Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-93-03182/USCOURTS-ca10-93-03182-0/pdf.json

Parties Involved:
American Health Care Association
Amicus Curiae
Americare Properties, Inc.
Appellee
Innovative Health of Kansas, Inc.
Appellee
Kansas Department of Social and Rehabilitation Services
Appellant
Kansas Health Care Association, Inc.
Appellee
Kross Development Company, Inc.
Appellee
Riverview Manor, Inc.
Appellee
Vintage Group, Inc.
Appellee
Donna Whiteman
Appellant

Document Text:

f 

• 

PUBLISH 

FILED 

United State& Court of Appeals 

Tenth Circuit 

UNITED STATES COURT OF APPEALS AUG 0 4 1994 

TENTH CIRCUIT 

KANSAS HEALTH CARE ASSOCIATION, 

INC.; KROSS DEVELOPMENT COMPANY, 

INC., doing business as Rossville 

Valley Manor; VINTAGE GROUP, INC., 

doing business as Gatewood Care 

Center; INNOVATIVE HEALTH OF 

KANSAS, INC., doing business as 

Lakewood Health Care Center; 

AMERICARE PROPERTIES, INC., doing 

business as Pleasant Valley Manor 

and Moran Manor; RIVERVIEW MANOR, 

INC., doing business as Riverview 

Manor, for themselves and all 

others similarly situated, 

Plaintiffs - Appellees, 

v. 

KANSAS DEPARTMENT OF SOCIAL AND 

REHABILITATION SERVICES; DONNA 

WHITEMAN, Secretary, Kansas 

Department of Social and 

Rehabilitation Services, 

Defendants - Appellants. 

AMERICAN HEALTH CARE ASSOCIATION, 

Amicus Curiae. 

ROBERT L. HOECKER 

Clerk 

No. 93-3182 

Appeal from the United States District Court 

for the District of Kansas 

(D.C. No. 93-4045-RDR) 

Phyllis D. Thompson, Covington & Burling, Washington, D.C. 

(Vicki J. Larson and Alicia M. Strohl, Covington & Burling, 

Washington, D.C., and Bruce A. Roby, Department of Social and 

Rehabilitation Services, Topeka, Kansas, with her on the briefs), 

for Appellants . 

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Kevin M. Fowler (John C. Frieden and Randall J. Forbes with him on 

the briefs), Frieden, Haynes & Forbes, Topeka, Kansas, for 

Appellees. 

Joel M. Hamme and Joseph W. Metro, Reed Smith Shaw & McClay, 

Washington, D. C., on the briefs for Amicus Curiae, American Health 

Care Association. 

Before ANDERSON and TACHA, Circuit Judges, and ROSZKOWSKI,* Senior 

District Judge. 

ANDERSON, Circuit Judge. 

Defendants appeal from orders of the district court imposing 

a mandatory preliminary injunction and awarding plaintiffs interim 

relief on their claim that defendants' Medicaid payment plan for 

nursing home facilities violated federal law. We affirm. 

BACKGROUND 

Plaintiff Kansas Health Care Association, Inc. ( "KHCA") is a 

nursing home trade association representing approximately half of 

the 400 nursing homes in Kansas. The remaining five plaintiffs 

are corporations that own and operate six Medicaid-certified 

nursing homes in Kansas.l Defendant Kansas Department of Social 

and Rehabilitation Services ("SRS") is the state agency charged 

* The Honorable Stanley J. Roszkowski, Senior United States 

District Judge for the Northern District of Illinois, sitting by 

designation. 

l The remaining plaintiffs and appellees are Kross Development 

Company, Inc., d/b/a Rossville Valley Manor; Vintage Group, Inc., 

d/b/a Gatewood Care Center; Innovative Health of Kansas, Inc., 

d /b/ a Lakewood Health Care Center; Americare Properties, Inc., 

d/b/a Pleasant Valley Manor and Moran Manor; and Riverview Manor, 

Inc., d/b/a Riverview Manor. 

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with administering the reimbursement of nursing homes that 

participate in the Medicaid program. The other defendant, Donna 

Whiteman, is the Secretary of SRS, whom plaintiffs sue in her 

official capacity. 

Kansas participates in the Medicaid program, a joint federal/ 

state arrangement authorized by Title XIX of the Social Security 

Act, 42 U.S.C. § 1396-1396v ("Medicaid Act"), under which the 

federal government gives grants to states to assist them in 

providing medical, nursing home, and other care for certain lowincome individuals. See Wilder v. Virginia Hosp. Ass'n, 496 U.S. 

498, 502 (1990). The decision to participate in the Medicaid 

program is voluntary, but participating states are thereby 

obligated to comply with the Act and regulations promulgated by 

the Secretary of the United States Department of Health and Human 

Services ("Secretary"). Id.; AMISUB (PSL), Inc. v. Colorado Dep't 

of Social Servs., 879 F.2d 789, 794 (lOth Cir. 1989), cert. 

denied, 496 U.S. 935 (1990). 

To qualify for federal Medicaid funds, a state must submit a 

"plan for medical assistance" to the Health Care Financing 

Administration ("HCFA"), the Secretary's delegate with 

responsibility for administering the Medicaid program. 42 U.S.C. 

§ 1396.2 The plan must contain a detailed and comprehensive 

description of the state's Medicaid program, including 

reimbursement procedures for those persons or entities who provide 

2 HCFA is the agency within HHS which Congress has designated 

to administer the Medicaid program. See AMISUB, 879 F.2d at 794 

n. 9. 

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services to Medicaid patients. 42 U.S.C. § 1396a(a); 42 C.F.R. 

§ 430.10 (1993). 

