1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

12-29-1995

New Jersey Hosp. Assn v. Waldman

Precedential or Non-Precedential:

Docket 95-5391

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Recommended Citation

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

__________ 

No. 95-5391 

__________ 

THE NEW JERSEY HOSPITAL ASSOCIATION, 

 Appellant, 

v. 

 WILLIAM WALDMAN, 

 VELVET MILLER, 

 LEONARD FISHMAN 

_______________ 

Appeal From the United States District Court 

for the District of New Jersey 

(D. C. Civ. No. 95-cv-1260) 

_______________ 

Argued September 15, 1995 

Before: SLOVITER, Chief Judge, ALITO and SEITZ, Circuit Judges. 

Filed: December 29, 1995 

________________ 

Mark H. Gallant, Esq. (Argued) 

Thomas McKay, III, Esq. 

Marcy C. Panzer, Esq. 

Cozen & O'Connor 

1900 Market Street 

Philadelphia, PA 19103 

 Attorneys for Appellant

Mark H. Lynch, Esq. (Argued) 

Covington & Burling 

1201 Pennsylvania Ave. 

Washington, DC 20044 

 Attorney for Appellees 
2 

_______________________ 

OPINION OF THE COURT 

_______________________ 

SEITZ, Circuit Judge. 

 The New Jersey Hospital Association ("NJHA") instituted 

this action challenging the reduction of Medicaid reimbursement 

for general inpatient hospital services as set by the New Jersey 

Department of Human Services, Division of Medical Assistance and 

Health Services. NJHA seeks declaratory and prospective 

injunctive relief under 42 U.S.C. § 1983 claiming certain New 

Jersey state officials violated the procedural and substantive 

requirements of the Boren Amendment to the Medicaid Act, 42 

U.S.C. § 1396a(a)(13)(A), in setting the new payment rates 

effective March 6, 1995. Here, NJHA appeals from the district 

court's order denying its application for a preliminary 

injunction seeking to invalidate the new rates. The district 

court had jurisdiction under 28 U.S.C. § 1331 and 42 U.S.C. 

§ 1983. We have jurisdiction pursuant to 28 U.S.C. § 1292(a)(1). 

 I. FACTS 

A. The Parties

 NJHA is a non-profit association representing seventyone of the eighty-four hospitals in New Jersey that receive 

Medicaid reimbursement from the State of New Jersey. The 

defendants in this action are William Waldman, the Commissioner 

of the Department of Human Services ("DHS"), Velvet Miller, the 
3 

Director of the Division of Medical Assistance and Health 

Services of DHS, and Leonard Fishman, the Commissioner of the New 

Jersey Department of Health ("DOH"). The defendants have been 

sued in their official capacities. DHS is the state agency 

responsible for New Jersey's Medicaid Program, and the Division 

of Medical Assistance and Health Services is the office within 

DHS that administers the program. DOH assists DHS with Medicaid 

rate-setting. In this opinion, the defendants will be referred 

to as "New Jersey" or "the State." 

B. Medicaid and the Boren Amendment

 The Medicaid program "`establishes a joint federal and 

state cost-sharing system to provide necessary medical services 

to indigent persons who otherwise would be unable to afford such 

care.'" Temple Univ. v. White, 941 F.2d 201, 205 (3d Cir. 1991) 

(quoting Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1309 

(2d Cir. 1991)). State participants receive federal Medicaid 

funds in return for administering a Medicaid program. They are 

obligated to comply with certain federal statutory and regulatory 

requirements in developing their programs. See West Va. Univ. 

Hosps., Inc. v. Casey, 885 F.2d 11, 15 (3d Cir. 1989). 

 Historically, states paid hospitals the "reasonable 

costs" of services actually provided. See Wilder v. Virginia 

Hosp. Ass'n, 496 U.S. 498, 507 n.7 (1990). This amounted to 

payment for the actual costs incurred by hospitals in providing 

care to Medicaid recipients, regardless of disparities in costs 

or efficiencies among hospitals. However, in 1981 Congress 
4 

enacted the Boren Amendment to the Social Security Act, which 

gave state participants the ability to alter the Medicaid 

repayment methodology. States were given more flexibility to 

formulate their rates. Programs could include statewide or 

classwide rates, rates based on a prospective cost, or incentive 

provisions to encourage efficiency. Flexibility was ensured by 

limiting federal oversight. See id. at 507. The Amendment 

"replaced the `reasonable cost' standard with the current 

standard of `reasonable and adequate to meet the costs which must 

be incurred by efficiently and economically operated 

facilities.'" West Va. Univ. Hosps., 885 F.2d at 15. 

 In order to qualify for federal financial support, a 

participating state must submit a "State Plan" or a change in 

payment methods and standards to the Heath Care Financing 

Administration of the Department of Health and Human Services 

("HCFA"). See 42 U.S.C. § 1396a(a). The state must make findings 

and give assurances to the HCFA that its program comports with 

federal requirements. Id. Such findings and assurances also must 

be made whenever a state changes its payment methods and 

standards. See 42 C.F.R. § 447.253(a) & (b). 

