New Jersey Hosp. Assn v. Waldman

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
12-29-1995
New Jersey Hosp. Assn v. Waldman
Precedential or Non-Precedential:
Docket 95-5391
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1
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
No. 95-5391
__________
THE NEW JERSEY HOSPITAL ASSOCIATION,
Appellant,
v.
WILLIAM WALDMAN,
VELVET MILLER,
LEONARD FISHMAN
_______________
Appeal From the United States District Court
for the District of New Jersey
(D. C. Civ. No. 95-cv-1260)
_______________
Argued September 15, 1995
Before: SLOVITER, Chief Judge, ALITO and SEITZ, Circuit Judges.
Filed: December 29, 1995
________________
Mark H. Gallant, Esq. (Argued)
Thomas McKay, III, Esq.
Marcy C. Panzer, Esq.
Cozen & O'Connor
1900 Market Street
Philadelphia, PA 19103
Attorneys for Appellant
Mark H. Lynch, Esq. (Argued)
Covington & Burling
1201 Pennsylvania Ave.
Washington, DC 20044
Attorney for Appellees
2
_______________________
OPINION OF THE COURT
_______________________
SEITZ, Circuit Judge.
The New Jersey Hospital Association ("NJHA") instituted
this action challenging the reduction of Medicaid reimbursement
for general inpatient hospital services as set by the New Jersey
Department of Human Services, Division of Medical Assistance and
Health Services. NJHA seeks declaratory and prospective
injunctive relief under 42 U.S.C. § 1983 claiming certain New
Jersey state officials violated the procedural and substantive
requirements of the Boren Amendment to the Medicaid Act, 42
U.S.C. § 1396a(a)(13)(A), in setting the new payment rates
effective March 6, 1995. Here, NJHA appeals from the district
court's order denying its application for a preliminary
injunction seeking to invalidate the new rates. The district
court had jurisdiction under 28 U.S.C. § 1331 and 42 U.S.C.
§ 1983. We have jurisdiction pursuant to 28 U.S.C. § 1292(a)(1).
I. FACTS
A. The Parties
NJHA is a non-profit association representing seventy-
one of the eighty-four hospitals in New Jersey that receive
Medicaid reimbursement from the State of New Jersey. The
defendants in this action are William Waldman, the Commissioner
of the Department of Human Services ("DHS"), Velvet Miller, the
3
Director of the Division of Medical Assistance and Health
Services of DHS, and Leonard Fishman, the Commissioner of the New
Jersey Department of Health ("DOH"). The defendants have been
sued in their official capacities. DHS is the state agency
responsible for New Jersey's Medicaid Program, and the Division
of Medical Assistance and Health Services is the office within
DHS that administers the program. DOH assists DHS with Medicaid
rate-setting. In this opinion, the defendants will be referred
to as "New Jersey" or "the State."
B. Medicaid and the Boren Amendment
The Medicaid program "`establishes a joint federal and
state cost-sharing system to provide necessary medical services
to indigent persons who otherwise would be unable to afford such
care.'" Temple Univ. v. White, 941 F.2d 201, 205 (3d Cir. 1991)
(quoting Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1309
(2d Cir. 1991)). State participants receive federal Medicaid
funds in return for administering a Medicaid program. They are
obligated to comply with certain federal statutory and regulatory
requirements in developing their programs. See West Va. Univ.
Hosps., Inc. v. Casey, 885 F.2d 11, 15 (3d Cir. 1989).
Historically, states paid hospitals the "reasonable
costs" of services actually provided. See Wilder v. Virginia
Hosp. Ass'n, 496 U.S. 498, 507 n.7 (1990). This amounted to
payment for the actual costs incurred by hospitals in providing
care to Medicaid recipients, regardless of disparities in costs
or efficiencies among hospitals. However, in 1981 Congress
4
enacted the Boren Amendment to the Social Security Act, which
gave state participants the ability to alter the Medicaid
repayment methodology. States were given more flexibility to
formulate their rates. Programs could include statewide or
classwide rates, rates based on a prospective cost, or incentive
provisions to encourage efficiency. Flexibility was ensured by
limiting federal oversight. See id. at 507. The Amendment
"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.'" West Va. Univ. Hosps., 885 F.2d at 15.
