State of N.Y. v. Shalala

• Citation: 119 F.3d 175
• Decision Date: 17 July 1997
• Docket Number: Nos. 208,677,D,s. 208
• Parties: , Medicare & Medicaid Guide P 45,499 STATE OF NEW YORK, Petitioner, v. Donna E. SHALALA, as Secretary of The Department of Health and Human Services, United States Department of Health and Human Services, Bruce C. Vladeck, as Administrator of Health Care Financing Administration, Health Care Financing Administration, Respondents. ockets 92-4144(L), 96-4004(CON).
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 175

119 F.3d 175

53 Soc.Sec.Rep.Ser. 793, Medicare & Medicaid Guide

P 45,499

STATE OF NEW YORK, Petitioner, v. Donna E. SHALALA, as Secretary of The Department of Health and Human Services, United States Department of Health and Human Services, Bruce C. Vladeck, as Administrator of Health

Care Financing Administration, Health Care Financing

Administration, Respondents.

Nos. 208, 677, Dockets 92-4144(L), 96-4004(CON).

United States Court of Appeals, Second Circuit.

Argued Sept. 27, 1996.

Decided July 17, 1997.

Charles A. Miller, Caroline M. Brown, Lewis Rosman, Covington & Burling, Washington, DC, John E. Robitzek, Acting General Counsel, New York State Department of Social Services, Albany, NY, Alan A. Pfeffer, Sarah van Leer, New York State Department of Social Services, Albany, NY, for Petitioner.

Jeffrey A. Clair, Anthony J. Steinmeyer, U.S. Department of Justice, Washington, DC, Frank W. Hunger, Assistant Attorney General, U.S. Department of Justice, Washington, DC, for Respondents.

Before: WALKER, McLAUGHLIN and JACOBS, Circuit Judges.

WALKER, Circuit Judge:

This case presents two questions. First, whether the Secretary of the Department of Health and Human Services ("Secretary") erred in rejecting the attempt by petitioner State of New York ("New York") to resubmit an amendment to its state plan detailing the method of reimbursing providers of medical care in accordance with the federal Medicaid program. We hold that the Secretary erred in interpreting our decision in Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306 (2d Cir.1991), as barring New York from taking further action to gain approval of the amendment found defective in Pinnacle.

The second question is whether the Secretary erred in determining that the submission of a "new" amendment by New York reflecting the same provisions as the amendment invalidated in Pinnacle required the publication of fresh public notice. We

affirm the Secretary's interpretation of her own regulation as requiring publication of a new public notice for the submission of new amendments.

BACKGROUND

I. The Medicaid Program

The Medicaid program is a joint federal and state cost-sharing system that reimburses health care providers for the cost of treating individuals who are unable to pay for necessary medical care. Participation in the program by a state is voluntary. If a state chooses to participate in the program, it must comply with the Medicaid Act, 42 U.S.C. § 1396 et seq., and the regulations promulgated thereunder by the Secretary. See Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 2514-15, 110 L.Ed.2d 455 (1990).

A participating state, such as New York, must submit a "plan[ ] for medical assistance" to the Secretary for her approval in order to receive from the federal government partial reimbursement for health care expenditures. 42 U.S.C. §§ 1396 & 1396a(b). Payments by the federal government under the program are known as "federal financial participation" ("FFP"). 42 C.F.R. § 430.10. The plan for medical assistance is a "comprehensive written statement submitted by the [state] agency describing the nature and scope of its Medicaid program and giving assurance that it will be administered in conformity with [federal law]." Id.

The plan for medical assistance must, among other things, establish a method for reimbursing health care providers that render care to Medicaid beneficiaries. See 42 U.S.C. § 1396a(a)(13). Section 1396a(a)(13) of Title 42, known as the Boren Amendment, specifies the requirements with which a state's method of reimbursing health care providers must comply in order to receive FFP payments. Under this section, a state plan for medical assistance must:

provide ... for payment ... of the hospital services, nursing facility services, and services in an intermediate care facility for the mentally retarded provided under the plan through the use of rates (determined in accordance with methods and standards developed by the State ... ) 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 ... and to assure that individuals eligible for medical assistance 42 U.S.C. § 1396a(a)(13)(A).

have reasonable access ... to inpatient hospital services of adequate quality....