The Boren Amendment to the Medicaid Act governs payment rates 

to nursing home facilities and requires a state plan to: 

provide . . . for payment . . . of the . . . services . . . through the use of rates (determined in accordance 

with methods and standards developed by the State ... ) ... which the State finds, and makes assurances 

satisfactory to the Secretary, are reasonable and 

adequate to meet the costs which must be incurred by 

efficiently and economically operated facilities in 

order to provide care and services in conformity with 

applicable State and Federal laws, regulations, and 

quality and safety standards . . 

42 U.S.C. § 1396a(a) (13) (A); see also 42 C.F.R. § 447.250(a) .3 

The Act and implementing regulations similarly obligate state 

plans to provide for the payment of such costs "consistent with 

3 The Boren Amendment, enacted in 1980 as part of the Omnibus 

Budget Reconciliation Act of 1980, Pub. L. No. 96-499, § 962(a), 

94 Stat. 2599, 2650 (1980), changed the method of Medicaid 

reimbursement. When originally enacted, the Medicaid Act provided 

for retrospective reimbursement for the "reasonable cost" of 

services actually provided to Medicaid patients. See Wilder, 496 

U.S. at 507 n.7. The Boren Amendment was designed to give the 

states more responsibility for and flexibility in determining 

reimbursement rates, in order to reduce rising Medicaid costs. 

Id. at 506; see also Oregon Ass'n of Homes for the Aging v. 

Oregon, 5 F.3d 1239, 1243 (9th Cir. 1993); Colorado Health Care 

Ass'n v. Colorado Dep't of Social Servs., 842 F.2d 1158, 1165-66 

(lOth Cir. 1988). In response to the Boren Amendment, most states 

now have prospective reimbursement plans, such as the Kansas plan 

at issue in this case, in which "providers are paid in advance and 

payments are calculated according to the State's formula for what 

such care should cost." Wilder, 496 U.S. at 507 n.7. Providers 

who exceed those prospectively determined costs must absorb their 

losses. 

The Boren Amendment as now written reflects amendments 

enacted in 1987 and 1990 to implement appropriate reimbursement 

procedures designed to compensate for compliance with extensive 

nursing home reforms enacted in 1987, as part of the Omnibus 

Reconciliation Act of 1987, Pub. L. No. 100-203, § 4211, 101 Stat. 

1330-160. 

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Ill 

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efficiency, economy, and quality of care." 42 U.S.C. 

§ 1396a(a) (30); 42 C.F.R. § 447.250(b). 

The Boren Amendment contains both a procedural and a 

substantive component. Each creates rights enforceable by 42 

u.s.c. § 1983. See Wilder, 496 U.S. at 524; Kansas Health Care 

Ass'n v. Kansas Dep't of Social and Rehabilitation Servs., 958 

F.2d 1018, 1020 (lOth Cir. 1992) ("KHCA I"). The procedural 

component involves two separate parts: 

First, the State Medicaid Agency must engage in a 

"finding" process that all federal requirements have 

been met to substantiate its assurances, including the 

assurances that its payment rates satisfy the 

"efficiency and economy" requirement. Second, the State 

Medicaid Agency must supply HCFA with "assurances" that 

all federal requirements have been met, including the 

"efficiency and economy" requirement. 

AMISUB, 879 F.2d at 796 (citing 42 U.S.C. § 1396a(a) (13) (A); 42 

C.F.R. §§ 447.205, 447.250(a), 447.253(a) and (b)). The state's 

"findings" precede the "assurances" to HCFA. The findings are not 

themselves, however, reviewed by HCFA; only the assurances are. 

We have further held that the findings requirement 

encompasses a three-part determination: the state agency must "at 

g minimum, ... make 'findings' which identify and determine (1) 

efficiently and economically operated hospitals; (2) the costs 

that must be incurred by such hospitals; and (3) payment rates 

which are reasonable and adequate to meet the reasonable costs of 

the state's efficiently and economically operated hospitals." 

AMISUB, 879 F.2d at 796 (emphasis original) .4 While a state is 

4 While AMISUB dealt with hospital reimbursement, its holding 

applies equally to nursing home providers. See KHCA I, 958 F.2d 

at 1023. 

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"free to create its own method for arriving at the required 

findings," the requirement to make findings is real: "[m]ere 

recitation of the wording of the federal statute is not sufficient 

for procedural compliance. There is a presumption that a state 

will engage in a bona fide finding process before it makes 

assurances to HCFA that the required findings have been made." 

Id. at 797. Several courts have interpreted AMISUB's 

identification and determination requirement to not mandate 

explicit "findings," but to permit its "accomplishment through the 

terms of the state plan itself." New Jersey Ass'n of Health Care 

Facilities v. Gibbs, 838 F. Supp. 881, 898 (D.N.J. 1993); Folden 

v. Washington Dep't of Social and Health Servs., 744 F. Supp. 

1507, 1533 (W.D. Wash. 1990), aff'd, 981 F.2d 1054 (9th Cir. 

1992) . 

Substantively, to satisfy the Boren Amendment's "reasonable 

and adequate" standard, Medicaid payments must fall within a "zone 

or range of reasonableness." Colorado Health Care Ass'n, 842 F.2d 

at 1167; see also Folden v. Washington Dep't of Social and Health 

Servs., 981 F.2d 1054, 1058 (9th Cir. 1992); West Virginia Univ. 

Hasps .. Inc. v. Casey, 885 F.2d 11, 26 (3d Cir. 1989), cert. 

denied, 496 U.S. 936 (1990) .5 The Boren Amendment does not 

specifically state whether all or only a certain percentage of 

5 The HCFA, in response to comments concerning its rules and 

regulations, has also indicated that the term "reasonable and 

adequate" should not be considered "a precise number, but rather a 

rate which falls within a range of what could be considered 

reasonable and adequate." 48 Fed. Reg. 56,049. 