In order to qualify for federal financial support, a
participating state must submit a "State Plan" or a change in
payment methods and standards to the Heath Care Financing
Administration of the Department of Health and Human Services
("HCFA"). See 42 U.S.C. § 1396a(a). The state must make findings
and give assurances to the HCFA that its program comports with
federal requirements. Id. Such findings and assurances also must
be made whenever a state changes its payment methods and
standards. See 42 C.F.R. § 447.253(a) & (b).
C. New Jersey's Medicaid Program
1. 1993 Repayment Methodology
In 1993, New Jersey formulated a standardized,
predetermined, statewide payment amount for over 700 separate
Diagnosis Related Grouping's ("DRGs"). DRGs represent groups of
patients that are clinically similar to one another and
5
relatively homogeneous with respect to resource utilization. For
each hospital serving the state, rates were set for each DRG and
a statewide "mean" for each DRG was established. To determine
the "mean," the State used 1988 hospital costs and 1991 billing
data. Inflation factors were used to update 1988 hospital costs
to 1993 levels. In addition, the mean-based DRGs were increased
by a 2.5% "operating margin" factor to create a margin surplus.
DRG payments included a capital cost allowance and a 9.15%
adjustment designed to ease the transition from the pre-1993
system, which provided higher payments. The payment that a
hospital received for a "medicaid discharge" depended on the DRG
into which it fell.
2. Revision of the 1993 System
In early 1994, New Jersey decided to overhaul its 1993
Medicaid payment system. Basically, the new Medicaid rate-
setting methodology made four changes to the previous repayment
system. Payments of the 9.15% transition adjustment, 2.5%
operating margin, and capital cost allowance were eliminated. The
fourth change consisted of a "median-plus 5%" DRG standard in
place of the 1993 "mean-based" DRG standard. Once again, 1988
hospital costs, adjusted for inflation, were the benchmarks for
each DRG.
D. District Court's Opinion
NJHA's complaint seeks, inter alia, an injunction
prohibiting use of the new rate-setting methodology, as well as a
6
requirement that the State return to the methodology used in the
1993 system. This action presently is pending before the
district court. NJHA also sought a preliminary injunction. After
a hearing thereon, the district court ruled that substantial
compliance had been shown with respect to both the procedural and
substantive requirements of the Boren Amendment. On that basis,
it found that NJHA failed to demonstrate a reasonable likelihood
of success on the merits. It thereupon denied a preliminary
injunction solely on that ground. NJHA appeals.
II. ANALYSIS
A. Preliminary Injunction
In reviewing the district court's order denying NJHA's
motion for a preliminary injunction, "`[w]e review the district
court's conclusions of law in a plenary fashion, its findings of
fact under a clearly erroneous standard, and its decision to
grant or deny the injunction for an abuse of discretion.'" AT & T
v. Winback and Conserve Prog. Inc., 42 F.3d 1421, 1427 (3d Cir.
1994) (quoting Johnson & Johnson-Merck Consumer Pharmaceuticals,
Inc. v. Rhone-Poulenc Rorer Pharmaceuticals, Inc., 19 F.3d 125,
127 (3d Cir. 1994)). Those standards are employed in judging the
following factors:
(1) the likelihood that the plaintiff will
prevail on the merits at the final hearing;
(2) the extent to which the plaintiff is
being irreparably harmed by the conduct
complained of; (3) the extent to which the
defendant will suffer irreparable harm if the
preliminary injunction is issued; and (4) the
public interest. The injunction shall issue
only if the plaintiff produces evidence
sufficient to convince the district court
that all four factors favor preliminary
relief.
