Petition for Writ of Certiorari — Casey v. West Virginia University Hospitals, Inc.

2 (999

*

IN THE SUPREME COURT OF THE j

UNITED STATES a

October Term, 1989

ROBERT CASEY, Governor of

Pennsylvania, et al.,

Petitioners

ae

WEST VIRGINIA UNIVERSITY

HOSPITALS, INC.,

Respondent

PETITION FOR CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

ERNEST D. PREATE, JR.

Attorney General]

BY: JOHN G. KNORR, III

Chief Deputy Attorney

General

Counsel of Record

JEROME T. FOERSTER

Deputy Attorney General

Office of Attorney General

15th Fl., Strawberry Square

Harrisburg, PA 17120

(717) 783-1471

QUESTION PRESENTED

Whether a Medicaid provider has

a private federal cause of action under

42 U.S.C. § 1983 to enforce the Medicaid

Act against a State?

emma

LIST OF PARTIES

The petitioners are Robert

Casey, the Governor of Pennsylvania;

John White, the Secretary of the Pennsyl-

vania Department of Public Welfare; and

David S. Feinberg, the Director of the

Office of Medical Assistance within that

Department.

The respondent is West Virginia

University Hospitals, Inc., a non-profit

West Virginia corporation.

QUESTION PRESENTED............2.4-.

DEG OF PARTIES... 2. cess cccccvces

TABLE OF AUTHORITIES.............

OPINIONS BELOW... . cc ccccccccsvces

STATEMENT OF JURISDICTION........

STATUTORY PROVISIONS

te): er

STATEMENT OF THE CASE............

REASONS FOR GRANTING

py) a} & ee

THIS CASE PRESENTS AN _ IMPORTANT

QUESTION OF FEDERAL LAW IDENTICAL

TO THAT WHICH THE COURT HAS AGREED

TO REVIEW IN BALILES V, VIRGINIA

HOSPITAL ASSOCIATION

CONCLUSION... cc cvccccccccvcsccces

- ili -

CASES PAGE(s)

Baliles v. Virginia Hospital

Association, No. 88-2043

(cert. granted, October 22,

EES Aw CA Oe hk 6 eau bbe code 15, 16

Harris v. McRae, 448 U.S. 297

CRMs ered re eb aRnce dawe ear 5

Middlesex County Sewage

O.B. 2B TRPORe seek ensstusasess 17

Missiasinoi B ita) Ansociati

vy. Heckler, 701 F.2d 511 (5th

4, ee} oe eee eee 16

UNITED STATES CONSTITUTION

Eleventh Amendment............. 1l

Fourteenth Amendment........... 10

STATUTES

SB U.6.6. B BORds sv vcvcascsunen ha, &6

26 URE. BD RReae 00 0s sku cuecke 2

42 U.8.€. © O0OGs ccsccscsscsases as Be

6

42 0.8.6. 3 BRRORIE soci onccien a, 6,

10

- iV «

STATUTES PAGE(S)

42 U.S.C. § 1396a(a)(13)(A).... 6, 16

42 U.S.C. § 1396a(a)(37)....... 6, i0

ey 2 ee i: Pere ee 3, 5,

ll, 15

REGULATIONS

G2 C.F .R. BH OE7. ZSSCES) « 2 cca vce. 10, 17

OPINIONS BELOW

The opinion of the Court of

Appeals is reported at 885 F.2d 11 and

is reprinted in the appendix at p. le.

The opinion of the District Court on the

merits is reported at 701 F.Supp. 496

and is reprinted in the Appendix at

p. 120a. The opinion of the District

Court on costs is not reported, but is

reprinted in the Appendix at p. 277a.

STATEMENT OF JURISDICTION

The judgment of the Court of

Appeals was filed on September 5, 1989,

Pet. App. 287a, and the respondent

timely petitioned for rehearing. The

Court of Appeals denied rehearing on

October 5, 1989, Pet. App. 290a, and

this petition is being filed within 90

Gays thereafter. The Court has

jurisdiction pursuant to 28 B.8.€.

§ 1254(1).

STATUTORY PROVISIONS INVOLVED

Rs 42 U.S.C. § 1983 provides in

relevant part:

Every person who, under

color of any statute, ordi-

nance, regulation, custom, or

usage, of any State...

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.

2. Title XIX of the Social Security

Act, 42 U.S.C. § 1396 et seg., known as

the Medicaid Act, provides in relevant

part, et 42 ¥0.8.€. § 1396a(a), as

follows:

A State plan for medical

assistance must--...

(13) provide--

(A) for payment ... of the

hospital “os 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 econom-

ically operated facilities

‘ and to assure that indi-

viduals eligible for medical

assistance have reasonable

access eee to impatient

hospital services.

tien

STATEMENT OF THE CASE

Ei This action challenges

Pennsylvania's administration of the

Medical Assistance or “Medicaid” program

authorized by Title XIX of the Social

Security Act, 42 U.S.C. § 1396 et seq.

The respondent, a hospital, attacks the

adequacy of the payment rates Pennsyl-

vania has established for its services,

and attacks other aspects of the program

as well. The courts below held that the

respondent could maintain this action

under 42 U.S.C. § 1983, and the

petitioners ask the Court to review that

holding.

a. Medicaid is an exercise in

"cooperative federalism,” Harris v.

McRae, 448 U.S. 297, 308 (1980), in

which the state and federal governments

work together to provide, "as far as

praticable under the conditions in each

state,” medical assistance to poor

people. 42 U.S.C. § 1396. To receive

the federal financial assistance made

available by the act, a state must

submit to the Secretary of Health and

Human Services, and have approved by

him, a “state plan,” ibid, the contents

of which are prescribed by 42 U.S.C.

§ 1396a(a).

Regarding hospital services,

the act requires that the state plan

"“must...provide...for payment...through

the use of rates...which the state

finds, and make assurance satisfactory

to the Secretary, are reasonabie and

adequate to meet the costs which must be

incurred by efficiently and economically

operated facilities.” 42 U.S.C. § 1396a

(a)(13)(A). These payment rates must

also take into account the situation of

hospitals serving disproportionate

numbers of poor patients. Ibid.

b. Pennsylvania pays for

Medicaid hospital services by using

“prospective” payment rates, that is,

rates that are set in advance. Pet.

App. 145a. For in-state hospitals,

these rates are set by assigning

hospitals to one of seven groups, using

4 number of variables designed to

measure each hospital's teaching status,

Medicaid volume, environmental

characteristics and costs. Pet. App.

146a-147a. For each group, a group

payment rate is then calculated, based

upon the average costs of the hospitals

within that group. Pet. App. 148a-152a.

Both of these steps--the

assignment of hospitals to groups’ and

the calculation of group payment

rates--are vastly more complex than can

ofa

be described here. The information

needed to perform them comes from the

cost reports submitted by the in-state

hospitals, which in turn contains the

data on 750,000 Medicaid cases over a

two-year period. C.A. App. 494a.?

For out-of-state hospitals,

Pennsylvania has no such cost reports.

C.A. App. 488a. Moreover, the services

provided to Pennsylvania Medicaid

recipients by out-of-state hospitals are

miniscule from the point of view of both

Pennsylvania and the hospitals. Most

out-of-state hospitals treat fewer than

ten Pennsylvania Medicaid patients in

the course of a year. Pet. App. 180a.

The respondent is by far the largest

l-c.A. App.” refers to the Appendix

filed in this case in the Court of

Appeals.

out-of-state provider, Pet. App. 17Sa-

180a, but even so, Pennsylvania Medicaid

patients account for only 5% of respon-

dent's inpatient admissions. Pet. App.

135a. Pennsylvania therefore decided

that, instead of attempting to ‘assign

each out-of-state hospital to one of the

seven payment groups, it would pay all

out-of-state hospitals the average

payment rate for in-state hospitals.