C. New Jersey's Medicaid Program

1. 1993 Repayment Methodology 

 In 1993, New Jersey formulated a standardized, 

predetermined, statewide payment amount for over 700 separate 

Diagnosis Related Grouping's ("DRGs"). DRGs represent groups of 

patients that are clinically similar to one another and 
5 

relatively homogeneous with respect to resource utilization. For 

each hospital serving the state, rates were set for each DRG and 

a statewide "mean" for each DRG was established. To determine 

the "mean," the State used 1988 hospital costs and 1991 billing 

data. Inflation factors were used to update 1988 hospital costs 

to 1993 levels. In addition, the mean-based DRGs were increased 

by a 2.5% "operating margin" factor to create a margin surplus. 

DRG payments included a capital cost allowance and a 9.15% 

adjustment designed to ease the transition from the pre-1993 

system, which provided higher payments. The payment that a 

hospital received for a "medicaid discharge" depended on the DRG 

into which it fell. 

2. Revision of the 1993 System 

 In early 1994, New Jersey decided to overhaul its 1993 

Medicaid payment system. Basically, the new Medicaid ratesetting methodology made four changes to the previous repayment 

system. Payments of the 9.15% transition adjustment, 2.5% 

operating margin, and capital cost allowance were eliminated. The 

fourth change consisted of a "median-plus 5%" DRG standard in 

place of the 1993 "mean-based" DRG standard. Once again, 1988 

hospital costs, adjusted for inflation, were the benchmarks for 

each DRG. 

D. District Court's Opinion

 NJHA's complaint seeks, inter alia, an injunction 

prohibiting use of the new rate-setting methodology, as well as a 
6 

requirement that the State return to the methodology used in the 

1993 system. This action presently is pending before the 

district court. NJHA also sought a preliminary injunction. After 

a hearing thereon, the district court ruled that substantial 

compliance had been shown with respect to both the procedural and 

substantive requirements of the Boren Amendment. On that basis, 

it found that NJHA failed to demonstrate a reasonable likelihood 

of success on the merits. It thereupon denied a preliminary 

injunction solely on that ground. NJHA appeals. 

II. ANALYSIS 

A. Preliminary Injunction

 In reviewing the district court's order denying NJHA's 

motion for a preliminary injunction, "`[w]e review the district 

court's conclusions of law in a plenary fashion, its findings of 

fact under a clearly erroneous standard, and its decision to 

grant or deny the injunction for an abuse of discretion.'" AT & T 

v. Winback and Conserve Prog. Inc., 42 F.3d 1421, 1427 (3d Cir. 

1994) (quoting Johnson & Johnson-Merck Consumer Pharmaceuticals, 

Inc. v. Rhone-Poulenc Rorer Pharmaceuticals, Inc., 19 F.3d 125, 

127 (3d Cir. 1994)). Those standards are employed in judging the 

following factors: 

 

(1) the likelihood that the plaintiff will 

prevail on the merits at the final hearing; 

(2) the extent to which the plaintiff is 

being irreparably harmed by the conduct 

complained of; (3) the extent to which the 

defendant will suffer irreparable harm if the 

preliminary injunction is issued; and (4) the 

public interest. The injunction shall issue 

only if the plaintiff produces evidence 

sufficient to convince the district court 

that all four factors favor preliminary 

relief. 

Id. (quoting Merchant & Evans, Inc. v. Roosevelt Bldg. Prods., 

963 F.2d 628, 632-33 (3d Cir. 1992)). 
7 

 As a threshold matter, New Jersey argues that NJHA 

cannot satisfy the irreparable injury requirement because each 

hospital has an adequate state law remedy which should be 

pursued. It points to New Jersey Administrative Code 10:52-

9.1(b)(2) which provides in pertinent part that a hospital may 

seek an adjustment to its rates if it can demonstrate that it 

"would sustain a marginal loss in providing inpatient services to 

Medicaid recipients at the rates under appeal even if it were an 

economically operated hospital." (emphasis added). A hospital 

not satisfied with the administrative determination may seek 

judicial review in the Appellate Division of the New Jersey 

Superior Court. See N.J. Admin. Code tit. 10, § 52-9.1(d)(1995). 

 For purposes of these proceedings, New Jersey has 

defined marginal cost as 60% of actual costs. By using 60% as 

marginal cost, almost no hospital will be able to seek adjustment 

of its rates. More important, the administrative appeal process 

is directed at an individual hospital's reimbursement rates, not 

the methodology and implementation of New Jersey's entire 

Medicaid Reimbursement Program. We therefore conclude that the 

use of the state's administrative remedy would not preempt this 

action. 

