurisdiction or the filing of the amendment. See Craig v. Champlin Petroleum Co., 421 F.2d 236, 239 (10th Cir.); cf. Grubbs v. General Electric Credit Corp., 405 U.S. 699, 705-706, 92 S.Ct. 1344, 31 L.Ed.2d 612.³ We must determine whether from the face of that complaint it appears that a right or immunity created by the Constitution or laws of the United States is an element, and an essential one, of the plaintiffs' cause of action. See Pan American Petroleum Corp. v. Superior Court, 366 U.S. 656, 663, 81 S.Ct. 1303, 6 L.Ed.2d 584; Gully v. First National Bank, 299 U.S. 109, 112-113, 57 S.Ct. 96, 81 L.Ed. 70. And it is no substitute that the defendant was almost certain to raise a federal defense. Pan American Petroleum Corp. v. Superior Court, supra at 663 of 366 U.S., 81 S.Ct. 1303.

The amended and supplemental complaint alleges several claims as deriving from the laws and Constitution of the United States.⁴ It is unnecessary to analyze all the various claims. We are satisfied that claims A and F as stated in the margin are sufficient to support federal jurisdiction as substantial claims arising under federal law.

Claim A averred that qualified recipients are being denied a right allegedly guaranteed by the federal Social Security Act to receive care at the nursing home of their choice. See 42 U.S.C. A. § 1396a(a)(23). And claim F stated that Kansas Administrative Regulation 30-5-27 is in conflict with 42 U.S.C.A. § 1396a(a)(30) which stipulates essentially that state plans must provide methods and procedures relating to utilization and the payment for care and services as may be necessary to safeguard against unnecessary utilization and to assure that payments are not in excess of reasonable charges consistent with efficiency, economy and quality of care. We express no view on the merits of such claims of conflict between the Kansas manual and regulations and the federal statutes beyond saying that they are not so wholly insubstantial that federal jurisdiction does not exist. See Harmony Nursing Home, Inc. v. Anderson, 341 F.Supp. 957 (D.Minn.). We conclude that the claims made could not be dismissed as obviously without merit and defective as a jurisdictional base. See Levering & G. Co. v. Morrin, 289 U. S. 103, 105, 53 S.Ct. 549, 77 L.Ed. 1062; see also Goosby v. Osser, 409 U.S. 512, 518, 93 S.Ct. 854, 35 L.Ed.2d 36. And the plaintiffs as recipients of payments would have standing for themselves and for the interest of those served by them to assert these claims in view of the relationship to the indigents cared for. See Harmony Nursing Home, Inc. v. Anderson, supra at 959 of 341 F.Supp.; see also Sierra Club v. Morton, 405 U.S. 727, 737, 92 S.Ct. 1361, 31 L.Ed.2d 636; Barrows v. Jackson, 346 U.S. 249, 256-258, 73 S.Ct. 1031, 97 L.Ed. 1586.

While not granting relief to the plaintiffs on federal grounds the trial court sustained the plaintiffs' principal position under state law. In so doing the court exercised pendent jurisdiction over these claims. When the declaratory judgment was entered on state grounds the federal claims had not been dismissed or abandoned. In these circumstances and in view of the complexity of the intertwined federal issues, the exercise of pendent jurisdiction was within the reasonable discretion of the trial court. See United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218.

(2) The validity of the Board's cost plus formula for payment.

The district court held that the formula of the Board based on allowable cost plus a limited profit was repugnant to K.S.A. 39-708(x), as the statute existed until July 1, 1971. This holding was expressed by declaring that such provisions of the manual effective July 1, 1970, were unlawful in view of the statute.⁵ The holding also was expressed by declaring that the regulation of the Board, K.A.R. 30-5-27, which likewise adopted the formula, was contrary to the statute.⁶

We should refer briefly to the federal and state statutory provisions involved as a background for our discussion.

The federal Social Security Act consists of several enactments under which the federal government makes funds available to the states for the care of various categories of needy individuals. The sections of the federal statute with which we are concerned are Title XVI (Grants to the States for Aid to the Aged, Blind or Disabled or for Such Aid and Medical Assistance for the Aged, 42 U.S.C.A. §§ 1381 et seq.) and Title XIX (Medicaid) (Grants to States for Medical Assistance Programs, 42 U.S.C.A. §§ 1396 et seq.).

Of particular relevance here are those sections of the federal statute providing for grants to states for assistance to needy individuals for institutional care under Title XVI in "intermediate care facilities," 42 U.S.C.A. §§...