Pet. App. 164a. |

In addition to these payment

rates, which cover operating costs,

Pennsylvania distinguishes between

in-state and out-of-state hospitals in

paying for capital costs, which are

calculated differently for in-state and

out-of-state hospitals, Pet. App. 17la-

174a; and in making “direct medical

education” payments to teaching hospi-

tals, which are available to in-state

Le

but not out-of-state hospitals. Pet.

App. 175a-178a. The cumulative

<—

effective of these policies on the

respondent is that Pennsylvania

reimburses it for 54% of its costs, as

opposed to 95% for the average in-state

hospital. Pet. App. 182a.

The respondent claimed that

these policies violated the governing

6 ee 2 eet anda BP Lee

statute, see 42 U.S.C. § 1396a(a)

(13)(A), and the Fourteenth Amendment's

equal protection clause. It claimed

also that Pennsylvania's administrative

appeal system did not permit it

adequately to challenge these policies,

in violation of the governing statute

and regulations. See 42 o.§.¢.

§ 1396a(a)(37); 42 C.F.R. § 447.253(c).

2. The District Court held

that this action, insofar as it

presented claims arising under the

Social Security Act and its regulations,

ay

was authorized by 42 U.S.C. § 1983.

Pet. App. 194a-197a.

On the merits, the District

Court held that Pennsylvania's

reimbursement scheme for out-of-state

hospitals violated both the governing

Statutory provisions, Pet. App. 197a-

230a, and the equal protection clause,

Pet. App. 231a-242a; and that the

state's administrative appeal system

violated the federal statute and

regulations. Pet. App. 242a-255a.

Finally, the District Court held that

the respondent's relief would run, not

from the date of judgment, but from the

Gate the action had been commenced, and

rejected the petitioners' Eleventh

Amendment arguments’ to the contrary.

2There was no question that’ the

respondent's constitutional claim was

authorized by Section 1983. Pet. App.

196a-197a.

=

ah: A sh mma

ON ae. AE OF Ng eA NON A Fe Aa a

Pet. App. 255a-27a. The District Court

issued a declaratory and injunctive

order accordingly. Pet. App. 273a-276a.

Subsequently, the District

Court held that the respondents’ were

entitled to recover expert witness

expenses as part of their costs, without

regard to the $30 per day limit estab-

lished by 28 U.S.C. § 1921. Pet. App.

277a-286a.

The Court of Appeals

affirmed in part and reversed in part.

The Court of Appeals affirmed the

District Court's holding that Section

1983 authorized the respondent to pursue

its statutory claims, Pet. App. 24a-24,

and affirmed likewise the holding that

Pennsylvania's reimbursement scheme for

out-of-state hospitals violates the

federal statute. Pet. App. 48a-90a.

The Court of Appeals expressed “serious

reservations” about the District Court's

slide

holding that this scheme likewise

violates the equal protection clause,

but found it unnecessary to reach this

issue. Pet. app. 90a, n.

As to Pennsylvania's administra-

tive appeals system, the Court of Appeals

reversed the District Court and held

that it did comply with federal law.

Pet App. 9la-98a. In light of this

disposition, and its issuance of relief

only from the day of judgment, the Court

of Appeals did not need to consider the

Eleventh Amendment issue raised by the

District Court's issuance of _ relief

retroactive to the day the complaint was

filed. Pet. App. 98a, n.

Finally, the Court of Appeals

reversed the District Court on the issue

of expert witness fees, and held that

the $30 per day limit of 28 U.S.C.

§ 1921 applied. Pet. App. 99a-llé6a.

oiSia

The Court of Appeals denied the

respondent's petition for rehearing.

Pet. App. 290a-291a.

aiie

REASONS FOR GRANTING THE WRIT

THIS CASE PRESENTS AN IMPORTANT

QUESTION OF FEDERAL LAW IDENTICAL

TO THAT WHICH THE COURT HAS AGREED

TO REVIEW IN BALILES V, VIRGINIA

HOSPITAL ASSOCIATION,

This case presents the same

question which the Court will be

considering in Baliles Vv. Virginia

Hospital Association, No. 88-2043 (cert.

granted, October 22, 1989): whether a

Medicaid provider may enforce the

statute against a State by a private

action under 42 U.S.C. § 1983. There is

therefore no need to belabor the

importance of this question, and we

discuss it only summarily.>

As Virginia pointed out in its

petition for certiorari in Baliles, the

3The Court may wish to defer action

on this petition until Baliles is

decided.

==

decision of the Fourth Circuit in

Baliles, and of the Third Circuit in

this case, effectively converts’~ the

Medicaid program into an_ entitlement

program, not for poor people, but for

hospitals and other health care

providers. These decisions also subvert

Congress’ desire, as expressed in the

so-called “Boren Amendment" to the

Medicaid statute, 4 to free the states

from excessive and stifling federal

oversight of their reimbursement

schemes. E.g., Mississippi Hospital

Association v. Heckler, 701 F.2d 511,

523° €Stm. Cie. 2963). Congress in the

Boren Amendment intended to reduce

federal oversight in this area, but’ the

4the “Boren Amendment" was Section

2173(a) of the Omnibus’ Budget recon-

Ciliation Act of 1981, 95 Stat. 808, now

codified at 42 U.S.C. § 1396a(a)(13)(A)

and reproduced in relevant part at p. 3-

4, infra.

wife

effect of the decision below is simply

to shift this oversight from the federal

bureaucracy to the federal courts.

Furthermore, the federal

Medicaid regulations expressly require

the States to maintain their own appeals

systems for providers. 42 C.F.R. § 447.

2539(c). The Court of Appeals, by

tacking on to these systems a private

right of action under section 1983, has

made it possible for hospitals, or their

associations, to launch multiple attacks

in multiple fora on State reimbursement

schemes. It is unlikely that this is

what Congress had in mind when it

designed the Medicaid program. -

Middlesex County Sewage Authority v.

National Sea cClammers Association, 453

U.S. 13 (1981).

wie

CONCLUSION

For the foregoing reasons, the

Court should grant the petition for the

writ of certiorari and, upon review, the

decision of the Court of Appeals should

be vacated or reversed.

Respectfully submitted,

ERNEST D. PREATE, JR.

Attorney General

BY: JOHN G. KNORR, lII

Chief Deputy Attorney General

Chief, Litigation Section

JEROME T. FOERSTER

Deputy Attorney General

Office of Attorney General

15th Fl., Strawberry Square

Harrisburg, PA 17120

(717))783-1471

-]8-

Page

Opinion of the Court

ee ee la

Opinion of the District

ee, I so 5 sg cab i6.@ 0.0 0 8's 8000 120a

Order of the District

oe A 2 Sy rr ee 273a

Opinion of the District

a Lk EE eae 277a

Order of the District

ee EA ao ee eee 285a

Judgment of the Court

ee Rs oc os 0 60 0 66 0 0 0-0 0's 0 0 8s 287a

Order of the Court of

ABSOSGLS CEGROSC LNG) ccc ccc eee eese 290a

Filed: September 5, 1989

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 89-5165

WEST VIRGINIA UNIVERSITY HOSPITALS, INC.

Vv.

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

BECKER, STAPLETON, and

ROSENN,

Circuit Judges

Opinion Filed September 5,

1989

Before:

-la-

ERNEST D. PREATE, JR.,

Attorney General

JEROME T. FOERSTER,

Deputy Attorney

General (Argued)

CALVIN R. KOONS,

Senior Deputy Attorney

General

JOHN G. KNORR, III,

Chief Deputy Attorney Genera]

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, VA 23219

JACK M. STOVER, ESQ.

Shearer, Mette, Evans &

Woodside 1801 North Front Street

P. 0. Box 729

Harrisburg, PA 17108-0729

Attorneys for Appellees

-2a-

OPINION OF THE COURT

ROSENN, J., Circuit Judge.

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

legislation 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 reimburse-

ment to an out-of-state hospital such as

WVUH violated federal medicaid standards

encompassed by Title XIX of the federal

-3a-

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

-4a-

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 = mean-

ingful 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 judgment.

Finally, in an unpublished memorandum

and order also issued the day of

judgment, the district court awarded

attorneys fees to the plaintiff pursuant

-5Sa-

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, chal-

lenging the decision on the merits, the

scope of relief, and the award of expert

witness’ fees. We affirm in part and

reverse in part.

