Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-85-01016/USCOURTS-ca10-85-01016-0/pdf.json

Nature of Suit Code: 444
Nature of Suit: Civil Rights Welfare
Cause of Action: 

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P U B L I S H FI LED 

United Scates C.OUrr of Appeals 

IN THE UNITED STATES COURT OF APPEALS Tench Circuit 

FOR THE TENTH CIRCUIT 

COLORADO HEALTH CARE ASSOCIATION; 

GERIATRICS, INC.; MILLER NURSING HOME, 

INC., d/b/a FAIRVIEW CARE CENTER; 

SPRINGS VILLAGE, INC., d/b/a SPRINGS 

VILLAGE RECOVERY CENTER; W II, INC., 

d/b/a GLEN AYR HEALTH CENTER; NORTH 

SHORE MANOR, INC.; and EVERGREEN CARE 

CENTRE, LTD., 

Plaintiffs-Appellants, 

v. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

COLORADO DEPARTMENT OF SOCIAL SERVICES; ) 

GEORGE s. GOLDSTEIN, in his official ) 

capacity as Acting Executive Director ) 

of the Department of Social Services; ) 

COLORADO STATE BOARD OF SOCIAL SERVICES;) 

GILBERT R. SLADE; NONA THAYER; FELIX S. ) 

CORDOVA; THOMAS C. HICKMAN; MARKE. ) 

NOTESTINE; LARRY VELASQUEZ; SHARON L. ) 

HILL; JAMES E. MARTIN; and FLORANGEL ) 

MENDEZ, in their official capacities ) 

as members of the Colorado Board of ) 

Social Services; and the STATE OF ) 

COLORADO, ) 

Defendants-Appellees. 

) 

) 

FEB 2 2 1988 

ROBERT L. HOECKER 

Clerk 

No. 85-1016 

ON APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 83-K-345) 

Frederick Miles, Miles & McManus, Denver, Colorado (Richard G. 

McManus, Jr., Miles & McManus, Denver, Colorado, was also on the 

brief) for Plaintiffs-Appellants 

Wade Livingston, Assistant Attorney General, Denver, Colorado 

(Duane Woodard, Attorney General, Charles B. Howe, Chief Deputy 

Attorney General and Rich~rd H. Forman, Solicitor General, all of 

Denver, Colorado, ·were also on the brief) for Defendants-Appellees 

Before HOLLOWAY, Chief Judge, and BARRETT and SEYMOUR, Circuit 

Judges 

HOLLOWAY, Chief Judge 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 1 
The plaintiff-appellant Colorado Health Care Association 

appeals from the dismissal of its complaint which challenged a 

reduction in reimbursement paid by the State of Colorado (State) 

to providers of long term nursing services to Medicaid patients. 

The services are provided as authorized by Title XIX of the Social 

Security Act, 42 u.s.c. §§ 1396 to 1396p and the Colorado Medical 

Assistance Act (Medicaid), Colo. Rev. Stat. §§ 26-4-101 et seq. 

The association is a not-for-profit corporation comprised of 

operators of long-term nursing facilities; other appellants are 

entities who either own, lease, operate or manage such facilities 

and are certified to provide services under the Colorado Medicaid 

program (hereinafter "appellants" or "providers"). The appellants 

challenged the repeated suspension or elimination of the 

"incentive allowance" component of the daily rate paid by the 

State to nursing homes which provide services to Medicaid 

patients. The district court dismissed their complaint. Colorado 

Health Care Association v. Colorado Dept. of Social Services, 598 

F. Supp. 1400. This timely appeal followed. We find the district 

court's opinion persuasive and affirm. 

I. 

A. Colorado Medicaid Reimbursement Plan 

The central issue is whether the State's decision to amend 

its Medicaid plan so as to eliminate the payment of the incentive 

allowance resulted in violation of the Medicaid standards mandated 

by the Boren Amendment. Codified within 42 U.S.C. 

1396a(a)(l3)(A)(l982), the Boren Amendment of 1980 requires that a 

state reimburse service providers under rates which are reasonable 

2 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 2 
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. Id. 

(Effective October 1, 1980). 1 

Under the Colorado Medicaid plan, the State pays certified 

nursing homes for their services to qualified Medicaid patients on 

a daily rate, paid per patient per day (PPD). The Colorado 

Department of Social Services (DSS) is the State agency which 

administers the Medicaid program. DSS establishes a PPD rate for 

individual nursing homes. The rate is prospective and based on 

histotical costs for all certified and participating nursing 

homes for the preceding reporting period of six months. The 

reimbursement rate is adjusted every six months. 

The overall PPD rate for each participant provider is 

calculated and determined by two components: administration costs 

and health care costs. Administration costs which are 

reimbursable or allowable under state law include the expenses 

incurred with the administration of the nursing home, property, 

and room and board. Health care costs are not included in the 

1 

The amendment was part of the Omnibus Reconciliation Act of 

1980, which intended to effect reductions throughout the existing 

federal budget. See Report of the House Budget Committee on the 

Omnibus Reconciliation Act of 1980, House Report No. 96-1167, 96th 

Cong., 2d Sess. at 1; reprinted in 1980 U.S. Code Cong. & Admin. 

News 5526, 5527. Prior to the 1980 amendment, the states were 

required to determine reimbursement rates ''on a reasonable costrelated basis, as determined in accordance with methods approved 

and verified by the Secretary [of Health and Human Services]." 42 

u.s.c. § 1396a(a)(l3)(E) (reasonable cost standard)(codified as 

amended at 42 u.s.c. § 1396a(a)(l3)(A)). 

3 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 3 
calculation of the incentive allowance at issue. Colo. Rev. Stat. 

§ 26-4-103 (4.5). 

The administrative costs are the basis for the incentive 

allowance and are subject to a maximum reimbursement formula or 

ceiling. 2 This ceiling is statutorily defined within "Reasonable 

cost of services" as "the actual costs of administration, 

property and room and board costs excluding food costs, to the 

ninetieth percentile of medicaid patients" residing in 

participating facilities. Id. The reasonable cost or ninetieth 

percentile is based on the reported costs of medicaid patients in 

all participating nursing homes in the State. These costs are 

audited and reviewed in the six-months period being used to 

establish a new rate. 