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Medicaid patient expenditures must be reimbursed.6 Indeed, an 

issue in this case is whether all "allowable" reasonable costs 

must be reimbursed, or whether some lesser percentage satisfies 

the Medicaid Act.? Individual components of the reimbursement 

rate do not necessarily determine compliance with the Boren 

Amendment. "It is the resulting overall payment which is 

evaluated for statutory compliance." Colorado Health Care Ass'n, 

842 F.2d at 1167; Folden, 744 F. Supp. at 1535. 

The state must amend its plan to reflect changes in federal 

or state law or policy, and to reflect any changes in the 

operation of its Medicaid program. Amendments must be submitted 

to the HCFA for approval. 42 C.F.R. § 430.12(c). Thus, any 

amendments which change the payment rate for services, such as 

nursing home services, must receive HCFA approval. Id. 

§ 447.253(a). Whenever a state changes its payment rates, but in 

any event not less than annually, the state agency administering 

6 As the Seventh Circuit has acknowledged, the Boren 

Amendment's failure to define certain key terms has rendered 

interpretation of its requirements problematic: 

Construing the Medicaid Act is made difficult by its 

failure to define "reasonable and adequate," 

"efficiently and economically operated facilities," or 

"costs which must be incurred." ... It comes as no 

great surprise that this definitional abyss has spawned 

considerable litigation . 

Lett v. Magnant, 965 F.2d 251, 253 (7th Cir. 1992). 

7 In AMISUB, we held that Colorado's Medicaid reimbursement 

plan violated the substantive requirements of the Boren Amendment 

where "no Colorado hospital, no matter how efficiently and 

economically operated, [was] reasonably and adequately 

reimbursed." AMISUB, 879 F.2d at 799. Cf. Gibbs, 838 F. Supp. at 

901 n.11 ("The Court does not hold, nor does it mean to suggest, 

that a state system designed in advance to reimburse only 86% of 

the industry's aggregate costs satisfies the Boren Amendment."). 

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its Medicaid program must make findings that the payment rates are 

"reasonable and adequate to meet the costs that must be incurred 

by efficiently and economically operated providers . " Id. 

§ 447.253 (b) (1). 

States, rather than the federal government, administer their 

own Medicaid programs, and each state has "'wide discretion in 

administering its local program'" provided it complies with 

federal Medicaid law. Erie County Geriatric Ctr. v. Sullivan, 952 

F.2d 71, 74 (3d Cir. 1991) (quoting Lewis v. Hegstrom, 767 F.2d 

1371, 1373 (9th Cir. 1985)). While states have considerable 

discretion, their determination of reasonable reimbursement rates 

must be principled: "[t]he state must articulate 'a rational 

connection between the facts found and the choice made.'" 

Colorado Health Care Ass'n, 842 F.2d at 1167 (quoting Baltimore 

Gas and Elec. Co. v. Natural Resources Defense Council, 462 U.S. 

87, 105 (1983)); see also Pinnacle Nursing Home v. Axelrod, 928 

F. 2d 1306, 1314 (2d Cir. 1991) (A state must "establish a nexus 

between the costs of operating efficient and economic nursing 

facilities and the proposed reimbursement rates under the state 

plan. ") . 

Kansas has by statute elected to participate in the Medicaid 

program. See Kan. Stat. Ann. § 39-708c. Kansas employs a 

prospective-payment, facility-specific, Medicaid reimbursement 

system. On July 1 of each year, SRS establishes a new 

reimbursement rate plan. The plan at issue in this case is plan 

TN 92-22, which was developed in June, 1992, took effect July 1, 

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1992, and expired June 30, 1993. Reimbursement rates are 

recalculated every year. 

Under TN 92-22, state auditors engaged in a "desk review" of 

each facility's costs as reported for the 1991 calendar year. In 

the desk review process, auditors make adjustments for 

arithmetical errors, for reclassification of costs between 

categories, or for any clearly unallowable costs. The reported 

costs of facilities with an occupancy rate of less than 85% or 

with administrative salaries exceeding a certain level were 

adjusted. These adjusted costs were considered "allowable" costs. 

Allowable costs were divided into four costs centers --

administrative, room and board, health care, and plant operating 

-- and divided by total patient days. This resulted in an average 

cost per patient day for each cost center in each facility. 

Because the reimbursement rate for the rate year July 1, 

1992, through June 30, 1993, was based on 1991 calendar year 

allowable costs, those costs had to be adjusted for inflation. 

The inflation adjustment occurred in two ways. Twenty-five to 

thirty percent of a nursing home's allowed costs were adjusted 

using the Consumer Price Index ("CPI"), to account for "historical 

inflation" -- inflation which had occurred since the reported 

costs were incurred. This historical inflation rate applied to 

certain allowable costs for the period between July 1, 1991, and 

May 31, 1992, the last date for which the CPI was available prior 

to ratesetting. In TN 92-22, the rate was 2.7%.8 

8 In response to questions from the district court, both 

parties presented evidence as to what nursing home facility costs 

(continued on next page) 

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Other costs (employee salaries, payroll taxes and other 

nursing home costs) representing approximately 60-70% of a 

facility's costs were adjusted, using the Data Resources, Inc. 

("DRI") Market Basket index, an inflation index specific to the 

costs of nursing homes, to account for future or estimated 

inflation -- anticipated inflation occurring during the coming 

rate year.9 The DRI is typically higher than the CPI. 