Id. (quoting Merchant & Evans, Inc. v. Roosevelt Bldg. Prods.,
963 F.2d 628, 632-33 (3d Cir. 1992)).
7
As a threshold matter, New Jersey argues that NJHA
cannot satisfy the irreparable injury requirement because each
hospital has an adequate state law remedy which should be
pursued. It points to New Jersey Administrative Code 10:52-
9.1(b)(2) which provides in pertinent part that a hospital may
seek an adjustment to its rates if it can demonstrate that it
"would sustain a marginal loss in providing inpatient services to
Medicaid recipients at the rates under appeal even if it were an
economically operated hospital." (emphasis added). A hospital
not satisfied with the administrative determination may seek
judicial review in the Appellate Division of the New Jersey
Superior Court. See N.J. Admin. Code tit. 10, § 52-9.1(d)(1995).
For purposes of these proceedings, New Jersey has
defined marginal cost as 60% of actual costs. By using 60% as
marginal cost, almost no hospital will be able to seek adjustment
of its rates. More important, the administrative appeal process
is directed at an individual hospital's reimbursement rates, not
the methodology and implementation of New Jersey's entire
Medicaid Reimbursement Program. We therefore conclude that the
use of the state's administrative remedy would not preempt this
action.
We turn now to the application of the Boren Amendment
to this case. In that respect, we are not without guidance from
this court. See, e.g., Temple Univ., 941 F.2d 201 (reviewing
Pennsylvania's Medicaid reimbursement rates to in-state
hospitals); West Va. Univ. Hosps., 885 F.2d 11 (reviewing
Pennsylvania's Medicaid reimbursement rates to out-of-state
8
hospitals). NJHA appears to appeal only the narrow question of
New Jersey's procedural compliance with the Boren Amendment. This
court has taken the view that the Boren Amendment contains both a
procedural and substantive dimension. Id. at 29. However, the
line between the two is often blurred. We, therefore, conclude
that review is facilitated, if not required, by examining both
procedural and substantive aspects of a state's plan.
Accordingly, we will address New Jersey's overall compliance with
the Boren Amendment.1
B. The Boren Amendment
In undertaking our review of New Jersey's new program,
we begin with the pertinent language of the Boren Amendment:
A State plan for medical assistance must-- .
. . provide-- . . . for payment . . . of the
hospital services . . . provided under the
plan through the use of rates (determined in
accordance with methods and standards
developed by the State . . . and which, in
the case of hospitals, take into account the
situation of hospitals which serve a
disproportionate number of low income
patients with special needs . . .) which the
State finds and makes assurances satisfactory
to the Secretary, are reasonable and adequate
to meet the costs which must be incurred by
efficiently and economically operated
1
While NJHA appears to seek review of procedural compliance
alone, it states: "The central issue raised below and on appeal
is whether DHS properly engaged in an objective review of economy
and efficiency, and rendered bona fide `findings' capable of
supporting assurances that the resulting rates were `reasonable
and adequate' and not likely to impair reasonable `access' to
services." Appellant's Brief at 14. As discussed infra, this
Court has deemed the "reasonable and adequate" and the
"reasonable access" requirements as being substantive in nature.
Thus, NJHA necessarily seeks review of the State's procedural and
substantive compliance.
9
facilities in order to provide care and
services . . . 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.
42 U.S.C. § 1396a(a)(13)(A)(emphasis added). Initially, in
interpreting a state's plan, we note that the legislative history
of the Amendment manifests Congress's strong concern that its
procedural and substantive requirements be "invariably and fully
satisfied." West Va. Univ. Hosps., 885 F.2d at 24. We turn to
our interpretive task with that caveat in mind.
1. Substantive Compliance
This Court has observed that the Boren Amendment
"authorizes states to develop their own Medicaid reimbursement
standards and methodologies for payment for hospital services,
but subjects those standards and methodologies to three general
federal requirements." Id. at 22. Those requirements mandate
that a state's rates
(1) take into account the circumstances of
hospitals serving a disproportionate share of
low income patients;
(2) are reasonable and adequate to meet the
necessary costs of an efficiently operated
hospital; and
(3) are reasonable and adequate to assure
medicaid patients of reasonable access to
inpatient hospital care.