During the times material to this case, the incentive 

allowance was calculated on the difference between the ceiling 

rate of 90% and the nursing home's administration cost rate. This 

incentive factor was further limited in that it could not exceed 

twelve percent of the ceiling rate, that is, the ninetieth 

percentile. Added to this incentive allowance is the inflation 

allowance, based on the consumer price index, which takes into 

account the increases in costs that occur between the time the 

costs are incurred and the time the rate is paid. IV R. TR 103-

104. The historical costs for administration and health care are 

2 

During the course of this litigation § 26-4-103 (4.5) was 

amended to also limit maximum reimbursement of health care 

services and food costs to the ninetieth percentile. Colo. Rev. 

Stat. § 26~4-103 (4.5) (Supp. 1987). That limitation is not at 

issue here. 

4 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 4 
subject to the statutory limits on components which will be 

recognized as reimburseable elements. 3 

As to the administration cost, the calculation of that PPD 

rate can be stated as: 

actual costs 

limited by statute 

patient days 

+ incentive 

allowance 

(if costs below 

ninetieth 

percentile) 

+ inflation 

factor 

(based 

on 

consumer 

price 

index) 

= PPD 

(Per 

Patient 

rate paid 

Daily to 

service 

provider) 

If a nursing home's costs exceed the ninetieth percentile costs, 

then the DSS calculates the rate based upon the ninetieth 

percentile or reasonable costs rather than the nursing home's 

actual allowable costs. Section 26-4-103 (4.5), and§ 26-4-110 

(5)(a), Colo. Rev. Stat. If a nursing home's actual allowable 

costs are below the ninetieth percentile, the department will 

increase the nursing home's rate by adding an incentive allowance 

to their actual costs. At the times in question here, the 

incentive allowance was initially calculated as 50 percent and 

after 1984 as 25 percent 4 of the difference between the ninetieth 

3 

The calculation of the individual provider's rate involves a 

history of statutory changes as to the costs which are allowable 

and reimbursed and the mathematically derived ceilings and 

limitations. See 1973 Colo. Sess. Laws Ch 340, section 1, p.1200; 

1977 Colo. Sess. Laws 372, sections 2,4, pp. 1352, 1353; 1982 

Colo. Sess. Laws, Ch. 112, sections 2, 3, p.431; 1984 Colo. Sess. 

Laws Ch. 219, section 1, p.794; 1984 Colo. Sess. Laws, Ch. 222, 

section 1, p. 797. The parties have addressed this statutory 

history and argued that the underlying rationale for the 

reimbursement method is material to their claims and defenses. We 

consider this history only as it bears upon any dispositive issue. 

4 

In 1984 this percent was reduced to 25 percent. Colo. Rev. 

Stat§ 26-4-110(5)(c) (1987 Supp.}. 

5 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 5 
percentile and the nursing home's actual costs. IV R. TR 51-104-

106. 

B. Administrative and Procedural History 

The DSS has at five times adopted a rule which temporarily 

suspended the payment of the incentive allowance to those nursing 

homes whose administrative costs were below the ninetieth 

percentile. Initially, the decision or informal rule suspending 

this payment was made by the Colorado Board of Social Services 

(CBSS) within the DSS. After public hearings on January 7, 1983 

and February 4, 1983, at its regular meeting on February 4, the 

CBSS adopted, on an ''emergency basis" an amendment to its longterm care reimbursement regulations. This change eliminated 

payment of the incentive for services rendered from April 1, 1983 

to May 30, 1983 and from May 30, 1983 until June 30, 1983 because 

of a projected $24 million shortage in Medicaid funds. 

Plaintiffs' Exh. 1. The State stipulated that the denial of this 

component of the PPD was "due strictly to a 'lack of available 

appropriations.'" IR. 127, , 4. 

The appellants filed this suit in state court and the case 

was removed to federal court on the appellees' petition; 

jurisdiction arises from the federal question, pursuant to 28 

U.S.C.§§ 1331,1441. IR. 1-23. Subsequently, the Governor of 

Colorado approved a supplemental appropriation act which made 

funds available to pay the incentive allowance. Plaintiffs' Exh. 

3, S.B. 273. In S.B. 273, $755,662 was appropriated from general 

funds with the purpose as stated: "Restores one-half of the 

nursing home incentive payment for the last half of the year 

6 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 6 
[1982-1983, the 1983 fiscal year]." Plaintiffs' Exh. 4 at line 

22. 

After the Governor's signing of S.B. 273, the DSS adopted an 

emergency regulation which reinstated the incentive allowance. 

Under this amendment to the rule adopted on February 4, the DSS 

informed providers that it would reimburse them for "up to 62 days 

of foregone incentive." Plaintiffs' Exh. 6. Thereafter, the 

parties executed a stipulation which was approved by the district 

court providing for the reinstatement of payments to the 

appellants. 

The second suspension of the incentive payment occurred after 

the Governor vetoed the appropriation for the incentive allowance 

in the general appropriation bill for fiscal year 1983-84. This 

appropriation was to pay the incentive which remained unpaid for 

1982-83. Plaintiffs' Exh. 8, S.B. 401. DSS did not pay the 

incentive allowance beyond the 62 day period, supra, and notified 

providers that the incentive allowance would not be paid for the 

period from April 6 to June 30, 1983. Plaintiffs' Exh. 9.· A 

fiscal year commenced on July 1, with Medicaid appropriations for 

1983-1984, the 1984 fiscal year. 

On July 18 and 19, 1983, a hearing was held on appellants' 

motion for an order to show cause why the DSS should not pay the 

incentive allowance for the last portion of 1983 fiscal year. 

Upon conclusion of the hearing, the parties agreed to consolidate 

it with a trial on the merits pursuant to Rule 65(a)(2), Fed. R. 

Civ. P. 

On May 4, 1984 the CBSS suspended the incentive payment for 

the third time, enacting an emergency rule in order to "only pay 

7 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 7 
the incentive allowance to nursing homes with available 

appropriations specifically appropriated" for this purpose. II 

R. 249, Supplemental Complaint, Exh. A at 254. Providers were 

denied the ince~tive payment for services rendered from June 1, 

1984 to June 30, 1984. After the third suspension, the parties 

made further stipulations and the complaint was supplemented to 

include the second suspension and derivative claims. II R 249. On 

December 5, 1984, the district court dismissed the complaint. 

During the pendency of this appeal, the appellants have 

supplemented the complaint to include claims based on the fourth 

and fifth suspensions of the incentive allowance. On or about 

August 1, 1986 the CBSS eliminated the payment for the service 

period commencing August 1 through November 30, 1986. 