While in prior years, the DRI estimated inflation rate was 

applied to the period from the last date for which the CPI was 

available to the midpoint of the rate-paying year, in TN 92-22 the 

estimated inflation rate was effectively applied to a shorter 

period of time -- i.e. the one month between the last date for 

which the CPI was available and the first day of the rate-paying 

period (July 1, 1992). In TN 92-22, this future inflation rate 

(continued from previous page) 

were adjusted for inflation. Defendants presented evidence that 

approximately 27% of the unaudited allowable costs of a facility 

were subject to historical inflation. Defs.' Mem., Appellants' 

App. at 119. Plaintiffs submitted evidence that approximately 25% 

of a facility's costs were subject to historical inflation. Pls.' 

Resp. to Questions, Appellants' App. at 242. Testimony at the 

preliminary injunction hearing indicated that approximately 30% of 

a facility's costs were subject to historical inflation. Tr. of 

Hr'g, Appellants' App. at 350-51. 

9 Defendants submitted evidence that approximately 59% of the 

allowable costs of a facility are salaries, most of which are 

subject to estimated inflation. Defs.' Mem., Appellants' App. at 

119. Plaintiffs presented evidence that approximately 60% of 

facility costs are subject to estimated inflation. Pls.' Resp. to 

Questions, Appellants' App. at 242. Testimony at the preliminary 

injunction hearing indicated approximately 70% of a facility's 

costs were subject to estimated inflation. Tr. of Hr'g, 

Appellants' App. at 350-51. 

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was 0.4%.10 As the district court found with respect to the 

overall inflation adjustment under TN 92-22, "[t]he bottom line, 

as described by plaintiff's expert, is that the actual allowable 

costs of individual nursing homes in the current rate-paying year 

were forecasted to be the actual allowable costs of the homes in 

1991 plus 1% for inflation." Kansas Health Care Ass'n v. Kansas 

Dep't of Social and Rehabilitative Servs., 822 F. Supp. 687, 694 

(D. Kan. 1993). Plaintiffs introduced evidence that in fact 

nursing homes experienced a 3.35% rate of inflation during the 

nine-month period ending March 31, 1993. Pls.' Resp. to 

Questions, Appellants' App. at 251. Defendants introduced no 

evidence of specific studies or findings made with respect to the 

decision to change the way in which estimated inflation was 

calculated. Tr. of Hr'g, Appellants' App. at 365. 

SRS then took these allowable costs per patient per cost 

center, as adjusted for both historical and estimated inflation, 

and arrayed them from lowest to highest in order to determine a 

ceiling for reimbursement for each cost center. For health care 

and room and board, the ceiling was the 90th percentile; for plant 

operating, the ceiling was the 85th percentile; and for 

administrative costs, the ceiling was the 75th percentile. This 

meant that, for example, reimbursement for room and board was 

limited to the costs of a home at the 90th percentile of the 

array. These percentile limits, as defendants admit, "reflect 

economically and efficiently run facilities." If a facility's 

10 The 0.4% figure was derived by taking the annual inflation 

rate as projected for 1992, 5.2%, dividing it by twelve and 

rounding it down to the nearest tenth of a percentage point. 

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costs, as adjusted for inflation, are below the percentile limits, 

its reimbursement rate is based upon its actual costs as adjusted 

for inflation, not the percentile limit. Thus, as the district 

court noted: 

a nursing home's actual costs could be below the cost 

limits in each cost center, but the home might not be 

fully reimbursed for the costs it actually incurred 

during the rate year, if the home's actual Medicaid 

costs exceeded the costs incurred by the home in the 

last cost report as adjusted for inflation. Underreimbursement is the actual result if any shortfall in 

reimbursement is not compensated for by incremental 

funding for an efficiency incentive and for real 

property costs. 

Kansas Health Care Ass'n, 822 F. Supp. at 692. 

Additionally, TN 92-22 provided for an incentive factor to 

increase the per diem rates by up to fifty cents for those 

facilities whose plant operating and administrative costs compared 

favorably to other facilities.11 Finally, certain ownership costs 

such as depreciation, mortgage interest, and lease expenses were 

reimbursed by means of a fixed, facility-specific Real and 

Personal Property Fee ("RPPF"). This RPPF is based upon 1983 or 

1984 cost reports, and is not adjusted for inflation. The 

district court found that, as a rough estimate, approximately half 

11 As the district court stated: 

The incentive factor is a per diem add-on ranging from 

zero to fifty cents. It is based upon administrative 

costs and plant operating costs minus real and personal 

property taxes. Providers with the lowest 30% of such 

costs receive a $.50 incentive factor. Providers with 

the highest 25% of such costs receive no incentive 

factor. Incentive factors of $.40 and $.30 are given to 

providers between the 30% and 75% range of costs. 

Kansas Health Care Ass'n, 822 F. Supp. at 692. 

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of all nursing homes in the Medicaid program were fully reimbursed 

by the RPPF for their actual ownership costs. Id. 

Defendants submitted TN 92-22 and SRS Secretary Whiteman's 

accompanying assurances to HCFA on August 12, 1992. These 

assurances have apparently never been formally approved or 

disapproved by HCFA. As a result, TN 92-22 went into effect.12 

Plaintiffs filed suit on March 2, 1993, eight months after TN 

92-22 went into effect, seeking declaratory and injunctive relief 

on the ground that the plan violated the Boren Amendment. After a 

four and one-half day hearing, the district court granted 

plaintiffs' requested relief, finding that plaintiffs had 

established irreparable harm and were likely to succeed on their 

Boren Amendment claim. Id. at 698-99. The court enjoined further 

payments under TN 92-22 and ordered SRS to develop new rates. Id. 

at 699. When the parties were unable to agree on new rates, the 

court issued an order setting an interim rate13 and ordering the 

SRS to pay into an interest-bearing account the difference between 

the interim rate and the TN 92-22 rates. This relief applied to 

all Medicaid-participating nursing homes in Kansas. 