-6a-

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, WVUH

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

service as well to residents of the

Pennsylvania county of Washington.

Historically, the Hospital has provided

Significant numbers of Pennsylvania

medicaid patients with hospital care.

-J7a-

For the years 1984 to 1987, WVUH gave

inpatient hospital care to more Pennsyl-

vania medicaid patients than did over

one-half of the hospitals located in

Pennsylvania. Five percent of ail 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 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

-9a-

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., ist 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 administer-

-10a-

ing a medicaid program developed by the

state within the parameters established

by federal law and regulations.

Before 1980, Title XIX required

states to pay hospitals the “reasonable

cost" of rendering inpatient hospital

services to medicaid recipients. This

requirement translated into ae retro-

spective 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.&.C.A.

§ 1396(a)(13)(A) (West Supp. 1989).

The 1981 OBRA_- also reduced

federal oversight of states' reim-

bursement 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 require-

ments are reflected both in the statute

itself and in its implementing regula-

tions 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 admin-

istering 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, effec-

tive beginning fiscal year 1984-1985,

replaced the retrospective method of

reimbursement with a prospective method.

Under this system, each hospital admis-

sion is classified according to the

patient’s illness diagnosis into 1 of

447 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

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 calcu-

lation for in-state hospitals depends on

the type of hospital seeking reimburse-

ment and the average cost for that type

of hospital. Under the PPS, all partici-

pating in-state hospitals, approximately

233 in number, are assigned to one of

an DM fi

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

to 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 geographical

location outside Pennsylvania. Moreover,

-l6a-

aS ee ae

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 Pennsyl-

vania statewide average cost per case or

pays the hospitals 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

ee a

education costs (DME) and capital costs.

Again, out-of-state hospitals are treated

Gifferently 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 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 allow-

able DME costs, whichever is lower.

-18a-

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.

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 prospec-

tive payment system for reimbursement of

in-state hospitals’ capital costs, to be

-19a-

phased in between July 1, 1986, and

June

30, 1992. During that period, Pennsyl-

vania would pay in-state hospitals

for

their actual capital costs on a decreas-

ing percentage basis. After July

1992, the state will reimburse

in-state hospitals at the same flat

for their capital costs.

Out-of-state hospitals are

reimbursed for their capital costs

the same manner. The Pennsyly

medicaid prospective payment system

never reimbursed out-of-state hospi

using actual allowable costs of capi

l,

all

rate

not

in

ania

has

tals

tal.

Pennsylvania pays out-of-state hospitals

an “add-on” for capital reimbursement

that represents the average cap

ital

costs” of all Pennsylvania hospitals.

That “add-on” bears no relationship to

the actual capital costs of out-of-s

tate

hospitals. Moreover, although the MAP

gave in-state hospitals approximately

ten years to adjust to ae flat rate

payment for capital costs, out-of-state

hospitals were allowed no phase-in

period to adjust to 4 prospective

payment system for such costs.

D. 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 administra-

tive 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 recon-

sideration 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.

II. THE DISTRICT COURT'S DECISION

WVUH 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 require-

ments 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 Pennsyl-

vania'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 Gistrict court awarded

attorneys fees, which included expert

witness fees, to WVUH as the prevailing

party. The defendants appeal.

III. WVUH's RIGHT TO CHALLENGE THE

REIMBURSEMENT PROGRAM

Before assessing the validity

of Pennsylvania's medicaid reimbursement

program, we first address the prelim-

inary question whether WVUH has a cause

of action entitling it to challenge the

program.

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 state statute,

ordinance, regulation, cus-

tom, or usage, of any State

ov...the District of Colum-

bia, subjects, or causes to

be subjected, any citizen of

the United States or other

person within the jurisdic-

tion thereof to the depri-

vation of any rights, privi-

leges, or immunities secured

-24a-

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 Consti-

tution 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

~~ ?Sa—

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 19823 are

not limited to claims hased 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 under 1983 exists for violation

of a federal law if two requirements are

met. First, the federal law must create

private rights enforceable under section

-26a-

1983. Pennhurst State Schoo] 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 Develop-

mentally Disabled Assistance and Bill of

Rights Act because that Act conferred no

substantive rights but merely consti-

tuted 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 Cis. 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 §ea

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 fore-

close a private remedy under section

1983. Jd. at 21. The burden of proving

@ 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 "lightly

conclude’'” that Congress intended such

foreclosure. Id. at 423-24 (quoting

Smith v,. Robinson, 468 U.S. 992, 1012

(1984)?

lwVUH in its supplemental brief

urges us to apply the test articulated

in Cort v,. Ash, 422 U.S. 66 (1975), for

determining whether a statute implies a

(FOOTNOTE CONTINUED ON NEXT PAGE)

-29a-

’ sid

(FOOTNOTE CONTINUED)

private right of action. The Hospital

should be happy that we refuse its

request and instead apply the _ tradi-

tional, and, coincidentally for it, more

favorable analysis to determine private

enforceability under § 1983. Whether a

federal statute is enforceable ' under

§ 1983 and whether the statute creates

an implied right’ of action involve

separate inquiries. See, e.g., Middlesex

Cty. Sewerage Auth. v National Sea

Clammer ae eee ose. 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 avcordance with the

four-factor analysis of Cort v. 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 remaining Cort v,

Ash requirements relating to the

existence of a remedy--that Congress

intended to create a remedy, that the

(FOOTNOTE CONTINUED ON NEXT PAGE)

-30a-

(FOOTNOTE CONTINUED)

remedy is consistent with the legislative

scheme, and that the cause of action is

not traditionally relegated to state

law. In sum, under Cort v, Ash the

plaintiff bears the burden of estab-

lishing not only the existence of a

right, but also the existence of an

intended private remedy.

In appropriate cases, the second

avenue 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 to have been

violated creates a federal right in

favor of the plaintiff, and the other,

whether Congress has foreclosed the

remedy of private enforcement. The

§ 1983 analysis intersects with’ the

Court v. Ash analysis insofar as the

plaintiff 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.

-3la-

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_e 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.

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

-32a-

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

in the program is voluntary, but once a

state chooses to 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 partici-

pation 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 1396(a)(13)(A)

imposes federal requirements on states’

-33a-

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 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) stipu-

lates, in pertinent part, that

oa 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 accor-

dance with methods and standards

-34a-

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

-35a-

OS aaa ee

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 reimburse-

ment is parallel to the construction of

the other forty-nine provisions imposing

federal requirements on state 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.

-36a-

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

-37a-

Oe ethan a>

ee a ee

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

help 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

-38a-

persons assisted by medicaid, nct the

providers from whom the state buys

medical services.

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

(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 "bene-

ficiaries.” Their interests and the

ee

Ne ee

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, e4.q,.,

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 conciusion 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

after full analysis of the issue, see

owl i fie

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 (llth 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 ll.

-~42a-

The legislative history of

section 1396a(13) (A) buttresses our

conclusion that WVUH has a private right

to enforce the federal hospital reim-

bursement 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., lst

Sess., 962 reprinted in 1981 U.S. Code

Cong. & Admin. News 1010, 1324. The

Same report also emphasizes the conclu-

sion 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 dispropor-

tionate number of low income patients.

ld. 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

-44a-

of an adequate or reasonable hospital

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.

-45a-

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 of 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 compre-

hensive...to demonstrate congressional

intent to preclude the remedy of suits

under § 1983.°'”" Wright v,. City of

Roanoke Redevelopment & House 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

-46a-

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 that WVUH states a

valid claim under’ section 1983 for

enforcement of its rights under the

Social Security Act .7

2We note that exhaustion of state

administrative remedies is not a pre-

requisite to an action under § 1983.

Robinson v. Block, 869 F.2d 202, 207 n.5

(3d Cir. 1989).

-47a-

oo te) ee he ke ae

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 Pennsyl-

vania medicaid recipients complies with

federal statutory and regulatory law.

