Petition for Writ of Certiorari — West Virginia Univ. Hospitals, Inc. v. Casey
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No. DEC 22 1989
; PANIOL., JR.
IN THE — _—
Supreme Court of the Gnited States
October Term, 1989
WEST VIRGINIA UNIVERSITY HOSPITALS, INC.,
Petitioner,
Vv.
ROBERT CASEY, Governor of the Commonwealth of
Pennsylvania, JOHN F. WHITE, Secretary of the Pennsylvania
Department of Public Welfare, and DAVID S. FEINBERG,
Director of the Bureau of Policy and Program Development of
the Pennsylvania Department of Public Welfare,
Respondents,
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Robert T. Adams
McGUIRE, WOODS, BATTLE &
BOOTHE
One James Center
Richmond, Virginia 23219
(804) 775-1000
December 22, 1989 Counsel of Record
Additional Counsel
Listed Inside Cover
Appeiiate Printing Services * Heritage Building * Suite 908 * Richmond, VA 23219 * (800) 642-7789
Julia Krebs-Markrich
McGUIRE, WOODS, BATTLE & BOOTHE
The Army and Navy Club Building
1627 Eye Street, N.W.
Washington, D.C. 20006
(202) 857-1700
Jack M. Stover
METTE, EVANS & WOODSIDE
1801 North Front Street
Harrisburg, Pennsylvania 17102
(717) 232-5000
Counsel for Petitioner
QUESTION PRESENTED
May an award of attorneys’ fees under 42 U.S.C. § 1988 include
compensation for expert witnesses?
RULE 28.1 LISTING
West Virginia University Hospitals, Inc., is a public
corporation created by the West Virginia Legislature. See
§ 18-11c-2(d) of the Code of West Virginia. It has the following
subsidiary (not wholly owned) and affiliate:
Subsidiary: HealthNet Insurance Company
Affiliate: Health, Education and Research Corporation
TABLE OF CONTENTS
By ee | Sy) 2 0 re
STII TIIIIETIIED crccnccsccensensscesesesessesssosseeesseseseceses
REASONS FOR GRANTING THE WRIT OF
STITT etisencadecensccsensessescsncesseseseocesescess
An Award Under 42 U.S.C. § 1988
May Include Expert Witness Fees.....................06.
ESE
APPENDIX
A. Opinion Sought To Be Reviewed ...................
B. Published Opinion Of The District Court......
C. Unpublished Opinion Of The District Court
- iii -
il
TABLE OF AUTHORITIES
CASES
Page
Alyeska Pipeline Service Co. v. Wilderness Society,
Pa ee EE 5 6 oa ek ere Wie ere ne OS K's 8,9
Crawford Fitting Co. v. J.T. Gibbons, Inc.,
en ck os a aes oer eNOS eS 8,9
Denny v. Westfield State College, 880 F.2d 1465
os 4 Ge rr a a ee eee 6,8,9
Friedrich v. City of Chicago, 888 F.2d 511
Co | Pre a eee ere ee 6,7,
8,9
Missouri v. Jenkins, US. _, 109S. Ct. 2463,
em Pee eee ee 6,7,
8,9
Ramos v. Lamm, 713 F.2d 546 (10th Cir. 1983) ...... 6
SapaNajin v. Gunter, 857 F.2d 463 (8th Cir. 1988) ..... 6
Sevigny v. Dicksey, 846 F.2d 953 (4th Cir. 1988) ...... 6
United States v. Ron Pair Enterprise, Inc., CC
109 S. Ct. 1026, 103 L.Ed.2d 290 (1989) ........ 7
West Virginia University Hospitals, Inc. v. Casey,
701 F. Supp. 496 (M.D. Pa. 1988) ............ yw K
4,5
West Virginia University Hospitals, Inc. v. Casey,
ge bite os SO eee eee eS 2,5,
6,8
-ivV-
STATUTES
ee Be eg ok eee eens
OE a wc es a ee ees
ee a ia
28 U.S.C. § 1343(3) 2... 0. ee errenene
Diet CI oe oe
eee Seo
SE BU ees tee eee
42 U.S.C. § 1396a(a)(13)(A) 2... ee eee
(URE. OUI go oo kc kc ccc ee
I i Gi teeter mee
MR BU. 66s cca eee
MISCELLANEOUS
Rule 17, Rules of the United States Supreme Court
. 10
No.
IN THE SUPREME COURT OF THE UNITED STATES
October Term, 1989
WEST VIRGINIA UNIVERSITY HOSPITALS, INC.,
Petitioner,
Vv.
ROBERT CASEY, Governor of the Commonwealth of
Pennsylvania, JOHN F. WHITE, Secretary of the Pennsylvania
Department of Public Welfare, and DAVID S. FEINBERG,
Director of the Bureau of Policy and Program Development of
the Pennsylvania Department of Public Welfare,
Respondents.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
The petitioner, West Virginia University Hospitals, Inc.,
respectfully prays that a writ of certiorari issue to review the
judgment and opinion of the United States Court of Appeals for
the Third Circuit, entered in the above-entitled proceeding on
September 5, 1989.
OPINIONS BELOW
The decision of the United States Court of Appeals for the
Third Circuit is reported at 885 F.2d 11, and is included in the
Appendix at A-1 to A-49. The opinion of the United States
District Court for the Middle District of Pennsylvania is reported
at 701 F. Supp. 496, and is included in the Appendix at B-1 to
B-68. An unpublished memorandum opinion of the District
Court concerning an award of attorneys’ fees is included in the
Appendix at C-1 to C-4.
JURISDICTION
The decision of the United States Court of Appeals for the
Third Circuit was issued on September 5, 1989. An order, denying
petitioner’s timely request for a rehearing, was issued by the
United States Court of Appeals for the Third Circuit on October
5, 1989. The mandate of the United States Court of Appeals for
the Third Circuit was issued on October 13, 1989.
The jurisdiction of this Court to issue a writ of certiorari in
this case is based upon 28 U.S.C. § 1254(1).
STATUTE INVOLVED
42 U.S.C. § 1988.
Proceedings in vindication of civil rights; attorney’s fees
The jurisdiction in civil and criminal matters conferred
on the district courts by the provisions of this Title, and
of Title "CIVIL RIGHTS," and of Title "CRIMES," for
the protection of all persons in the United States in
their civil nghts, and for their vindication, shall be
exercised and enforced in conformity with the laws of
the United States, so far as such laws are suitable to
carry the same into effect; but in all cases where they
are not adapted to the object, or are deficient in the
provisions necessary to furnish suitable remedies and
punish offenses against law, the common law, as
modified and changed by the constitution and statutes
of the State wherein the court having junsdiction of
such civil or criminal cause is held, so far as the same
is not inconsistent with the Constitution and laws of the
United States, shall be extended to and govern the said
courts in the trial and disposition of the cause, and, if it
is of a criminal nature, in the infliction of punishment
on the party found guilty. In any ation or proceeding
to enforce a provision of sections 1981, 1982, 1983,
1985, and 1986 of this title, title IX of Public Law
92-318, or title VI of the Civil Rights Act of 1964, the
count, in its discretion, may allow the prevailing party,
other than the United States, a reasonable attorney’s
fee as part of the costs.
STATEMENT OF THE CASE
West Virginia University Hospitals, Inc., (hereinafter referred
to as "WVUH") operates a tertiary medical center in
Morgantown, West Virginia, six miles south of the border
between the Commonwealth of Pennsylvania and the State of
West Virginia. 701 F. Supp. at 498-499 (Findings of Fact # 7, 14,
and 15); Appendix at B-3 to B-4. As a consequence, WVUH is a
significant provider of hospital services to Pennsylvania medicaid
recipients living in southwestern Pennsylvania. 701 F. Supp. at
498-499 (Findings of Fact # 8-22); Appendix at B-3 to B-S.
In January, 1986, Pennsylvania’s Department of Public
Welfare notified WVUH of new medicaid payment rates for
WVUH’s hospital services to Pennsylvania medicaid recipients.
Convinced that the new payment rates were contrary to the
minimum standards for reimbursement specified in the Social
Security Act, WVUH attempted to resolve the problem
administratively. However, the Pennsylvania Department of
Public Welfare informed WVUH that an administrative appeal,
based upon the methodological inadequacies of Pennsylvania’s
reimbursement system, would not lead to any relief. See 701 F.
Supp. at 521; Appendix at B-56.
Consequently, in July, 1986, WVUH filed suit in the United
States District Court for the Middle District of Pennsylvania.
WVUH challenged the adequacy of Pennsylvania’s payment
system and the adequacy of Pennsylvania’s medicaid
administrative appeals system under federal law. The
jurisdiction of the district court was based upon 28 U.S.C. § 1331,
28 U.S.C. § 1343(3) and (4), and 28 U.S.C. § 1332. WVUH also
sought remedies under 42 U.S.C. § 1983 and under 28 U.S.C.
§ 2201.
In May and June, 1988, the District Court conducted @ six-day
trial. At trial, WYVUH depended upon the testimony of three
expert witnesses who testified about the deficiencies in
Pennsylvania’s payment system for oui-of-state hospitals like
WVUH and the inadequacy of Pennsylvania’s administrative
appeals system. These experts were essential both at trial and
during the pretrial preparation of the case between 1986 and
1988.
1 WVUH alleged four causes of action in its complaint:
(1) the imadequacy of the payment system under 42 U.S.C.
§ 1396a(a)(13)(A);
(2)the lack of any basis-in-fact for the assurances Pennsylvania officials
provided the Federal Government aboui the payment system as required by
42 U.S.C. § 1396a(a)(13)(A);
(3)the inadequacy of the administrative appeals system under 42 U.S.C.
§ 1396a(a)(37) and the implementing federal regulations; and
(4) a violation of the Equal Protection Clause of the United States
Constitution due to the irrational discrimination in payments made by
Pennsylvania’s medicaid program to out-of-state hospitals as contrasted to
payments made in-state hospitals.
The District Court declared that Pennsylvania’s payment
system and her administrative appeals system violated federal law.
701 F. Supp. at 526; Appendix at B-67. The District Court
ordered the Pennsylvania defendants to develop new payment and
appeals systems by May 1, 1989. The District Court also awarded
fees under 42 U.S.C. § 1988 after submission of a joint fee
proposal by the parties.
In making the fee award, the District Court included expert
witness fees, naving concluded that the experts’ work was
"essential" to the District Court’s decision. Appendix at C-2.
Moreover, in the joint fee proposal submitted by WVUH and the
Pennsylvania defendants, the parties stipulated that the experts’
work, which encompassed both pretrial and trial work, was
"necessary" and that $104,133.00 was a reasonable amount of
compensation for such work. See Appendix at C-1 to C-2.
The Court of Appeals for the Third Circuit ultimately
affirmed the District Court in all but two respects. First, the
Court of Appeals held that expert witness fees were not
compensable in an award of attorneys’ fees under 42 U.S.C. 1988.
885 F.2d at 35; Appendix at A-48. This ruling is in direct conflict
with rulings of the Seventh, Eighth, and Tenth Circuits. Secondly,
the Court of Appeals reversed the District Court on the issue of
the adequacy of Pennsylvania’s administrative appeals system.
The Court of Appeals refused to rehear the case as requested
by WVUH. Consequently, WVUH has petitioned this Court for a
writ of certiorari.
REASONS FOR GRANTING THE
WRIT OF CERTIORARI
An Award Under 42 U.S.C.
§ 1988 May Include Expert
Witness Fees.
The Third Circuit’s ruling upon the compensability of expert
witness fees under 42 U.S.C. § 1988 is a part of a multi-circuit
conflict. The Fourth Circuit, the First Circuit, and now the Third
Circuit hold that expert witness fees are not compensable under
42 U.S.C. § 1988." See Sevigny v. Dicksey, 846 F.2d 953 (4th Cir.
1988); Denny v. Westfield State College, 880 F.2d 1465 (1st Cir.
1989); West Virginia University Hospitals, Inc. v. Casey, 885 F.2d
11 (3d Cir. 1989) (Appendix at A-1 to A-49). By contrast, the
Eighth Circuit, Tenth Circuit, and, most recently, the Seventh
Circuit, have held that an award under 42 U.S.C. § 1988 may
include expert witness fees. See SapaNajin v. Gunter, 857 F.2d
463 (8th Cir. 1988); Ramos v. Lamm, 713 F.2d 546 (10th Cir.
1983); Friedrich v. City of Chicago, 888 F.2d 511 (7th Cir. 1989).
This conflict between the Courts of Appeals on this issue is an
important one which is best illustrated by the difference in
approach taken by the Third Circuit and by the Seventh Circuit in
their recent decisions. These decisions sharply contrast one
another in their respective applications of this Court’s decision in
Missouri v. Jenkins, U.S. _, 109 S. Ct. 2463, 105 L.Ed.2d
229 (1989).
Missouri v. Jenkins clearly establishes that an award of
attorneys’ fees under 42 U.S.C. § 1988 is not limited to fees
2. The First Circuit’s holding in this regard extends only to testimonial work in
court; the First Circuit has not yet decided whether nontestimonial work is
compensable under 42 U.S.C. § 1988. See 880 F.2d at 1472.
generated by attorneys. Instead, this Court has ascertained that
the Congressional intent behind 42 U.S.C. § 1988 is to provide a
"fully compensatory fee.”" See Missouri v. Jenkins, 109 S. Ct. at
2471, 105 L.Ed.2d at 242. In light of that intent, this Court has
explained that fee awards may take into account the work of
non-attorneys "whose labor contributes to the work product for
which the attorney bills her client." 109 S. Ct. at 2470, 105
L.Ed.2d at 241.
Speaking for the Seventh Circuit in Friedrich v. City of
Chicago, Judge Posner provides a thoughtful analysis of 42 U.S.C.
§ 1988 and of Missouri v. Jenkins, in which he specifically rejects
the Third Circuit’s conclusion reached in this case. First, Judge
Posner points out that this Court has flatly rejected the argument
that the plain language of 42 U.S.C. § 1988 contemplates a fee
award for only an attorney’s fees, not an expert’s fee. 888 F.2d ut
513. Following this Court’s example in Missouri v. Jenkins, Judge
Posner applies the paramount rule of statutory construction that
the intention of the drafters of the legislation prevails over the
Strict language of the statute. Id. at 514 (citing United States v.
Ron Pair Enterprise, Inc., US. __, 109 S. Ct. 1026, 103
L.Ed.2d 290 (1989)). Judge Posner succinctly states:
When a court can figure out what Congress probably
was driving at and how its goal can be achieved, it is
not usurpation -- it is interpretation in a sense that has
been orthodox since Aristotle -- for the court to
complete (not enlarge) the statute by reading it to bring
about the end that the legislators would have specified
had they thought about it more clearly or used a more
perspicuous form of words. That is what the Supreme
Count did in the Jenkins case.
888 F.2d at S14.
In his analysis, Judge Posner recites the history of the
enactment of 42 U.S.C. § 1988, beginning with this Court’s
holding in Alyeska Pipeline Service Co. v. Wilderness Society, 421
U.S. 240 (1975). That history clearly reveals Congress’ intention
to overrule Alyeska by the enactment of 42 U.S.C. § 1988 to
provide for a fully compensatory fee -- a fact noted by this Court
in Missouri v. Jenkins when addressing the issue of whether
paralegal fees were compensable under 42 U.S.C. § 1988. 109
S. Ct. at 2470-2471, 105 L.Ed.2d at 241-242; see also Friedrich v.
City of Chicago, 888 F.2d at 514.
Just as paralegals assist in the preparation of an attorney’s
work product, experts educate counsel and preclude the need for
the attorney to educate himself, which would obviously require
more time and run up an attorney’s fees even more. 888 F.2d at
514. Judge Posner wisely warns that a refusal to pay experts’ fees
would encourage underspecialization and inefficient trial
preparation "just as to forbid shifting the cost of paralegals would
encourage lawyers to do paralegals’ work.” Id.
While the Third Circuit attempts to distinguish Missouri v.
Jenkins, see 885 F.2d at 34; Appendix A-47, Judge Posner
persuasively and cogently rejects the possibility that Missouri v.
Jenkins is distinguishable. 888 F.2d at 514. The Third Circuit
holds that, because witness fees are governed by 28 U.S.C. 1821,
the controlling precedent is Crawford Fittin _v. J.T. Gibbons
Inc., 482 U.S. 437 (1987), rather than Missouri v. Jenkins. 885
F.2d at 34; App. A-47. What the Third Circuit ignores, but Judge
Posner does not, is the fact that Crawford did not involve 42
U.S.C. § 1988. 888 F.2d at 515. Indeed, 28 U.S.C. § 1821 is
specifically inapplicable where another statute, like 42 U.S.C.
§ 1988, provides for costs or fees. 888 F.2d at 515.
Even if 28 U.S.C. § 1821 were applicable, Judge Posner
observes that that statute deals only with testimonial work
performed by experts; it does not affect nontestimonial work by
experts. Therefore, expert fees for non-testimonial work are not
controlled in any way by Crawford. Id.; see also Denny v.
Westfield State College, 880 F.2d at 1472 (in which the First
Circuit also notes the distinction).
Judge Posner also rejects arguments, based upon Crawford, to
the effect that courts shou!d not lightly infer a repeal of 28 U.S.C.
§ 1821 by provisions of law that do not explicitly refer to witness
fees. 888 F.2d at 515. Again, Judge Posner points out that it is
Congressional intent that controls and that, based on that intent,
witness fee awards under 42 U.S.C. § 1988 are excluded from 28
U.S.C. § 1821. Id. at 516.
The Congressional intent to exclude expert witness fees from
the reach of 28 U.S.C. § 1821 is apparent from the history of 42
U.S.C. § 1988. Prior to this Court’s decision in Alyeska, the
federal courts awarded expert witness fees under what they
believed to be their general equitable powers. In Alyeska, this
Court held that the equitable powers of the federal courts were
not so broad. Congress reacted to Alyeska by enacting 42 U.S.C.