12 HCFA has 90 days from submission of the state's "assurances" 

to determine whether it approves a state's plan. 42 C.F.R. 

§ 447.256(b). If it fails to act within the 90 days, the plan is 

deemed approved. Id. 

13 The interim rate was the "current reimbursement formula" with 

certain changes: "[t]he actual rate of inflation, according to 

the DRI index for the nursing home industry, for the period from 

July 1, 1991 to December 31, 1992, shall serve as the historical 

and future (or "estimated") inflation factors applied to allowable 

reported costs. In addition, the future inflation period shall be 

extended to the midpoint of the rate-paying year." Order, 

Appellant's App. at 332. The allowable costs to which the 

inflation adjustments were made were not changed. 

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DISCUSSION 

Defendants appeal from the grant of a preliminary injunction. 

The district court may grant a preliminary injunction if the party 

seeking it shows: (1) a substantial likelihood of prevailing on 

the merits; (2) irreparable harm in the absence of the injunction; 

(3) proof that the threatened harm outweighs any damage the 

injunction may cause to the party opposing it; and (4) that the 

injunction, if issued, will not be adverse to the public interest. 

Autoskill Inc. v. Nat'l Educ. Support Sys .. Inc., 994 F..2d 1476, 

1487 (lOth Cir.), cert. denied, 114 S. Ct. 307 (1993): Resolution 

Trust Corp. v. Cruce, 972 F.2d 1195, 1198 (lOth Cir. 1992). We 

review the grant of a preliminary injunction for abuse of 

discretion, reversing that grant only if the district court 

"'abuses its discretion, commits an error of law, or is clearly 

erroneous in its preliminary factual findings.'" Autoskill, 994 

F.2d at 1487 (quoting Hartford House. Ltd. v. Hallmark Cards. 

Inc., 846 F.2d 1268, 1270 (lOth Cir.), cert. denied, 488 U.S. 908 

(1988)); SCFC ILC, Inc. v. VISA USA. Inc., 936 F.2d 1096, 1098 

(lOth Cir. 1991). Because a preliminary injunction is an 

"extraordinary remedy . . . the right to relief must be clear and 

unequivocal." SCFC ILC. Inc., 936 F.2d at 1098 (citations 

omitted) . Mandatory preliminary injunctions impose "an even 

heavier burden [on the movant] of showing that the four factors 

listed above weigh heavily and compellingly in movant's favor." 

Id. 

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Defendants argue that the district court erred as a matter of 

law in: (1) finding that plaintiffs established irreparable harm; 

(2) finding that plaintiffs had demonstrated a likelihood of 

success on the merits of their Boren Amendment claim; and (3) in 

granting preliminary relief to all Medicaid-participating Kansas 

nursing homes without first certifying a class as required by Fed. 

R. Civ. P. 23(b) .14 

I. ESTABLISHMENT OF IRREPARABLE HARM 

Defendants argue the district court erred in finding that 

plaintiffs had established irreparable harm when it relied on the 

Eleventh Amendment's immunity as the 11 Sole basis 11 for its finding, 

and when it failed to consider plaintiffs' delay in seeking relief 

as indicative of a lack of harm. The district court found 

irreparable harm, stating that plaintiffs had established a great 

likelihood that the reimbursement rates were inadequate under the 

Boren Amendment, that the Eleventh Amendment eliminated a legal 

remedy in damages, and that no adequate administrative remedy 

existed for plaintiffs. Kansas Health Care Ass'n, 822 F. Supp. at 

698. 

A. Eleventh Amendment. 

The Eleventh Amendment bars retrospective monetary relief 

against a state. Green v. Mansour, 474 U.S. 64, 68 (1985); 

Edelman v. Jordan, 415 U.S. 651, 677-78 (1974). We do not read 

14 Defendants do not challenge the district court's conclusions 

regarding the balance of harm and the public interest. 

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the district court's opinion as finding irreparable harm 

established on the sole basis of the Eleventh Amendment's bar to 

retrospective monetary relief. Rather, the district court 

correctly analyzed the issue in terms of whether the plaintiffs 

had established harm -- a legally cognizable injury to them 

resulting from noncompliance with the Boren Amendment -- and 

whether plaintiffs had any adequate remedy. Because the Eleventh 

Amendment bars a legal remedy in damages, and the court concluded 

no adequate state administrative remedy existed, the court held 

that plaintiffs' injury was irreparable. We agree. See Temple 

Univ. v. White, 941 F.2d 201, 215 (3d Cir. 1991) ("As to the 

inadequacy of legal remedies, the Eleventh Amendment bar to an 

award of retroactive damages against the [state] clearly 

establishes that any legal remedy is unavailable and the only 

relief available is equitable in nature.") (citation omitted), 

cert. denied, 112 S. Ct. 873 (1992); see also Kansas Hosp. Ass'n 

v. Whiteman, 835 F. Supp. 1556, 1563-64 (D. Kan. 1993) (Eleventh 

Amendment bar evidences irreparability). Thus, in our view, the 

Eleventh Amendment bar simply indicates irreparability, but does 

not, in itself, establish harm. Contrary to defendants' view, the 

district court opinion said no more. 

B. Delay. 

Defendants argue that plaintiffs' delay in seeking injunctive 

relief undermines their claim of irreparable injury. While delay 

can undermine a claim of irreparable harm, we hold that it does 

not in this case. "As a general proposition, delay in seeking 

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preliminary relief cuts against finding irreparable injury." 

Gibbs, 838 F. Supp. at 928; see also Lydo Enters .. Inc. v. City of 

Las Vegas, 745 F.2d 1211, 1213 {9th Cir. 1984). However, the 

district court found that "[t]he evidence proves that plaintiffs 

attempted through December 1992 to reach a negotiated settlement 

of this matter." Kansas Health Care Ass'n, 822 F. Supp. at 699. 