See Temple Univ., 941 F.2d at 210 (citing West Va. Univ. Hosps.,
885 F.2d at 22). The implementing regulations for
10
§1396a(a)(13)(A) reiterate these statutory requirements. See 42
C.F.R. § 447.253(b).2
a. "Disproportionate Share" and "Reasonable Access"
Requirements
2
(a) State assurances. In order to receive
HCFA approval of a State plan change in
payment methods and standards, the Medicaid
agency must make assurances satisfactory to
the HCFA . . . and must comply with all other
requirements of this subpart.
(b) Findings. Whenever the Medicaid agency
makes a change in its methods and standards,
but not less often then annually, the agency
must make the following findings:
(1) Payment rates. (i) The Medicaid agency
pays for inpatient hospital services and
long-term care facility services through the
use of rates that are reasonable and adequate
to meet the costs that must be 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 take into account the
situation of hospitals which serve a
disproportionate number of low income
patients with special needs; [and]
. . . .
(C) The payment rates are adequate to
assure that recipients have reasonable
access, taking into account geographic
location and reasonable travel time, to
inpatient hospital services of adequate
quality.
42 C.F.R. § 447.253 (a) & (b) (emphasis added).
11
In enacting the Boren Amendment, there was a
congressional concern that states account for the special
circumstances of those hospitals serving a large number of
Medicaid patients. West Va. Univ. Hosps., 885 F.2d at 23 (citing
H.R. Rep. No. 158, 97th Cong., 1st Sess. 294-96 (1981)).
Moreover, Congress was concerned that a state's rates not be so
low as to cause the closing of a "dangerous number of hospitals
or of a single medically important facility" necessitating
unreasonable travel for Medicaid patients. Id. (citing H.R. Rep.
No. 158, 97th Cong., 1st Sess. 294 (1981); H.R. Conf. Rep. No.
208, 97th Cong., 1st Sess. 962, reprinted in 1981 U.S.C.C.A.N.
1010, 1324). In developing its reimbursement rates, a state is
required to take into account the situations of those hospitals
serving a disproportionate share of low income patients and to
find that its rates assure Medicaid patients reasonable access to
inpatient hospital care. With respect to these substantive
requirements this Court has said:
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.
West Va. Univ. Hosps., 885 F.2d at 24. Accordingly, a state's
compliance with the disproportionate share and reasonable access
requirements is subject to our plenary review. Id.b. "Reasonable and Adequate" Requirement
In addition to the two previously identified
requirements, a state must find that its rates are reasonable and
12
adequate to meet the necessary costs of an efficiently operated
hospital. However, this Court has said that a court should not
undertake an independent assessment of what rates it believes are
reasonable and adequate. Rather, the assessment should concern
itself with whether the rates are "arbitrary and capricious." Id.In West Virginia University Hospitals, it was noted
that in promulgating the regulations implementing § 1396a(a)(13),
the HCFA expressly declined to prescribe "reasonable and
adequate" rates. Id. at 26. The Court observed that "`the term
is not a precise number, but rather a rate which falls within a
range of what could be considered reasonable and adequate.'" Id.
(quoting 48 Fed. Reg. 56,046, 56,049 (Dec. 19, 1983)). Thus, a
state must show a rational basis for its Medicaid program. This
requires "`a rational connection between the facts found and the
choices made.'" Id. at 28 (internal quotations omitted)(quoting
Colorado Health Care Ass'n v. Colorado Dep't of Social Servs.,
842 F.2d 1158, 1167 (8th Cir. 1988)). Accordingly, the Boren
Amendment contemplates a "deferential" standard of review by the
courts in assessing compliance with the reasonable and adequate
requirement. Id. at 23. With the appropriate standards of review
in mind, we turn to an analysis of New Jersey's Medicaid Plan to
determine whether NJHA has shown the likelihood that it will
prevail on the merits of its claim that New Jersey violated the
Boren Amendment.