Supplemental II R. at 22-24. On December 5, 1986, the CBSS 

similarly eliminated the payment for the service period commencing 

December 5, 1986 through June 30, 1987. 

CBSS has in all instances amended the reimbursement plan 

through its emergency rule making power. The rule has repeatedly 

been stated as necessary because of projected deficits in the 

overall Medicaid budget and, with regard to the incentive 

allowance, the lack of available appropriations. The record shows 

that the first and third rules were submitted to the federal 

Secretary (Secretary) of Health and Human Services (HHS). The 

Secretary accepted the amended rules with the accompanying 

assurances and subsequently formally approved the rules. II R 

279-283. 

The appellants argue that the district court erred in finding 

the State's actions are lawful under federal and state law because 

8 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 8 
(1) the elimination of this specific payment is a reduction in 

providers' overall payment effectuated solely for budgetary 

reasons and therefore proscribed by federal law, despite the 

Secretary's approval of the State's action; (2) the State's 

emergency rules to effect the reduction were not enacted in 

conformance with the Colorado Administrative Procedure Act (CAPA), 

Colo. Rev. Stat. § 24-4-103; (3) the State's agency, DSS, lacked 

the statutory authority to enact the emergency regulation to 

effect the payment reduction; and (4) the State is barred by 

contract and equitable principles from denying payment which 

appellants have earned. In addition, on appeal the State asserts 

that it did not waive its Eleventh Amendment immunity so as to 

subject the state to retroactive relief, if appellants prevail. 5 

II 

Standard of review 

With respect to their claims of invalidity of the State's 

action under both federal and State law, the appellants argue that 

we should apply the higher standard whether the State's action was 

supported by substantial evidence. We disagree and apply instead 

5 

The appellees have raised the issue whether the appellants, 

as nursing home operators, have standing to challenge the amended 

rules on behalf of Medicaid recipients. Here the argument lacks 

merit. In similar cases the federal courts have permitted 

providers to bring actions to enforce the Medicaid statutes. 

Edgewater Nursing Center Inc. v. Miller, 678 F.2d 716 (7th Cir. 

1982), cert. denied, 469 U.S. 1215 (1985); Minnesota Ass'n of 

Health Care Facilities v. Minnesota Dept. of Public Welfare, 602 

F.2d 150 (8th Cir. 1979); California Hospital Ass'n v. Obledo, 602 

F.2d 1357 (9th Cir. 1979); Massachusetts General Hospital v. 

Weiner, 569 F.2d 1156 (1st Cir. 1978); National Union of Hospital 

and Health Care Employees, RWDSU, AFL-CIO v. Carey, 557 F.2d 278 

(2d Cir. 1976). We agree with these courts in recognizing that 

Medicaid patients and health-care providers have parallel 

interests with respect to Medicaid funding and reimbursement. 

9 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 9 
the standard whether the State's action was arbitrary and 

capricious and in accord with law. 

The Colorado Medicaid reimbursement plan results from 

legislative and policy decisions made at both the federal and 

State level. Our review is limited. Our task is only to 

determine whether the agency conformed with controlling statutes. 

See Baltimore Gas and Electric Co. v. Natural Resources Defense 

Fund, 462 U.S. 87, 97 (1983); Citizens to Preserve Overton Park, 

Inc. v. Volpe, 401 U.S. 402 (1971). 

federal law has been violated. 

We can determine whether 

Here we consider the Social 

Security law and whether the State in amending its payment method 

for the incentive allowance has complied with the requirements for 

states which choose to participate in the Medicaid program. While 

participation in the Medicaid program is optional, once a State 

elects to participate, it must comply with federal statutory 

requirements. Harris v. McRae, 448 U.S. 297, 301, (1980). 

In a review of informal agency action, the Court is limited 

to deciding whether the action is arbitrary and capricious. 

Overton Park, 401 U.S. at 413-414; Baltimore Gas, 462 U.S. at 106; 

Anderson v. U.S. Dept. of Housing And Urban Development, 701 F.2d 

112, 113 (10th Cir. 1983); Mississippi Hospital Association Inc. 

v. Heckler, 701 F.2d 511, 516 (5th Cir. 1983). The appellants 

claim district court error in light of the requirements of the 

Colorado law, the CAPA, for which the arbitrary and capricious 

standard is also applicable. Under Section 24-4-106(7) of the 

CAPA, which prescribes the bases for setting aside agency action, 

the statute does not distinguish between rulemaking and 

adjudicatory functions of agencies for purposes of judicial 

10 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 10 
review. The Supreme Court of Colorado has determined that for 

purposes of judicial review of informal rulemaking, the arbitrary 

and capricious standard tends to merge with the substantial 

evidence standard. Citizens for Free Enterprise v. Dept. of 

Revenue, State of Colorado, 649 P.2d 1054, 1062 n.6 (Colo. 1982). 

The key question during judicial review is whether the agency 

action is reasonable and supported by the record before the 

court. Id. (citing K. Davis, Administrative Law Treatise§ 29.00-

1 at 528 (1982 Supp.)); Anderson, 701 F.2d at 115 ("The 

controlling test is whether the recorq facts supporting agency 

action are adequately adduced and rationally applied''). "The 

court is not empowered to substitute its judgment for that of the 

agency." Overton Park, 401 U.S. at 416. 

A presumption of validity attaches to the agency action and 

the burden of proof rests with the appellants who challenge such 

action. Mississippi Hospital, 701 F. 2d at 516; see also Overton 

Park, 401 U.S. at 415. The same presumption of validity applies 

to a state agency as to a federal agency. Mary Washington 

Hospital, Inc. v. Fisher, 635 F. Supp. 891, 897 (E.D. Va. 1985). 

If the appellees have met the specific requirements of federal and 

state law, then we must defer to the agency's exercise of 

discretion unless the DSS acted arbitrarily or capriciously. Id.; 

Overton Park, 401 U.S. at 416; Mississippi Hospital, 701 F. 2d at 

516. 

III 

Federal Statutory Requirements 

A. Congressional Intent 

Our first inquiry is whether the payment to the appellants 

after DSS suspended one component, the incentive allowance, 

11 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 11 
resulted in noncompliance with the federal statute and 

regulations. This issue is ultimately determinative of all the 

appellants' claims. This is our first occasion to determine 

whether a change in one component of compensation to providers 

causes a violation of the Medicaid statute. 

