State of N.Y. by Perales v. Sullivan, 1110

• Decision Date: 05 January 1990
• Docket Number: D,No. 1110,1110
• Parties: , Medicare&Medicaid Gu 38,354 STATE OF NEW YORK, by its Commissioner of Social Services, Cesar A. PERALES, Petitioner, v. Louis R. SULLIVAN, M.D., * Secretary of the United States Department of Health and Human Services, and the United States Department of Health and Human Services, Health Care Financing Administration, Respondents. ocket 89-4004.
• Court: U.S. Court of Appeals — Second Circuit

Page 20

894 F.2d 20

28 Soc.Sec.Rep.Ser. 282, Medicare&Medicaid Gu 38,354

STATE OF NEW YORK, by its Commissioner of Social Services Cesar A. PERALES, Petitioner, v. Louis R. SULLIVAN, M.D., ^* Secretary of the United States Department of Health and Human Services, and the United States Department of Health and Human Services Health Care Financing Administration, Respondents.

No. 1110, Docket 89-4004.

United States Court of Appeals Second Circuit.

Argued May 11, 1989.

Decided Jan. 5, 1990.

Laurel W. Eisner, Asst. Atty. Gen. of the State of N.Y., New York City (Robert Abrams, Atty. Gen. of the State of N.Y., Judith T. Kramer, Asst. Atty. Gen. of the State of N.Y., New York City, of counsel), for petitioner.

Elizabeth Dusaniwskyj, Asst. Regional Counsel, U.S. Dept. of Health and Human Services, New York City (Annette H. Blum, Chief Counsel, U.S. Dept. of Health and Human Services, New York City, of counsel), for respondents.

Before KEARSE, CARDAMONE and PIERCE, Circuit Judges.

CARDAMONE, Circuit Judge:

The sole legal question involved in this appeal is whether New York hospitals may include in their reimbursement rates under the Medicaid Act, 42 U.S.C.A. Secs. 1396-1396s (West 1983 & Supp.1989), some of the costs incurred in obtaining excess medical malpractice insurance for attending physicians. In attempting to delve into the vast, cumbrous array of the Medicaid statute and its regulations, the relevance of Bacon's observation that in humans generally there is "more of the fool than the wise" becomes apparent. F. Bacon, Essays, of Boldness, 3 Harv. Classics 33 (Eliot ed. 1909). Fortunately, the issue presented is narrowly focused and the correct answer to the question raised may be gleaned by careful analysis.

New York State, by its Commissioner of Social Services, Cesar A. Perales, petitions for review of a decision of the Secretary of the United States Department of Health & Human Services (Secretary) which affirmed a decision of the United States Health Care Financing Administration (Health Administration or Administration) disapproving New York State Medicaid Plan Amendments 86-6, 86-23, 87-34, and 87-10A (Amendments). The Health Administration's decision was affirmed by the Secretary in a decision dated November 15, 1988. The proposed amendments would revise the method for calculating payment rates for inpatient hospital services to include in the reimbursement rate part of the costs of providing excess medical malpractice insurance coverage for attending physicians who provide emergency care in the hospital. Because the Secretary's ruling is neither arbitrary nor capricious, and is within the scope of his statutory authority based upon a permissible interpretation of the Medicaid statute, we affirm.

BACKGROUND

Title XIX of the Social Security Act, 42 U.S.C.A. Sec. 1396 et seq. (West 1983 & Supp.1989) (Medicaid Act or the Act), establishes a cooperative federal/state program that reimburses health care providers for the costs incurred when treating low income and disabled patients who are unable to pay for health care. A state is not required to participate in the Medicaid program, but if it does it must comply with the Act and its implementing regulations. A state satisfying federal requirements is thereby entitled to reimbursement for a portion of the costs incurred in providing medical assistance to qualified recipients.

To qualify for federal financial participation under the Act, a state must develop and submit to the Secretary--through the Financing Administration--a Medicaid "plan" describing its medical assistance program. The plan must indicate the types of care the state's program will cover, and must include certain services specifically required by the Act, such as inpatient and outpatient hospital services, and laboratory, X-ray, skilled nursing, and physicians' services. 42 U.S.C. Secs. 1396a(a)(10)(A) and 1396d(a)(1)-(5).