(i) New Jersey's Consideration of Hospitals Serving a
Disproportionate Number of Low Income Patients.
13
Initially, we consider whether New Jersey took into
account the situations of those hospitals serving a
disproportionate number of low income patients in developing its
new rates. The district court seems not to have addressed this
requirement in reviewing New Jersey's substantive compliance with
the Boren Amendment, as no mention of it can be found in the
court's opinion. However, it appears that the State gave some
consideration to the "disproportionate share" requirement. We,
therefore, will undertake plenary review of New Jersey's
compliance with the "disproportionate share" requirement using
the record before us.
In addition to reimbursement as determined by the new
methodology, hospitals receive disproportionate share ("DSH")
payments in respect of their Medicaid shortfall and their costs
of treating the uninsured. See Declaration of John Guhl,
Assistant Director for Budget Affairs of the Division of Medical
Assistance and Health Services of DHS ("Guhl Decl.") ¶ 30, Joint
Appendix ("J.A.") at 340. Hospitals also receive DHS payments
under the Medicare program by treating a high volume of low
income patients, including recipients of Medicaid. Id. However,
even with evidence of these additional payments, the record is
unclear as to how the new reimbursement program will impact those
hospitals serving a large number of Medicaid patients. Therefore,
we are unable to determine the extent or adequacy of the State's
consideration of the "disproportionate share" requirement.
Nonetheless, the record before us indicates some evidence of
compliance, and this Court has no evidence to the contrary.
14
Accordingly, we are not prepared to say NJHA has shown the
likelihood of succeeding on the ground that the "disproportionate
share" requirement was not satisfied.
(ii) Requirement that New Jersey's Rates Assure
Medicaid Patients Reasonable Access to Quality
Hospital Care, Taking Into Account Geographic
Location and Reasonable Travel Time.
In developing its reimbursement rates, a state is
required to find that its rates assure Medicaid patients
reasonable access to inpatient hospital care. See West Va. Univ.
Hosps., 885 F.2d at 22-23. NJHA asserts that the State "made no
bona fide findings concerning the impact of the cuts on access to
care and quality of care." Brief for Appellants at 34. While
NJHA attacks this lack of findings on procedural grounds, we
consider this requirement to be substantive in nature, albeit one
having procedural prerequisites. Once again, we undertake
plenary review of New Jersey's compliance with this requirement
on the record before this Court.
The State argues that "[t]he district court had a
convincing array of evidence on access before it when it
considered NJHA's request for preliminary injunctive relief."
Brief for Appellees at 43. Moreover, it asserts that "[t]he
strength of the record on this issue supports the district
court's implicit finding that NJHA would be unlikely to succeed
on the merits of a substantive challenge based upon a lack of
access." Id.15
The district court failed to address individually the
"reasonable access" requirement. Also, it did not articulate the
plenary standard of review to which we subject a state's
compliance with either the "disproportionate share" or
"reasonable access" requirements. Consequently, we are uncertain
whether the district court would have found implicitly or
explicitly that New Jersey complied with the "reasonable access"
requirement had it reviewed the plan for its impact on access
under the proper standard of review.3 Hampered as we are by the
district court's failure to address this issue, we turn, in the
interest of disposing of this matter, to the question of whether
New Jersey considered access to quality hospital care.
In considering access, the record before this Court
shows that the State took into account what it termed the "high
cost coverage" of the new system which it estimated to be 90% in
the aggregate. See Guhl Decl. ¶ 19, J.A. at 336. Thus, it argues
access should not be affected. The State also presented evidence
that New Jersey hospitals have excess bed capacity. Presuming
this to be true, the State asserts that hospitals with excess
beds will have an incentive to treat Medicaid patients so long as
the marginal costs associated with these patients are paid and
some contribution is made toward defraying hospitals' fixed
costs. Moreover, it has set forth that marginal costs
3
To the extent one might glean from the district court's opinion
that the standard of review for substantive compliance with the
Boren Amendment in this Circuit is "arbitrary and capricious," we
wish to dispel that notion. Such standard of review only applies
to the substantive requirement that the new rates be "reasonable
and adequate."