The answer requires a close examination

of Title XIX, its objectives, its legis-

lative history, and its implementing

regulations.

Section 1396a(a)(13)(A) provides

in relevant part as follows:

A State plan for medical

assistance must-- ...provide--

,iekOe payment...of the

hospital... services provided

under the plan through the use

of rates (determined in accord-

ance 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 dispro-

portionate number of low income

-48a-

patients with special needs...)

which the State finds, and makes

assurances satisfactory to the

Secretary, are reasonable _ and

adequate to meet the costs which

must be incurred by efficiently

and economically operated

facilities in order to provide

care and services in conformity

with applicable State and Federal

laws, regulations, and quality

and safety standards and to

assure that individuals eligible

for medical assistance have

reasonable access (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 method-

ologies to three general federal

requirements.

-49a-

The first requirements, deriving

from the parenthetical modifying “rates,”

mandates that a state's reimbursement

rates take into account the situations

of those hospitals service a dispropor-

tionate number of low income patients.

The second end third requirements, found

in the phrase following that parenthet-

ical, 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 "“dispropor-

tionate share” requirement, the second,

the “reasonable and adequate” require-

ment, and the third, the “reasonable

access” requirement. The federal regu-

lations implementing section 1396a(a)(13)

(A), 42 C.F .R. §§ 447.250- 447.280,

reiterate these statutory demands.

-50a-

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 Recon-

Ciliation 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 methodologies.

See Colorado Health Care Ass'n, v,

Colorado Dep't. of Social Services, 842

F.2d 1158, 1165 (10th Git « 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

-Sla-

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. lst

Sess. 292. States were toc be allowed

"greater latitude” and "greater

f lexibi ty" in designing their

programs. See id. at 293; S.Rep. No.

139, 97th Cong., Ist Sess 478, reprinted

in 1981 U.S. Code Condq. & Admin. News

396, 744.

rhe 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

-52a-

treating a disproportionate share of

poor people receive adequate support

from medicaid. Thus, a state's reim-

bursement 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., lst Sess. 294 (expressing concern

that rates not be so low as to dis-

courage 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., lst

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 institu-

tions in developing their rates.")

We believe that this’ scheme

also contemplates a deferential st +ndard

of review by the courts in assessing

compliance with the “reasonable and

-54a-

adequate” requirement of section

1396a(a)(13)(A). Applying 4 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

restrains nor chauvinistic policies

designed to curb access to out-of-state

hospitals” can excuse a failure to

3at oral argument before us_ the

following colloguy occurred between the

court and counsel for the State:

MR. FOERSTER: And the assump-

tion was made that we had no

evidence to the contrary, and

still haven’t, that the experi-

ence out-of-state as a whole is

any different from the experi-

ence in state: that these

hospitals would have about the

same amount of medicaid utiliza-

tion as does the average in-state

hospital.

(FOOTNOTE CONTINUED ON NEXT PAGE)

ea __

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 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., Hechler,

701 F.2d 511, 516 (5th Cir. 1983).

(FOOTNOTE CONTINUED)

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 I answered before, the

considerations that keep the money

in-state, the treatment’ in-state,

the marketing too.

-56a-

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 ifivariably 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 dispro-

portionate share requirement. See

42 C.F.R. § 447.253(b)(1)(1i) (A) (1988).

-57a-

The district court found that WVUH

serves a disproportionate number of low

income patients. Although only five

percent of WVUH‘s admiss’ons are

Pennsylvania Medicaid recipients, some

thirty-eight percent of all WVUH

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 dispropor-

tionate share provider.

4The 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

Pennsylvania 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.

-58a-

Pennsylvania, in its reimburse-

ment 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. ns high

medicaid volume may boost a hospital to

a higher group’ rating, allowing the

hospital to command a4 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, ponnerivenie

reimburses all out-of-state hospitals on

-59a-

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 "{tJhe 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

-60a-

hospitals any more than other out-of-

state hospitals are reimbursed.”

Appellee'’s Addendum of statutes,

regulations, and stipulation of

undisputed facts ¥ 133.

At oral argument, the State

asserted that it accounted for dispro-

portionate 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-statement payment rate, with no

provision for increasing that rate on

the basis of disproportionate share and

no determination that the payment in

itself would account for the needs of

disproportionate share of low-income

providers. we see nothing in the

development or implementation of the

-6la-

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

5942 C.F.R. § 431.52(b) requires

that a state plan must provide that the

State will furnish medicaid to: "(1) A

recipient who is a recipient of the

State while the recipient is in another

(FOOTNOTE CONTINUED ON NEXT PAGE)

-62a-

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 Pennsyl-

vania residents without reasonable access

to hospital care. At oral argument,

defense counsel affirmed that without

access to WVUH, some Pennsylvania

medicaid patients would have to travel

seventy miles or more to obtain tertiary

hospital care. Moreover, the district

(FOOTNOTE CONTINUED)

State, to the same extent that medicaid

is furnished to residents in the State,"

when the recipient meets certain

prescribed conditions Or ad © & | is

general practice for recipients in a

particular locality to use medical

resources in another State.”

-63a-

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).

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

Hopital's withdrawal from the Pennsyl-

vania 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

~64a-

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.

-65a-_

Nevertheless, the present

record is somewhat incomplete on the

point. There 18S 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

141la. 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.

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

6 Whereas the substantive

hospital.

dimensions of the first two requirements

could be fairly drawn from the statute

end its legislative history, discerning

congressional intent with respect to the

substantive element of the _ reasonable

and adequate requirement is a more

daunting project.

6The defendants have not asserted

that WVUH is not an “efficiently and

economically operated” facility.

-67a-

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

-68a-

and adequate.” See 48 Fed.Reg. 56,046,

56,049 (Dec.' 19, 1983). See also

of Social Services, 842 F.2d 1158, 1167

(10th cer, 1988) ("Reasonableness has

been characterized as a zone, not a

pinpoint.")(citing Reivitz, 733 F.2d at

1233).

It follows from the departure

f rom 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 vigorously argues, is whether the

reimbursement rates to out-of-state

hospitals in the aggregate are arbitrary

and capricous.

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 congres-

Sional 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 sensi-

tivity to the special needs of teaching

and tertiary care hospitals. The House

report accompanying an initial version

of the statutes states:

The Committee intends States to

recognize that facilities that

provide teaching services Or

other specialized tetiary care

services that may have operating

costs which exceed those of a

community hospital. The

Committee is concerned that the

reimbursement methods estab-

lished by the States recognize

the need to provide a full range

of both primary care and tertiary

_ Sia.

H.R.

294.

report echoes the concern for teaching

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 reim-

bursement mechanism, the Commit-

tee does not want such policies

to result in arbitrary and

unduly low reimbursement levels

for hospital services.

Rep. No. 158, 97th Cong., lst Sess.

The subsequent House conference

hospitals:

The conferees recognize that

public hospitals and teaching

hospitals which serve a_ large

medicaid and low income

population are particularly

dependent on Medicaid reimburse-

ment, and are concerned that’ a

State take into account’ the

special situation that exists in

these institutions in developing

their rates.

-7la-

H.R. Conf. Rep. No. 208, 97th Cong., lst

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 DMW costs is

in large part a reimbursement for

patient care. Id.

-72a-

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

cperating 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 function if it is reimbursed

-73a-

at a rate deriving from the average

indirect costs of teaching and non-

teaching hospitals. 701 F.Supp. at

908. 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

-74a-

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, Pennsyl-

vania presumes that rates would not be

arbitrary even if they were to force

WVUH 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

7TThe 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 Pennsyl-

vania's program helps’ finance their

training.

-75a-

"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 Gisplayed by

Pennsylvania here might be tolerated

under certain circumstances. On the

other hand, we must give some content to

the 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 hestitate, however, at this

point to hold that Pennsylvania's refusal

-76a-

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 that provides

tertiary care and serves 4a dispropor-

tionate number of low income patients.