Title XIX of the Social Security Act, as amended, provides: 

A state plan for medical assistance must •.. 

provide ••• for payment of the skilled nursing 

facility services provided under the plan through 

the use of rates (determined in accordance with 

methods and standards developed by the 

State ••• ) which the State finds, and makes 

assurances satisfactory to the Secretary, are 

reasonable and adequate to meet costs which must be 

incurred by efficiently and economically operated 

facilities in order to provide care and services in 

conformity with applicable State and Federal laws, 

regulations and quality and safety standards and to 

assure that individuals eligible for medical 

assistance have reasonable access . • . to 

inpatient hospital services of adequate quality; 

and such State makes further assurances, 

satisfactory to the Secretary, for the filing of 

uniform cost reports by each skilled nursing or 

intermediate care facility and periodic audits by 

the State of such reports. 

42 u.s.c. §1396a(a)(l3)(A); P.L. 96-499, §962 (a)(l980); P.L. 97-

35, §2173(a)(l)(B)(C)(l981). The Boren Amendment provisions are 

underlined. HHS subsequently promulgated regulations implementing 

the new federal statutory standard. See 42 C.F.R. § 447.250 to 

.280. 

The Boren Amendment of the Omnibus Reconciliation Act of 1980 

(OBRA), incorporated into the statute quoted above, had two 

purposes: first, that the states set their own reimbursement 

rates without stifling and expensive federal oversight of the 

methodology used; and, second, that Medicaid expenses be reduced 

by allowing the states to develop payment systems which would 

encourage efficiency. Nebraska Health Care Association v. 

12 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 12 
Dunning, 575 F. Supp. 176, 178 (D. Neb. 1983). The Congress moved 

away from payments determined by the "reasonable cost-related 

basis", also called the medicare standard, to rates which would be 

determined in accordance with methods and standards to be 

developed by the states. 6 The statute mandated a significant 

change in the basis for payment as well as the procedures to be 

followed by the state and federal agencies. The states would no 

longer be required to follow complex procedures of review and 

approval by the Secretary of HSS. See Mississippi Hospital, 701 

F. 2d at 515 (states ta freely experiment with methods and 

standards which would be simpler and less expensive than complex 

Medicare reasonable cost formula). 

The judidical interpretation of congressional intent 

regarding the Boren and OBRA amendments has generally focused on 

the two purposes of the legislation outlined above. "Probing 

beyond this bottom line to the underlying rate setting methodology 

is not required under the new standard." Coalition of Michigan 

6 

The Senate Report accompanying the amendment stated: 

The committee continues to believe that states 

should have flexibility in developing methods of 

payment for their medicaid programs and that 

application of the reasonable cost reimbursement 

principles of the medicare program for long-term 

care facility services is not entirely 

satisfactory. These principles are inherently 

inflationary and contain no incentives for 

efficient performance. S. Rep. No. 96-471, 96th 

Cong., 2d Sess., reprinted in 4 Medicare and 

Medicaid Guide~ 24,407, at 8780-81 (CCH) (1981). 

See also Coalition of Michigan Nursing Homes, Inc. 

v. Dempsey, 537 F. Supp. 451, 455-456 (E.D. Mich. 

1982) (federal legislative history); Wilmac 

Corporation v. Heckler, 633 F. Supp. 1000, 1007 

(E.D. Pa. 1986) (Boren amendment instituted a 

"lower standard" for reimbursement within statutory 

compliance). 

13 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 13 
Nursing Homes, Inc. v. Dempsey, 537 F. Supp 451, 459 (E.D. Mich. 

1982); accord Mississippi Hospital, 701 F. 2d at 521; Nebraska 

Health Care , 575 F. Supp at 178; Illinois Hospital Association 

v. Illinois Department of Public Aid, 576 F. Supp. 360, 369( N.D. 

Ill. 1983); Children's Hospital of Philadelphia v. Secretary of 

Department of Public Welfare, 568 F. Supp. 1001, 1007 (E.D. Pa. 

1983). In contrast to earlier provisions in the law that required 

the States to adopt inflationary and complex methods of 

reimbursement, "[the Boren Amendment] permits and encourages 

States to develop simpler, more efficient ways of paying for 

nursing home care, including budget-based and negotiated rates." 

Nebraska Health Care, 575 F.Supp. at 178 (citing 126 Cong. Rec. 

S8927 (daily ed. June 30, 1980)(statement of Senator Boren)); 

Alabama Hospital Association v. Beasley, 702 F. 2d 955, 958 (11th 

Cir. 1983); see also Illinois Hospital, 576 F. Supp. at 368 n.11 

(OBRA standard also applies to hospitals providing services to 

Medicaid recipients. 

The State submitted its overall Medicaid plan to the 

Secretary, received approval, and thereafter was bound to follow 

the regulations which prescribe how a state operates its plan. 

When a state wishes to make a significant change in its methods 

and standards for determining the reimbursement rate,it must 

submit assurances and related information to HHS. 42 

C.F.R §447.253 and .255. The related information includes the 

amount of the average proposed payment rate for each type of 

provider and the amount that payment will be increased or 

decreased, the estimated effects, short-term and long-term of rate 

14 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 14 
changes on availability of services, type of care furnished and 

extent of provider participation. Id. at(a), (b). 

If HSS does not notify the state within 60 days that its 

assurances regarding a proposed payment rate are unacceptable, 

then the assurances will be deemed accepted. 42 C.F.R. §256(b). 

Where the state's proposed rate has been accepted or deemed 

accepted by HHS,the rate will be effective on the date specified 

in the agency's assurances. However, the effectiveness date 

cannot begin before the first day of the calendar quarter in which 

the agency .submits the assurances and related information. Id. at 

( C) • 

B. Appellees' Amendment of Payment Plan 

At issue is whether the State complied with the procedures 

for amending and whether the result of the amending procedures 

kept the State's overall reimbursement within the requirements of 

a reasonable and adequate payment which promotes efficiency and 

economy in the providers' operations. The district court found 

that DSS had submitted the first and third rules suspending the 

incentive payment as amendments, with assurances, to the Secretary 

who accepted and approved these.changes. 

The Secretary's approval was not required before the State's 

agency, DSS, could implement the change. See 42 C.F.R. §256; 

Illinois Council, 579 F. Supp. at 1145. This expedited approach 

implements the congressional intent that the Secretary and HHS 

will not overburden the states and facilities with unnecessary and 

burdensome paperwork requirements. See s. Rep. No. 139, 97th 

Cong., 1st Sess. 478, reprinted in 1981 U.S. Code Cong. & Ad. News 

396, 744; Mississippi Hospital, 701 F.2d at 520. The record 

15 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 15 
supports the district court's finding that procedurally and 

substantively the appellee complied with the requirements of the 

Social Security Act. 