§ 1988 to grant such equitable powers. Judge Posner in Friedrich
provides a telling discussion of the status of pre-Alyeska law and
the evidence of the Congressional intent to return to the status uf
pre-Alyeska law, which authorized reimbursement of expert
witness fees. 888 F.2d at 517-518. His conclusion that expert
witness fees are compensable under 42 U.S.C. § 1988 is compelled
by the history of that statute’s enactment and this Court’s decision
in Missouri v. Jenkins.
This Court has long heeded the rule of giving effect to
legislative intent and has required the lower courts to honor that
rule. The Third Circuit has failed to do so. This Court’s decision
in Missouri v. Jenkins rejected the facile argument, now adopted
by the Third Circuit in this case, that the words "attorney’s fees" in
42 U.S.C. § 1988 mean only fees generated by attorneys. Having
decided in Missouriy enkins that paralegal work is compensable
under 42 U.S.C. § 1988, this Court ought now to address the
parallel issue raised by the Third Circuit’s erroneous decision in
this case. By doing so, this Court will resolve the continuing and
growing conflict between the Courts of Appeals.
CONCLUSION
For these reasons, this petition for a writ of certiorari should
be granted. The question presented fully satisfies the criteria set
forth in Rule 17 of the Rules of the Supreme Court.
Therefore, WVUH requests that a writ of certiorari issue to
review the decision of the Court of Appeals for the Third Circuit.
Respectfully submitted,
WEST VIRGINIA UNIVERSITY
HOSPITALS, INC.
By_/s/ Robert T. Adams
Counsel of Record
Robert T. Adams
McGUIRE, WOODS, BATTLE &
BOOTHE
One James Center
Richmond, Virginia 23219
(804) 775-1000
Counsel of Record
Julia Krebs-Markrich
McGUIRE, WOODS, BATTLE &
BOOTHE
The Army and Navy Club Building
1627 Eye Street, N.W.
Washington, D.C. 20006
(202) 857-1700
-10-
December 22, 1989
Jack M. Stover
METTE, EVANS & WOODSIDE
1801 North Front Street
Harrisburg, Pennsylvania 17102
(717) 232-5000
Counsel for Petitioner
-]j-
APPENDIX A
SR ee ee as.
i RO oe Et ee pal SB POY pea a OO” Dee eee i
FILED: SEPTEMBER 5, 1989
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 89-5165
WEST VIRGINIA UNIVERSITY HOSPITALS, INC.
v.
ROBERT CASEY, Governor, Commonwealth of
Pennsylvania; JOHN WHITE, Secretary, Department of
Public Welfare; DAVID S. FEINBERG, Director, Office of
Medical Assistance; THE DEPARTMENT OF PUBLIC
WELFARE,
Appellants
Appeal from the United States District Court
for the Middle District of Pennsylvania
D.C. Docket No. Civil 86-0955
Argued May 22, 1989
Before BECKER, STAPLETON, and ROSENN,
Circuit Judges
Opinion Filed September 5, 1989
ERNEST D. PREATE, JR., Attorney General
JEROME T. FOERSTER, Deputy Attorney General (Argued)
CALVIN R. KOONS, Senior Deputy Attorney General .
JOHN G. KNORR, III, Deputy Attorney General
OPINION OF THE COURT
ROSENN, J., Circuit Judge
Chief, Litigation Section
Office of Attorney General
Litigation Section
15th Floor, Strawberry Square
Harrisburg, PA 17120
Attorneys for Appellants
ROBERT T. ADAMS, ESQ.
(Argued)
JULIA KREBS-MARKRICH,
ESQ.
THOMAS J. STALLINGS, ESQ.
McGuire, Woods, Battle &
Boothe
One James Center
Richmond, Virginia 23219
JACK M. STOVER, ESQ.
Shearer, Mette, Evans &
Woodside
1801 North Front Street
P.O. Box 729
Harrisburg, PA 17108-0729
Attorneys for Appellees
A-2
:
3
}
:
This interesting and complex appeal arises from the cross-fire
currently trapping many hospitals across our nation between
rising operating costs, on the one hand, and federal legis!ation
aimed at the sharp containment of health delivery costs, on the
other. The plaintiff, West Virginia University Hospitals, Inc.
(WVUH or the Hospital), brought this action against certain
Pennsylvania state officials under the Civil Rights Act, 42 U.S.C.
§ 1983, alleging that the Pennsylvania program for providing
medicaid reimbursement to an out-of-state hospital such as
WVUH violated federal medicaid standards encompassed by Title
XIX of the federal Social Security Act and violated the equal
protection clause of the fourteenth amendment to the United
States Constitution. WVUH also claimed that Pennsylvania’s
administrative appeals system was legally inadequate. The
Hospital sought injunctive and declaratory relief invalidating the
out-of-state aspects of the State’s hospital reimbursement
program.
After a bench trial before the United States District Court for
the Middle District of Pennsylvania, the district court, in a
thoughtful and painstaking opinion published at 701 F. Supp. 496
(M.D. Pa. 1988), granted WVUH’s request for relief on all
counts. District Judge Rambo concluded that Pennsylvania’s
reimbursement program as applied to WVUH violated both
federal statutory law and the equal protection clause of the
Constitution, and held that the state’s administrative appeal
system was legally inadequate. She ordered Pennsylvania to
revise its reimbursement methodology for WVUH and to
formulate an adequate and meaningful medicaid administrative
appeals system for the Hospital. Additionally, the court held that
the State must permit WVUH to avail itself of the new appeals
system to challenge its reimbursements from the date the
Hospital commenced this action, rather than from the date of
A-3
judgment. Finally, in an unpublished memorandum and order
also issued the day of judgment, the district court awarded
attorneys fees to the plaintiff pursuant to 42 U.S.C. § 1988 in the
amount of $500,000, of which $104,133 was attributable to expert
witness fees and costs.
Pennsylvania appeals, challenging the decision on the merits,
the scope of relief, and the award of expert witness fees. We
affirm in part and reverse in part.
I. FACTS
A. The Parties.
The plaintiff WVUH is a_ university-affiliated teaching
hospital located six miles south of the border between West
Virginia and Pennsylvania. As a "tertiary care" hospital, WVWUH
provides a complex level of hospital and medical services not
generally found in community hospitals. WVUH is the closest
source of tertiary care for many residents in the Pennsylvania
counties of Fayette and Greene, and provides services as well to
residents of the Pennsylvania county of Washington. Historically,
the Hospital has provided significant numbers of Pennsylvania
medicaid patients wit hospital care. For the years 1984 to 1987,
WVUH gave inpatient hospital care to more Pennsylvania
medicaid patients than did over one-half of the hospitals located
in Pennsylvania. Five percent of all WVUH inpatient admissions
are attributable to Pennsylvania medicaid recipients, while overall
medicaid patients at WVUH constitute twenty-three percent of
all admissions. WVUH is by far the largest out-of-state provider
of medical services to Pennsylvania medicaid recipients.
The defendants in this action are Pennsylvania Governor
Robert Casey, John F. White, the Secretary of Pennsylvania’s
Department of Public Welfare (DPW), and David Feinberg, the
DPW official responsible for developing the Pennsylvania
6 tae
a ete Nee sess al
hospital reimbursement program at issue in this case. Although
technically incorrect, for simplicity’s sake this opinion may
occasionally use the words "Pennsylvania" or "the State" when
referring to the defendants.
B. The federal medicaid act.
In 1965 Congress enacted Title XIX of the Social Security Act
(known as Medicaid or The Medicaid Act) to provide medical
assistance to needy persons. 42 U.S.C. § 1396 et seg. The purpose
of the act was to provide a nationwide program of medical
assistance for low income families and individuals. Medicaid
became the primary source of health care coverage for the poor in
America. The program is jointly financed with federal and state
funds “and is basically administered by each state within certain
broad requirements and guidelines." House Subcomm. on Health
and the Environment, Data on the Medicaid Program: Eligibility,
Services, Expenditures Fiscal Years 1967-77, H.R. Rep. No. 10,
95th Cong., 1st Sess. 1. The federal unit currently responsible for
overseeing the medicaid program is the Health Care Financing
Administration (HCFA). Federal law requires that one state
agency must be designated as the single state agency responsible
for the administration of the program. The state determines the
scope of the services offered and generally determines the
eligibility level for the programs. Id. at 1-2. Thus, the Act
implemented a federal-state joint venture in which participating
states receive federal medicaid funds in return for administering a
medicaid program developed by the state within the parameters
established by federal law and regulations.
Before 1980, Title XIX require states to pay hospitals the
"reasonable cost" of rendering inpatient hospital services to
medicaid recipients. This requirement translated into a
retrospective form of reimbursement based on the actual costs
incurred by the hospitals in providing medicaid services. In 1981,
however, Congress, hoping to contain escalating medicaid costs,
enacted as part of the 1981 Omnibus Budget Reconciliation Act
(OBRA), P.L. 97-35, a new standard of hospital reimbursement.
The OBRA replaced the "reasonable cost" standard with the
current standard of "reasonable and adequate to meet the costs
which must be incurred by efficiently and economically operated
facilities." 42 U.S.C.A. § 1396(a)(13)(A) (West Supp. 1989).
The 1981 OBRA also reduced federal oversight of states’
reimbursement methodologies. ‘Pursuant to section
1396a(a)(13)(A), the HCFA will approve a state reimbursement
plan based on the state’s satisfactory "assurances" that the plan is
in compliance with federal requirements. These requirements are
reflected both in the statute itself and in its implementing
regulations published by the HCFA in interim form in 1981 and
in final form in 1983. 42 C.F.R. §§ 447.250-447.280.
C. The Pennsylvania medicaid program:
operating cost, direct medical
education cost, and capital cost
reimbursement.
In Pennsylvania, DPW is the state agency responsible for
administering medicaid. The medicaid program developed by
DPW for the state is called the "Medicaid Assistance Program" or
"MAP."
Consistent with the 1981 federal policy change with respect to
hospital reimbursement, Pennsylvania developed a "prospective
payment system" (PPS) for reimbursement of hospitals to contain
escalating costs associated with medicaid services. This system,
effective beginning fiscal year 1984-1985, replaced the
retrospective method of reimbursement with a prospective
method. Under this system, each hospital admission is classified
according to the patient’s illness diagnosis into 1 of 477 categories
known as Diagnostic Related Groups (DRGs). 53 Fed. Reg.
38,576-89 (1988). A hospital is reimbursed in accordance with the
flat fee fixed for the applicable category -- regardless of the
number of services used or the patient’s length of stay. The DRG
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system, being prospective in nature, will sometimes
undercompensate for a given service and will sometimes
overcompensate. The expectation, however, is that in the
aggregate an efficiently operated hospital will receive an
appropriate amount to reimburse it for medicaid services.
Unquestionably, Pennsylvania’s PPS treats in-state hospitals
differently than out-of-state hospitals. Rate calculation for
in-state hospitals depends on the type of hospital seeking
reimbursement and the average cost for that type of hospital.
Under the PPS, all participating in-state hospitals, approximately
233 in number, are assigned to one of seven groups. Grouping for
in-state hospitals takes into account four concepts: teaching
Status, medicaid volume, environmental characteristics, and
hospital costs. These four concepts are measured by a total of
thirteen variables, including such things as the number of resident
and intern programs, total number of patients, area wage index,
and so on. The actual grouping of in-state hospitals is
accomplished by a computer program.
After classifying the in-state hospitals, Pennsylvania then
determines a group average cost per case, which is based on actual
allowable costs and adjusted for inflation and budget neutrality.
The hospitals in Group 1 have the highest group rate, and those in
Group 7 have the lowest.
To determine the amount of reimbursement to in-state
hospitals under the PPS, Pennsylvania multiplies the relative
value of the DRG by the hospital’s group average cost per case.
The higher the group rate, the higher the payment for a given
DRG. Thus, Pennsylvania pays a Group 1 hospital more to treat a
given DRG than it pays a Group 2, 3, 4, 5, 6, or 7 hospital to treat
that DRG.
Out-of-state hospitals, on the other hand, receive quite
different treatment under the PPS. Unlike in-state hospitals,
Out-of-state hospitals are not grouped according to the concepts of
hospital costs, teaching status, medicaid volume, and
environment. Instead they are treated on the basis of one factor
only: their yeographical location outside Pennsylvania.
Moreover, the group rate assigned to out-of-state hospitals is not
based on the average allowable costs of that group based on
historical data, but rather on the average of payments made to
in-state hospital providers. To reimburse inpatient operating
costs of out-of-state hospitals, Pennsylvania multiplies the relative
value of the DRG assigned to the patient’s illness by the
Pennsylvania statewide average cost per case or pays the hospital’s
actual charges for treating that illness, whichever is lower.
Aside from operating cost reimbursement under the PPS, the
MAP provides in-state hospitals additional hospital
reimbursement on the basis of two other considerations: direct
medical education costs (DME) and capital costs. Again,
out-of-state hospitals are treated differently with respect to these
two bases of medicaid reimbursement.
In-state hospitals receive an amount, in addition to their
operating cost reimbursements, to reimburse them for the direct
medical education (DME) costs (if any) associated with their
medicaid service. For the years 1984 to 1986, Pennsylvania
reimbursed in-state hospitals for the MAP share of their DME
costs on an actual cost basis subject to certain limitations.
Beginning fiscal year 1986-1987, Pennsylvania _ limits
reimbursement to in-state hospitals for DME costs to 1.9 percent
over the amount paid the hospital for DME costs the previous
year, or the hospital’s allowable DME costs, whichever is lower.
In contrast, Pennsylvania decided as a matter of policy not to
pay out-of-state hospitals for DME costs associated with
medicaid. Thus, teaching hospitals such as WVUH receive no
DME cost reimbursement from Pennsylvania when they treat
Pennsylvania medicaid patients.
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Finally, in addition to reimbursement of inpatient operating
costs under the PPS and in addition to payments for DME costs,
Pennsylvania reimburses in-state hospitals for their allowable
capital costs. For the period July 1, 1984 through June 30, 1986,
reimbursement of in-state hospitals’ capital costs was based on
actual capital costs incurred. After that date, Pennsylvania
initiated a prospective payment system for reimbursement of
in-state hospitals’ capital costs to be phased in between July 1,
1986, and June 30, 1992. During that period, Pennsylvania would
pay in-state hospitals for their actua! capital costs on a decreasing
percentage basis. After July 1, 1992, the state will reimburse all
in-state hospitals at the same flat rate for their capital costs.
Out-of-state hospitals are not reimbursed for their capital
costs in the same manner. The Pennsylvania medicaid
prospective payment system has never reimbursed out-of-state
hospitals using actual allowable costs of capital. Pennsylvania
pays out-of-state hospitals an "add-on" for capital reimbursement
that represents the average capital costs of all Pennsylvania
hospitals. That "add-on" bears no relationship to the actual capital
costs of out-of-state hospitals. Moreover, although the MAP gave
in-state hospitals approximately ten years to adjust to a flat rate
payment for capital costs, out-of-state hospitals were allowed no
phase-in period to adjust to a prospective payment system for such
costs.
B. The MAP appeals system.
Pursuant to federal regulation, the state medicaid agency must
provide hospitals with a system by which to appeal. In
Pennsylvania the administrative agency division that adjudicates
the appeals is the DPW’s Office of Hearings and Appeals (OHA).
The OHA hearing officer recommends a decision to the Director
of OHA, who either adopts or rejects the recommendation. Both
parties have the right to request reconsideration from the
Secretary of DPW. Outside of the administrative appeals process,
review of the decision of the Director of OHA or the Secretary of
DPW may be sought through the judicial system of the
Commonwealth of Pennsylvania.
Il. THE DISTRICT COURT’S DECISION
WVUDH initiated this action on July 16, 1986. After a six-day
bench trial in May 1988, the district court concluded that in all
aspects -- operating costs, DME costs, and capital costs --
Pennsylvania’s reimbursement program fell considerably short of
the requirements of Title XIX and violated federal law.
Moreover, the court concluded that Pennsylvania’s classification
of hospitals, affording different treatment to hospitals depending
on their location inside or outside the state, violated WVUH'’s
rights under the equal protection clause of the United States
Constitution. Finally, the court declared Pennsylvania’s
administrative appeal system invalid because it allowed a hospital
to challenge only the application of the state’s methodology,
rather than the methodology itself. The court ordered
Pennsylvania to revise its medicaid reimbursement program and
administrative appeals system as they applied to WVUH and to
allow the Hospital to employ the revised appeal system to
challenge reimbursements from the date the action was
commenced. Pursuant to 42 U.S.C. § 1988, the district court
awarded attorneys fees, which included expert witness fees, to
WVUH as the prevailing party. The defendants appeal.
Ill. WVUH’s RIGHT TO CHALLENGE THE
REIMBURSEMENT PROGRAM
Before assessing the validity of Pennsylvania’s medicaid
reimbursement program, we first address the preliminary
question whether WVUH has a cause of action entitling it to
challenge the program.
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The threshold issue in this case is whether WVUH can assert a
cause of action against the defendant state officials under 42
U.S.C. § 1983 for alleged violation of the federal medicaid statute.
Section 1983 provides in relevant part that:
Every person who, under color of any statute,
ordinance, regulation, custom, or usage, of any State
or ... the District of Columbia, subjects, or causes
to be subjected, any citizen of the United States or
other person within the jurisdiction thereof to the
deprivation of any rights, privileges, or immunities
secured by the Constitution and laws, shall be liable
to the party injured in an action at law, suit in
equity, or other proper proceeding for redress.
42 U.S.C. § 1983. Pennsylvania argues that a hospital cannot
State a valid claim under section 1983 for alleged violation of the
medicaid statute with respect to hospital reimbursement. This
court has not previously had the opportunity to rule on this
question of law.
Section 1983 provides a remedy for deprivation under color of
State law of "any rights . . . secured by the Constitution and laws."