Moreover, simply because WVUH is not an

in-state hospital, it receives absolutely

-77a-

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 relation-

ship 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 will apply. Contrast that

System with the out-of-state reimburse-

ment. Capital cost reimbursement’ to

out-of-state hospitals consists of an

"add-on" that represents’ the average

Capital costs of all in-state hospitals,

with no adjustment for out-of-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

-78a-

distressed by the capital cost reimburse-

ment system because it recently opened a

replacement facility which greatly

increased its capital costs.

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 4

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

~-79a-

be eed > SO eee ee eee

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 reim-

bursement of medicaid costs incurred by

-80a-

an out-of-state tertiary hospital. Our

role is to determine whether Pennsyl-

vania can nonarbitrarily make that

assertion.

In the face of such great

disparity in its 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, v. 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

-~Bla-

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 reimburse-

ment rates in section 1396a(13)(A),

OBRA's legislative history notes. that

although the Committee recognized that

the current economic constraints’ and

need for reductions in federal funds for

medicaid requires that states be given

the flexibility necessary to improve the

-82a-

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., lst 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 administra-

tive responsibility, bear an insignifi-

cant 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 f rom the

universe of in-state hospitals and

applying them to out-of-state hospitals

provides a reasonable 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 Pennsyl-

vania medicaid patients. It serves more

of these Pennsylvania patients than over

half of the Pennsylvania hospitals.

Although we do not suggest that audits

_ QBAasa,

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

varies so widly in its reimbursement

rates for hospitals whose “[mJjedical

services are needed.” 42 Cs sRe

§ 431.52(b), to serve Pennsylvanians.

We therefore conclude that the

Pennsylvania medicaid program as it

applies to WVUH is violative of federal

8The district court found that

Pennsylvania could audit 75-100 more

hospitals each year without increasing

its audit staff.

-85a-

law because it fails to meet the reason-

able and adequate requirement of section

1396a(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, mot 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.”

-66a-

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 3 procedural and A

substantive dimension. The procedural

dimension is explicit in the federal

regulations implementing section

1396a(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# a, § 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

-87a-

is required to find that its new plan

complies with the three’ substantive

requirements discussed above. Section

447.253(a) 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 follow-

ing findings:

(1) Payment rates. (i) The

Medicaid agency pays for in-

patient 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

incurred by efficiently and

economically operated providers

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 taken into account

the situation of hospitals which

serve a disproportionate number

of low income patients’ with

special needs: [and]

znaenr t

-88a-

(C) The payment rates are

adequate to assure that recip-

ients 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 a state merely makes conceptual

policy decisions. A policy predicated

upon provincialism and _ self-interest,

not 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.”

9The district court held that

Pennsylvania's out-of-state reimburse-

ment 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.

-90a-

Vv. THE VALIDITY OF THE ADMINISTRA-

TIVE 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.8.C. § 1396(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 grounds 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

reievant legislative history, held that

this procedure was insufficient.

-92a-

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 facil-

ity rates will not receive Federal

review under the revised regulations,”

the HCFA required in one of its regula-

tions that states participating in the

medicaid program develop an appeals

procedure by which individual facilities

could request review and adjustment of

their rates. The requlation stated:

The agency must provide an

appeals procedure that allows

individual providers an opportu-

nity to submit additional

evidence and request prompt

administrative review of payment

rates.

Fed.Reg. p. 47972. The HCFA noted, how-

ever, that it was open to suggestions on

-93a-

how best to guarantee review of payment

rates and it invited comments on its

provider appeals regulation.

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. More-

over, 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,

-94a-

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 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

-95a-

en -

We re cer - —d

a

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. 1984)(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 admin-

‘istering 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.

-96a-

By so holding, we do not mean

to imply with the language licenses the

states to virtually eliminate all appeals

by choosing to deem no issues appro-

priate 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

cequirement 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.

= | ll

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 Commonwealth Court. See

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 Pennsyl-

vania offers. We reverse therefore the

district court's judgment invalidating

Pennsylvania's appeals system. ?°

10%n light of our disposition with

respect to the administrative appeals

procedure, we have no cause to consider

(FOOTNOTE CONTINUED ON NEXT PAGE)

-98a-

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++

(FOOTNOTE CONTINUED)

the eleventh amendment issue raised in

the district court and pursued. on

appeal. The district court's judgment

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 date 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 discre-

tion, may allow the prevailing

party, other than the United

States, a reasonable attorney's

fee as part of the costs.

42 U.S.C.A. § 1988 (West 1981).

-99a-

awarded attorneys fees to WVUH as the

prevailing party in a_e section 1983

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 disburse-

ments, 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.

-100a-

The defendants’ argument rests

on the Supreme Court's decision in

word Fitti ; - + Sib}

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

U.S.C. § 1821(b), sets the amount of

-l10la-

compensation to be paid witnesses at

thirty dollars a day.??

The petitioners in Crawford

Fitting argued that federal courts had

Giscretion under Rule 54(d) to award

costs above and beyond those listed in

section 1920 and in excess of the amount

l2Section 1821 provides in rele-

vant 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.

x naueR ®

(b) A witness shall be paid an

attendance fee of $30 per day

for each day'’s attendance. Me

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).

-102a-

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 U.S. at 445.

The defendants ask us to apply

Crawford Fitting to except witness fees

awarded as party of an attorneys fees

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 dollars a day,

even though those fees are assessed as

party of an attorneys fee under the

fee-shifting statute of section 1988

rather than as ae_erun-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

Gisallowing 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

-104a-

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, Taxa-

tion of Costs and Awards of Expenses in

Foneral Covnrt, 1] wee Fae 552 597-94

;

(gathering cases).

Depending on the law of the

ireuit, the “expenses” allowable as

part of an attorneys fee have sometimes

included expert witness fees. See Ramos

Lamm 712 F.2d 546, 559 (10th Cir.

19R2)(expert witness fees reimburseable

under Section 1988 if “reasonably neces-

sary” 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

-105a-

witness fees, are part of attorneys fee

under section 1988). But see Wheeler v,

Durham City Bod. 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 prepa-

ration 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 sectior

1821 statutory amount if “the expert's

testimony is indispensable to determi-

nation of the case. See Robexzts v. S.S,

Kyriakoula D. Lemos, 651 F.2d 201 20€

(3d Cir. 1981); see slso Rank v. Baelshy

590 F. Supp. 787, 801 (M.D. Pa 1984

-106a-

(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

Gistrict court agreed, that Crawford

Fitting does not apply to fees awarded

under section 1988. The argument has

much merit. Justice Blackmun, concurring

-107a-

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.l1 (Marshall, J., dissenting). More-

over, 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 concur-

rence in International Woodworkers v,

Champion Int'l. Corp., 790 F.2d 1174,

1181-1193 (5th 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

-108a-

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.

Indeed, a number of courts

examining the question raised here have

concluded the Crawford Fitting does not

limit expert witness fee award junder

section 1988 to the rate set in section

1821(b).2°

13See Sapanajin v. Gunter, 827

F.2d 463, 465 (8th Cir. 1988)(holding

that because expert witness fee award

was not made as a taxation of costs

under section 1821 but as an expense

under section 1988, the cap on fees set

out in Crawford Fitting does not apply);

(FOOTNOTE CONTINUED ON NEXT PAGE)

-109a-

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

(FOOTNOTE CONTINUED)

Black Grievance Comm, v., Philadelphia

0 a 690 F.Supp. 1393, 14023

(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 (2a Cat. 1988) (same) ;

United States v,. Yonkers Bd. of Educ.,

vi wan FP 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 182)

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 (lst Gans 1988) (although not

reaching issue, strongly suggesting it

would not “elongate” Crawford Fitting to

apply in context of express fee shifting

statute).

-11]10a-

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 “"(Lajny

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.” Jd. at 445.