The appellants argue that deference should be denied to the 

HHS determination that the State's proposed amendments met 

statutory requirements because HHS failed to provide a record of 

the scope and nature of its review. Appellants' Brief at 29-33. 

Appellants say that since the State failed to provide either 

"proper or adequate assurances" to HHS, the federal agency review 

failed to consider the requisite factors and to explain its 

determination which, therefore, precludes a meaningful judicial 

review. Id. at 32. We disagree. 

The district court did not merely rely on deference to the 

HHS determination but, in fact, considered whether DSS submitted 

the amendment as procedurally required by the regulations and 

whether the approved resulting payment structure is substantively 

in accord with the requirements of the social security law. It is 

undisputed that the State twice submitted the proposed rules to 

the HHS, which approved the change. We need not delve into the 

deliberative process of the federal agency in giving the approval. 

See Illinois Hospital, 576 F. Supp. at 369. We do consider 

whether the resulting rules complied with the basic standard of 

rates "reasonable and adequate" to meet costs incurred by 

"efficiently and economically operated facilities''. But, as 

noted, probing beyond this bottom line to the underlying ratesetting methodology is not required. Coalition of Michigan 

16 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 16 
Nursing Homes v. Dempsey, 537 F. Supp. 451, 459 (D.D. Mich. 

1982). 7 

The appellants argue too narrowly that the change in one 

component of the overall payment, due to state budgetary 

constraints, rendered the resulting payment unreasonable and 

inadequate. To terminate or affect one component, even if only 

for reasons of budgetary consideration, does not automatically 

produce a noncompliant payment. It is the resulting overall 

payment which is evaluated for statutory compliance. See 

Wisconsin v. Revitz, 733 F.2d 1226, 1233 (7th Cir. 1984) (prior 

medicaid reimbursement rate is not, per se, the only reasonable 

and adequate rate); accord Illinois Council on Long Term Care v. 

Miller, 579 F. Supp. 1140, 1147 (N.D. E.D. Ill. 1983). 

Reasonableness has been characterized as a zone, not a pinpoint. 

Revitz, 733 F.2d at 1233 (citing Federal Power Commission v. 

Conway Corp., 426 U.S. 271, (1976)); accord Freidman, 668 F. Supp. 

216. Here we construe it as a zone or range in which a State may 

consider the relevant factors and data and determine a valid 

reimbursement rate which is reasonable and adequate. The state 

must articulate "a rational connection between the facts found and 

the choice made." Baltimore Gas, 462 U.S. at 105. 

The record demonstrates that the State considered the 

relevant factors and data so that a rational relationship exists 

7 

The fact that appellants did not name the Secretary and HHS 

as defendants does not limit our review of the Colorado rule, as 

approved by the Secretary, for compliance with federal law. As 

the district court pointed out, "there exists no federal or state 

administrative forum to which plaintiffs can turn for 

consideration of their claims." Colorado Health, 593 F. Supp. at 

1406; Illinois Hospital, 576 F. Supp. at 369. 

17 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 17 
between these elements and the conclusion that the incentive 

payment should be terminated. Baltimore Gas, 462 U.S. at 105; 

Overton Park, 401 U.S. at 416; Revitz, 733 F.2d at 1231; 

California Hospital Ass'n V. Schweiker, 559 F. Supp. 110, 116 

(C.D. Cal. 1982), aff'd 705 F.2d 466 (9th Cir. 1983); see also 

Mary Washington, 635 F. Supp. at 898 (relevant factors to be 

considered for economy and efficiency standard). Here the DSS 

reviewed information on the entire range of Medicaid services 

which had to be covered under the State's appropriation for all 

Medicaid services. The documents show the DSS considered some 

forty (40) different options for cutting the program costs, 

including elimination or reduction of some services such as 

elective surgery, psychiatric services, payment for prescription 

drugs; closing the children's unit at the Ft. Logan facility, as 

well as the termination of the incentive allowance to nursing 

homes. III R. at 34; Plaintiff's Exh. 15. Insofar as 

quantifiable, the State computed its projected shortfall and 

available appropriations for the time periods involved. 8 This 

analysis by the State included consideration of the savings in 

Medicaid and General Fund appropriations, client and provider 

impact, comments on immediate and long term implications, and 

8 

The appellants argue that the varying State estimates of the 

amount of the shortfall or lack of available appropriations 

indicate the failure of the State to comply with federal statutes 

and regulations. During the time periods involved in this action 

the shortfall estimates for all Medicaid services ranged from 

$13.9 million to $24 million. We find that appellants' contention 

that "quantified estimates'' were imprecise is unpersuasive as it 

is counter to "the essence of the Boren Amendment [which] was to 

reduce this very type of detailed oversight." Coalition of 

Michigan, 537 F. Supp. at 463. 

18 

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potential for success in implementation. Plaintiffs' Exh. 15; see 

also Exh. 11, 16, 22, 28. 

The appellants' argument that state budgetary limits are an 

inappropriate factor has been rejected. See Coalition of 

Michigan, 537 F. Supp. at 463 and n.41. The providers argue that 

the State is precluded from reducing payment "solely on the basis 

of budgetary appropriations." Conference Agreement, the Boren 

Amendment, § 9, OBRA of 1980, P.L. 96-499 (1980), 1980 U.S. Code 

Cong., & Ad. News 5526, 5944. States must accommodate the overlap 

and conflict among (1) the 1980 federal mandate to reduce Medicaid 

costs, (2) their own state law limitations on deficit spending, 

(3) the reality of shrinking state revenues, and (4) the history 

of reduced federal Medicaid funding subsequent to the Boren 

Amendment. The language, supra, and the strict interpretation 

urged by the appellants has been rejected by the courts which say 

it should "be taken with a grain of s~lt''. Coalition of Michigan, 

537 F. Supp. at 463. n. 41; Revitz, 733 F.2d at 1236; (see also 

Mary Washington, 635 F. Supp. at 894 (states in "intractable" 

position where legislative intent to discourage reductions 

adversely affecting quality of care is concurrent with OBRA 

mandate to contain Medicaid costs). We concur in the district 

court's rejection of this argument. 