42 U.S.C. § 1983 (emphasis added). Interpreting this language in
Maine v. Thiboutot, 448 U.S. 1 (1980), the Supreme Court held
that the phrase "and laws" does not implicitly refer only to equal
rights laws (making only equal rights violations actionable under
section 1983), but rather refers generally to all federal statutory
law. The plain language of section 1983, together with its
legislative history and the Court’s past treatment of the provision,
compels the conclusion that causes of action under section 1983
are not limited to claims based on constitutional or equal rights
violations. 448 U.S. at 6-8.
Thiboutot, however, does not stand for the broad proposition
that section 1983 provides a cause of action for any violation of
any federal law. As subsequent cases explain, a cause of action
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under 1983 exists for violation of a federal law if ‘wo
requirements are met. First, the federal law must create private
rights enforceable under section 1983. Pennhurst State School
and Hospital v. Halderman, 451-U.S. 1 (1981). In Pennhurst the
Court held that a section 1983 action did not lie for alleged
violation of the Developmentally Disabled Assistance and Bill of
Rights Act because that Act conferred no substantive rights but
merely constituted a congressional declaration of policy. Id. at
18-27. With respect to the existence of the private rights
requirement, valid federal regulations as well as federal Statutes
may create rights enforceable under section 1983. Wright v. City
of Roanoke Redevelopment and Housing Authority, 479 U.S.
418, 431-32 (1987) (HUD regulations defining statutory term
"rent" as including a "reasonable amount" for utilities grants
tenants rights enforceable under section 1983); Alexander _v.
Polk, 750 F.2d 250, 259 (3d Cir. 1984) (WIC regulation creates
enforceable right to notice of fair hearing).
Second, and stated negatively, the federal law must not reflect
a congressional intent to foreclose private enforcement.
Middlesex Cty. Sewerage Auth. v. National Sea Clammers Ass’n,
453 U.S. 1 (1981). In Sea Clammers, the Court held that a cause
of action for violation of two federal environmental statutes did
not lie because the comprehensive remedial schemes provided in
those statutes reflect a congressional intent to foreclose a private
remedy under section 1983. Id. at 21. The burden of proving a
congressional intent to foreclose a section 1983 remedy, however,
lies with the state actor, and that burden is not easily satisfied.
Once it is determined that a federal provision creates an
enforceable right, a cause of action exists under section 1983 for
violation of that provision "unless the state actor demonstrates by
express provision or other specific evidence from the statute itself
that Congress intended to foreclose such private enforcement.
Wright, 479 U.S. at 423. A court deciding the issue may not
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“lightly conclude” that Congress intended such foreclosure. Id.
at 423-24 (quoting Smith v. Robinson, 468 U.S. 992, 1012 (1984).
Undertaking the analysis, then, the first question is whether
the Medicaid Act, Title XIX of the federal Social Security Act, 42
U.S.C.A. §§ 1396 through 1396s (West 1983 & Supp. 1989),
creates private rights in favor of hospitals participating in a state’s
medicaid program. Following the example set by the Court in
Pennhurst, we seek the answer to this question in the language,
purpose, and legislative history of the statute alleged to have been
violated.
1 WVUH in its supplementa! brief urges us to apply the test articulated in
Cort v. Ash, 422 U.S. 66 (1975), for determining whether a statute implies a
private right of action. The Hospital should be happy that we refuse its
request and instead apply the traditional, and, coincidentally for it, more
favorable analysis to determine private enforceability under § 1983.
Whether a federal statute is enforceable under § 1983 and whether the
Statuie creates an implied right of action jnvolve separate inquiries. See,
¢.g., Middlesex Cty. Sewerage Auth. v. Nationa! Sea Clammers Ass’n, 453
U.S. 1, 19 (1981).
For the sake of clarity, we briefly explain the difference between a § 1983
private right of action analysis and the general implied right of action
analysis of Cort v. Ash. When a statute does not explicitly supply a private
right of action, two occasionally intersecting avenues may be explored for a
possible private right of enforcement. First, an implied private right of
action to enforce the statute may exist directly under the statute in
accordance with the four-factor analysis of Cort y. Ash. To establish an
implied right of action under Cort v. Ash, the plaintiff must satisfy the first
requirement -- that the statute creates a federal right in favor of the
plaintiff. The plaintiff must then satisfy the three remainig Cort v. Ash
requirements relating to the existence of a remedy -- that Congress
intended to create a remedy, that the remedy is consistent with the
legislative scheme, and that the cause of action is not traditionally relegated
to state law. In sum, under Cort y. Ash the plaintiff bears the burden of
establishing not only the existence of a right, but also the existence of an
intended private remedy.
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Generally, the Medicaid Act consists of numerous sections and
subsections that together form a cooperative mosaic through
which the federal government reimburses a portion of the
payments made by participating states to hospitals and other
providers furnishing care to eligible needy persons. States
participating in the program are charged with administering the
medicaid plan and distributing the state and federal funds.
Participation ir the program is voluntary, but once a state chooses
io participate it is obligated to devise a medicaid plan that
complies with the federal statutory and regulatory conditions of
funding. See Pennhurst, 451 U.S. at 11 (state participation in
federal-state cooperative program to treat developmentally
disabled carries obligation to comply with federal law).
Section 1396a of the medicaid act enumerates the various
federal requirements of state medicaid plans. In particular,
subsection 1396a(a)(13)(A) imposes federal requirements on
states’ reimbursement to hospitals and other entities providing
care to medicaid patients. It is this subsection that WVUH
charges the defendants violated, and it is to this subsection,
therefore, that we turn to ascertain whether it created substantive
In appropriate cases, the second avenues for private enforcement of a
federal statute is § 1983. In determining whether a private right of action
exists under § 1983, only two inquiries are relevant: one, whether the
statute alleged io have been violated creates a federal right in favor of the
plaintiff, and the other, whether Congress has forclosed the remedy of
private enforcemeat. The § 1983 analysis intersects with the Cort v. Ash
analysis insofar as the plaintff under both analyses must establish the
creation of a federal right. With respect to the existence of a remedy,
however, the contrast between the two analyses is stark. Under Cort v. Ash
the plaintiff must establish that Congress intended the remedy. Under §
1983 analysis, on the other hand, once a federal right is established, the
existence of a remedy is presumed because § 1983 itself provides the
authorization for private enforcement. The burden is on the defendant to
establish that Congress intended to foreclose private enforcement.
private rights enforceable under section 1983 in favor of hospitals
offering care to medicaid patients.
We begin with the statutory language. Section
1396a(a)(13)(A) stipulates, in pertinent part, that
A State plan for medical assistance must -- . . .
(13) provide --
(A) for payment . . . of the hospital . . . 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 ....
42 U.S.C.A. § 1396a(a) (West Supp. 1989) (emphasis added). The
language of this subsection is "cast in the imperative," see
Alexander v. Polk, 750 F.2d at 259, mandating the state to
maintain at least some sort of standard (the nature of which is
better left for the merits discussion) in its hospital reimbursement
plan. The language succinctly sets forth a congressional
command, which is wholly uncharacteristic of a mere suggestion
or “nudge,” Pennhurst, 451 U.S. at 19 (quoting Rosado v.
Wyman, 397 U.S. 397, 413 (1970)), in the direction of providing
appropriate reimbursement of hospitals treating medicaid
patients.
The construction of this subsection treating hospital
reimbursement is parallel to the construction of the other
forty-nine provisions imposing federal requirements on state
A-15
medicaid programs. All provisions are prefaced by the language
that “[a] State plan for medical assistance must... ." There can be
no mistaking that the stipulations of section 1396a(a) clearly
constitute conditions that a state must meet to participate in the
joint program.
In this respect, the statutory language of section 1396a(a)
differs from the language examined in Pennhurst. In that case,
the Court held that the "bill of rights" provision of the
Developmentally Disabled Assistance and Bill of Rights Act, 42
U.S.C. § 6010, did not create in favor of the mentally retarded any
substantive rights to “appropriate treatment" in the "least
restrictive environment." The Court compared the "bill of rights"
provision with other sections of the act and observed that
"[njoticeably absent from 6010 is any language suggesting that
6010 is a ’condition’ for the receipt of federal funding under the
Act," making section 6010 stand "in sharp contrast" to the other
sections that manifestly were conditions. 451 U.S. at 13. The
Court’s concern in Pennhurst that a state might not realize that its
participation in a federal-state program is subject to federal
conditions is relieved here by the express and imperative language
of the Medicaid Act.
Defendants assert, however, that the purpose of the medicaid
program weighs against finding that section 1396a(a)(13)(A)
affords substantive rights to hospitals offering care to medicaid
patients. They argue that imposing federal requirements with
respect to hospital reimbursement does not equate with granting
substantive rights in favor of hospitals to legally enforce
reimbursement. The Medicaid Act helps states to fund a public
assistance medical program for the financially needy, and
therefore, defendants conclude any benefit conferred on hospitals
is purely incidental. The beneficiaries of the act, argue
defendants, are the needy persons assisted by medicaid, not the
providers from whom the state buys medical services.
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rr
We recognize, of course, that the primary purpose of medicaid
is to achieve the praiseworthy social objective of granting health
care coverage to those who cannot afford it. It does not
necessarily follow, however, that Title XIX grants substantive
rights only to medicaid patients. Although the broad purpose of
the Medicaid Act as a whole is to help the poor attain medical
care, the specific purpose of section 1396a(a)(13)(A) is to assure
State compliance with some federal standard of hospital
reimbursement. The section sets up a plan for the adequate and
reasonable reimbursement of hospitals which serve medicaid
patients, and thus the hospitals are the section’s "beneficiaries."
Their interests and the interests of medicaid patients are bonded
by a common goal, the delivery of adequate health care by the
hospitals to state medicaid patients and the enjoyment of such
care by the patients. The interests of both are intertwined and
hospitals have a concrete stake in reimbursement in accordance
with the federal statute and regulations.
Other courts have allowed health providers to challenge state
medicaid plans as violative of Title XIX because they considered
the interests of health providers and of medicaid patients to be
"parallel." See, e.g., Coos Bay Care Center v. Oregon, Dep’t of
Human Resources, 803 F.2d 1060, 1063 (9th Cir. 1986) (private
health care facility’s challenge of medicaid program states a claim
under section 1983), cert. granted, 481 U.S. 1036, vacated as moot,
108 S. Ct. 52 (1987); Nebraska Health Care Ass’n v. Dunning, 778
F.2d 1291, 1296 (8th Cir. 1985) (long-term medical care facilities
may maintain section 1983 action challenging medicaid plan).
Although we approve of these cases, their reasoning may
sometimes suggest that they are concerned with a sort of
representative standing rather than the creation of federal rights
in favor of the health providers.
We prefer to ground our decision more explicitly and precisely
on our conclusion that Title XIX affords enforceable rights to
hospitals serving medicaid patients. In this respect, we join with
the Fourth Circuit, which recently arrived at the same conclusion
A-17
after full analysis of the issue, see Virginia Hosp. Ass’n v. Baliles,
868 F.2d 653, 657-61 (4th Cir. 1989), petition for cert. filed (June
15, 1989), and the Tenth Circuit, which adopted the Fourth
Circuit’s reasoning and result in a like case. See Amisub, Inc. v.
Colorado Dep’t of Social Services, No. 88-2482, slip op. at 10
(10th Cir. July 11, 1989). Cf. Silver v. Baggiano, 804 F.2d 1211,
1217 (11th Cir. 1986) (expressly reserving question whether
Social Security Act creates a right enforceable by a health
provider under section 1983). Furthermore, once it is determined
that WVUH has a private enforceable right under section 1983,
we have no doubt as to its standing to bring this action. See
Amisub, slip op. at 11.
The legislative history of section 1396a(a)(13)(A) buttresses
our conclusion that WVUH has a private right to enforce the
federal hospital reimbursement standard. In the Joint
Explanatory Statement of the Committee of Conference
commenting on the 1981 OBRA as enacted, Congress expressed
its concern that state reimbursement methodologies adequately
compensate hospitals for their care of medicaid patients. The
report states: "the conferees intend that State hospital
reimbursement policies should meet the costs that must be
incurred by efficiently-administered hospitals in providing
covered care and services to medicaid eligible as well as the costs
required to provide care in conformity with State and Federal
requirements." H.R. Conf. Rep. No. 208, 97th Cong., Ist Sess.,
962, reprinted in 1981 U.S. Code Cong. & Admin. News 1010,
1324. The same report also emphasizes the inclusion in the Title
XIX amendment of a provision “providing that the States, in
developing their payment rates, take into account the situation of
hospitals . . . which serve a disproportionate number of low
income patients." Id. We believe that Congress’s concern with
appropriate hospital reimbursement implies an intent to supply
hospitals with an indispensable right to enforce state compliance
with federal standards that, whether strictly or loosely, govern
state reimbursement methodologies. Who else is more aggrieved
by the absence of an adequate or reasonable hospital
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reimbursement rate than a disadvantaged hospital and who has a
more compelling interest to press for a correction? We therefore
conclude that the beneficiaries of section 1396(a) are the
hospitals that serve medicaid patients and that they have an
enforceable private right.
Having determined that Title XIX supplies WVUH with
private rights enforceable under section 1983, we next inquire
whether the medicaid statute reflects a congressional intent to
foreclose private enforcement. In accordance with the law as we
described it above, WVUH has a remedy under section 1983 to
enforce its rights under Title XIX unless defendants demonstrate
that Congress intended to preclude private enforcement of that
federal law.
Pennsylvania argues that Title XIX reflects a congressional
intent to foreclose private enforcement of hospitals’ rights
because the statute requires the Department of Public Welfare to
provide hospitals with an administrative remedy and because all
State medicaid plans are subject to review by the Secretary of
Health and Human Services and disapproval of a plan may result
in suspension or reduction of federal payments. We believe,
however, that Pennsylvania fails to carry its burden of proving that
these remedial devices are "sufficiently comprehensive . . . to
demonstrate congressional intent to preclude the remedy of suits
under 1983.” Wright v. City of Roanoke Redevelopment &
Housing Auth., 479 U.S. 418, 424 (1987) (quoting Sea Clammers,
453 U.S. at 20). Title XIX gives no indication that the cut-off of
funds to the federal agency is intended to supplant a section 1983
remedy. As the Supreme Court has recently held, "the existence
of a state administrative remedy does not ordinarily foreclose
resort to 1983." Wright, 479 U.S. at 427-28 (citing Patsy v. Board
of Regents of Florida, 457 U.S. 496, 516 (1982)). Moreover, we
fail to perceive how the cut-off of funds in futuro to the state
agency effectively reimburses a hospital for services rendered to
the state’s medicaid patients in the past. We therefore conclude
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that WVUH states a valid claim under section , 1983 for
enforcement of its rights under the Social Security Act.
IV. THE VALIDITY OF PENNSYLVANIA’S HOSPITAL
REIMBURSEMENT PROGRAM
We now arrive at the heart of this case -- whether
Pennsylvania’s plan for reimbursing out-of-state hospitals for
their inpatient services to Pennsylvania medicaid recipients
complies with federal statutory and regulatory law. The answer
requires a close examination of Title XIX, its objectives, its
legislative history, and its implementing regulations.
Section 1396a(a)(13)(A) provides in relevant part as follows:
A State plan for medical assistance must -- .. .
provide -- ... for payment... of the hospital...
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
2 We note that exhaustion of state administrative remedies is nol a
prerequisite to an action under § 1983. Robinson v. Bloc’, 869 F.2d 202,
207 n. 5 (3d Cir. 1989).
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eligible for medical assistance have reasonable
access (taking into account geographic location and
reasonable travel time) to inpatient hospital
services of adequate quality; and such State makes
further assurances, satisfactory to the Secretary, for
the filing of uniform cost reports by each hospital . .
. and periodic audits by the State of such reports . .
42 U.S.C.A. § 1396a (West Supp. 1989). This section, as we read
it, authorizes states to develop their own medicaid reimbursement
standards and methodologies for payment of hospital services, but
subjects those standards and methodologies to three general
federal requirements.
The first requirement, deriving from the parenthetical
modifying "rates," mandates that a state’s reimbursement rates
take into account the situations of those hospitals serving a
disproportionate number of low income patients. The second and
third requirements, found in the phrase following that
parenthetical, require a state to find that its rates are reasonable
and adequate to meet the necessary costs of an efficiently
operated hospital and to assure medicaid patients of reasonable
access to inpatient hospital care. The first requirement we term
the "disproportionate share" requirement, the second, the
"reasonable and adequate" requirement, and the third, the
"reasonable access" requirement. The federal regulations
implementing section 1396a(a)(13)(A), 42 C.F.R.
§§ 447.250-447.280, reiterate these statutory demands.
Our assessment of compliance with these three requirements
is informed by the goals and purposes of the medicaid statute as
reflected in its structure and legislative history. Section
1396a(a)(13)(A) was enacted as part of the 1981 Omnibus Budget
Reconciliation Act, 95 Stat. 357, (OBRA) in an effort to contain
the spiraling costs of inpatient hospital services and to reduce
potentially stifling and expensive federal oversight of state
A-21
methodologies. See Colorado Health Care Ass’n v. Colorado
Dep’t of Social Services, 842 F.2d 1158, 1165 (10th Cir. 1988)
(discussing purposes of the Boren Amendment); Wisconsin Hosp.
Ass’n v. Reivitz, 733 F.2d 1226, 1228 (7th Cir. 1984) (same). As
explained in the House report accompanying an earlier version of
the statute, Congress intended by section 1396a(a)(13)(A) to free
states from the previous "reasonable cost" criterion and to
encourage them to develop prospective reimbursement systems
that would foster hospital efficiency and reduce medicaid costs.
See H.R. Rep. No. 158, 97th Cong., Ist Sess. 292. States were to
be allowed "greater latitude" and "greater flexibility” in designing
their programs. See id. at 293; S. Rep. No. 139, 97th Cong., Ist
Sess. 478, reprinted in 1981 U.S. Code Cong. & Admin. News 396,
744.