II. New York's Plan for Medical Assistance

This case arises from New York's attempt to amend its state plan for medical assistance to change the method of reimbursing medical providers for their wage costs. On January 1, 1986, New York adopted the Resource Utilization Group-II ("RUG-II") Medicaid reimbursement system for nursing facilities. Under RUG-II, reimbursement rates were set prospectively based on the degree of care required by patients. The facilities were classified in peer groups and the reimbursement rate was calculated based on the historical costs, adjusted for inflation, incurred by the peer group.

The RUG-II system adjusted for the variation in wage costs across New York by incorporating a Regional Input Price Adjustment Factor ("RIPAF"). The initial RIPAF methodology included in the RUG-II system based the reimbursement for wage costs on the average wage rate of the region of New York where the facility was located. See Pinnacle, 928 F.2d at 1310. Facilities with wage costs below the average wage rate received payments exceeding the actual cost they incurred for wages, whereas facilities with higher than average wage costs received payments below the actual cost they incurred for wages.

Publicly owned facilities complained that they were hurt by the RIPAF methodology because labor costs at public facilities were generally above the average rate as a result of various factors, including a unionized workforce and pension contributions mandated by state law. After public notice and comment, New York modified the RIPAF methodology, effective January 1, 1987, to accommodate the concerns of the higher wage facilities. See 10 N.Y.C.R.R. § 86-2.10; Regional Input Price Adjustment Factors, N.Y. St. Reg. 16 (Oct. 22, 1996). Under this modified RIPAF methodology, a range or "corridor" of wage costs was established for each region. If a facility in the region paid more or less than the average wage for the region, its reimbursement rate would be adjusted accordingly within the upper and lower limits of the corridor. For clarity, we refer to this modified RIPAF methodology adopted by New York in 1987 as the "corridor adjustment."

To amend New York's plan for medical assistance to reflect the corridor adjustment, New York, on March 31, 1987, submitted Medicaid State Plan Amendment ("SPA") 87-7 to the Health Care Financing Administration ("HCFA"), the federal agency charged by the Secretary with reviewing state plans for medical assistance, see 42 C.F.R. § 430.10. New York requested an effective date of January 1, 1987 for SPA 87-7. On February 21, 1989, HCFA approved SPA 87-7 with an effective date of January 1, 1987. Pinnacle, 928 F.2d at 1311.

In June 1989, a group of nursing homes adversely affected by the corridor adjustment filed suit in federal court against New York and the Secretary alleging that the corridor adjustment violated the procedural and substantive requirements of the Medicaid Act and the equal protection guarantees of the state and federal constitutions. Id. On August 15, 1989, the district court issued a preliminary injunction barring the application of the corridor adjustment, and partially granted the nursing homes' motion for summary judgment on the ground that the corridor adjustment was enacted without complying with federally-mandated procedures because the state's findings and assurances were inadequate. Id. On October 5, 1990, the district court entered final judgment on all claims. The court reaffirmed its order enjoining New York from implementing the corridor adjustment because of the inadequacy of the findings submitted to HCFA, dismissed the nursing homes' substantive challenges to the corridor adjustment, and declined to address the nursing homes' constitutional challenges. Id. at 1312.

The nursing homes appealed the district court's decision to dismiss their substantive challenges and leave their constitutional claims unresolved, and the state appealed the district court's decision to enjoin the corridor adjustment. On March 25, 1991, this court held in Pinnacle that the corridor adjustment "was enacted without complying with While the appeal was pending in Pinnacle, New York pursued administrative action through two separate avenues in an attempt to reimplement the corridor adjustment by curing the deficiencies found in Pinnacle.

                the procedural requirements of the [Medicaid Act]" based on the inadequate findings and assurances submitted to HCFA by New York.  Id. at 1318.   We vacated the district court's dismissal of the nursing homes' substantive and constitutional claims because if the state were to remedy the procedural defects in the enactment of the corridor adjustment, the nursing homes would be forced to initiate an entirely new action.  Id. at 1317-18
                

A. SPA 87-7

New York attempted to gain reapproval from HCFA for SPA 87-7, with an effective date of January 1, 1987, by submitting additional assurances and findings. New York argued that the Pinnacle decision permitted the state to seek federal approval of SPA 87-7 if the state cured the procedural defects identified in the Pinnacle litigation. On January 28, 1992, HCFA took the position that the Pinnacle decision did not permit the state to seek reapproval of SPA 87-7. On February 10, 1992, the Administrator of HCFA confirmed that HCFA believed that Pinnacle precluded the approval of SPA 87-7. On June 23, 1992, HCFA rejected New York's request for reconsideration of HCFA's position that the state could not submit supplemental assurances and findings to cure the defects in SPA 87-7. On August 20, 1992,...