States can consider their budgetary constraints as a factor 

in amending their medicaid payment method so long as the result 

complies with the federal requirement for a reasonable and 

adequate payment. Revitz, 733 F.2d at 1236 (citing Illinois 

Council, 579 F. Supp. at 1148); United Hospital Center, Inc. v. 

Richardson, 757 F.2d 1445, 1450 (4th Cir. 1985) (Secretary states 

19 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 19 
that service provider may be subject to overall state revenue 

limit, if provider continues to receive reimbursement in 

conformance with Medicaid statutes and regulations). The 

appellants' argument against state budgetary constraints is 

derived from Alabama Nursing Home Association v. Harris, 617 F.2d 

388 (5th Cir. 1980). However, because of the statutory changes, 

the Fifth Circuit has now recognized that budgetary constraints 

can be considered by states in determining the reimbursement to 

medicaid service providers. Mississippi Hospital, 701 F.2d at 

518, 521. 

Here the reimbursement rate represents the State's considered 

judgment of what rates will both reflect the actual costs 

incurred, and also allow the State to comply with its 

appropriation limitations. See Coalition of Michigan, 537 F. 

Supp. at 463. The State has considered more than just the amount 

of money to be saved. In fact, it formulated and reviewed multilayered options so that fairness to the parties affected was 

considered. See Plaintiffs' Exhs. 11, 15, 16, 22 and 28. The 

resulting payment falls "within range of what could be considered 

reasonable and adequate," as Congress mandated. Mary Washington, 

635 F. Supp. at 901 (quoting 48 Fed. Reg. 56049 (December 19, 

1983)). The quantified data and descriptive analysis suffice as 

the appropriate data on the relevant factors; the appellees made a 

good faith examination of the impact of the options available. 

Id. at 899; see Plaintiffs' Exhs. 12, 17 through 21, 31 and those 

last cited above. The State is not statutorily required to 

produce the data and analysis of special studies which the 

appellants desire. Cf. Mary Washington, 635 F. Supp. at 897 

20 

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(state not required to make written findings under federal 

regulations so long as it makes necessary findings which are 

reasonable). 

The wide latitude given to the states under the Boren 

Amendment and OBRA extends to the mechanisms used to promote 

participation by efficiently and economically operated facilities. 

The payment of an incentive allowance for service providers who 

contain their costs below a specific standard or percentile is not 

required by the federal legislation nor by HSS regulations. The 

thrust of the 1980 amendment was to shift the federal concern away 

from the method used by each state to determine reimbursement to 

the quality of care while containing costs. Nebraska Health, 575 

F. Supp. at 178 (quoting Senator Boren that the amendment would 

allow states to implement ''budget-based and negotiated rates"). 

The states are not required to reimburse providers for costs they 

actually or even reasonably incur. Wilmac Corp., 633 F. Supp. at 

1007; Friedman, 668 F. Supp. at 223. 9 

The states can set a benchmark rate for efficient costs by 

establishing fixed ceilings or caps. Friedman, 668 F. Supp. at 

223. Here it is the 

administration costs 

9 

ninetieth 

incurred by 

percentile 

Colorado 

of allowable 

nursing homes 

The appellants charge that the Colorado plan fails to meet 

federal requirements because it disregards the costs incurred 

because of a changing patient profile, that is, higher accuity 

patients who require more services when transferred from hospitals 

to nursing homes. Appellants' Opening Brief at 28. If such a 

change in patient population and concomitant needs should be 

specifically addressed in a state's reimbursement rate, then the 

Secretary is the one to so determine. Illinois Council, 579 F. 

Supp. at 1150; see also Mary Washington, 635 F. Supp. at 896-901 

(court exercises its discretion in equity to decline to determine 

if new and necessary services should be included in state's 

reimbursement rate). 

21 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 21 
participating in the state Medicaid plan. 

proscribed by the federal legislation 

substantive result of the State's efforts 

compliance. 

This ceiling is not 

as a procedural or 

to achieve statutory 

The amending of the state Medicaid plan so as to remove the 

incentive allowance and provide only reimbursement limited by a 

ceiling does not remove the payment plan from federal compliance. 

Coalition of Michigan, 537 F. Supp. at 454, 459-60. The courts 

have found rates below the ninetieth percentile to be in 

compliance. ~, Id. (eightieth percentile ceiling); Mississippi 

Hospital, 701 F.2d at 517-18 (eightieth percentile ceiling): 

compare Nebraska Health Care Association v. Dunning, CV 82-L-472, 

slip op. (D.C. Neb. July 4, 1984) (state plan was-federally 

approved for payment at sixty-fifth percentile, but was no longer 

in compliance when state subsequently imposed pro rata cut). It 

is not necessary that we determine what ceiling would be 

noncompliant so as to affect detrimentally the services provided 

to Medicaid patients. Here we find no basis to conclude that the 

ninetieth percentile ceiling, in and of itself, fails to meet the 

statutory requirements. 

In view of the Congressional intent to move away from the 

costs-incurred as the basis for payment and to contain the costs 

of Medicaid, this Colorado ceiling based on the allowable costs 

incurred by providers is a reasonable and adequate payment and 

serves to promote efficiency and economy. Because favorable 

budgetary conditions previously allowed the State to include the 

incentive allowance based on allowable administration costs does 

not mean the State cannot respond to changing financial conditions 

22 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 22 
while complying with state and federal law. The appellants would 

have the State and the courts give priority to a single component 

for service providers. This approach would disregard the needs of 

the significant population which qualifies for and relies on 

Medicaid services because of low income or indigency, ~, the 

elderly, children, pregnant women, psychiatric patients, disabled 

persons, etc. See Colo. Rev. Stat. § 26-4-103(2) (definition of 

categorically needy); § 26-4-105 (list of fifteen services 

provided under Medicaid). 

We do not believe that the federal law requires the appellees 

to disregard responsibilities to the population served by Medicaid 

and the State's fiscal obligations under Colorado law. In the 

implementation of the repeated suspensions of the incentive 

allowance, the State reasonably conformed with the federal 

statutory requirements. The State's factual foundation and 

conclusions therefrom are rationally related. The evidence before 

us fails to reveal arbitrary and capricious actions. To the 

contrary, it demonstrates a responsive effort by the State to use 

appropriate facts and rationale to cope with the various needs of 

Medicaid patients in the face of increasing costs and limited 

state revenues. Accordingly, we sustain the district court's 

determination that the appellees complied with the federal 

statutes and regulations governing Medicaid payments to nursing 

home operators. 