The states’ discretion in devising new reimbursement
standards and methodologies, however, was limited by the
Congress’s concern that medicaid recipients have reasonable
access to medical services and that hospitals treating a
disproportionate share of poor people receive adequate support
from medicaid. Thus, a state’s reimbursement rates may not be so
low as to compel the closing of a dangerous number of hospitals
or of a single medically important hospital, and thus compel
medicaid recipients to travel an unreasonable distance to obtain
medical care. See H.R. Rep. No. 158, 97th Cong., Ist Sess. 294
(expressing concern that rates not be so low as to discourage
hospitals from treating medicaid patients). Moreover, because
hospitals treating a large volume of medicaid patients are at the
same time of singular importance to the health care of the poor
and often already financially distressed, states must take into
account these hospitals’ special circumstances in setting
reimbursement rates. See id. at 294-296 (discussing special needs
and high social value of hospitals serving disproportionate
number of poor people); H.R. Conf. Rep. No. 208, 97th Cong., Ist
Sess. 962, reprinted in 1981 U.S. Code Cong. & Admin. News
1010, 1324 ("The conferees recognize that public hospitals and
teaching hospitals which serve a large Medicaid and low income
population are particularly dependent on Medicaid
reimbursement, and are concerned that a State take into account
the special situation that exists in these institutions in developing
their rates.")
We believe that this scheme also contemplates a deferential
standard of review by the courts in assessing compliance with the
"reasonable and adequate” requirement of _ section
1396a(a)(13)(A). Applying a higher standard would run counter
to the congressional intent that states be afforded considerable
freedom in pursuing ways of limiting medicaid costs and
encouraging efficiency. On the other hand, neither state
budgetary restraints nor chauvinistic policies designed to curb
access to out-of-state hospitals” can excuse a failure to conform to
the federal "reasonable and adequate standard," Wisconsin Hosp.
Ass'n, supra at 1235. In evaluating whether Pennsylvania’s rates
are "reasonable and adequate" to meet the costs of an efficiently
3 At oral argument before us the following colloquy occurred between the
court and counsel for the State:
MR. FOERSTER: And the assumption was made that we had
no evidence to the contrary, and still haven't, that the
experience out-of-state as a whole is any different from the
experience in state: that these hospitals would have about the
same amount of medicaid utilization as does the average
in-state hospital.
THE COURT: If that’s true, then why shouldn't West
Virginia Hospital be factored in on the same basis as the
Pennsylvania hospitals?
MR. FOERSTER: Again I could only go back to what |!
answered before, the considerations that keep the money
in-state, the treatment in-state, the marketing too
Tr. 19-20.
A-23
operated hospital, we will not engage in an independent
assessment of what rates we believe would be reasonable and
adequate. Rather, we will only inquire whether the state’s
determination was arbitrary and capricious. “See Mississippi
Hospital Ass’n v. Heckler, 701 F.2d 511, 516 (Sth Cir. 1983).
At the same time, however, we believe that compliance with
the remaining two federal requirements -- reasonable access and
disproportionate share -- is subject to our plenary review. The
legislative history manifests Congress’s strong concern that these
requirements be invariably and fully satisfied. We will not
presume to declare how the State must satisfy these requirements,
but neither will we defer to the State’s judgment that the
requirements have indeed been met. With these standards of
review in mind, we begin our evaluation of Pennsylvania’s
reimbursement program.
We question first whether Pennsylvania’s reimbursement
program as it applies to WVUH fulfills the disproportionate share
requirement. See 42 C.F.R. § 447.253(b)(1)(ii)(A) (1988). The
district court found that WVUH serves a disproportionate
number of low income patients. Although only five percent of
WVUH’s admissions are Pennsylvania m@uicaid recipients, some
thirty-eight percent of all WYVUH admissions are low income
persons. The district court, appropriately taking a broad view of
the issue, looked at WVUH’s treatment of all low income
patients, not just Pennsylvania medicaid patients, and found that
the Hospital had established itself as a disproportionate share
provider.
4 The district court found as a fact that in both fiscal years 1984-1985 and
1985-1986, WVUH treated in excess of 800 Pennsylvania medicaid patients.
In fiscal year 1986-1987, it treated approximately 730 Pennsylvania
medicaid patients. WVUH provided more care to Pennsylvaina medicaid
residents than over one-half of the in-state hospitals for fiscal years ending
June 10, 1986 and fiscal year ending June 30, 1987.
A-24
ae
Pennsylvania, in its reimbursement system for in-state
hospitals, accounts for disproportionate share through its
grouping methodology for reimbursing operating costs. under
Pennsylvania’s in-state plan, medicaid volume is one of the four
concepts that determine a hospital’s assignment to one of seven
hospital groups. A high medicaid volume may boost a hospital to
a higher group rating, allowing the hospital to command a higher
reimbursement rate per DRG. The methodology thus uses high
medicaid volume as a proxy for disproportionate share of low
income patients. In contrast, when Pennsylvania sets its
reimbursement rates for out-of-state hospitals, it does not
consider those hospitals’ shares of low income admissions.
Rather, Pennsylvania reimburses all out-of-state hospitals on the
basis of the average payment it makes to in-state hospitals.
Significantly, Pennsylvania chose this method without first
undertaking any studies examining the effects of its methodology
on Out-of-state low income providers. The State stipulated in the
pretrial memorandum of undisputed facts that Pennsylvania did
no empirical studies with respect to out-of-state payments and did
not look at individual cost data for out-of-state hospitals.
Moreover, the State stipulated that "[t]he out-of-state
reimbursement methodology does not contain any provision with
which to identify out-of-state hospitals serving a disproportionate
share of low income patients and by which to reimburse those
hospitals any more than other out-of-state hospitals are
reimbursed." Appellee’s Addendum of statutes, regulations, and
stipulation of undisputed facts 4 133.
At oral argument, the State asserted that it accounted for
disproportionate share of low-income providers when it
determined the relative value of the DRG payment on the basis of
in-state cost data. We fail to see, however, how this method
fulfills the federal requirement. Pennsylvania assigned all
Out-of-state hospitals the average in-state payment rate, with no
provision for increasing that rate on the basis of disproportionate
share and no determination that the payment in itself would
A-25
account for the needs of disproportionate share of low-income
providers. We see nothing in the development or implementation
of the State’s out-of-state reimbursement plan that demonstrates
compliance with the federal mandate that rates account for
disproportionate _ share. We _ therefore conclude that
Pennsylvania’s operating costs reimbursement system is invalid
insofar as it fails to account for out-of-state hospitals’
disproportionate share of low income admissions.
The second requirement of state medicaid plans is that their
rates assure medicaid recipients of reasonable access to quality
hospital care, taking into account geographic location and
reasonable travel time. See 42 C.F.R. § 447.253(b/1)(ii)(C)
(1988).> Throughout the district court’s opinion and the oral
argument before us there ran an undercurrent of concern that
inadequate reimbursement will encourage WVUH to close its
doors to medicaid patients, leaving a considerable number of
Pennsylvania residents without reasonable access to hospital care.
At oral argument, defense counsel affirmed that without access to
WVUH, some Pennsyivania medicaid patients would have to
travel seventy miles or more to obtain tertiary hospital care.
Moreover, the district court found, and Pennsylvania does not
contest, that WVUH’s withdrawal from the Pennsylvania
medicaid plan would "jeopardize some Pennsylvania medicaid
recipients’ access to needed health care services." 701 F. Supp. at
509 (finding of fact # 181).
5 42 C.F.R § 431.52(b) requires that a state plan must provide that the State
will furnish medicaid to : "(i) A recipient who is a recipient of the State
while that recipient is in another State, to the same extent that medicaid is
furnished to residents in the State,” when the recipient meets certain
prescribed conditions or "[iJt is general practice for recipients in a
particular locality to use medical resources in another State.”
A-26
The record establishes that the closing of WVUH to
Pennsylvania medicaid patients would deprive some of those
patients of reasonable access to needed health care. It is not,
however, so clearly established that Pennsylvania’s
reimbursement system will result in the Hospital’s withdrawal
from the Pennsylvania medicaid plan, although there is a
probability that it will withdraw because of the large number of
Pennsylvania medicaid patients it treats and the substantial
disparity in reimbursement between Pennsylvania medicaid
recipients in Pennsylvania and those treated at WVUH. The
district court found that inadequate medicaid reimbursement will
have "substantial financial consequences for the Hospital and will
jeopardize its continued ability to care for MAP patients." 701 F.
Supp. at 509 (finding of fact # 180). The court also found that
although on the average an in-state hospital is reimbursed for
approximately ninety-five percent of its costs in treating a
Pennsylvania medicaid recipient, WVUH recoups only about
fifty-four percent of its costs in treating a Pennsylvania medicaid
patient. In view of these facts, one can reasonably anticipate that
WVUH will not continue indefinitely to treat Pennsylvania
medicaid patients under the State’s present reimbursement
mechanism.
Nevertheless, the present record is somewhat incomplete on
the point. There is no evidence that the Hospital has stopped
treating medicaid patients, and the president of WVUH testified
that WVUH has not yet seriously considered quitting the
Pennsylvania medicaid plan. App. at 14la. We are therefore
unprepared on this record to invalidate Pennsylvania’s overall
reimbursement plan as it applies to WVUH on the basis of
nonfulfillment of the reasonable access requirement. Such a
holding, we believe, would require remand to the district court for
finding of the relevant facts. As explained infra, however, a
remand will not be necessary in light of our conclusion with
respect to compliance with the third federal requirement as well
as our conclusion concerning the first federal requirement, supra
at 30.
A-27
The third requirement imposed by section 1396a(a)(13)(A) is
that the state must find that its rates are "reasonable and
adequate” to meet the costs of an efficiently operated hospital.°
Whereas the substantive dimensions of the first two requirements
could be fairly drawn from the statute and its legislative history,
discerning congressional intent with respect to the substantive
element of the reasonable and adequate requirement is a more
daunting project.
The states, we need hardly reiterate, enjoy broad discretion in
devising their hospital reimbursement plans. The changes
instituted by 1981 OBRA contemplated state experimentation
with medicaid methodologies and certainly contemplated
reduction in the outlay of medicaid funds. Importantly, the 1981
OBRA definitely contemplated that states would implement
prospective payment systems that would not be based on actual
costs. In promulgating regulations implementing section
1396a(a)(13)(A), the HCFA expressly refused to set a federal
standard prescribing "reasonable and adequate" rates. It did
observe, however, that "the term is not a precise number, but
rather a rate which falls within a range of what could be
considered reasonable and adequate." See 48 Fed. Reg. 56,046,
56,049 (Dec. 19, 1983). See also Colorado Health Care v.
Colorado Dep’t of Social Services, 842 F.2d 1158, 1167 (10th Cir.
1988) ("Reasonableness had been characterized as a zone, not a
pinpoint.") (citing Reivitz, 733 F.2d at 1233).
It follows from the departure from a_ cost-driven
reimbursement standard that a state’s plan does not violate the
substantive provision of the reasonable and adequate requirement
simply because it fails to reimburse one efficiently operated
hospital its actual costs. What matters, rather, as the State
6 The defendants have not asserted that WVUH is not an “efficiently and
economically operated” facility.
A-28
vigorously argues, is whether the reimbursement rates to
out-of-state hospitals in the aggregate are arbitrary and
capricious.
Although Congress and the HCFA consciously declined to
impose clearcut federal standards and requirements (with the
exception of the reasonable access and disproportionate share
requirements), the legislative history reflects congressional
concerns that in turn may suggest some guidance as to what may
constitute nonarbitrary reimbursement rates. The congressional
reports concerning section 1396a(a)(13)(A) reflect a great
Sensitivity to the special needs of teaching and tertiary care
hospitals. The House report accompanying an initial version of
the statute states:
The Committee intends States to recognize that
facilities that provide teaching services or other
specialized tertiary care services that may have
operating costs which exceed those of a community
hospital. The Committee is concerned that the
reimbursement methods established by the States
recognize the need to provide a full range of both
primary care and tertiary care services to Medicaid
beneficiaries and take into account the differences
in Operating costs of the various types of facilities
needed to provide this broad scope of services .. . .
Thus, while the Committee recognizes that in this
time of economic constraint and reductions in
Federal funds for Medicaid. States must be given
the flexibility necessary to improve the Medicaid
reimbursement mechanism, the Committee does
not want such policies to result in arbitrary and
unduly low reimbursement levels for hospital
services.
A-29
H.R. Rep. No. 158, 97th Cong., Ist Sess. 294. The subsequent
House conference report echoes the concern for teaching
hospitals:
The conferees recognize that public hospitals and
teaching hospitals which serve a large medicaid and
low income population are particularly dependent
on Medicaid reimbursement, and are concerned
that a State take into account the special situation
that exists in these institutions in developing their
rates.
6
H.R. Conf. Rep. No. 208, 97th Cong., Ist Sess. 962, reprinted in
U.S. Code Cong. & Admin. News 1010, 1324.
Teaching hospitals, the district court found and the defendants
do not contest, incur greater costs than nonteaching hospitals in
delivering the same service. 701 F. Supp. at 515. The court found
that the bulk of a teaching hospital’s direct medical education
(DME) costs is made up of residents’ salaries. And, the court
continued, residents spend about seventy-five percent of their
time administering patient care. Thus, the court concluded,
reimbursement of DME costs is in large part a reimbursement for
patient care. Id.
Pennsylvania’s reimbursement methodology for in-state
hospitals provides for increased payments to teaching hospitals.
The reimbursement system for operating costs identifies teaching
status as one of the four concepts relevant to grouping in-state
hospitals. Teaching status may therefore increase a hospital’s
reimbursement per DRG. Moreover, above and beyond the
operating costs reimbursement, the Pennsylvania program
reimburses in-state teaching hospitals for the medicaid share of
DME costs that the hospitals incur.
Pennsylvania recognizes that a teaching hospital will not be
adequately reimbursed for the costs associated with its teaching
A-30
> ee
function if it is reimbursed at a rate deriving from the average
indirect costs of teaching and nonteaching hospitals. 701 F. Supp.
at 508. Moreover, Pennsylvania acknowledges that the failure of a
payer to compensate for DME costs will necessarily shift those
costs to another payer, and the failure of all payers to compensate
for DME costs will eventually cause serious financial problems for
the teaching hospital. Nevertheless, Pennsylvania provides no
DME cost reimbursement to out-of-state hospitals.
Pennsylvania’s justification is that it chose, as a matter of
policy, not to reimburse the medicaid share of DME costs
incurred by out-of-state hospitals in treating Pennsylvania
medicaid patients because the state did not want to underwrite
the medical education of residents and interns (even if some of
them will be Pennsylvanian doctors)’ at out-of-state hospitals.
Pennsylvania’s theory is "[nJothing in any law or regulation
requires WVUH to be a teaching hospital." Thus, Pennsylvania
presumes that rates would not be arbitrary even if they were to
force WVUE to abandon its teaching role.
It is true that Congress did not specifically codify its manifest
concern that medicaid rates be adequate to assure the continued
existence of teaching hospitals. On the basis of only the statutory
and regulatory language, there is therefore some merit to the
proposition that rates fulfill the "reasonable and adequate"
requirement, even if they do not reimburse DME costs, as long as
they reimburse operating costs. Although it seems to strike a
discordant note with the national agenda of the federal medicaid
program, perhaps such state chauvinism as is displayed by
Pennsylvania here might be tolerated under certain
7 The district court observed that some 7% of WVUH residents practice in
Pennsylvania. Moreover, as the district court observed, some of the
residents in Pennsylvania teaching hospitals will practice out of state, yet
Pennsylvania's program helps finance their training.
A-31
circumstances. On the other hand, we must give some content to
ihe notion of nonarbitrary rates, and we therefore turn again to
the legislative history. That legislative history Suggests that
Congress intended teaching hospitals in general, not just those
within state borders, to be adequately supported by medicaid
plans. See supra at 35.
We hesitate, however, at this point to hold that Pennsylvania's
refusal to reimburse out-of-state hospitals’ DME costs is arbitrary
and capricious and in violation of the reasonable and adequate
requirement of section 1396a(a)(13)(A). We remain fully
cognizant of the states’ freedom to experiment with their
reimbursement systems, and do not want unnecessarily to restrict
it. Instead, withholding judgment on this aspect of the plan
individually, we examine the plan as a whole.
Under Pennsylvania’s plan, WVUH receives reimbursement
for operating costs at the average rate of payment for all in-state
hospitals (or based on the Hospital’s actual charges, whichever is
lower), notwithstanding WVUH’s character as a teaching hospital
at provides tertiary care and serves a disproportionate number
of low income patients. Moreover, simply because WVUH is not
an in-state hospital, it receives absolutely no DME cost
reimbursement. Finally, unlike in-state hospitals, WVUH’s is
reimbursed for its capital costs on the basis of a rate that bears no
relationship to its actual costs. Pennsylvania reimburses its
in-state hospitals on the basis of a ten-year phase-in plan that pays
in-state hospitals for their actual capital costs on a decreasing
percentage basis. After the ten years, a uniform flat rate wili
apply. Contrast that system with the out-of-state reimbursement.
Capital cost reimbursement to out-of-state hospitals consists of an
"add-on" that represents the average capital costs of all in-state
hospitals’ actual costs. And out-of-state hospitals do not enjoy the
benefit of a ten-year phase-in to adjust to the flat payment rate.
WVUH is particularly distressed by the capital cost
reimbursement system because it recently opened a replacement
facility which greatly increased its capital costs.