Within three months of having failed to reach such a settlement 

plaintiffs commenced this action. Under those circumstances, we 

are reluctant to hold that plaintiffs' delay should be fatal to 

their claim of irreparable injury. 

Plaintiffs also claim that they needed to wait for empirical 

cost data to determine how they were faring under TN 92-22. 

Defendants argue that the very fact that they needed such data to 

verify their ongoing injury, rather than immediately appreciating 

its imminence and extent, undermines plaintiffs' claim of such 

injury. We are reluctant to criticize plaintiffs for awaiting 

specific and concrete documentation of the adequacy of their 

Medicaid reimbursement rates. Without such documentation, they 

run the risk of having their claimed injury be deemed speculative. 

Further, as we discuss below, we do not believe that the only 

injury acute enough to justify injunctive relief is imminent 

bankruptcy or the imminent complete demise of plaintiffs' 

business. 

Additionally, as the district court observed, the delay does 

not alter any conclusion, based upon the evidence presented, that 

the reimbursement rates do or do not inflict harm upon plaintiffs, 

even though such delay suggests that the reimbursement rates are 

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not "a grave threat to the very existence of plaintiffs." Id. 

However, plaintiffs do not, nor need they, assert that they are on 

the verge of going out of business in order to establish that they 

are suffering imminent and irreparable harm because of a violation 

of the Boren Amendment.15 

Finally, we agree with the district court that defendants 

have not claimed that they are somehow disadvantaged because of 

the delay. We therefore find no error or abuse of discretion in 

the district court's conclusion that plaintiffs established that 

they have or will suffer an irreparable harm, which is not 

undermined by their delay in commencing this action. 

II. LIKELIHOOD OF SUCCESS ON BOREN AMENDMENT CLAIM 

Defendants argue the district court erred in finding that 

plaintiffs had demonstrated a likelihood of success on the merits 

of their Boren Amendment claim, because the court erroneously 

concluded that the SRS' "findings" were procedurally inadequate 

and it ·erroneously awarded substantive relief based upon that 

15 Indeed, an expert testified that Kansas has an extremely high 

percentage of private-pay patients, as compared to Medicaid 

patients. As a result, Kansas has a very high rate of crosssubsidization of private-pay patients for Medicaid patients. Tr. 

of Hr'g, Supplemental App. at 172, 176-77, 183. For that reason, 

the expert opined, the number of bankruptcies or nursing home 

failures is not necessarily an accurate indication of the adequacy 

or inadequacy of Medicaid reimbursement rates. 

We do not believe the fact that many facilities can subsidize 

Medicaid underreimbursement should undermine plaintiffs' claim of 

injury from such underreimbursement. Under that analysis, a 

wealthy individual would never be able to prove monetary injury, 

on the theory that such an individual could always in fact 

subsidize any such injury through his or her other sources of 

wealth. 

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perceived procedural violation alone. In particular, defendants 

claim that the court erred when it required the SRS to find that 

its rates would in fact fully reimburse all facilities for their 

allowable costs. 

In reviewing the validity of a state Medicaid reimbursement 

plan, we "must determine whether the plan is procedurally and 

substantively in compliance with the requirements of the Federal 

Medicaid Act and its implementing regulations." AMISUB, 879 F.2d 

at 795. That is a question of law, reviewable de novo. Id. We 

do not, therefore, limit our review to the more deferential 

arbitrary and capricious standard usually applicable to agency 

actions.16 

The district court granted plaintiffs' motion for a 

preliminary injunction, holding that plaintiffs had made "a very 

strong showing that defendants did not engage in a bona fide 

findings process prior to implementing the current reimbursement 

rate and prior to making assurances to HCFA that the rate complied 

with the Boren Amendment." Kansas Health Care Ass'n, 822 F. Supp. 

at 697. The court further held that plaintiffs had established "a 

great probability that the reimbursement rate violates the 

substantive requirements of the Boren Amendment." Id. at 698. We 

agree. 

16 As we acknowledged in AMISUB, a "state agency's determination 

of procedural and substantive compliance with federal law is not 

entitled to the deference afforded a federal agency." 879 F.2d at 

796. 

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A. Procedural Compliance. 

As we have previously stated, the Boren Amendment's 

procedural requirements entail the making of findings "which 

identify and determine (1) efficiently and economically operated 

hospitals; (2) the costs that must be incurred by such hospitals; 

and, (3) payment rates which are reasonable and adequate to meet 

the reasonable costs of the state's efficiently and economically 

operated hospitals." AMISUB, 879 F.2d at 796. William McDaniel, 

the SRS employee whom defendants stipulated was most familiar with 

the findings file for TN 92-22, testified that SRS considered 

those facilities which stayed within the cost center ceilings as 

efficiently and economically operated. Tr. of Hr'g, Supplemental 

App. at 55-56. Thus, defendants implicitly identified and 

determined efficiently and economically operated facilities. 

Mr. McDaniel testified that he did not make any effort to 

specifically determine the costs that must be incurred by an 

economically and efficiently operated facility to meet the needs 

of Medicaid patients in the upcoming rate-paying year, nor did he 

make any findings relating thereto. Id. at 58-59. Rather, SRS 

employed the system it had utilized in prior years of calculating 

reimbursement rates for each facility based upon that facility's 

historical costs, as adjusted for inflation. In doing so, the 

evidence indicated that defendants simply failed to make the 

requisite findings to establish a rational nexus between the facts 

and data and the reimbursement rate they selected. 