23 

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IV 

State Law Requirements 

A. CAPA record requirements 

The appellants charge that in enacting the amended rules, the 

State acted without a certified administrative record and a 

statement of basis and purpose as required by CAPA, the Colorado 

Administrative Procedures Act, and, that DSS, as an agency, lacked 

the statutory authority to enact the emergency regulations to 

cease the payment of the incentive allowance. Furthermore they 

say that the record before us is incomplete. 

The lack of a certified administrative record or statement of 

basis and purpose as the foundation for noncompliance with CAPA 

was not raised below. We nevertheless have considered the claim 

and find that it lacks merit. Colorado law allows the parties to 

stipulate to less than the record specificed under § 24-4-106(6) 

of the CAPA.lO The parties entered a stipulation for 

consolidation under Rule 65(a)(2), Fed. R. Civ. P., which stated 

that "it is specifically understood that the Court shall consider 

the evidence previously received which would be admissible upon a 

trial on the merits, as well as any pleadings, filings or other 

10 

Colo. Rev. Stat. 24-4-106(6) provides: 

(6) In every case of agency action, the record on 

review, unless otherwise stipulated by the parties, 

shall include the original or certified copies of 

all pleadings, applications, evidence, exhibits, 

and other papers presented to or considered by the 

agency, rulings upon exceptions, and the decision, 

findings, and action of the agency. As to alleged 

errors, omissions, and irregularities in the agency 

record, evidence may be taken independently by the 

court. (emphasis added) 

24 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 24 
documents which otherwise form part of the record and that the 

same shall be considered during the Court's ruling upon this 

matter." See IR. 127-128; 133-134 at~ 5. The argument that the 

stipulations cannot excuse the State from the requirements of CAPA 

is untenable since the language of the statute clearly provides 

that parties can stipulate to less than the record described in 

§ 24-4-106(b). Id., see Harris, 665 P.2d at 401 (court did not 

have discretion to deny a motion to supplement record where the 

parties had not stipulated to a record less than that required 

under§ 24-4-106(6)). 

In any event, what was in the stipulated record shows ample 

justification for the State's action. After the Governor vetoed 

the incentive payment monies in S.B. 401, the DDS submitted its 

emergency rule to the legislative drafting office, in accordance 

with § 24-4-103(8)(d). 11 See II R. 252-264. This submission 

included the required fiscal impact statement and a statement of 

basis and purpose. Id. at 253, 255. These documents, and the 

other materials before the court do not leave us to guess at the 

reasoning process of the agency. The statement of basis and 

purpose reveals and explains the perceived necessity for the rule: 

the foreseeable shortfall in the Medicaid funds. Citizens, 649 

P.2d at 1062. 

The agency provides a foundation in fact for the resulting 

emergency regulation. Id. Here the more relevant facts are 

fiscal calculations, which the State has provided. The State has 

11 

The evidence submitted 

materials provided to the 

subsequent emergency rules. 

to the court does not include 

legislative drafting office for 

25 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 25 
repeatedly articulated that if cutbacks were not implemented in 

the Medicaid budget, then Medicaid patients would suffer cutbacks 

or a total loss of services. 12 If the state did not provide the 

services required by the federal statutes it would suffer the 

sanction of denial of federal funds which would further curtail 

the services to medicaid patients. 13 The State has detailed the 

cuts, even to their specific effect upon individual service 

providers. See II R. at 253-262. 

As emergency, informal rulemaking, the procedures followed by 

DSS were reasonable. The appellants were given notice via 

newspapers, oral contact, and the copies of the proposed rules. 

III R. 84-85. They were not precluded from submitting materials 

at these hearings or during the course of litigation. The amended 

rules which were enacted are supported by the facts in the record, 

the requisite for informal rulemaking. Citizens, 649 P.2d at 1063 

(citations omitted); see also Colorado Auto & Truck Wreckers v. 

Dept. of Revenue, 618 P.2d 646, 652 (Colo. 1980) (department 

proposing a regulation has no affirmative duty to offer evidence 

12 

See Emergency Justification, II R. at 256 ("If such cutbacks 

were not implemented, there is the risk that all Medicaid 

recipients might be denied all services for a period of time. 

This is an unacceptable option to the department as it is not in 

the public interest."); Emergency Justification, Plaintiffs' 

Exhibit 1 at 2 (" ..• without such cost saving measures some 

Medicaid benefits will be discontinued before the end of the 1983 

fiscal year.") 

13 

See Summary of Medicaid Shortfall and Interventions to 

Mitigate the Shortfall, Plaintiffs' Exhibit 11 and Letter from R. 

Valdez to L. White and G. Mitchell, re: anticipated 

overexpenditure of Medicaid budget, Plaintiffs' Exhibit 22 

(failure to provide federally required services would result in 

sanctions). 

26 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 26 
\ '' 

in support of it so long as proposed regulation is part of the 

record) • 

As the district court found, the amended rules are also valid 

as a policy judgment. Colorado Health, 598 F. Supp. at 1049; see 

Plaintiffs' Exh. 8, Governor Lamm's Veto statement: "It is 

inappropriate to pay last year's nursing home incentive when 

medical services are being limited because of financial 

constraints." At best, the appellants raise technical flaws which 

do not affect substantial rights. Colorado Health, 598 F. Supp. 

at 1408. When viewed in the light of the materials considered by 

DSS and the CBSS, and the breadth and judgmental or predictive 

nature of the policy choice inherent in the decision to suspend 

payment of the incentive allowance, the resulting rules were not 

in violation of Colorado law. Citizens, 649 P.2d at 1064-65 and 

n.8 (citing FCC v. National Citizens Committee for Broadcasting, 

436 U.S. 775 (1978) and FPC v. Transcontinental Gas Pipe Line 

Corp., 365 U.S. 1 (1961)). 

B. DSS statutory authority 

Appellants say that the DSS and its board, the CBSS, lacked 

statutory authority to enact emergency rules amending the Medicaid 

payment plan pursuant to the appellees' interpretation of the 

statutory language that the incentive allowance is to be paid 

"subject to available appropriations." 