A-32
As we note above, the district court found that this dual
reimbursement system resulted in in-state hospitals on the
average receiving approximately ninety-five percent of their costs
in treating a Pennsylvania medicaid recipient, but WVUH is
reimbursed only about fifty-four percent. Now, even if we were to
conclude that it is not per se arbitrary and capricious to reimburse
out-of-state hospitals on the basis of a flat in-state hospital
average, or to reimburse out-of-state hospitals on a different (and
presumably, here, lower) scale for capital costs, or not to
reimburse them their DME costs at all, there still seems to be
something seriously wrong with this reimbursement system. Can
the zone of reasonableness possibly be so large as to encompass
percentages of cost reimbursement for Pennsylvania medicaid
recipients ranging from fifty-four to ninety-five?
The HCFA, in declining to define certain statutory terms,
Stated that "the State’s methods and standards implicitly act as the
State’s definition of an efficiently and economically operated
facility." 48 Fed. Reg. 56,046, 56,049 (Dec. 19, 1983). To some
extent, the same is true of the term “reasonable and adequate."
Pennsylvania, by virtue of the federal statute and regulations,
holds its in-state program out as reasonably and adequately
reimbursing efficiently operated hospitals. At the same time,
however, Pennsylvania impliedly makes the same assertion with
respect to its fifty-four percent reimbursement of medicaid costs
incurred by an out-of-state tertiary hospital. Our role is to
determine whether Pennsylvania can nonarbitrarily make that
assertion.
In the face of such great disparity in the reimbursement rates
between its in-state hospitals and WVUH, Pennsylvania must
show a rational basis for its medicaid reimbursement program. As
Other courts have explained, a "state must articulate a ’rational
connection between the facts found and the choice made.”
Colorado Health Care Ass’n, 842 F.2d at 1167 (quoting Baltimore
Gas & Elec. Co. vy. Natural Resources Defense Council, Inc., 462
U.S. 87, 105 (1983)). Pennsylvania, we conclude, wholly fails to
offer such a rational basis.
Pennsylvania’s preference of its own hospitals does not justify
undercompensating out-of-state hospitals that are serving
Pennsylvania patients under a federal program. The State is not
merely exercising discretion in how to spend its own money;
medicaid funds derive in large part from the federal government.
Nothing in Title XIX remotely suggests that a state may use
federal funds to give its own hospitals preferential treatment and,
at the same time, disadvantage out-of-state hospitals. In
establishing the new federal standards for hospital reimbursement
rates in section 1396(a)(13)(A), OBRA’s legislative history notes
that although the Committee recognized that the current
economic constraints and need of reductions in federal funds for
medicaid requires that states be given the flexibility necessary to
improve the medicaid reimbursement mechanism, ‘the
Committee does not want such policies to result in arbitrary and
unduly low reimbursement levels for hospital services." H.R.
Rep. No. 158, 97th Cong., Ist Sess. 293-94 (1981). Nothing in
section 1396(a) speaks in terms of a dichotomy in rate
reimbursement built on state boundary lines; it nowhere suggests
that state boundary lines act as points of demarcation in
reimbursement for the delivery of health care. Under the federal
regulations, supra at n. 6, state boundary lines, except for
administrative responsibility, bear an insignificant role, if any,
with respect to the actual delivery of health care in a program
designed on a national level to aid the poor in a highly mobile
society.
Moreover, Pennsylvania’s excuse of administrative burden
does not, in this case, provide a rational basis for WVUH'’s grossly
diminished reimbursement rates. Pennsylvania argues that it
would be too time and resource consuming to account for the
characteristics and costs of out-of-state hospitals, and that
deriving flat rates from the universe of in-state hospitals and
applying them to out-of-state hospitals provides a reasonable
A-34
solution. | Although this argument may become valid at some
point, it is not valid in this case. WVUH undisputedly is the
largest Out-of-state provider of health care to Pennsylvania
medicaid patients. It serves more of these Pennsylvania patients
than over half of the Pennsylvania hospitals. Although we do not
Suggest that audits and calculations be made for all! out-of-state
hospitals, the retrieval and evaluation of relevant information
from WVUH, and other Significant out-of-state providers,® would
not pose any particular administrative burden. It is simply
irrational and arbitrary, not too mention patently unfair, to refuse
to do so when the result is a system that various so wildly in its
reimbursement rates for hospitals whose "[mJedical services are
needed," 42 C.F.R. § 431.52(b), to serve Pennsylvanians. We
therefore conclude that the Pennsylvania medicaid program as it
applies to WVUH is violative of federal law because it fails to
meet the reasonable and adequate requirement of section
1396a(a)(13)(A).
We neither hold nor suggest that Pennsylvania must apply
precisely the same methodology to WVUH and other out-of-state
hospitals as it does for its in-state hospitals if there is a rational
basis for a departure. The methodology applied, however, must
be rational, not arbitrary or whimsical. Nor do we suggest that
Pennsylvania is precluded from formulating an acceptable
reimbursement system to out-of-state hospitals without empirical
evidence concerning their historical costs of operation so long as
its reimbursement rates fall within the range of "rates reasonable
and adequate to meet the costs which must be incurred by
efficiently and economically operated facilities."
8 The district court found that Pennsylvania could audit 75-100 more
hospitals each year without increasing its audit staff.
Finally, although not necessary to the outcome of the case
given the preceding discussion, we hold that in addition to the
substantive provisions Pennsylvania violated the procedural
requirements of Title XIX. The three federal provisions
discussed above contain both a procedural and a substantive
dimension. The procedural dimension is explicit in the federal
regulations implementing section 1396a(a)(13)(A). These federal
regulations condition HCFA approval of a new state plan on the
state’s assurances that it has complied with the regulatory
requirements. 42 C.F.R. § 447.253 (1988). One of these
regulatory requirements is that the State make findings in support
of its change in medicaid plan. Essentially, the State is required
to find that its new plan complies with the three substantive
requirements discussed above. Section 447.253(b) of the HCFA
regulations provides:
(b) Findings. Whenever the Medicaid agency
makes a change in its methods and standards, but
not less often than annually, the agency must make
the following findings:
(1) Payment rates. (i) The Medicaid agency
pays for inpatient hospital services and long-term
care facility services through the use of rates that
are reasonable and adequate to meet the costs that
must be ir ured by efficiently and economically
operated provicers to provide services in conformity
with applicable State and Federal laws, regulations,
and quality and safety standards.
(ii) With respect to inpatient hospital services
(A) The methods and standards used to
determine payment rates take into account the
situation of hospitals which serve a disproportionate
A-36
a of low income patients with special needs:
and]
(C) The payment rates are adequate to assure
that recipients have reasonable access, taking into
account geographic location and reasonable travel
time, to inpatient hospital services of adequate
quality.
42 C.F.R. § 447.253(b) (1988).
In structuring its out-of-state reimbursement program
Pennsylvania admits to gathering no information with respect to
these hospitals’ actual costs. No empirical analysis was conducted
to measure the effects of the reimbursement program on
out-of-state hospitals. Pennsylvania did not even identify its large
out-of-state providers. Federal law is not satisfied if 2 state
merely makes conceptual policy decisions. A policy predicated
upon provincialism and self-interest, now upon findings of
reasonableness and adequacy, is unacceptable. We hold that the
federal regulations unambiguously require the State to make
findings, and in so doing they do not distinguish between
out-of-state and in-state hospitals. In failing to make these
requisite findings, Pennsylvania violated federal law.”
The district court held that Pennsylvania’s out-of-state reimbursement
program violated not only Title XIX, but also the equal protection rights of
WVUH guaranteed by the fourteenth amendment. Although we have
serious reservations concerning this treatment of the equal protection
rights issue by the district court, we dispose of this case on statutory
grounds and therefore see no need to reach the constitutional issue.
V. THE VALIDITY OF THE ADMINISTRATIVE
APPEALS SYSTEM
Our last inquiry with respect to Pennsylvania’s medicaid
program is whether the district court correctly concluded that the
program’s administrative appeals system is legally inadequate.
For our answer, we must again look to section 1396a and its
implementing regulations to ascertain whether Pennsylvania
comports with federal law.
Title XIX requires states participating in the medicaid
program to institute an appeals procedure by which providers may
challenge their payment rates. 42 U.S.C. 1396a(a)(37) (West
Supp. 1989); 42 C.F.R. § 447.253(c). The federal regulation
States:
Provider appeals. The Medicaid agency must
provide an appeals or exception procedure that
allows individual providers an opportunity to submit
additional evidence and _ receive’ prompt
administrative review, with respect to such issues as
the agency determines appropriate, of payment
rates.
42 C.F.R. § 447.253(c). It is undisputed that, at least at the
hearing level, Pennsylvania’s appeals procedure allows providers
to challenge their payment rates on the ground of the application
of the state’s reimbursement methodology; it does not allow
providers to challenge the validity of the methodology itself. See
701 F. Supp. at 510 (finding of fact # 197). The district court,
after review of the federal regulation and the relevant legislative
history, held that this procedure was insufficient.
Our review of the federal law, however, leads us to conclude
otherwise. On September 30, 1981, the HCFA published interim
final regulations. 46 Fed. Reg. 47964-47973. Because "individual
facility rates will not receive Federal review under the revised
A-38
regulations," the HCFA required in one of its regulations that
States participating in the medicaid program develop an appeals
procedure by which individual facilities could request review and
adjustment of their rates. The regulation stated:
The agency must provide an appeals procedure that
allows individual providers an opportunity to submit
additional evidence and request prompt
administrative review of payment rates.
Fed. Reg. p. 47972. The HCFA noted, however, that it was
open to suggestions on how best to guarantee review of payment
rates and it invited comments on its provider appeals regulations.
Some two years later, the HCFA reviewed the comments it
received and promulgated the final regulation quoted above. In
its accompanying commentary, the HCFA rejected suggestions
that it establish minimum criteria defining the scope of review of
payment rates. The agency wrote:
We also believe that establishing minimum criteria
for appeals and penalty clauses for frivolous appeals
in the regulation would be contrary to the statutory
intent allowing States greater flexibility in
developing more cost effective reimbursement
systems. Moreover, the States, not the Federal
government, are in the best position to determine
the administrative process that would best meet
their needs and be most compatible with their
reimbursement system. However, States are free to
establish reasonable criteria for appeals to limit the
issues On appeal that may be appropriate or to adopt
other procedures to prevent frivolous appeals.
48 Fed. Reg. 56046, 56052 (Dec. 19, 1983). Consistent with the
hands-off philosophy reflected in this commentary, the HCFA
rewrote the appeals regulation to require an appeals procedure
A-39
for payment rates "with respect to such issues as the agency
determines appropriate.” 42 C.F.R. § 447.253(c).
We believe that this permissive language giving the agency
greater authority to select the issues for determination permits
the state agency to reject review of challenges to the validity of its
methodology in its administrative appeals system. In the situation
of a uniform rate, which describes Pennsylvania’s reimbursement
of out-of-state hospitals, such a limited appeals system may not
seem the best approach. See Mary Washington Hosp., Inc. v.
Fisher, 635 F. Supp. 891, 903 (E.D. Va. 1985) (observing that "the
more general the rate-setting system is, the stronger the need for
some appropriate method of accommodating particular situations
that the general rules do not adequately address."). However, we
conclude that the language of the federal regulation, in keeping
with the federal policy to contain health costs and give states great
flexibility in the administering of medicaid, reserves to the
judgment of the states the decision whether to allow challenges to
the validity of the methodology at the administrative level.
By so holding, we do not mean to imply that the language
licenses the states to virtually eliminate all appeals by choosing to
deem no issues appropriate for appeal. Implicit in the regulation
is, we believe, a requirement that at least correct calculation of
the payment rate is a mandatory issue for appeal. In this respect,
it is significant that the HCFA rejected a suggestion that the
appeals process requirement be waived in states adopting uniform
statewide reimbursement rates. 48 Fed. Reg. 56052. By requiring
an appeals procedure even in that situation, the regulation
appears to contemplate that at least some issue is appealable, and
the logical conclusion is that the essential and dominant
appealable issue is rate calculation. Pennsylvania allows appeals
by providers pursuant to 1 Pa. Code §§ 35.1-35.251. Canonsburg
Gen. Hosp. v. Department of Health, 422 A.2d 141 (1980).
Appeals raising the incorrect calculation of the rate may be
appealed from a hearing officer’s determination to the Director
of OHA or the Secretary of the Department and then to the
A-40
Commonwealth Court. See Northwestern Inst. of Psychiatry v.
Commonwealth, 513 A.2d 495, 498 (Pa. Commw. 1986); Grand
Oak Nursing Home v. Commonwealth, 541 A.2d 800, 802 (Pa.
Commw. 1986).
We conclude that the federal regulation requires no more of
the State’s appeals procedure than Pennsylvania offers. We
reserve therefore the district court’s judgment invalidating
Pennsylvania’s appeals system. |?
VI. EXPERT WITNESS FEES UNDER
42 U.S.C. § 1988
After its decision on the merits, the district court in an
exercise of its discretion under 42 U.S.C. § 1988!! awarded
attorneys fees to WVUH as the prevailing party in a section 1983
10 In light of our disposition with respect to the administrative appeals
procedure, we have no cause to consider the eleventh amendment issue
raised in the district court and pursued on appeal. The district court’s
judment ordering Pennsylvania to revise its appeals procedure and to apply
it to WVUH for reimbursement claims dating from the commencement of
this action raised serious eleventh amendment concerns about whether this
remedy was retroactive relief unavailable against the state in federal court.
Because we uphold the appeals system and issue only prospective relief
from the day of judgment, the eleventh amendment is not implicated by our
decision.
11 Section 1988 provides in pertinent part:
In any action or proceeding to enforce a provision of [section
1983}, the court, in its discretion, may allow the prevailing
party, other than the United States, a reasonably attorney’s fee
as part of the costs.
42 U.S.C.A. § 1988 (West 1981).
A-41
action. Following the parties’ joint proposal on the amount of
fees, the court awarded the Hospital $500,000. Of this amount
$350,000 was allocated to attorneys fees, $45,867 to
disbursements, and $104,133 to expert witness fees. The
defendants unsuccessfully contested the award of expert witness
fees before the district court, arguing that such fees are statutorily
limited to thirty dollars a day by 28 U.S.C. § 1821(b). On appeal
the defendants do not challenge an award of expert witness fees in
general, but they do renew their argument that the amount of
expert witness fees improperly exceeded the statutory maximum.
The defendants’ —— on the Supreme Court’s
decision in Crawford Fitting " v. LT. Gibbons, Inc., 482 U.S.
437 (1987). In Crawford Fitting the Court held that a federal
court taxing expert witness fees as costs under Fed. R. Civ. P.
54(d) could not exceed the statutory maximum of thirty dollars a
day contained in 28 U.S.C. § 1821(b). The statutory framework
underlying that decision is as follows. Rule 54(d) provides that
costs shall be taxed against the losing party unless the court
otherwise directs. The modern day codification of the 1853 Fee
Act, 28 U.S.C. § 1920, in turn enumerates the various costs that
may be assessed against a party, and these costs include "[flees and
disbursements for printing and witnesses. Another statute, 28
A-42
U.S.C. § 1821(b), sets the amount of compensation to be paid
witnesses at thirty dollars a day. .
The petitioners in Crawford Fitting, argued that federal courts
had discretion under Rule 54(d) to award costs above and beyond
those listed in section 1920 and in excess of the amount provided
in section 1821. The Court rejected petitioners’ contention,
concluding that their view of Rule 54(d) as authorizing courts to
decide what is taxable as a cost would render section 1920
superfluous. 437 U.S. at 441. Thus, because section 1920 listed
witness fees as a taxable cost, and because section 1821(b)
authorized witness compensation of only thirty dollars a day, the
Court held that expert witness fees taxed as costs against the
losing party under Rule 54(d) could not exceed section 1821(b)’s
Statutory cap. 437 US. at 445.
The defendants ask us to apply Crawford Fitting to expert
witness fees awarded as part of an attorneys fee under 48 U.S.C.
§ 1988. They assert that the broad ruling of Crawford Fitting
precludes awarding of expert witness fees in excess of thirty
12 Section 1821 provides in relevant part:
(a)(1) Except as otherwise provided by law, a witness in
attendance at any court of the United States . . . shall be paid
the fees and allowances provided by this.section.
“**
(b) A witness shall be paid an attendance fee of $30 per day
for each day’s attendance. A witness shall also be paid the
attendance fee for the time necessarily occupied in going to
and returning from the place of attendance at the beginning
and end of such attendance or at any time during such
attendance ....
28 U.S.C.A. § 1821 (West Supp. 1989).
A-43
dollars a day, even though those fees are assessed as part of an
attorneys fee under the fee-shifting statute of section 1988 rather
than as a run-of-the-mill cost taxed as of course in favor of the
prevailing party under Rule 54(d). The Hospital, on the other
hand, argues that Crawford Fitting’s reach does not extend to
section 1988, and that expert witness fees assessed under that
section are not subject to a statutory cap.
Section 1988 is a statutory exception to the general American
Rule disallowing shifting of attorneys fees. Applicable in civil
rights cases, the statute states that a court may award to the
prevailing party "a reasonable attorney’s fee as part of the costs."
In construing section 1988, courts developed the general principle
that incidental expenses incurred by the attorney, and not usually
absorbed as overhead but rather charged to the client, may be
included as part of an “attorney’s fee" under section 1988. See
Bartell, Taxation of Costs and Awards of Expenses in Federal
Court, 101 F.R.D. 553, 592-94 (gathering cases).
Depending on the law of the circuit, the "expenses" allowable
as part of an attorneys fee have sometimes included expert witness
fees. See Ramos v. Lamm, 713 F.2d 546, 559 (10th Cir. 1983)
(expert witness fees reimbursable under section 1988 if
"reasonably necessary" to case); Heiar v. Crawford County, 746
F.2d 1190, 1203 (7th Cir. 1984) (expenses of litigation "distinct
from either statutory costs or the costs of the lawyer’s time
reflected in his hourly billing rates," including expert witness fees,
are part of attorneys fee under section 1988). But see Wheeler v.