16
represented 60% of hospitals' average costs. It contends that
because all hospitals will be reimbursed their marginal costs
under the new system, access will not be affected. Id. at ¶ 28,
J.A. at 339-40; see also Brief for Appellees at 41-43 (discussing
State's compliance with "access" requirement).
Conversely, NJHA points to more recent figures and
argues that marginal costs are not 60% but 80% of actual costs.
Brief for Appellant at 36. However, in testimony before the
district court the State proffered that even if marginal costs
are 80%, 69 of 84 hospitals will be reimbursed above the margin.
See Transcript of Testimony of J. Guhl, J.A. at 855-57,
Appellees' Supplemental Appendix at 5. NJHA challenges this
proffer and asserts that only 60 hospitals will be reimbursed
their marginal costs. Reply Brief of Appellant at 19.
Even if we were to accept that aggregately 90% of
hospitals will receive their costs, and marginal costs are 80% so
that 60 to 69 hospitals will be reimbursed their costs, the
record remains deficient on the effect of the rates on hospitals
in various geographic areas in New Jersey, and on travel time as
dictated by the Boren Amendment and its implementing regulations.
This deficiency notwithstanding, it is apparent that the State
gave some consideration to the "reasonable access" requirement.
Thus, although we cannot say with confidence how access will be
affected, we still are not prepared to say, in the context of a
preliminary injunction, that NJHA has shown the likelihood of
succeeding on its challenge to the State's compliance with the
"reasonable access" requirement. At the final hearing, the
17
record should be developed to determine whether under the new
system a dangerous number of hospitals in one geographic area or
a single important medical facility would be forced to close or
seriously reduce services to the detriment of the communities
they serve. If the new rates create such dangers, the obvious
intent that states account for the special circumstances of those
hospitals serving a large number of Medicaid patients would be
violated.
(iii) Requirement that New Jersey's Rates
are Reasonable and Adequate to Meet the Costs
of an Efficiently Operated Hospital.
We turn to the third substantive requirement, viz.,
whether New Jersey's rates are "reasonable and adequate" to meet
the costs of an efficiently operated hospital. In the past, we
have noted that "[w]hereas the substantive dimensions of the
first two requirements could be easily drawn from the statute and
its legislative history, discerning legislative intent with
respect to the substantive element of the reasonable and adequate
requirement is a more daunting project." West Va. Univ. Hosps.,
885 F.2d at 26.
We note, once again, that we exercise a deferential
standard of review in determining whether the State's actions
were arbitrary and capricious in formulating the new rates. Under
this standard, we are cautioned that we should not undertake an
independent assessment of what rates we believe are reasonable
and adequate. Rather, we should concern ourselves with whether
18
New Jersey's determination was "arbitrary and capricious."
Thus, the State need only show a rational basis for its Medicaid
program. Therefore, we will examine New Jersey's plan as a
whole.
As the district court found, in determining the
statewide median for each DRG category, the State used the same
1988 hospital cost reports that it used to calculate the
statewide mean for each DRG in development of the 1993 rates. It
then employed various inflation factors to raise the 1988 median
costs for each DRG to the most current year costs. The district
court was not persuaded that the 1988 cost data was stale or
outdated. New Jersey Hosp. Ass'n v. Waldman No. 95-1260, 1995 WL
465664, at *10 (D.N.J. May 25, 1995). The 1995 median-based
reimbursement methodology also includes additional payments for
high length of stay outlier4 cases to remunerate hospitals for
extraordinary costs sometimes incurred in treating Medicaid
patients. NJHA, while arguing that use of 1988 costs adjusted by
the various inflation factors is improper, nevertheless asks us
to maintain the 1993 mean-based methodology which employs the
same 1988 costs similarly adjusted for inflation. The
difference, as we see it, is that the payout using the 1993
methodology produces a more favorable result for NJHA members.