In analyzing the authority delegated to the agency we 

consider the intent and language of the Colorado Medicaid Act, 

§ 26-4-101 et seq. The Act directs that in cooperation, with the 

federal government, the necessary medical and remedial care and 

services be provided for persons who are 11 cate9orically needy'' as 

27 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 27 
contemplated by the provisions of Titles IV, XVI, and XIX of the 

Social Security Act. §§ 26-4-102, 26-4-103(2). The Colorado DSS 

is the designated agency of the State for administering the 

program. § 26-4-104. See Colo. Rev. Stat. §§ 26-1-102-109 

(promotion of the public health and welfare of the people of 

Colorado to be achieved through rules and regulations promulgated 

by the State department's board, the CBSS}. 

Act the delegation to the DSS is explicit: 

Under the Medicaid 

The state department, by rules and regulations, 

shall establish a program of medical assistance to 

provide necessary medical care for the 

categorically needy. The state department is 

hereby designated as the single state agency to 

administer such program in accordance with Title 

XIX and this article (emphasis added). 

§ 26-4-104. Any actions of the DSS must be within the scope of 

this authority. 

Statutes must be construed so as to effectuate their intent 

and beneficial purposes, not to defeat them. See,~, Ingraham 

v. Cooper, 698 P.2d 1314, 1315 (Colo. 1985}; Colorado Dept. of 

Social Services v. Board of County Commissioners, 697 P.2d 1, 18 

(Colo. 19 8 5} ; _I_n_d_u_s_t_r_i_a_l __ C_o_mm_i_s_s_i_o_n __ v_. __ B_o_a_r_d __ o_f ___ C_o_u_n_t_y 

Commissioners, 690 P.2d 839, 844 (Colo. 1984). By their language, 

subject matter and inclusion in the same code, the organic statute 

for DSS and the Medicaid Act must be read in pari materia. See 

Allen v. Charnes, 674 P.2d 378 (Colo. 1984). Here a comprehensive 

regulatory scheme was envisioned by the General Assembly. 

Colorado Dept. of Social Services, 697 P.2d at 16. It intended 

that the scheme be administered to conform to the concomitant 

federal enactment. The state and federal statutes should be 

28 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 28 
construed together so as to maintain institutional harmony. 

Industrial Commission, 690 P.2d at 844 (citations omitted). 

The authority for promulgating and administering regulations 

is explicitly delegated to DSS and its board, CBSS. Colo. Rev. 

Stat. § 26-4-110(5)(c). (The CBSS shall, _s_u_b~j_e_c_t __ t_o __ a_v_a_i_l_a_b_l_e 

appropriations, adopt rules and regulations to determine and pay 

Medicaid providers whose actual administration costs are less than 

authorized reasonable costs.) Given the charge to protect the 

public safety and welfare and the forseeable shortfall in state 

monies which provide Medicaid services, the DSS and its board were 

not acting beyond the delegated authority when the emergency rules 

were enacted. As noted earlier, DSS was faced with a legal 

obligation to provide services to the categorically needy while 

the appropriated funds for this task were inadequate for the 

demands to be met during each of the fiscal periods involved. The 

emergency rules and regulations were appropriate as they were 

based on considerations directly related to the promotion of 

public safety and welfare and explicitly on the subject matter of 

the Medicaid Act as well as within the authority delegated to the 

DSS in the Medicaid Act. Citizens, 649 P.2d at 1065. The DSS 

actions clearly furthered the express purpose of the Medicaid Act. 

Id. The continued payment of the incentive allowance and other 

Medicaid components which were curtailed would have brought 

consequences in conflict with the intent of the Act, e.g., the 

loss of services to the categorically needy and possible federal 

sanctions for failure to provide federaliy required services. 

We are not persuaded by the appellants' argument that the 

appellees were required to spend all the Medicaid appropriations 

29 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 29 
( 

until they received a forthcoming appropriation or before they 

could make the finding underlying the emergency rule that a 

funding shortfall existed. To hold as the appellants argue would 

bring an absurd result. Ingram, 698 P.2d at 1315; Colorado Dept., 

697 P.2d at 18. We hold that the appellees' emergency rulemaking 

was within the authority of the DSS and that it acted in 

accordance with the CAPA and the Medicaid Act. 

V 

The Claim Under Contract Law 

The appellees are charged with having failed to make payments 

"earned" under the contract between nursing home providers and the 

State. To the extent that appellants enjoy contractual rights, 

they are defined by the state's compliance with federal law 

pertaining to medicaid reimbursement. Massachusetts General 

Hospital v. Weiner, 569 F.2d 1156, 1161 (1st Cir. 1978); see 

Reivitz, 733 F.2d at 1232-33. Where the State is found to be in 

conformity with federal requirements, the appellants lack a basis 

for contractual claims. Illinois Council, 579 F. Supp. at 1148-

1149. 

As a potentially independent basis for entitlement, the 

contract here between the service providers and the State does not 

include the incentive allowance as a specific component of the 

appellants' compensation. The appellants agreed to be bound by 

state and federal regulations, which specifically are addressed in 

the contract as a changeable condition. 14 The appellants agreed 

14 

Appellants' Exh. 24, Contract, states: 

6. Payment Rate 

(Footnote continued on next page) 

30 

Appellate Case: 85-1016 Document: 010110018208 Date Filed: 02/22/1988 Page: 30 
to perform their duties and obligations "in conformance with • 

all pertinent regulations •.• in effect as of the date of the 

contract, or as they may later be amended." Plaintiffs' Exh. 24: 

Contract at 11 1. The appellants were unambiguously on notice that 

they were contracting to a prospective variable payment rate. 

The appellees' compliance with the federal statutes and the 

specific language of the contract demonstrate there was no denial 

of compensation which was earned. The Social Security Act does 

not require payment of the incentive allowance. The contract 

fails to provide an alternative ground for entitlement to it. The 

incentive allowance is an option or add-on permissible under the 

state and federal law, but 

how 

dependent upon the State's 

discretionary choice in it constructs the Medicaid 

reimbursement plan. The district court properly rejected the 

contract claim. 

VI 

Accordingly, for the reasons stated, 15 the judgment of 

dismissal is 

AFFIRMED. 

(Footnote continued): 

15 

(a) Contractor shall be reimbursed by the 

Department in such amounts as may from time to 

time be set by the Colorado Department of 

Social Services pursuant to the Medicaid 

statute, the Colorado Medical Assistance Act, 

and the rules and regulations promulgated 

thereunder. 

The State has sought to preserve its Eleventh Amendment 

objections as to retroactive relief in the event the judgment were 

reversed. We are instead affirming and need not address the 

issue. 

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