Durham City Bd. of Educ., 585 F.2d 618, 624 (4th Cir. 1978) (fees
of expert witnesses "are traditionally not regarded as attorney’s
fees," however essential their services to the _ successful
preparation and trial of a complex case). In our own circuit, we
have followed the rule, not limited to civil rights cases but
certainly applicable in a section 1988 case, that a district court has
the equitable discretion to award expert witness fees in excess of
the section 1821 statutory amount if "the expert’s testimony is
indispensable to determination of the case." See Roberts v. S.S.
A-44
Kyriakoula D. Lemos, 651 F.2d 201, 206 (3d Cir. 1981); see also
Rank v. Balshy, 590 F. Supp. 787, 801 (M.D. Pa. 1984) (expert
witness fees allowable as part of attorneys fee under section 1988
in excess of thirty dollars a day).
The Hospital and the defendants stipulated that WVUH’s
experts were indispensable to the case, and the district court
independently expressed its heavy reliance on their testimony.
Under the rule in this circuit, WVUH normally would be entitled
to expert witness fees in excess of the statutory maximum. The
issue before us, however, is whether Crawford Fitting repudiates
the previous law with respect to enhanced awards of expert
witness fees under section 1988.
The Hospital argues, and the district court agreed, that
Crawford Fitting does not apply to fees awarded under section
1988. The argument has much merit. Justice Blackmun,
concurring in Crawford Fitting, and Justices Marshall and
Brennan, dissenting, all emphasized that the Court in that case
did not reach the question whether a court may award excess
expert witness fees under section 1988. 482 U.S. at 445
(Blackmun, J., concurring); id. at 446 n. 1 (Marshall, J.,
dissenting). Moreover, the policy underlying section 1988, that of
making the prevailing party whole, would suggest that the rule of
cost taxation embodied in Crawford Fitting should not apply in
the context of attorneys fee shifting in civil rights actions. In his
strong concurrence in International Woodworkers v. Champion
Int'l. Corp., 790 F.2d 1174, 1181-1193 (Sth Cir. 1986), aff'd sub
nom. Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437
(1987). Judge Rubin makes the forceful argument that based on
the legislative history of the Civil Rights Attorney’s Fees Awards
Act of 1976, Congress intended to treat expert witness fees like all
other litigation expenses and include them as part of the attorneys
fee awardable under section 1988. |
A-45
Indeed, a number of courts examining the question raised here
have concluded that Crawford Fitting does not limit expert
witness fees awards under section 1988 to the rate set in section
1821(b).!?
On the other hand, the broad language of Crawford Fitting
strongly suggests that we reach the opposite conclusion. Although
on its facts a Rule 54(d) case, the substance and reasoning in
Crawford Fitting seems to dictate that, even in the case of a fee
shifting statute such as section 1988, a court may not award fees in
excess of the statutory maximum of thirty dollars a day unless the
fee shifting statute expressly makes such an allowance. The Court
wrote that it "will not lightly infer that Congress has repealed
§§ 1920 and 1821, either through Rule 54(d) or any other
provision not referring explicitly to witness fees." 482 U.S. at 445.
Moreover, the Court plainly expressed its disfavor for "[a}ny
argument that a federal court is empowered to exceed the
limitations explicitly set out in sections §§ 1920 and 1821 without
plain evidence of congressional intent to supersede that section."
Id. at 445.
13 See Sapanajin v. Gunter, 857 F.2d 463, 465 (8th Cir. 1988) (holding that
because expert witness fee award was not made as a taxation of costs under
section 182] but as an expense under section 1988, the cap on fees set out in
Crawford Fitting does not apply); Black Grievance Comm. v. Philadelphia
Elec. Co., 690 F. Supp. 1393, 1403 (E.D. Pa. 1988) (same); Hillburn v.
Comm’r of Conn. Dep’t of Income Maintenance, 683 F. Supp. 23, 27 (D.
Conn. 1987), aff'd 847 F.2d 835 (2d Cir. 1988) (same); United States v.
Yonkers Bd. of Educ., 118 F.R.D. 326, 330 (S.D.N.Y. 1987) (same); cf.
Mathis v. Spears, 857 F.2d 749, 758-59 (Fed. Cir. 1988) (post-Crawford case
holding section 1821 inapplicable to award of expert witness expenses
under fee-shifting statute pertaining to patents); Freeman v. Package
Machinery Co., 865 F.2d 1331, 1346-47 (ist Cir. 1988) (although not
reaching issue, strongly suggesting it would not “elongate” Crawford Fitting
to apply in context of express fee shifting statute)
A-46
We believe that the recent decision of the Court in Missouri v.
Jenkins, 47 U.S.L.W. 4735 (1989), in no way alters the ruling of
the Court in Crawford. Unlike Crawford, which dealt with
witness fees statutorily fixed by Congress as part of the costs, the
Court in Jenkins dealt with a comparatively new phenomenon in
the legal world, the enhancement of attorney’s fees by including
the fees for services of paralegals and law clerks. Their fees,
however, are not regulated by statute as are witness fees. In fact,
Missouri, against whom the fees were taxed, conceded "that
compensation for the cost of these personnel should be included
in the fee award." Id. at 4738. Missouri’s argument was that
section 1988 did not authorize billing paralegals at market rates,
but only at their cost to the attorneys hiring them; charging
market rates produced a windfall for the attorney.
We acknowledge that in this age of sophisticated litigation, in
which expert witnesses play an increasingly important role, thirty
dollars per day is an insignificant sum. However, we believe that
we are constrained by the language of Crawford to abandon our
previous rule and to limit expert witness fees to thirty dollars a
day. Congress has chosen to legislate in this area and unless the
Statute under which expert witness fees are awarded expressly
repeals the limits of sections 1920 and 1821(b), we must defer to
legislative fiat. In so holding, we join with the other circuits
interpreting Crawford Fitting that have arrived at the same
conclusion with respect to fee-shifting statutes similar to section
1988. Denny v. Westfield State College, 58 U.S.L.W. 2077 (ist
Cir. 1989) (holding in a Title VII sex discrimination case that
absent some reasonably explicit indication of Congressional intent
that witness fees be shifted without regard to the thirty dollars per
day cap, the Crawford rule must prevail). See Glenn v. General
Motors Corp., 841 F.2d 1567, 1575 (11th Cir.), cert. denied, 109 S.
Ct. 378 (1988) (holding section 1821) applicable to fee-shifting
provision of Equal Pay Act because "the broad language in
Crawford Fitting does not permit a distinction based upon
whether or net the award is made under a fee-shifting statute");
Leroy v. City of Houston, 831 F.2d 576, 584 (Sth Cir. 1987), cert.
A-47
denied, 108 S. Ct. 1735 (1988), (holding section 1821 applicable to
fee-shifting provision of Voting Rights Act); cf. Gilbert v. City of
Little Rock, 867 F.2d 1062, 1062-63 (8th Cir. 1989), petition for
cert. filed (May 20, 1989) (en banc) (affirming by an equally
divided court the order of the district court awarding expert
witness fees as expenses under section 1988 at the statutory rate of
thirty dollars a day); Boring v. Kozakiewicz, 833 F.2d 468, 474 (3d
Cir. 1987), cert. denied, 108 S. Ct. 1298 (1988), (stating in dicta
that under Crawford Fitting "[a] prevailing party in a civil rights
case is not entitled to tax such fees as costs"); see also Central
Delaware Branch of NAACP vy. City of Dover, 123 F.R.D. 85,
94-95 (D. Del. 1988) (awarding expert witness fees under section
1988 at statutory rate of thirty dollars a day).
We thus conclude that, under Crawford Fitting, section 1988
as presently drafted does not authorize expert fee awards in excess
of the statutory cap of thirty dollars per day provided in section
1821(b). We therefore vacate the district court’s judgment
awarding attorneys fees insofar as it awards WVUH expert
witness fees in excess of thirty dollars per day.
Vil. CONCLUSION
We conclude that WVUH can assert a cause of action against
the defendants under 42 U.S.C. § 1983 for violation of the federal
medicaid statute and that statute does not reflect a congressional
intent to foreclose private enforcement. Although states possess
broad discretion in devising their hospital reimbursement plans
under the medicaid statute, we hold that overall the Pennsylvania
medicaid program as it applies to WVUH violates federal law
because it fails to meet the disproportionate share and the
reasonable and adequate requirements of section 1396(a)( 13)(A)
and the procedural provisions of Title XIX.
As for Pennsylvania’s administrative appeals system, we
conclude that it sufficiently satisfies Title XIX and the
implementing federal regulation. Finally, the district court’s
award of expert fees in excess of thirty dollars per day exceeded
federal statutory provisions.
Accordingly, the judgment of the district court declaring the
Commonwealth of Pennsylvania’s medicaid prospective system as
it applies to WVUH in violation of federal law will be affirmed as
well as its order directing the defendants to formulate a
methodology within ninety days from the day of judgment for its
medicaid prospective payment system for WVUH consistent with
and in conformity with federal law. Reimbursement to WVUH
under a prospective payment system that conforms to federal law
will commence with the date of the district court’s initial
judgment in this matter. The judgment of the district court
declaring Pennsylvania’s administrative appeals system as it
applies to WVUH in violation of federal law will be reversed.
The judgment of the district court with respect to attorney’s fees
will be vacated insofar as it grants expert witness fees in excess of
thirty dollars per day.
Two-thirds of WVUH'’s costs on appeal will be taxed against
the appellants.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
APPENDIX B
Re ee ee ee
ee =
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
WEST VIRGINIA UNIVERSITY )
HOSPITALS, INC.,
Plaintiff
CIVIL ACTION NO. 86-0955
V.
ROBERT CASEY, Governor,
i i i i ee
etal.,
Defendants
MEMORANDUM
Background
West Virginia University Hospitals, Inc. (WVUH or the
Hospital) commenced this action against the Commonwealth of
Pennsylvania’s Department of Public Welfare and individuals on
July 26, 1986. Pursuant to stipulation, the Department of Public
Welfare was dismissed as a defendant on February 25, 1987.
WVUH brought this action under 42 U.S.C. section 1983 alleging
Pennsylvania’s medicaid reimbursement program for out-of-state
hospitals violates federal payment standards and violates the
equal protection clause of the fourteenth amendment of the
United States Constitution. Plaintiff further alleges
Pennsylvania’s administrative appeals system for out-of-state
hospitals is legally inadequate. The Hospital seeks injunctive and
declaratory relief regarding its past treatment under
Pennsylvania’s reimbursement program and administrative
appeals system. The trial in this action took place before the
court on May 2, 3, 4, 5, 6, and 16, 1988. The parties have been
given an opportunity to present arguments and proposed findings
of fact and conclusions of law. The opinion of the court follows.
Findings of Fact
In accordance with Federal Rule of Civil Procedure 52(a) the
court finds the following facts.
I. The Parties
1. WVUH is a non-stock, non-profit corporation organized
under the laws of West Virginia. Plaintiff's Pretrial
Memorandum Undisputed Facts No. 1. (Hereinafter referred to
as "Facts.")
2. Defendant Robert P. Casey is the Governor of the
Commonwealth of Pennsylvania. Facts 2.
3. The Secretary of the Department of Public Welfare (the
Secretary) of Pennsylvania was Walter C. Cohen at the time this
action was filed. The Secretary is now John F. White, Jr. Facts 3.
4. The Secretary reports to the Governor of Pennsylvania.
The Secretary is responsible for implementing, administering and
operating the medicaid program in Pennsylvania. The Medicaid
program in Pennsylvania is called the "Medicaid Assistance
Program" (MAP). Facts 4.
5. Since November, 1987, David S. Feinberg has been Acting
Director of the proposed Office of Hospital and Outpatient
Programs in the Department of Public Welfare (the Department
or DPW). From 1979 to November, 1987, Feinberg was the
Director of the Bureau of Policy and Program Development.
Facts 5.
Feinberg was responsible for the development of
Pennsylvania’s medicaid program’s prospective payment system.
Facts 6.
Il. The Hospital
7. WVUH is located six miles south of the border between the
State of West Virginia and the Commonwealth of Pennsylvania.
Facts 10.
8. The primary service area of the Hospital includes the West
Virginia counties of Monongahela, Marion, Harrison, Taylor,
Doddridge and Preston and the Pennsylvania counties of Fayette
and Greene. Facts 11.
9. Generally, Pennsylvania residents constitute approximately
16% of all WVUH inpatient admissions. Testimony of Katherine
Douglass, Transcript! at 163, lines 6, 15-17.
10. In 1985, 2,500 inpatient admissions to WVUH were
attributable to Pennsylvania residents. 860 of the admissions were
Pennsylvania medicaid recipients. Testimony of Katherine
Douglass, Transcript at 163, lines 15-20.
11. Approximately 204,000 people lived in Fayette and
Greene counties in the mid-1980s. By the late 1980s, the
population in Fayette and Greene counties is projected to grow to
209,000 people. Testimony of Katherine Douglass, Transcript at
158, lines 20-25.
12. 1,200 persons from Fayette County received inpatient care
at WVUH in 1985; 1,100 persons from Greene County received
1 Citations to "Transcript" refer to the trial transcript. Because some trial
testimony was transcribed on an expedited basis during trial, citations to
that testimony will be, for example, "May 4, 5, and 6, 1988 Transcript.”
Deposition testimony will be cited similarly i.e., "December 28, 1986
Vertrees Deposition.”
inpatient care. Testimony of Katherine Douglas, Transcript at
163, lines 21-25; 164, lines 1-7.
The Hospital also serves patients from Washington County,
Pennsylvania. In calendar year 1985 the Hospital had 102
Pennsylvania medicaid admissions from Washington County,
Pennsylvania. Facts 14.
Services Provided
14. A "tertiary care" hospital is a hospital that provides a level
of hospital and medical services that is inherently more complex
and that is generally not provided in small or community
hospitals. Testimony of Bernard Westfall, Transcript at 33, lines
2-25; 34, lines 1-25; 35 lines 1-15.
15. WVUH is the closest source of tertiary care services to
many individuals living in Greene and Fayette counties.
Testimony of Katherine Douglass, Transcript at 159, lines 11-25;
160-161; 162, lines 1-24.
16. Some Pennsylvania medicaid recipients who reside in
Fayette, Greene and parts of Washington counties, and who must
use the Hospital for complex or specialized medical services,
otherwise must travel 20 to 70 additional miles to Pittsburgh,
Pennsylvania, the next closest city (to the Hospital) in which such
services are offered. Facts 16.
17. Specialized or complex inpatient services available at the
Hospital which are not available in the Pennsylvania hospitals in
Fayette, Greene, and Washington counties include cardiac
catheterization, angiography, open heart surgery, high risk
obstetrics, neonatal intensive care, kidney transplant lithotripsy.
Testimony of Katherine Douglass, Transcript at 159, lines 16-25;
160, lines 1-25; 161, lines 1-25; 162, lines 1-25; 163, lines 1-25;
164, lines 1-25; 165, lines 1-25; 166, lines 1-3. Facts 17.
18. WVUH is a Level I trauma center equipped to deal with
head and spine injuries as well as cardiac and other emergencies.
It is the only Level I trauma center in the service area of WVUH.
The next closest Level I trauma center is located in Pittsburgh.
Testimony of Katherine Douglass, Transcript at 160, lines 11-25;
161, lines 1-5.
19. WVUH provides an extensive prenatal referral system for
high risk neonates and, as apart of that system, provides high risk
prenatal services to hospitals in the service area, including Greene
County Memorial Hospital located in Greene County,
Pennsylvania. Testimony of Katherine Douglass, Transcript at
161, lines 6-25; 162, lines 1-24.
20. WVUH also provides specialized outpatient services to
Pennsylvania residents. These services include pediatric
cardiology, pediatric neurology, neurosurgery, and other highly
technical types of care. Testimony of Katherine Douglass,
Transcript at 165, lines 16-22.
21. The outpatient services identified in the paragraph above
are not available at hospitals located in Fayette and Greene
counties. If patients did not use WVUH for such services, the
next closest hospital would be located in Pittsburgh. Testimony of
Katherine Douglass, Transcript at 165, lines 23-25; 166, lines 1-3.
22. WVUH also provides Pennsylvania residents with routine
hospital care such as routine obstetrics, normal newborn care and
tonsillectomies. Defendants’ Exhibit 76.
23. The types of routine cases seen at WVUH are similar to
the routine types of cases seen at most university teaching
hospitals. Testimony of James Vertrees, Transcript at 77, lines
8-14.
24. WVUH has approximately the same Case Mix Index
(CMI) as university teaching hospitals located in Pennsylvania
and other similarly situated hospitals. Plaintiff's Exhibit 66.
WVUH is a University Affiliated Teaching Hospital
25. The Hospital is a university affiliated teaching hospital:
the West Virginia University uses the Hospital to train health
professionals. Facts 39.
26. WVUH is a major academic medical center, one of only
121 such centers in the country. Testimony of Gerard Anderson,
Transcript at 392, lines 1-12.
27. 1,300 persons completed their physician and dentist
residency training programs at the Hospital between 1960 and
1984. Facts 40.
28. Approximately 7% of the 1,664 total living alumni of the
West Virginia University School of Medicine’s four-year medical
program live in Pennsylvania. Facts 47.
29. MAP recognizes that the provision of graduate medical
education programs improves the quality of care at a hospital.
Testimony of Gerard Anderson, Transcript at 320, lines 12-23.
Plaintiff's Exhibit 8.
WVUH’s Medicaid Volume
30. Historically, WVUH has provided significant numbers of
Pennsylvania medicaid recipients with hospital care.
31. In Calendar year 1981, the Hospital treated 610
Pennsylvania medicaid admissions on an inpatient basis. Facts 22.
32. In calendar year 1982, the Hospital treated 692
Pennsylvania medicaid admissions on an inpatient basis. Facts 25.
33. In calendar year 1983, the Hospital treated 783
Pennsylvania medicaid admissions on an inpatient basis. Facts 24.
34. In calendar vear 1984, the Hospital treated 828
Pennsylvania medicaid admissions on an inpatient basis. Facts 25.