As all parties agree, the most fundamental change in TN 92-22 

from previous reimbursement rate methodologies was the change in 

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the way estimated inflation was calculated. While this was only 

one element in the reimbursement rate calculus, it had a 

significant impact on the overall rate because it applied to some 

60-70% of a facility's costs. Defendants do not dispute the 

district court's conclusion that the "bottom line" was that "the 

actual allowable costs of individual nursing homes in [TN 92-22] 

rate-paying year were forecasted to be the actual allowable costs 

of the homes in 1991 plus 1% for inflation." Kansas Health Care 

Ass'n, 822 F. Supp. at 694. 

The evidence shows, however, that Mr. McDaniel, the person 

most familiar with the findings file for TN 92-22, had no idea why 

the inflation adjustment was changed. Defendants produced no 

evidence of any findings on the impact of such a change, or on the 

reasons for making that adjustment. Because Kansas' reimbursement 

system is prospective and facility-specific, based upon the 

historical costs of each facility, the inflation adjustment is a 

significant component of the system. Given defendants' admission 

that they made no effort to specifically determine what the 

necessarily incurred costs of an economically and efficiently 

operated facility would be in the upcoming rate-paying year, and 

that they made no findings on that point, it was incumbent upon 

them to make adequate findings justifying their assurances that 

the historical-based rates were adequate and reasonable. They 

simply failed to do that. We therefore affirm the district 

court's conclusion that plaintiffs established a great likelihood 

of showing a procedural violation of the Boren Amendment. 

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B. Substantive Compliance. 

We further agree with the district court that plaintiffs 

established a great likelihood that TN 92-22 violated the 

substantive requirements of the Boren Amendment.17 As the Supreme 

Court has stated, the Boren Amendment was designed "to 

decentralize the method for determining rates, but not to 

eliminate a State's fundamental obligation to pay reasonable 

rates." Wilder, 496 U.S. at 515. Thus, although reasonable rates 

encompass a zone of reasonableness, not a pinpoint, that zone must 

nonetheless itself be reasonable and adequate. 

Defendants argue that the district court erroneously held 

that a Medicaid reimbursement plan must reimburse all of the 

allowable costs of efficiently and economically operated 

providers. They cite our language in Colorado Health Care Ass'n, 

where we observed that, under the Boren Amendment, "states are not 

17 We disagree with the defendants that the district court 

opinion failed to adequately discuss and explain its holding that 

there was a substantive violation of the Boren Amendment. It 

discussed at some length the adequacy of the reimbursement rates. 

Further, as defendants acknowledge, a plaintiff may obtain 

injunctive relief for a procedural violation provided that 

violation results in or causes the substantive harm the statute 

was designed to prevent. See Hancock v. MontgomekY Ward Long Term 

Disability Trust, 787 F.2d 1302, 1308 (9th Cir. 1986) ("Substantive remedies are available for procedural defects . . . only when 

the defects 'caused a substantive violation or themselves worked a 

substantive harm.'") (quoting Ellenburg v. Brockway. Inc., 763 

F.2d 1091, 1096 (9th Cir. 1985)). Cf. Amoco Prod. Co. v. Village 

of Gambell, 480 U.S. 531, 545 (1987) (substantive harm is not 

presumed from procedural violation alone; harm must be proven). 

We are not presuming harm merely from a procedural violation of 

the Boren Amendment, as Village of Gambell forbids. Moreover, in 

our view, the procedural "findings" requirement of the Boren 

Amendment is designed to insure that a state devises substantively 

reasonable and adequate rates, and substantial procedural 

violations will often in fact lead to the substantive harm the 

statute is designed to avoid. 

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required to reimburse providers for costs they actually or even 

reasonably incur." 842 F.2d at 1169. That observation, however, 

was made in the context of discussing the significant and 

substantive shift from the pre-Boren Amendment standard of 

reimbursement for reasonable costs actually incurred to the postBoren Amendment standard of prospectively determined payment for 

the necessary costs of efficient and economical providers. We 

later observed in AMISUB that "pursuant to [the Boren Amendment] , 

[efficiently and economically operated] hospitals must be 

compensated for their reasonable costs for the plan to comply with 

federal Medicaid law." AMISUB, 879 F.2d at 799. Thus, under 

AMISUB, once a state has identified and determined economically 

and efficiently operated facilities and the costs which those 

facilities must incur, its prospectively determined reimbursement 

rates must be "reasonable and adequate to meet" those costs. Id. 

at 796. The plain language of the Boren Amendment permits that 

interpretation. 

This does not mean that all costs in fact incurred in the 

upcoming rate-paying year must be reimbursed; only the reasonable 

allowable costs previously identified as necessarily incurred by 

an efficiently and economically operated facility.18 States may 

accomplish desirable Medicaid cost containment and efficiency 

18 We do not suggest that an inflation adjustment must insure 

that "rates will increase in lock step with industry costs." 

Gibbs, 838 F. Supp. at 916. However, a state may not arbitrarily 

and without study or explanation reduce its inflation adjustment 

in a manner that virtually guarantees underreimbursement even for 

economically and efficiently operated facilities. See id. at 901 

n.11 ("The Court does not hold, nor does it mean to suggest, that 

a system designed in advance to reimburse only 86% of the 

industry's aggregate costs satisfies the Boren Amendment."). 

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through the identification and determination of economically and 

efficiently operated facilities and through the determination of 

what costs are necessary to provide appropriate and quality 

Medicaid services. 

In this case, as the district court found, the evidence 

showed consistent and widespread underreimbursement for Medicaid 

services. Defendants do not dispute the following findings made 

by the district court: 

A study of the 1992 cost reports of 91 nursing homes in 

Kansas (approximately 25% of all nursing facilities 

participating in the Medicaid program in Kansas) , demonstrated that 91% or 83 out of the 91 homes were not 

reimbursed for the "allowable" costs they incurred in 

the first six months of the current rate-paying period. 