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. Unlikely 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 tthe’ 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.” Jd. 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.

oii 2ae

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 section 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 (lst 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. Genera]

Motors Corp., 841 F.2d 1567, 1575 (llth

Cir.), cert.denied, 109 S.Ct. 278 (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 not the award is

made under a fee-shifting statute”);

Leroy v,. City of Houston, 831 F.2d 576,

584 (Sth Cir. 1987), cert. 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

(6th Cir. 1989), petition for cert.

filed (May 20, 1989)(en banc)(affirming

by an equally divided court the order of

-ll4a-

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. 1974), 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 taz such fees as

costs"); see also Central Delaware

Branch of NAACP v, 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(d). 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.

-ll6a-

VII. 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 1396a(a)(13)A and the procedural

provisions of Title XIX.

-117a-

As for Pennsylvania's adminis-

trative 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 Gay exceeded federal statutory

provisions.

Accordingly, the judgment of

the district court declaring the Common-

wealth 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 method-

Ology within ninety days from the day of

judgment for its medicaid prospective

payment system for WVUH consistent with

and inconformity with federal law.

Reimbursement to WVUH under a prospec-

tive payment system that conforms to

-118a-

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

IN THE UNITED STATE

DISTRICT COURT FOR THE

MIDDLED DISTRICT OF PENNSYLVANIA

WEST VIRGINIA ;

UNIVERSITY : CIVIL NO. 86-

HOSPITALS, INC., : 0955

Plaintiff (Judge Rambo)

ROBERT CASEY, :

ET AL.,

Defendants

MEMORANDUM

Background

West Virginia University

Hospitals, Inc. (WVUH or the Hospital)

commenced this action against the

Commonwealth of Pennsylvania's Depart-

ment of Public Welfare and individuals

on July 26, 1986. Pursuant to stipu-

lation, 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 Pennsyl-

vania’'s medicaid reimbursement program

-120a-

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 reim-

bursement 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

Rs WVUH is a non-stock, non-

profit corporation organized under the

laws of West Virginia. Plaintiff's

Pretrial Memorandum Undisputed Facts

No. l. (Hereinafter referred tc as

"Facts.”)

r Defendant Robert P. Casey

is the Governor of the Commonwealth of

Pennsylvania. Facts 2.

Be The Secretary of the

Department of Public Welfare (the

Secretary) of Pennsylvania was Walter W.

Cohen at the time this action was

filed. The Secretary is now John F.

White, Jr. Facts 3.

-122a-

4. The Secretary reports’ to

the Governor of Pennsylvania. The

Secretary is responsible for imple-

menting, administering and operating the

medicaid program in Pennsylvania. The

medicaid program in Pennsylvania is

Called the “Medicaid Assistance Program”

(MAP). Facts 4.

-F 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.

6. Feinberg was responsible

for the dGevelopment of Pennsylvania's

medicaid program's prospective payment

system. Facts 6.

-l123a-

Il. The Hospital

- WVUH is located six miles

south of the border between the State of

West Virginia and the Commonwealth of

Pennsylvania. Facts 10

mh

8. The primary service area

the Hospital includes the West Virginia

counties of Monongalia Marion,

Harrison, Taylor, Doddridge and Prest

and the Pennsylvania counties f Fayette

and Greene. Facts ll.

9 senera Penns 3 )

residents constitute approximatel *

of all WVUH inpatient admiss S

Testimony of Katherine Douglass,

: ] ) = c +c » =

Transcript at 163, lines 6, 15-1

lcitations 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, i988 Transcript.”

Deposition testimony will be cited

Similarly, j1.@., "December 28, 1986

Vertrees Deposition.”

-l124a-

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.

i Approximately 204,000

people lived in Fayette and Greene

Counties in the mid-1980's. 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.

ce 1,200 persons from Fayette

County received inpatient care at WVUH

in 1985; 1,100 persons from Greene

County received inpatient care.

Testimony of Katherine Douglass,

Transcript at 163, lines 21-25; 164,

lines 1-7.

13. 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 indi-

viduals living in Greene and Fayette

Counties. Testimony of Katherine

Douglass, Transcript at 159, lines ll-

25; 160-161; 162, lines 1-24.

~126a-

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

-~127a-

1-25; 163, lines 1-25; 164, lines 1-25;

165, lines 1-25; 166 lines 1-3. Facts

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 Testi-

mony 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 part of that system,

provides high risk prenatal services to

hospitals in the service area, including

Greene County Memorial Hospital located

in Greene County, Pennsylvania. Testi-

mony of Katherine Douglass, Transcript

at 161, lines 6-25; 162, lines 1-24.

-128a-

20. WVUH also provides special-

ized outpatient services to Pennsylvania

residents. These services include pedi-

atric 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.

aes WVUH also provides

Pennsylvania residents with routine

hospital care such as routine

obstetrics, normal newborn care and

tonsillectomies. Defendants’ Exhibit 76.

-129a-

as- The types of routine cases

seen at WVUH are similar to the routine

types of cases seen at most university

teaching hospitals. Testimony f James

Vertrees, Transcript at , lines 6-14.

24. WVUH has approximately the

same Case Mix Index (CMI) as university

teaching hospitals located

Pennsylvania and other Similarly

Situated hospitals. Plaintiff's Exhibit

66.

WVUH 15 8 University Affiliated

Teaching Hospital

aa The Hospital 1 ; er-

sity affiliated teaching hospitai: the

West Virginia University uses the

WY)

Hospital to train health professional

Facts 39.

26. WVUH iS a major academic

medical center, one of only 121 = 4such

centers in the country. Testimony of

-130a-

Gerard Anderson, Transcript at 392,

lines 1-12.

as 1,300 persons completed

their physician and dentist residency

training programs at tha 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 vo]

30. Historically, WVUH has

provided significant numbers of

Pennsylvania medicaid recipients with

hospital care.

-l3la-

31. In calendar

Hospital treated 610

medicaid admissions’ on

basis. Facts 22.

cy 2 In calender

Hospital treated 692

medicaid admissions on

basis. Facts 23.

ae In calendar

Hospital treated 783

medicaid admissions’- on

basis. Facts 24.

34. In calendar

Hospital treated 828

medicaid admissions’ on

basis. Facts 25.

33. In calendar

Hospital treated 853

medicaid admissions- on

basis. Facts 26.

-132a-

year 1981, the

Pennsylvania

an inpatient

year 1982, the

Pennsylvania

an inpatient

year 1983, the

Pennsylvania

an inpatient

year 1984, the

Pennsylvania

inpatiant

an

year 1985, the

Pennsylvania

an inpatient

36. In calendar year 1986, the

Hospital treated 840 Pennsylvania

medicaid admissions’ on an inpatient

basis. Facts 27.

Be In calendar year 1987, the

Hospital treated 552 Pennsylvania

medicaid admissions from the period

January 1 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.

-133a-

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, i988

Transcript at 124, lines 22-25; 125,

lines 1-25; 126, lines 1-25; 127, lines

1-21.

ei. Some Pennsylvania resl-

dents, including Pennsylvania medicaid

recipients, living in the counties of

Fayette, Greene, and Washington desire

and require access to the Hospital's

services and facilities. Facts 32.

-134a-

42. In fiscal years 1984-85,

1985-86 and 1986-87, WVUH provided inpa-

tient hospital care to more Pennsylvania

medicaid patients than over one-half of

the hospitals located in Pennsylvania.

Testimony of Thomas Manak, Transcript at

252, lines 8-25, 252, lines 1-7.

Plaintiff's Exhibit 5l(a).

43. Five percent of all WVUH

inpatiant admissions are attributable to

Pennsylvania medicaid recipients. Testi-

mony 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 mumbers 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

-~135a-

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

all 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.

WVUH's Incorporation History

47. In 1982 the West Virginia

Board of Regents commissioned a study to

determine how to resolve deficiencies

-136a-

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. Testi-

mony of Bernard Westfall, Transcript at

49, lines 22-25; 50, lines 1-25; S5l,

lines 1-25; 52, lines 1-19.

48. The West Virginia legis-

lature concurred. See § 18-11C-2(c) of

the Code of West Virginia.

49. The entity that the legis-

lature created to operate the facility

is WVUH. Testimony of Bernard Wastfall,

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 legis-

lature and subject to its control. The

legislature simply changed the form of

-137a-

the hospital organization. Testimony of

Bernard Westfall, Transcript at i42,

lines 12-25.