35. In calendar year 1985, the Hospital treated 853
Pennsylvania medicaid admissions on an inpatient basis. Facts 26.
36. In calendar year 1986, the Hospital treated 840
Pennsylvania medicaid admissions on an inpatient basis. Facts 27.
37. In calendar year 1987, the Hospital treated 552
Pennsylvania medicaid admissions from the period January !
through September 30, 1987. Facts 28.
38. The number of patients identified in paragraphs 31
through 37 above does not include the number of Pennsylvania
medicaid recipients who utilized the outpatient services of the
Hospital. Facts 29.
39. The annual number of outpatient visits at the Hospital
attributable to Pennsylvania medicaid recipients ranges from
7,000 to 7,500. Facts 30.
40. Pennsylvania medicaid recipients residing in Fayette,
Greene, and Washington counties have "freedom of choice" in
selecting their medical care providers. This means absent special
rules, {none of which are applicable to this case), Pennsylvania
recipients of medicaid may use the services of any hospital they
choose. Testimony of David Feinberg, May 4, 5, and 6, 1988
Transcript at 124, lines 22-25; 125, lines 1-25; 126, lines 1-25; 127,
lines 1-21.
41. Some Pennsylvania residents, including Pennsyivania
medicaid recipients, living in the counties of Fayette, Greene, and
Washington desire and require access to the Hospital’s services
and facilities. Facts 32.
42. In fiscal years 1984-85, 1985-86 and 1986-87, WVUH
provided inpatient hospital care to more Pennsylvania medicaid
patients than over one-half of the hospitals located in
Pennsylvania. Testimony of Thomas Manak, Transcript at 251,
lines 8-25; 252, lines 1-7. Plaintiff's Exhibit 51(a).
43. Five percent of all WVUH inpatient admissions are
attributable to Pennsylvania medicaid recipients. Testimony of
Stephen Pickett, Transcript at 170, lines 12-13; 175, lines 18-20.
44. In addition to serving Pennsylvania recipients, the
Hospital served the following numbers of West Virginia medicaid
admissions on an inpatient basis:
July 1, 1982 - June 30, 1983 2,049
July 1, 1983 - June 30, 1984 2,261
July 1, 1984 - December 31, 1984 1,181
Calendar Year 1985 2,319
Calendar Year 1986 1,848
January 1, 1987 - October 31, 1987 ~—- 1,618
45. Twenty-three percent of al! WVUH inpatient admissions
are recipients of medicaid. Testimony of Stephen Pickett,
Transcript at 170, lines 8-9.
46. Seventeen percent of all WVUH inpatient admissions are
West Virginia medicaid recipients. Testimony of Stephen Pickett,
Transcript at 170, lines 12, 13.
B-8
WVUH’s Incorporation History
46. In 1982 the West Virginia Board of Regents
commissioned a study to determine how to resolve deficiencies
cited by the national accreditation board for hospitals. The West
Virginia Board of Regents was advised that given the structural
problems of the existing facility, it was more prudent to replace
the facility than to renovate it. Testimony of Bernard Westfall,
Transcript at 49, lines 22-25; 50, lines 1-25; 51, lines 1-25; 52, lines
1-19.
48. The West Virginia legislature concurred. See
18-11C-2(c) of the Code of West Virginia.
49. The entity that the legislature created to operate the
facility is WVUH. Testimony of Bernard Westfall, Transcript at
59, lines 18-20.
50. WVUH and its predecessor entity, West Virginia
University Hospital, are the same. They are both creatures of the
West Virginia legislature and subject to its control. The
legislature simply changed the form of the hospital organization.
Testimony of Bernard Westfall, Transcript at 142, lines 12-25.
51. The West Virginia legislature has never relinquished
ownership of the Hospital’s assets and control. Plaintiff's Exhibit
71. See 18-11C-3 of the Code of West Virginia.
52. The change from West Virginia University Hospital to
WVUH was a change in the form of organization, not a change of
ownership or control. Testimony of Bernard Westfall, Transcript
at 142, lines 12-25; 688, lines 3-13; 690, lines 5-25; 691, lines 1-7.
B-9
The Provider Agreement with MAP
53. West Virginia University Hospital, the predecessor entity
to WVUH, entered into an agreement with the Pennsylvania
Medicaid Assistance Program. Defendants’ Exhibit 35.
54. The provider agreement, which was not dated, is
self-perpetuating unless terminated. Defendants’ Exhibit 35.
55. The defendants have never terminated the provider
agreement. Testimony of Donna Hoffmaster, Transcript at 482,
lines 6-9.
56. MAP has reimbursed WVUH for inpatient services
provided to Pennsylvania medicaid patients without interruption,
except for one seven week interruption beginning in December,
1987. The reason for withholding payment was due to an alleged
failure to report a change in ownership. Testimony of Amy
Leopard, May 3, 1988, Transcript at 7, lines 3-25; 8, lines 1-25; 9,
lines 1-25; 10, lines 1-13; Plaintiff's Exhibit 67; letter dated
December 2, 1987 from Virginia Antonoplos.
57. The payments were interrupted and withheld after MAP
employees consulted with counsel for MAP. The interruption of
payments was related to this litigation. Testimony of Amy
Leopard, May 3, 1988 Transcript at 13, lines 9-21.
58. The defendants offered no evidence demonstrating a
change in West Virginia University Hospital’s ownership.
Defendants testified only that they were aware that WVUH uses a
tax payer identification number for its short procedure unit (not
related to inpatient care) that is different from some other
numbers utilized by WVUH. Testimony of Donna Hoffmaster,
Transcript at 477, lines 16-25; 478, lines 1-12.
B-10
Ill. Pennsylvania Medicaid Program Reimbursement of
In-State Hospitals
The Nature of the Medicaid Program
59. Medicaid is a federal-state program that pays for medical
services provided to the eligible poor in accordance with Title
XIX of the Social Security Act and the applicable state and
federal regulations. Facts 55, 57.
| 60. The state designs and administers the medicaid program
within the broad parameters established by Title XIX of the
Social Security Act, implementing federal regulations, and the
applicable state laws and regulations. Facts 57.
61. Medicaid is a different program than Medicare. Medicare
is a program of health insurance administered by the federal
government. Facts 58.
62. The Commonwealth of Pennsylvania participates with the
federal government in providing a medicaid program to eligible
Pennsylvania residents. Facts 59.
63. As a part of its agreement with the federal government to
participate in medicaid, the defendants submitted a state plan for
medical assistance to the United States Secretary of Health and
Human Services for approval. Facts 60.
64. Pennsylvania’s state plan for medical assistance has been
approved by the United States Secretary of Health and Human
Services, including the Pennsylvania state plan provisions that
govern reimbursement of general acute care hospitals which
provide health care services to Pennsylvania medicaid recipients.
Facts 61.
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The Change From Retrospective "Reasonable Cost"
Reimbursement to Prospective Reimbursement
65. Prior to 1981, the Social Security Act required states to
pay hospitals the "reasonable cost" of rendering inpatient hospital
services to medicaid recipients. Facts 62.
66. "Reasonable cost" was a term defined and used in the
medicare program and adopted for use in the medicaid program.
Facts 63.
67. As a general rule, the "reasonable cost" standard of
reimbursement meant that states were required to reimburse
hospitals their actual, allowable costs (capital costs and operating
costs) of the care provided to medicaid recipients. Facts 64.
68. "Reasonable cost" reimbursement was a retrospective form
of reimbursement, involving the payment of interim rates during
the fiscal year with an end-of-year cost settlement once a hospital
reported its claimed actual, allowable medicaid costs. A hospital’s
reported costs were generally subject to audit. Facts 05.
69. On July 31, 1981, the United States Congress enacted the
Omnibus Budget Reconciliation Act of 1981, Public Law 97-35
(OBRA), which changed the requirement that state medicaid
programs reimburse hospitals the "reasonable" cost of providing
services. Facts 66.
70. Effective for fiscal year 1984-1985, the Commonwealth of
Pennsylvania replaced the reasonable cost system of
reimbursement for acute care inpatient services in hospitals in the
medicaid program. Facts 72.
71. In place of the reasonable cost standard Pennsylvania
adopted a "prospective payment system" for acute care inpatient
services in hospitals. Facts 73.
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72. Under a prospective payment system of reimbursement a
hospital is told in advance what its payment will be for specified
services. Facts 74.
73. The Pennsylvania prospective payment system was
designed, in part, to implement the OBRA standard and to
contain the rising cost of health care. Facts 75.
74. One of the goals of Pennsylvania’s system of prospective
payment is to provide hospitals with the incentive to become
more efficient and economical by providing them a fixed amount
of reimbursement for each case regardless of the provider’s actual
costs of treating those cases. Facts 76.
In-State Hospital Reimbursement of Operating Costs Of
Inpatient Care Under The MAP Prospective Payment
System Grouping
75. Under Pennsylvania’s medicaid prospective payment
system of reimbursement, all participating in-state hospitals were
separated into seven groups, excluding children’s hospitals. Facts
78.
76. The purpose of the grouping system was to place hospitals
with similar roles and potential for costs in the same group.
December 28, 1988 Deposition of James Vertrees at 35, lines
4-13; 53, lines 11-21. Defendants’ Exhibit 2 at 2198.
77. The underlying assumption was that similar hospitals have
similar costs and that reimbursement of the average cost of
similarly situated hospitals would be an equitable means of
payment. Testimony of Thomas Manak, Transcript at 213, lines
14-17.
78. Pennsylvania used a complex formula to identify the
similarities among hospitals. Testimony of Thomas Manak,
Transcript at 213, lines 18-19.
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79. Pennsylvania’s groupings for in-state hospitals take into
account four concepts: each hospital’s teaching status, its
medicaid volume, its environmental characteristics, and its
hospital costs. Facts 80.
80. Teaching status, medicaid volume, environmental
characteristics, and hospital costs are measured by a total of
thirteen variables. Facts 81.
81. The variables consist of, inter alia, the number of interns
and resident programs, medicaid volume, area wage index, and
total patients seen at the hospital. Testimony of Thomas Manak,
Transcript at 214, lines 15-17.
82. The actual grouping of in-state hospitals is done by
computer program after inputting each in-state hospital’s data for
the thirteen variables. Facts 82.
83. MAP has placed all in-state academic medical centers in
Group I. Testimony of Kelly Grotzinger, Transcript at 60, lines
21-25; 602, lines 8-10.
Group Average Cost Per Case
84. After all in-state hospitals were grouped into seven groups
by the computer, Pennsylvania determined a group average cost
per case. This group average cost per case is ultimately used to
determine the prospective payment. Facts 83.
85. To ascertain the group average cost per case for each of
the groups of in-state hospitals for fiscal years 84-35, 85-86 and
86-87, the defendants identified each hospital’s reported
Pennsylvania medicaid reimbursable costs for the most recently
completed fiscal year, subtracting certain costs specified in the
state plan and applicable regulations. Facts 84.
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86. The in-state hospital’s costs were then divided by the
number of Pennsylvania medicaid cases on paid claims history for
that in-state hospital for that year. Facts 85.
87. The resulting figure was that particular in-state hospital’s
average cost per case for the fiscal year from which the cost
information was derived. Facts 86.
88. The average cost per case for the hospital was then
standardized by a hospital-specific case mix index. Facts 87.
89. The defendants then determined a rate of increase for
each in-state hospital’s average cost per case by the particular
in-state hospital’s average cost per case for the preceding fiscal
year. Facts 88.
90. The defendants then adjusted the in-state hospital’s
average cost per case by an inflation rate, if the rate of increase
was greater than the rate of inflation for the preceding fiscal year.
Facts 89.
| 91. Ifthe rate of increase was equal to or less than the rate of
inflation, then the average cost per case was increased by one-half
of the difference between the rate of increase and the rate of
inflation for the preceding fiscal year. Facts 90.
92. The defendants projected the in-state hospital’s average
cost per case to the end of the forthcoming year by multiplying the
adjusted average cost per case by a projected inflation rate for the
forthcoming fiscal year. Facts 91.
93. For each group of in-state hospitals the defendants added
the projected average cost per case for each in-state hospital in a
given group, and divided the total by the number of hospitals in
that particular group. Facts 92.
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94. The resulting figure was the group average cost per case
which was then adjusted for budget neutrality. This number was
the group rate. Facts 93.
95. A group rate was calculated for each of the seven groups.
The hospitals in Group 1 have the highest group rate. The
hospitals in Group 7 have the lowest group rate. Testimony of
Thomas Manak, Transcript at 220, line 25; 221, lines 1-17; 225,
lines 16-24. Defendants’ Exhibit 2 at 2198, 2199.
The Payment Rate for a DRG
96. To determine how much to pay a hospital for treating a
patient with a given illness, MAP multiplies the relative value of
the Diagnostic Related Group (DRG) assigned to the patient's
illness by the hospital’s group average cost per case. Testimony of
Thomas Manak, Transcript at 224, lines 20-22.
97. The higher the group average cost per case, i.e., the
hospital’s group rate, the higher the payment for a given DRG.
Thus, MAP pays a Group | hospital more to treat a given DRG
than it pays a Group 2, 3, 4, 5, 6 or 7 hospital to treat the same
DRG. Testimony of Thomas Manak, Transcript at 225, lines
16-25; 226 lines 1-3.
98. The payment amount for a given case may be adjusted for
payments made by a third party payer, patient co-pay or resource
obligations, or, if the case qualifies as a day or cost outlier. Facts
97.
99. Under Pennsylvania’s prospective payment system,
hospitals are paid a set amount per inpatient case for the
hospital’s operating costs based on the hospital’s group rate and
the applicable DRG. Facts 98.
100. The DRG system of reimbursement creates "winners"
and "losers." A winner is a case where the DRG payment is
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greater than the actual cost of treating a particular patient. A
loser is where costs are more than the DRG payment received.
Testimony of Gerard Anderson, Transcript at 314, lines 11-15.
101. On aggregate, the expectation is that over a large number
of cases, in-state hospitals will be paid an appropriate amount.
Testimony of Gerard Anderson, Transcript at 314, lines 24-25.
In-State Hospital Reimbursement of Direct Medical
Education Costs
102. In addition to reimbursement of the inpatient operating
costs for each inpatient case, MAP pays in-state hospitals an
additional amount to reimburse them for their direct education
medical costs, if any. Facts 101.
103. MAP reimburses in-state hospitals for their direct
medical education (DME) costs in accordance with the federal
medicare regulations and applicable state laws and regulations for
such reimbursement. See Testimony of David Feinberg, May 4, 5,
and 6, 1988 Transcript at 95, lines 3-8, 19-24; 96, lines 1-3.
104. In developing its payment system, MAP recognized that
organized or planned educational activities enhance the quality of
care in an institution. Plaintiff's Exhibit 8. Testimony of Gerard
Anderson, Transcript at 320, lines 12-23.
105. In developing its payment system, MAP stated it wanted
to fairly reimburse the legitimate costs of DME. Plaintiff's
Exhibit 8.
106. The defendants concluded that reimbursement of DME
costs satisfied the OBRA standard. Facts 145.
107. A hospital’s direct medical education costs are largely the
salaries hospitals pay to residents in approved teaching programs.
Testimony of Michael Maher, Transcript at 642, lines 16-23.
B-17
108. Residents spend approximately 75% of their time
providing direct patient care. Testimony of Gerard Anderson,
Transcript at 321, lines 17-21.
109. MAP reimburses in-state hospitals for the MAP share of
their DME costs on a "pass through" basis subject to certain
limitations. Testimony of Thomas Manak, Transcript at 227, lines
14-25; 228, lines 1-2.
110. MAP has a specific line on its medicaid cost report for
hospitals to report their DME costs. Testimony of Michael
Maher, Transcript at 648, lines 6-12.
111. MAP reimbursed in-state hospitals for the MAP share of
their DME costs in 1984-1985 and 1985-1986 on an actual cost
basis subject to certain limitations. See 55 Pa. Code 1163.55.
Defendants’ Exhibit 2.
112. For fiscal year 1986-1987 and thereafter, MAP limits
reimbursement to in-state hospitals for DME costs to 1.95% over
the amount paid to the hospital in the previous year for DME
costs or the hospital’s allowable DME costs, whichever is less.
See 55 Pa. Code 1163.55(d). Defendants’ Exhibit 4.
113. In actual practice, MAP requires hospitals to claim
resident salaries as part of the hospitals’ cost of doing business.
MAP does not give residents in approved training programs
separate provider contracts. Testimony of Michael Maher,
Transcript at 649, lines 19-25; 650, lines 1-18.
114. There is no provision of the Pennsylvania State Plan or
other Pennsylvania rule that would permit interns and residents in
approved teaching programs to bill MAP directly for their
services instead of having hospitals claim their salaries as costs.
Testimony of David Feinberg, May 4, 5 and 6, 1988 Transcript at
106, lines 23-25; 107, lines 1-5; 121, lines 1-16.
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In-State Hospital Reimbursement of Capital Costs
115. In addition to reimbursement of the inpatient operating
costs for each inpatient case and in addition to any payments for
direct medical education costs, MAP reimburses in-state hospitals
for their allowable capital costs. Facts 103.
| 116. For the period July 1, 1984 through June 30, 1986 this
reimbursement for capital costs was determined for each in-state
hospital by ascertaining each hospital’s specific capital costs.
Facts 104.
117. MAP then paid its share ‘of the hospital’s actual
allowable costs on a pass-through basis. Testimony of Thomas
Manak, Transcript at 227, lines 1-12.
118. For the period July 1, 1984 through June 30, 1986, the
defendants found that the reimbursement of an in-state hospital’s
= allowable capital costs satisfied the OBRA standard. Facts
137.
119. After July 1, 1986, MAP initiated a prospective payment
system for reimbursement of an in-state hospital’s capital costs.