The state plan must also establish a rate at which it will reimburse health care providers for each service under the plan, and must provide

for payment ... of the hospital, skilled nursing facility, and intermediate care facility services provided under the plan through the use of rates (determined in accordance with methods and standards developed by the State and which, in the case of hospitals, take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs ...[ ) ] which the State finds, and makes assurances satisfactory to the Secretary, 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 and to assure that individuals eligible for medical assistance have reasonable access ... to inpatient hospital services of adequate quality....

42 U.S.C. Sec. 1396a(a)(13)(A).

We have previously held that Sec. 1396a(a)(13)(A) has been properly interpreted by the Secretary to apply only to inpatient hospital costs. See State of New York v. Bowen, 811 F.2d 776 (2d Cir.1987). This appeal asks what kind of hospital expenses may properly be included as inpatient hospital costs.

To answer that question we must analyze the two types of relationships that exist between doctors and the hospitals where their medical services are rendered; one type is staff physicians, the other is attending physicians. The former are salaried employees of a hospital; the latter are not employees of the hospital, but are in private practice for themselves, usually maintaining offices outside the hospital. Doctors denominated as staff physicians are usually recent graduates of medical schools who are completing a residency program, administrators who run the hospital's medical facilities, and senior staff physicians who supervise and train junior staff physicians and oversee the various medical departments. As salaried employees, medical malpractice insurance for staff physicians is almost always paid for by the hospital. The hospital includes this cost as an inpatient service cost for which it is reimbursed under Sec. 1396a(a)(13)(A) of the Act.

Attending physicians need to be affiliated with a hospital in order to admit their patients to the hospital. These doctors often perform services for individuals who are not their patients, but who were admitted directly to the hospital for emergency services. Obviously, they too provide valuable and necessary medical services for the hospital. Such physicians usually pay for their own primary malpractice insurance, which covers them for all their activities, whether performed inside or outside the hospital.

In 1985, the New York State Legislature passed the Medical Malpractice Reform Act, 1985 N.Y.Laws ch. 294, amended, 1986 N.Y.Laws ch. 266 (Malpractice Act), in response to the malpractice crisis. Due to the rising cost of obtaining malpractice insurance coverage and limitations on their primary coverage, many attending physicians--especially those in high-risk specialties--felt compelled to curtail their in-hospital practices. Because in-hospital care of the hospital's patients (as distinct from their own) exposed them to greater malpractice liability with resultant higher insurance premiums, a number of doctors either curtailed or ceased providing services for hospital patients. As a result there were not enough attending physicians available to deliver some high-risk services that the hospitals ordinarily provided.

The Malpractice Act was enacted to "ensure the continued availability and affordability of quality health services in New York state." 1985 N.Y.Laws ch. 294, Sec. 1. It instituted many reforms in the medical malpractice field. One of its provisions mandates that hospitals purchase excess malpractice liability insurance for attending physicians who declare their primary affiliation with that hospital. 1985 N.Y.Laws ch. 294, Sec. 19. The Malpractice Act states that physicians given excess insurance coverage by a hospital must furnish their own primary malpractice insurance in an amount not lower than $1 million per claimant and $3 million for all claimants. The excess coverage must bring the total coverage up to $2 million per claimant and $6 million aggregate, id., and applies to malpractice awards arising from both inpatient hospital and office-based care.

Under the Malpractice Act, the cost to the hospitals of the premiums for the excess malpractice insurance will be included in the per diem hospital rate along with the other costs of doing business. Id. at Sec. 21. It is this rate that is used to determine what the hospital's reimbursement will be from medical care cost providers, such as Blue Cross, Medicaid, and other third-party payors. The rate covers all reimbursable operating costs, including, for example, wages, fringe benefits and medical malpractice insurance for staff physicians, overhead, and capital expenses.

After the Malpractice Act was passed, New York submitted to the HCFA the proposed amendments to its state Medicaid plan, that are the subject of this litigation, seeking the HCFA's approval of the inclusion of a portion of the excess insurance premiums under the Medicaid Act. New York indicated that 5.2 percent of the total premium costs of the hospital-provided excess insurance was an inpatient hospital cost subject to reimbursement under Sec. 1396a(a)(13)(A). This percentage was arrived at through a statistical analysis of the percentage of those claims paid on behalf of each major category of third-party payor in every New York hospital from 1981 through 1984. The costs for the excess insurance were allocated among all the payors based upon the percentage of claims paid on behalf of each payor.

The portion of the excess premiums found allocable to Medicaid was approximately 17.4 percent, which included a proportionate share of the amount...