3 # The West Virginia legis-

lature 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.

ui

hN

The change from West

Virginia University Hospital to WVUH was

a change in the form of organization,

not a change of ownership or contro]

Testimony of Bernard Westfall, Tran-

script at 142, lines 12-25; 688, lines

3-13; 690, lines 5-25; 691, lines 1-7.

The Provider Agreement With MAP

yo West Virginia University

Hospital, the predecessor entity to 1

WVUH, entered into an agreement with the

Pennsylvania Medicaid Assistance Program.

Defendants’ Exhibit 35.

-138a-

54. The provider agreement,

which was not dated, is self-perpetu-

ating 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.

-139a-

a7 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 nec

evidence demonstrating a chanve in West

Virginia University Hospital's ownership.

Defendants testified only that they were

aware that WVUH uses a tax payer identi

fication number for its short procedure

unit (not related t<« 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.

-~140a-

Ill. Pennsylvania Medicaid Program

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

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 regulat-

ions. Facts 57.

61. Medicaid is a different

program than Medicare. Medicare is a

program of health insurance administered

by the federal government. Facts 58.

-~l4la-

62. The Commonwealth of

Pennsylvania participates with the

federal government in providing 4

medicaid program to eligible

Pennsylvania residents. Facts 59.

63. As a part of its agreement

with the federal government to partici-

pate in medicaid, the defendants submit-

ted 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.

-~l142a-

The Change From Retrospective

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 reim-

bursement 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” reim-

bursement was a retrospective form of

reimbursement, involving the payment of

-~143a-

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 ¢t

audit. Facts 65

69. n July ] 78 t he

United States Congress enacted the

Omnibu Budget Reconciliatior Act f

1981, Public Law 97-35 BRA wt

changed the requirement that tate

medicaid programs reimburse ‘ pit

the "reasonable” cost f prov }

services Facts 6€

70. Effective for fiscal year!

1984-1985, the Commonwealth of Pennsyl-

vania replaced the reasonable cost

system of reimbursement for acute care

inpatient services in hospitals in the

medicaid program. Facts 72.

-144a-

fe In place of the reasonable

cost standard Pennsylvania adopted a

.

"prospective payment system” for acute

care inpatient services in hospitals.

Facts 73.

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 ae fixed

amount of reimbursement for each case

regardless of the provider's actual

costs of treating those cases. Facts 76.

-145a-

eS

In-State Hospital Reimbursement

of Operating Costs of Inpatient

Care Under the MAP Prospective

we 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 f the

grouping syste was ¢ place r Ditals

with similar roles and potentia f

costs in the same group. December 28

1988 Deposition f James Vertrees at 35

lines 4-13; 53, lines 11-21. Defendants

Exhibit 2 at 2198.

77 The underlying assumptior

was that similar hospitals have similar

costs and that reimbursement of the

average cost of Similarly Situated

hospitals would be an equitable means f

-~146a-

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.

79. Pennsylvania's groupings

for in-state hospitals take into account

four concepts: each hospital's teaching

status, its medicaid volume, its environ-

mental characateristics, 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 8l.

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.

-147a-

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 his placed all in-state

academic medical centers in Group I.

Testimony of Kelly Grotzinger, Tran-

script at 60, lines 21-25; 602 ines

8-10.

Group Average Cost Per Case

RG Rhfttor a m_ctrtartre

hospitals were grouped nto seven groups

by the computer Penns ania determined

@ group average cost per Sase This

group average cost per case is ulti-

mately used to determine the prospective

payment. Facts 83.

-148a-

85. To ascertain the group

average cost per case for each of the

groups of in-state hospitals for fiscal

years 84-85, 85-86 and 86-87, the

defendants identified each hospital's

reported Pennsylvania medicaid reim-

bursable costs for the most’ recently

completed fiscal year, subtracting

certain costs specified in the state

plan and applicable regulations. Facts

84.

86. The in-stsie 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.

PA. If the 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

-150a-

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

9a.

93. For each group of in-staie

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.

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.

-15la-

a PRR

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.

OF The higher the group

average cost per case, a or one

hospital's group rate, the higher the

payment for a given DRG. Thus, MAP pays

-152a-

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 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

outline. 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 greater than the actual

oiSAge

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 reimburse-

ment 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.

-154a-

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

cystem, 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. 7

105. In developing its payment

system, MAP stated it wanted to fairly

reimburse the legitimate costs of DME.

Plaintiff's Exhibit 8.

-155a-

106. The defendants concluded

that reimbursement of DME costs

satisfied the OBRA standard. Facts 145.

107. h hospital's direct

medical education costs are larcely the

salaries hospitals pay to residents in

approved teaching programs. Testimony

of Michael Maher, Transcript at 642,

lines 16-23.

108. Residents spend approx-

imately 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 DMF

costs on a “pass through” basis subject

to certain limitations. Testimony of

—-

Thomas Manak, Transcript at 227, lines

14-25; 228. lines 1-2.

costs or the hospital’s

costs, whichever is

Pa. Code § 1163.55(d).

Exhibit 4.

less.

110 MAP has a specific line

t nedicaid cost report for hospitals

t eport their DME costs Testimony of

Michae Maher Transcript at 648, lines

MAF reimbursed in-state

t pit for the MAP share of their DME

t 1984-1985 and 1985-1986 on an

3 t Das : bp ect tc certain

nitatior see 55 Pa. Code § 1163.55.

ere ian’? Exnibdit <

For f ; year 1986-1987

thereafter MAF mits reimbursement

tate | pita for DME costs t<¢

* fer the amount paid tc the

hospital in the previous year for DME

allowable DME

See 55

Defendants’

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 1s pn prec s n of

the Pennsylvania State Plan I ther

Pennsylvania rule that would ermit

interns and residents IPE ed

teaching programs t bil MAF Jirectly

for their ser ces instead f ha ng

hospitals claim their salaries as

costs. Testimony of David Feinberg, May

©

4, 5 and 6, 1988 Transcript at ]

lines 23-25; 107, lines 1-5; 121, lines

1-16.

-158a-

In-State Hospital Reimbursement

of Capital Costs

115. In addition to reimburse-

ment 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

t 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 Dy

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.

-159a-

4

A te

~

—~

co

For the period July 1

1984 through June 30, 1986, the defen-

Gants found that the reimbursement f ar

in-state hospital's actual, 3llowable

Capital costs satisfied the BRA

standard. Facts 137

119 After J y =] BE MAE

; initiated a prospective payment systen

for reimbursement f ar tate

hospital's capital costs The systen

will phase-in betweer July 1] IB6 ar

June 30, 1992. During this per Ms

Will pay in-state hospitals f t he

actual capital costs n a lecreasing

percentage basis. After uly ] 1992

MAP will reimburse all in-state hospital:

the same flat rate for their Capital

costs. Testimony of David Feinberg, May

4, 5 and 6, 1988 Transcript at 464, lines

6-24; 65, line 1.

-160a-

The Phase-in of the Prospective

Payment System for in-State

Hospitals

120. The defendants adopted a

three-year phase-in for Pennsylvania's

A

spective payment system. for reim-

bursement of each in-state hospital's

operating costs. The phase-in began in

fiscal year 1984-1985. Facts 105.

ep The phase-in involved

blending each in-state hospital's group

average cost per case with the in-state

spital's hospital specific cost per

Za. 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 adjustmen*. Facts 107.

an in-state hospital's prospective

payment rate was calculated by adjusting

the percentages from 75%/25% t

50%/50% Facts 108

24 In fiscal year IR5-~19R7

the prospective payment rate f ar

in-state hospital was determined e

using nly that in-state I pita

group average cost per case Facts }

IV The Pennsylvania Medicaic

Program:

Reimbursement of Out-of-State

Hospitals

General]

125 The Pennsylvania med 31

prospective payment system does not

reimburse out-of-state hospitals the

y

same way it reimburses in-state

hospitals. Facts 117.