[A]nother study of the 91 homes, which accounts for the 

RPPF and property costs, but does not make the 1.8% 

estimated review and audit reduction, determined that 82 

out of 91 homes were not reimbursed their actual costs 

for the calendar year 1992. 

Defendants also demonstrated that one of the plaintiff 

nursing homes is being overreimbursed for Medicaid costs 

in the first six months of the rate-paying year. The 

other five fall with a range of reimbursement of 89.77% 

to 97.49%. 

Defendants also presented data from unreviewed and 

unaudited cost reports of 277 homes for the 1992 

calendar year which show a reimbursement rate of 94% for 

homes in the lower cost quartile and 84% for homes in 

the higher cost quartile, for the first six months of 

the rate-paying year. 

In 1991, there were 263 facilities with all cost centers 

below limits. . .. [T]he reimbursement rate ... does 

not meet the costs which must be incurred by 

approximately 90% of the providers, including we presume 

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most of the providers which, via the cost center limits, 

have been identified as "efficient and economical" 

facilities. 

Kansas Health Care Ass'n, 822 F. Supp. at 695-96. Additionally, 

an expert testified that, of the 25 nursing home facilities with 

which he works closely, all but one are not being fully reimbursed 

for costs which are under the cost center limits. Tr. of Hr'g, 

Supplemental App. at 68. 

Defendants argue that the district court's analysis 

impermissibly assumed that the Boren Amendment's "costs which must 

be incurred" is equivalent to allowable reasonable costs, and that 

"[e]ven if a nursing home's allowable costs fall under all of the 

cost center limits used in the State Plan, it is not reasonable to 

assume that the facility incurs no costs that are unnecessary." 

Appellants' Reply Brief at 12 n.6. What defendants ignore is our 

holding in AMISUB that the "plain language of federal Medicaid 

law" requires the state "at g. minimum to make 'findings' which 

identify and determine . . . the costs that must be incurred by 

[efficiently and economically operated] hospitals." AMISUB, 879 

F.2d at 796. Having failed to make such findings, defendants may 

not now suggest that the reasonable allowable costs of facilities 

they have implicitly identified as economically and efficiently 

operated may include unnecessary costs which need not be 

reimbursed. Given what the district court termed the demonstrated 

"consistent and significant shortfall in reimbursement," 822 F. 

Supp. at 696, defendants may not undermine those findings through 

the use of their own inadequate findings. 

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Defendants also charge that the district court opinion was 

inadequate in its substantive analysis because it failed to 

conduct an inquiry into individual provider operations to 

determine whether "costs which must be incurred" are in fact being 

paid. Defendants assert that our prior opinion in KHCA I required 

such detailed analysis. KHCA I in fact observed that the 

procedural requirements we noted in AMISUB, 879 F.2d at 796, 

"clearly demand that the state agency, SRS in this case, undertake 

a detailed evaluation of individual health care providers. This 

fact alone indicates that the district court's review of these 

procedural findings likely will force the court to scrutinize 

specific health care providers." KHCA I, 958 F.2d at 1023. We 

went on to observe that "[h]ad the state made absolutely no 

findings or findings that were clearly inadequate, we could 

conclude ... that SRS failed to comply with federal law." Id. 

As we have already indicated, that is what occurred here -- the 

evidence showed SRS made no findings explaining the changed 

inflation rate or how that change would affect the reasonableness 

and adequacy of the reimbursement rates, nor did it make specific 

findings on the neces~ary costs of efficiently and economically 

operated facilities. In that situation, we do not read KHCA I as 

mandating the kind of facility-by-facility inquiry defendants 

claim is necessary. 

In sum, we affirm the district court's conclusion that 

plaintiffs have demonstrated a great likelihood of prevailing on 

their claimed substantive violation of the Boren Amendment. 

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.. 

III. CLASS CERTIFICATION 

Defendants finally argue that, even if the district court 

correctly granted plaintiffs' preliminary injunction, it erred in 

effectively granting class-wide relief without certifying a class 

pursuant to Fed. R. Civ. P. 23. The district court held that 

class certification was not necessary, citing the Supreme Court's 

statement in Wilder, 496 U.S. at 520 n.18, that "[i]f a State errs 

in finding that its rates are reasonable and adequate . . . then a 

provider is entitled to have the court invalidate the current 

state plan and order the State to promulgate a new plan that 

complies with the Act." The district court further held that the 

invalidation of TN 92-22 "will affect the interests of all the 

potential class members, regardless of whether a class is formally 

certified." Kansas Health Care Ass'n, 822 F. Supp. at 689. We 

agree. 

This court has "recognized the line of authority indicating 

that a class certification is unnecessary if all the class members 

will benefit from an injunction issued on behalf of the named 

plaintiffs." Everhart v. Bowen, 853 F.2d 1532, 1538-39 n.6 (lOth 

Cir. 1988), rev'd on other grounds, 494 U.S. 83 (1990); ~ also 

7B c. Wright, A. Miller & M. Kane, Federal Practice and Procedure 

§ 1785.2 (1986 & Supp. 1994). We think it clear that that is the 

case here. As the district court held, "[w]e have no reason to 

doubt that defendants would apply any changes made to the 

reimbursement formula uniformly to nursing homes in Kansas." 

Kansas Health Care Ass'n, 822 F. Supp. at 689. We therefore 

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affirm the district court's conclusion that class certification 

was unnecessary in this case. 

CONCLUSION 

For the foregoing reasons, we AFFIRM the decisions of the 

district court granting a preliminary injunction and awarding 

interim relief. 

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