In West Virginia University Hospitals we noted:
It follows from the departure from a cost-
driven reimbursement standard that a state's
4
"Outlier" cases are those that have either an extremely long
length of stay or extraordinarily high costs when compared to
most discharges classified under the same DRG. See 48 Fed. Reg.
39752, 39776 (September 1, 1983).
19
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 . . .
is whether the reimbursement rates . . . in
the aggregate are arbitrary and capricious.
885 F.2d at 26 (emphasis added). The district court found that
one of NJHA's own experts estimated under the 1995 median-based
system that New Jersey hospitals will be reimbursed in the
aggregate 83.36% of the costs they incur in treating Medicaid
patients in 1995. Another NJHA expert compared 1993 Medicaid
costs to 1993 Medicaid payments using the 1995 median-based
system and found that in the aggregate 81.75% would have been
reimbursed using the new system. The State asserts that upon
comparing hospitals' 1993 Medicaid costs to 1993 payments under
the new methodology, cost coverage would be over 90% in the
aggregate. New Jersey Hosp. Ass'n, 1995 WL 465664, at *12.
Moreover, the district court noted that the changes
made to New Jersey's Medicaid program were prompted by the
following:
DHS found that New Jersey hospitals' costs
per discharge are the third highest in the
nation. DHS also discovered that New
Jersey's inpatient hospital payments per
Medicaid recipient are the third highest in
the nation. Moreover, DHS found that New
Jersey hospitals' average length of stay for
Medicare patients is 11.07 days as compared
to the national average of 8.0 days. Lastly,
DHS determined that under New Jersey's then-
current Medicaid payment system, New Jersey
hospitals were paid in excess of their actual
costs (113% of costs in the aggregate). Thus,
DHS was concerned that the then-current
medicaid system violated the federal upper
20
limit. As a result, DHS determined that the
mean-based DRG system was ripe for change.
Id. at *3 (citations omitted).
Based on the foregoing findings of fact made by the
district court concerning the State's findings, which we cannot
say are clearly erroneous, and giving deference to the State, we
are not prepared to say that NJHA has shown, for preliminary
injunction purposes, that New Jersey's rates overall are
unreasonable and inadequate. We so conclude because we cannot
say on this record that the rates were developed in an arbitrary
or capricious manner. Thus, we hold that NJHA has not shown the
likelihood of succeeding on its challenge to the State's
substantive compliance with the Boren Amendment. While aggregate
coverage is telling, it is not dispositive. Among other things,
at a final hearing on the merits, further analysis might provide
evidence as to whether a large percentage of the unreimbursed
costs must be incurred by efficiently and economically operated
facilities. If this is true, evidence of aggregate cost
coverage, as shown on this record, would not suffice to show
compliance with the federal requirement that the rates be
reasonable and adequate. Finally, we turn to the question of
whether NJHA showed the likelihood of succeeding on its claim
that the State failed to comply with the procedural requirements.
2. Procedural Compliance
In reviewing New Jersey's procedural compliance with
the Boren Amendment, our review is plenary. Temple Univ., 941
F.2d at 209.
21
Procedurally, the State is required to give assurances
that its Medicaid plan complies with the federal requirements.
See 42 U.S.C. § 1396a(a)(13)(A); 42 C.F.R. § 447.253(a) & (b).