-l162a-

Reimbursement for Operating

126. Under the Pennsylvania

prospective payment system al]

t-of-state hospitals are grouped

together in one group-- irrespective of

the differences that might exist between

the hospitals Such as teaching status,

ed 41d volume, environment, and

t ta ts Facts 118

+ _ ¢ state h spita Ss

are iped ng e factor only the

pita Ire not located in

Pe y inla Facts 119

e By grouping all

t-of-state hospitals together

Pennsylvania did not put out-of-state

hospi

costs

Depos

lines

tals with the potential for similar

together. December 28, 1987

ition of James Vertrees at 54,

13-18.

-~l63a-

129. Defendants determined

early as September 6, 1983

Pennsylvania medicaid

payment system would

out-of-state hospitals into

that

Or

Classify

—

t

a

as

he

prospective

1]

group

and reimburse them for operating costs

using a@ average in-state rate based on

the statewide average cost per "ase

Facts 120

130 The drafters f the MAF

prospective payment System were iware

that placing all it-of-state hospitals

together in a Jroup and basing the

payment on an average Pennsyivania

statewide cost per case was potentia

inequitable for a large iniversity

medical center because teaching

hospitals have extremely high costs

December 28, 1987 Deposition f James

Vertrees at 54, line 13-22

Plaintiff's Exhibit ll.

-164a-

The Lack of a Factua] Basis to

for WVUH

131. No empirical study was

done with respect to out-of-state

payments between the period September 6,

1983 and July is 1984 when the

prospective system was implemented.

Facts

keen To reimburse inpatient

perating 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 Pennsyl-

vania statewide average cost per case)

Or the hospital's actual charges for

treating that illness, whichever is

wer. See 55 Pa. Code § 1163.65(c).

133. In developing the

reimbursement methodology for out-of-

state hospitals, defendants did not look

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 t the

out-of-state hospitals in providing care

: Ln Pennsy } an a mead 7 e [ entrc

Testimony of Thomas Manak, Tran t at

22 nes 4 -

The Pe 4 2

payment rate ls not ser

difference that may ex]

out-of-state hospitals T t

Thomas Manak, Transcript at 223 line

136. A smal] mmunit

“”

7

i

rw

‘al

+

+

.

;

hospital that i

receive the same MAP payment for a giver

DRG that WVUH will receive Fact:« 129

-l166a-

a3? i 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 11l, 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 9-1ll. Testimony

of David Feinberg, May 4, 5, and 6, 1988

Transcript at 43, lines 4-21.

-167a-

a *~,'™

140. Few out-of-state hospitals

see more than 20 MAP cases per year.

Plaintiff's 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. Testi-

mony of Robert Gallagher, Transcript at

607, lines 1-6.

144. MAP presently nas_ the

audit capacity to verify the costs of

75-100 out-of-state hospitals. Testi-

mony of Robert Gallagher, Transcript at

607, lines 1-6.

~168a-

, :

ET OE rm

rtionate 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.

-169a-

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 reim-

bursement 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.

-170a-

i3i. 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 ae 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.

-l7la-

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 that represents

the average capital costs of all

Pennsylvania hospitals. Facts 140.

a33. 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,

-172a-

May 6, 1988 Transcript at 78, lines

7-25; 79, line l.

1ST. 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 Pennsyl-

vania 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 the

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.

-173a-

+) Capital reimbursement is

an important part of medicaid reimburse-

ment 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. Testi-

mony of James Vertrees, Transcript at

552, lines 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. Testimony of

David Feinberg, May 4, 5, and 6, 1988

Transcript at 129, lines 6-25; 130,

lines 1-7.

-174a-

Education Costs of Out-of-State

Hospitals

162. Pennsylvania does not

reimburse WVUH or any other out-of-state

hospital. for the costs of DME attrib-

utable to Pennsylvania medicaid recip-

ients. 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 reim-

bursed for the extra costs empirically

shown to be associated with’ their

teaching function, as reflected in the

issue paper dated October 12, 1984.

Facts 15l.

-175a-

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

Gated October 12, 1984. Facts i54.

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 accept

costs of maintaining a medical schooi or

a teaching hospital. Facts 156.

-176a-

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.

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 cost of

out-of-state hospitals. Testimony of

Gerard Anderson, Transcript at 331 lines

15-19.

170. Although MAP could have

asked for and verifie* 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,

-177a-

FOSS AL ws Se

lines 12-i5. 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, May 4, 5

and 6, 1988 Transcript at 57, line 25;

58, lines 1-4.

V. WVUH is the Largest Qut-of-

State Provider of Hospital

; —

————

173. The Hospital treated more

Pennsylvania medicaid recipients 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.

Plaintiff's Exhibit 51(A); Testimony

Thomas Manak, Transcript at 252, lines

3-7.

175. The Hespital treated more

Pennsylvania medicaid recipients in

fiscal year 1985-1986 than any other

out-of-state hospital provider. Facts

161.

176. WVUH treated substan-

tially 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.

-179a-

ae ee en A ee ee ee ee ee ef

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 1986-198

it treated approximately 730 Pennsyl-

vania 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.

-180a-

to WVUH

180. Because WVUH treats’ s0

many MAP cases, inadequate MAP reim-

bursement will have substantial finan-

Cial 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 Deposi-

tion 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.

-18la-

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 Pennsyl-

vania medicaid program.

183. On average, MAP reimburses

in-state hospitals approximately 95% of

the costs they incur in treating Pennsyl-

vania medicaid recipients. In contrast,

MAP reimburses WVUH for only approx-

imately 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.

-182a-

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 14-21.

Plaintiffs’ Exhibit 64.

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

Givision 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.

-183a-

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 31l,

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 reconsider-

ation from the Secretary should the

other party prevail. Id.; 1 Pa. Code

§§ 33.61, 35.187(8) and 35.190.

-184a-

191. Outside of the administra-

tive 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

-185a-

=

——

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 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

Guring 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 hospi-

tal were to appeal the adequacy of its

rate and if the defendants had correctly

-186a-

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 errors in the calculations, that

out-of-state hospital would not prevail

in an administrative appeal before an

administrative hearing officer in the

Pennsylvania appeals system. Facts 181.

198. No provision of law,

including regulations, provides any

authority or criteria that governs the

Secretary of Public Welfare’'s grant or

denial of relief to a hospital upon the

Secretary's reconsideration of an

adverse administrative appeals deci-

sion. Defendants’ Exhibits 2, 3, 4, 5,

a3.

199. None of the findings and

assurances MAP submitted to the Secretary

of Health and Human Services (HHS)

concerning the Pennsylvania prospective

payment system for inpatient care

directly references or is applicable to

out-of-state hospitals. Defendants'

Exhibit 15.

200. Defendants made no

assurances to HHS specifically related

to the adequacy of MAP reimbursement to

out-of-state hospitals. Testimony of

Peter Goodman, Transcript at 525, lines

20-25.

201. The Health Care Financing

Administration did not “look behind"

MAP's assurances concerning the adequacy

of its reimbursement rates, including

its payment rates to out-of-state hospi-

tals, nor did it require Pennsylvania to

-188a-

set forth the Commonwealth's’ specific

findings concerning the adequacy of those

rates. Testimony of Peter Goodman,

Transcript at 531, line 25; 532, lines

1-7.

:

i sdicti

Defendants challenge plain-

tiff's standing to bring this action.

In Warth v, Seldin, 422 U.S. 490 (1975),

the Supreme Court stated:

In essence the question of

standing is whether the liti-

gant is entitled to have the

court decide the merits of

the dispute or of particular

issues. This inquiry involves

both constitutional limita-

tions on federal court juris-

diction and prudential consid-

erations on its exercise....

In its constitutional dimen-

sion, standing imports

justicability: whether the

plaintiff has made out a ‘case

-189a-

Or controversy' between

himself and the defendant

within the meaning of Art.

eo Pee A federal court's

jurisdiction ‘ae can be

invoked only when the plain-

tiff himself has suffered

‘some t

This text is long and has been trimmed here. Open the source document for the complete record.