The system will be phased in between July 1, 1986 and June 30,
1992. During this period, MAP will pay in-state hospitals for their
actual capital-costs on a decreasing percentage basis. After July 1,
1992, MAP will reimburse all in-state hospitals the same flat rate
for their capital costs. Testimony of David Feinberg, May 4, 5 and
6, 1988 Transcript at 64, lines 6-24; 65, line 1.
The Phase-In of the Prospective Payment System for
In-State Hospitals
120. The defendants adopted a three year phase-in for
Pennsylvania’s prospective payment system for reimbursement of
each in-state hospital’s operating costs. The phase-in began in
fiscal year 1984-1985. Facts 105.
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121. The phase-in involved blending each in-state hospital’s
group average cost per case with the in-state hospital’s hospital
specific cost per case. Facts 106.
122. In fiscal year 1984-1985, an in-state hospital’s prospective
payment rate was a blend of 75% of the in-state hospital’s
hospital-specific cost per case, after a budget neutrality
adjustment, and 25% of the hospital’s group average cost per case,
after a budget neutrality adjustment. Facts 107.
123. In fiscal year 1985-1986, an in-state hospital’s prospective
payment rate was calculated by adjusting the percentages from
7$%/25% to 50%/S0%. Facts 108.
124. In fiscal year 1986-1987, the prospective payment rate of
an in-state hospital was determined by using only that in-state
hospital’s group average cost per case. Facts 109.
IV. The Pennsylvania Medicaid Program:
Reimbursement of Out-Of-State Hospitals
General
125. The Pennsylvania medicaid prospective payment system
does not reimburse out-of-state hospitals the same way it
reimburses in-state hospitals. Facts 117.
Reimbursement for Operating Costs
Grouping
126. Under the Pennsylvania prospective payment system all
out-of-state hospitals are grouped together in one group --
irrespective of the differences that might exist between the
hospitals, such as teaching status, medicaid volume, environment,
and hospital costs. Facts 118.
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127. Out-of-state hospitals are grouped using one factor only:
the hospitals are not located in Pennsylvania. Facts 119.
128. By grouping ail out-of-state hospitals together
Pennsylvania did not put out-of-state hospitals with the potential
for similar costs together. December 28, 1987 Deposition of
James Vertrees at 54, lines 13-18.
129. Defendants determined as early as September 6, 1983
that the Pennsylvania medicaid prospective payment system would
classify all out-of-state hospitals inio one group and reimburse
them for operating costs_using an average in-state rate based on
the statewide average cost per case. Facts 120.
130. The drafters of the MAP prospective payment system
were aware that placing all out-of-state hospitals together in a
group and basing their payment on an average Pennsylvania
Statewide cost per case was potentially inequitable for a large
university medical center because teaching hospitals have
extremely high costs. December 28, 1987 Deposition of James
Vertrees at 54, lines 13-22. Plaintiffs Exhibit 11.
The Lack of a Factual Basis to Support the Payment Rate
Used for WVUH |
131. No empirical study was done with respect to out-of-state
payments between the period September 6, 1983 and July 1, 1984
_when the prospective system was implemented. Facts 122.
132. To reimburse inpatient operating costs of out-of-state
hospitals, Pennsylvania multiplies the relative value of the DRG
assigned to the patient’s illness by the out-of-state group rate
(based on a Pennsylvania statewide average cost per case) or the
hospital’s actual charges for treating that illness, whichever is
lower. See 55 Pa. Code 1163.65(c).
B-21
133. In developing the reimbursement methodology for
out-of-state hospitals, defendants did not !ook at the individual
cost data for out-of-state hospitals. Facts 125.
134. Unlike the situation concerning in-state hospitals, the
Pennsylvania medicaid payment rate for out-of-state hospitals has
no relation to the actual costs incurred by the out-of-state
hospitals in providing care to Pennsylvania medicaid recipients.
Testimony of Thomas Manak, Transcript at 229, lines 4-5, 18-25;
230, lines 1-2.
135. The Pennsylvania medicaid payment rate is not sensitive
to differences that may exist between out-of-state hospitals.
Testimony of Thomas Manak, Transcript at 228, lines 20-24.
136. A small community hospital that is out-of-state will
receive the same MAP payment for a given DRG that WVUH
will receive. Facts 129.
137. MAP has no empirical analysis that validates the
payment rates for out-of-state hospitals. Testimony of David
Feinberg, May 4, 5, and 6, 1988 Transcript at 111, lines 6-14,
24-25; 112, line 2.
138. MAP has no factual basis for concluding that its
operating cost reimbursement to WVUH is adequate and
reasonable. Testimony of Gerard Anderson, Transcript at 244,
lines 8-25; 345, lines 1-3, 12-20.
139. MAP defends its payment rate for out-of-state hospitals
on the grounds that it was administratively too burdensome to
identify and validate the costs of out-of-state hospitals. December
15, 1987 Deposition of David Feinberg at 28, lines 9-11.
Testimony of David Feinberg May 4, 5, and 6, 1988 Transcript at
43, lines 4-21.
B-22
140. Few out-of-state hospitals see more than 20 MAP cases
per year. Plaintiffs Exhibit 56(A). Testimony of Thomas Manak,
Transcript at 257, lines 11-24.
141. WVUH is the only out-of-state hospital that serves more
than 160 MAP cases. Plaintiff's Exhibit 56(A).
142. MAP did not identify its large out-of-state providers.
Testimony of James Vertrees, Transcript at 550, lines 2-25; 551,
lines 1-18.
143. MAP considered out-of-state reimbursement a minor,
technical issue, not a substantive issue. Testimony of Robert
Gallagher, Transcript at 607, lines 1-6.
144. MAP presently has the audit capacity to verify the costs
of 75-100 out-of-state hospitals. Testimony of Robert Gallagher,
Transcript at 607, lines 1-6.
MAP Did Not Consider Whether Out-of-State Hospitals
Treat A Disproportionate Share of Low Income Persons
145. It costs more to treat low income patients and hospitals
that serve a large medicaid population are "particularly
dependent" on medicaid reimbursement. 48 Fed. Reg. 56048
(December 19, 1983).
146. The Pennsylvania medicaid prospective payment
methodology defines a low income patient as a patient who is a
Pennsylvania medicaid recipient. Testimony of Gerard Anderson,
Transcript at 359, lines 22-25; 360, lines 1-12.
147. MAP considers an in-state hospital that has an 18-20%
medicaid volume serves a disproportionate number of low income
patients. Testimony of David Feinberg, May 4, 5, and 6, 1988
Transcript at 109, lines 1-4.
B-23
148. The out-of-state reimbursement methodology does not
contain any provision with which to identify out-of-state hospitals
serving a disproportionate share of low income patients and by
which to reimburse those hospitals any more than other
out-of-state hospitals are reimbursed. Facts 133.
149. MAP does not take into account the high volume of
medicaid patients at WVUH. Testimony of Gerard Anderson,
Transcript at 424, lines 10-11.
150. Adequate medicaid reimbursement is essential for
hospitals that have a high volume of medical assistance patients
because their medicaid payment is significant in terms of their
total revenue picture. December 28, 1988 Deposition of James
Vertrees at 34, lines 7-14.
151. MAP concluded that the flat average rate paid to
out-of-state hospitals, if used in-state, would result in teaching
hospitals not getting enough payment and smaller community
hospitals getting more than they needed. MAP did not have a
similar concern for out-of-state hospitals. Testimony of James
Vertrees, Transcript at 561, lines 7-25; 562, lines 1-21.
Reimbursement of Capital Costs for Out-of-State Hospitals
152. Under the Pennsylvania medicaid prospective payment
system Pennsylvania does not reimburse WVUH or other
out-of-state hospitals for their capital costs in the same manner as
Pennsylvania reimburses in-state hospitals. Facts 125.
153. The Pennsylvania medicaid prospective payment system
has never reimbursed out-of-state hospitals using their actual
allowable costs of capital. Facts 139.
154. The Pennsylvania medicaid prospective payment system
pays out-of-state hospitals an "add-on" for capital reimbursement
B-24
that represents the average capital costs of all Pennsylvania
hospitals. Facts 140.
—155. The Pennsylvania "add-on" for capital costs to the
reimbursement of out-of-state hospitals bears no relationship to
the actual capital costs of those hospitals. Testimony of Thomas
Manak, Transcript at 230, lines 7-15.
| 156. MAP gave in-state hospitals approximately 10 years to
adjust to a flat rate payment for capital. Testimony of James
Vertrees, May 6, 1988 Transcript at 78, lines 7-25; 79, line 1.
157. Out-of-state hospitals did not have a chance to adjust to a
prospective payment for capital. Testimony of James Vertrees,
May 6, 1988 Transcript at 79, lines 2-4.
158. Under the current Pennsylvania regulations that govern
the medicaid prospective payment system, an out-of-state hospital
that believes that the capital part of its payment is inadequate,
cannot obtain more than that flat rate payment even if it can
demonstrate that it has additional actual capital costs and that
additional capital reimbursement is necessary to meet the costs of
an efficiently and economically run institution. Deposition of
David Feinberg at 164, lines 18-25.
159. Capital reimbursement is an important part of medicaid
reimbursement because hospitals need to replace or expand their
Capital assets over time. Testimony of Gerard Anderson,
Transcript at 364, lines 18-25; 365, lines 1-9.
160. WVUH’s hospital facility has exhausted its useful life.
Testimony of James vertrees, Transcript at 552, 18-22.
161. When WVUH opens its new facility, WVUH will have
no opportunity to obtain’ relief from MAP, under existing
regulations, to cover what it believes is the MAP share of the
additional capital costs associated with the new construction.
B-25
Testimony of David Feinverg, May 4, 5, and 6, 1988 Transcript at
129, lines 6-25; 130, lines 1-7.
Reimbursement of Direct Medical Education Costs of
Out-of-State Hospitals
162. Pennsylvania does not reimburse WVUH or any other
out-of-state hospital for costs of DME attributable to
Pennsylvania medicaid recipients. Facts 146.
163. WVUH incurs DME costs because it is a teaching
institution. Facts 147.
164. If the indirect costs of teaching hospitals were simply
averaged with the costs of non-teaching hospitals, the former
would not be adequately reimbursed for the extra costs
empirically shown to be associated with their teaching function, as
reflected in the issue paper dated October 12, 1984. Facts 151.
165. Based on Medicare results, the defendants acknowledge
that a hospital with an intern and resident-per-bed ratio of 0.3
would be expected to have costs about 18% higher than otherwise
similar hospitals with an intern and resident-per-bed ratio of 0.0,
as reflected in the issue paper dated October 12, 1984. Facts 154.
166. Because it costs more for a teaching hospital to provide
care, teaching hospitals would be adversely affected by receiving a
uniform DRG payment. Testimony of Gerard Anderson,
Transcript at 326, line 25; 327, lines 1-15.
167. As a general proposition, DME costs are legitimate and
accepted costs of maintaining a medical school or a teaching
hospital. Facts 156.
168. Failure of all payers to pay their share of DME costs
would either jeopardize a teaching hospital’s teaching program or
require that the costs be borne by another source. Facts 157.
B-26
169. The MAP papers governing "Teaching Hospitals" and
"Direct Medical Education" (Plaintiff's Exhibits 6 and 8), do not
contain any rationale or basis-in-fact for the MAP decision not to
reimburse the DME costs of out-of-state hospitals. Testimony of
Gerard Anderson, Transcript at 331, lines 15-19.
170. Although MAP could have asked for and verified the
DME costs for large out-of-state providers, it chose not to.
Testimony of James Vertrees, May 4, 5, and 6, 1988 Transcript at
550, lines 12-15. Testimony of Robert Gallagher, Transcript at
605, lines 1-7.
171, MAP stated that it would not pay for educating
physicians out-of-state. Testimony of David Feinberg, May 4, 5,
and 6, 1988 Transcript at 57, lines 19-24.
172. MAP had no actual data as to the number of physicians
who train at WVUH but practice in Pennsylvania. Testimony of
David Feinberg, My 4, 5, and 6, 1988 Transcript at 57, line 25; 58,
lines 1-4,
Vv. WVUH Is The Largest Out-of-State Provider of Hospital
Services to MAP Medicaid Recipients
173. The Hospital treated more Pennsylvania medicaid
recipients than more than one half of the in-state hospitals for the
period of July 1, 1985 through June 30, 1986. Facts 160.
174. WVUH provided more care to Pennsylvania medicaid
residents than over one half of the in-state hospitals for fiscal year
ending June 10, 1985 and fiscal year ending June 30, 1987.
Plaintiffs Exhibit 51(A); Testimony of Thomas Manak,
Transcript at 252, lines 3-7.
B-27
175. The Hospital treated more Pennsylvania medicaid
recipients in fiscal year 1985-1986 than any other out-of-state
hospital provider. Facts 161.
176. ©WVUH treated substantially more Pennsylvania
medicaid recipients in fiscal year 1984-1985 and fiscal year
1986-1987 than any other out-of-state provider. Plaintiff's Exhibit
55.
177. In fiscal year 1985-1986, 163 out-of-state hospitals
provided care to Pennsylvania medicaid recipients. Facts 162.
178. In both fiscal years 1984-1985 and 1985-1986, WVUH
treated in excess of 800 Pennsylvania medicaid patient cases. In
fiscal year 1986-1987, it treated approximately 730 Pennsylvania
medicaid patient cases. The next largest out-of-state provider
treated fewer than 160 Pennsylvania medicaid patients. Plaintiff's
Exhibit 56.
179. For fiscal years 1984-1985, 1985-1986 and 1986-1987,
most out-of-state hospital providers treated fewer than ten
Pennsylvania medicaid cases. Plaintiff's Exhibit 56(A). Facts
170.
VI. The Effect of MAP Payment to WVUH
180. Because WVUH treats so many MAP cases, inadequate
MAP reimbursement will have substantial financial consequences
for the Hospital and will jeopardize its continued ability to care
for MAP patients. Testimony of Bernard Westfall, Transcript at
98, lines 2-22. December 28, 1987 Deposition of James Vertrees
at 56, lines 4-8; 60, lines 5-22; 61, lines 1-15.
181. If WVUH withdraws from the Pennsylvania medicaid
program, it will jeopardize some: Pennsylvania medicaid
recipients’ access to needed health care services. Testimony of
Bernard Westfall, Transcript at 96, lines 14-25; 97, lines 1-18; 98,
lines 2-19.
182. The defendants’ failure to reimburse the Hospital
adequately will also curtail Pennsylvania medicaid recipients’
freedom of choice if WVUH is compelled to withdraw from the
Pennsylvania medicaid program.
183. On average, MAP reimburses in-state hospitals
approximately 95% of the costs they incur in treating
Pennsylvania medicaid recipients. In contrast, MAP reimburses
WVUH for only approximately 54% of the costs it incurs in
treating MAP patients. Testimony of Thomas Manak, Transcript
at 663, lines 20-25; 664, lines 1-24.
184. MAP pays an in-state hospital $344.00 more to treat an
average case than it pays WVUH to treat an average case.
Testimony of Thomas Manak, Transcript at 244, lines 15-19.
185. MAP reimburses WVUH an increasingly lower
proportion of WVUH’s costs of caring for a Pennsylvania
medicaid recipient. Testimony of Thomas Manak, Transcript at
246, lines 14-41. Plaintiffs’ [sic] Exhibit 64.
VII. The MAP Appeals System
186. Pursuant to requirements of federal regulation 42 C.F.R.
section 446.253(c), the Pennsylvania medicaid agency must
provide hospitals with a system by which to appeal. Facts 175.
187. The administrative agency division which adjudicates the
appeals is the Department of Public Welfare’s Office of Hearings
and Appeals (OHA). Testimony of David Feinberg, May 4, 5, and
6, 1988 Transcript at 87, lines 8-10.
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188. OHA employs hearing officers, some of them attorneys,
to hear appeals, take testimony, admit exhibits, make findings of
fact, and determine whether the Pennsylvania Medicaid Agency
properly applied its regulations. Defendants’ Exhibits 31, 32.
189. The hearing officer recommends a decision to the
Director of OHA, who either adopts or rejects the
recommendation. Defendants’ Exhibit 7. (General Rules of
Administrative Practice); 1 Pa. Code, Part II; 55 Pa. Code 1101.
190. Both parties to the administrative appeal, the Office of
Medical Assistance and the provider, have the right to request
reconsideration from the Secretary should the other party prevail.
Id.; 1 Pa. Code 33.61, 35.187(8) and 35.190.
191. Outside of the administrative appeals process, review of
the decision of the Director of OHA or the Secretary of DPW
may be sought from the judiciary of the Commonwealth of
Pennsylvania.
192% The Commonwealth Court is the judicial body in
Pennsylvania that is statutorily charged with the duty to review
administrative decisions.
193. The administrative hearing officer in the Pennsylvania
appeals system would provide no relief to an out-of-state hospital
if the out-of-state hospital appealed on the grounds that it should
be grouped as if it were an in-state hospital. Facts 177.
194. The administrative hearing officer in the Pennsylvania
appeals system would provide no relief to an out-of-state hospital
that appeals on the grounds that it should be reimbursed for the
Pennsylvania medicaid share of its direct medical education costs.
Facts 178.
195. The administrative hearing officer in the Pennsylvania
appeals system would provide no relief for an out-of-state hospital
B-30
that appeals on the grounds that it should be reimbursed as an
in-state hospital for its specific capital costs. Facts 179.
196. The administrative hearing officer in the Pennsylvania
appeals system would provide no relief for an out-of-state hospital
seeking inclusion of its hospital specific costs during the phase-in
of Pennsylvania’s prospective payment system as was the case for
in-state hospitals. Facts 180.
197. If an out-of-state hospital were to appeal the adequacy of
its rate and if the defendants had correctly applied the
reimbursement methodology, i.e., the hospital were properly
grouped with all other out-of-state hospitals, the hospital received
the correct payment for the out-of-state group, and there were no
error in the calculations, that out-of-state hospital would not
prevail in an administrative appeal before an administrative
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