This Court has held that in giving such assurances "the federal
regulations implementing § 1396a(a)(13)(A) `unambiguously require
the state to make findings' to support its Medicaid plan." Temple
Univ., 941 F.2d at 208-09 (quoting West Va. Univ. Hosps., 885
F.2d at 30); see also Wilder, 496 U.S. at 513 n.11 (noting
requirement that states make findings is a necessary prerequisite
to the requirement that assurances be made).
a. Findings and Assurances
While assurances must be based on findings, there is no
absolute mandate as to what is required in terms of meeting the
"findings" requirement. Logic dictates, however, that whatever
methods a state uses in arriving at the procedurally required
findings, such findings must be correct. Id. at 514. Our
language in West Virginia University Hospitals is particularly
applicable here:
The three federal provisions . . . contain
both a procedural and substantive dimension.
The procedural dimension is explicit in the
federal regulations implementing section
1396a(a)(13)(A). These federal regulations
condition HCFA approval of a new state plan
on the state's assurances that it has
complied with the regulatory requirements.
One of these regulatory requirements is that
the State make findings in support of its
change in medicaid plan. Essentially, the
State is required to find that its new plan
complies with the three substantive
requirements . . . .
22
885 F.2d at 29 (citation omitted).
In Temple University, we were critical of
Pennsylvania's failure to make findings as to the reasonableness
or adequacy of its rates to cover the costs of an efficiently and
economically operated hospital. 941 F.2d at 210. In the present
case, the district court noted the State's reasoning behind its
selection of the median-plus 5% methodology:
[I]t is reasonable to measure the efficiency
of hospitals by comparing the costs they
incur for delivering similar units of service
. . . . [E]fficiency is defined or understood
to mean the lowest possible cost per
comparable inpatient admission.
New Jersey Hosp. Ass'n, 1995 WL 465664 at *3. Thus, the State
found that its new rate system implicitly identified efficient
hospitals and therefore the costs they must incur. This was
accomplished by concluding that efficient hospitals will keep
their costs for each DRG at or below the statewide median with
certain adjustments for inflation, indirect medical education,
and area wage variation. Id. at *4.
Thereafter, the State conducted empirical analyses to
measure the effects of the payment program. This was
accomplished by comparing the amounts the new methodology would
have paid hospitals in 1993 to their actual Medicaid costs
reported on their Medicare cost reports for 1993. Id. A health
care consultant also was retained to review the new rate-setting
methodology and the State's analyses of the new rates. Id. at *5.
Additionally, the district court noted that various national
indicators which evidenced inefficiency on the part of New Jersey
23
hospitals also played a role in the formulation process.
Inefficiencies were noted in the areas of cost per discharge and
average length of stay. Id. at *4.
Based on the forgoing, the district court found that
the use of "1988 hospital cost data, increased to present-day
costs, represents sufficiently reliable cost data when used to
identify efficiently and economically operated New Jersey
hospitals." Id. at *10. We cannot say that this factual finding
is clearly erroneous. Thus, in light of our holding with respect
to the State's substantive compliance, we conclude, for purposes
of disposing of the preliminary injunction request, NJHA has not
shown that the State failed to meet the procedural requirements.
We note, at a final hearing the burden of proof rests
with NJHA to come forward with credible evidence that the State
did not comply with the federal requirements of the Boren
Amendment. See Colorado Health Care Ass'n v. Colorado Dep't of
Social Servs., 842 F.2d 1158, 1164 (10th Cir. 1988). It is
noteworthy that no discovery had been conducted prior to the
hearing on the application for the preliminary injunction.
Pending the district court's final decision on the merits, the
findings of fact and conclusions of law made in conjunction with
the preliminary injunction are indeed preliminary. As such, they
do not foreclose any findings or conclusions to the contrary
based on the record as developed at final hearing. See Oburn v.
Shapp, 521 F.2d 142, 149 n.18 (3d Cir. 1975).
The district court denied NJHA a preliminary injunction
solely on the ground that it had not shown the likelihood that it
24
would prevail on the merits. Thus, it found it unnecessary to
address the other factors to be considered when a preliminary
injunction is sought.
Based solely on the ground invoked by the district
court, NJHA has not shown on this record the reasonable
likelihood that it will prevail on the merits.
The order of the district court denying a preliminary
injunction will be affirmed.