 We turn now to the application of the Boren Amendment 

to this case. In that respect, we are not without guidance from 

this court. See, e.g., Temple Univ., 941 F.2d 201 (reviewing 

Pennsylvania's Medicaid reimbursement rates to in-state 

hospitals); West Va. Univ. Hosps., 885 F.2d 11 (reviewing 

Pennsylvania's Medicaid reimbursement rates to out-of-state 
8 

hospitals). NJHA appears to appeal only the narrow question of 

New Jersey's procedural compliance with the Boren Amendment. This 

court has taken the view that the Boren Amendment contains both a 

procedural and substantive dimension. Id. at 29. However, the 

line between the two is often blurred. We, therefore, conclude 

that review is facilitated, if not required, by examining both 

procedural and substantive aspects of a state's plan. 

Accordingly, we will address New Jersey's overall compliance with 

the Boren Amendment.1

B. The Boren Amendment

 In undertaking our review of New Jersey's new program, 

we begin with the pertinent language of the Boren Amendment: 

A State plan for medical assistance must-- . 

. . provide-- . . . for payment . . . of the 

hospital services . . . provided under the 

plan through the use of rates (determined in 

accordance with methods and standards 

developed by the State . . . and which, in 

the case of hospitals, take into account the 

situation of hospitals which serve a 

disproportionate number of low income 

patients with special needs . . .) which the 

State finds and makes assurances satisfactory 

to the Secretary, are reasonable and adequate

to meet the costs which must be incurred by 

efficiently and economically operated 

 

1

While NJHA appears to seek review of procedural compliance 

alone, it states: "The central issue raised below and on appeal 

is whether DHS properly engaged in an objective review of economy 

and efficiency, and rendered bona fide `findings' capable of 

supporting assurances that the resulting rates were `reasonable 

and adequate' and not likely to impair reasonable `access' to 

services." Appellant's Brief at 14. As discussed infra, this 

Court has deemed the "reasonable and adequate" and the 

"reasonable access" requirements as being substantive in nature. 

Thus, NJHA necessarily seeks review of the State's procedural and 

substantive compliance. 
9 

facilities in order to provide care and 

services . . . and to assure that individuals 

eligible for medical assistance have 

reasonable access (taking into account 

geographic location and reasonable travel 

time) to inpatient hospital services of 

adequate quality. 

42 U.S.C. § 1396a(a)(13)(A)(emphasis added). Initially, in 

interpreting a state's plan, we note that the legislative history 

of the Amendment manifests Congress's strong concern that its 

procedural and substantive requirements be "invariably and fully 

satisfied." West Va. Univ. Hosps., 885 F.2d at 24. We turn to 

our interpretive task with that caveat in mind. 

1. Substantive Compliance 

 This Court has observed that the Boren Amendment 

"authorizes states to develop their own Medicaid reimbursement 

standards and methodologies for payment for hospital services, 

but subjects those standards and methodologies to three general 

federal requirements." Id. at 22. Those requirements mandate 

that a state's rates 

(1) take into account the circumstances of 

hospitals serving a disproportionate share of 

low income patients; 

(2) are reasonable and adequate to meet the 

necessary costs of an efficiently operated 

hospital; and 

(3) are reasonable and adequate to assure 

medicaid patients of reasonable access to 

inpatient hospital care. 

See Temple Univ., 941 F.2d at 210 (citing West Va. Univ. Hosps., 

885 F.2d at 22). The implementing regulations for 
10 

§1396a(a)(13)(A) reiterate these statutory requirements. See 42 

C.F.R. § 447.253(b).2

 a. "Disproportionate Share" and "Reasonable Access" 

Requirements 

 

2

(a) State assurances. In order to receive 

HCFA approval of a State plan change in 

payment methods and standards, the Medicaid 

agency must make assurances satisfactory to 

the HCFA . . . and must comply with all other 

requirements of this subpart. 

(b) Findings. Whenever the Medicaid agency 

makes a change in its methods and standards, 

but not less often then annually, the agency 

must make the following findings: 

(1) Payment rates. (i) The Medicaid agency 

pays for inpatient hospital services and 

long-term care facility services through the 

use of rates that are reasonable and adequate

to meet the costs that must be incurred by 

efficiently and economically operated 

providers to provide services in conformity 

with applicable State and Federal laws, 

regulations, and quality and safety 

standards. 

 (ii) With respect to inpatient hospital 

services-- 

 (A) The methods and standards used to 

determine payment rates take into account the 

situation of hospitals which serve a 

disproportionate number of low income 

patients with special needs; [and] 

. . . . 

 (C) The payment rates are adequate to 

assure that recipients have reasonable 

access, taking into account geographic 

location and reasonable travel time, to 

inpatient hospital services of adequate 

quality. 

42 C.F.R. § 447.253 (a) & (b) (emphasis added). 
11 

 In enacting the Boren Amendment, there was a 

congressional concern that states account for the special 

circumstances of those hospitals serving a large number of 

Medicaid patients. West Va. Univ. Hosps., 885 F.2d at 23 (citing 

H.R. Rep. No. 158, 97th Cong., 1st Sess. 294-96 (1981)). 

Moreover, Congress was concerned that a state's rates not be so 

low as to cause the closing of a "dangerous number of hospitals 

or of a single medically important facility" necessitating 

unreasonable travel for Medicaid patients. Id. (citing H.R. Rep. 

No. 158, 97th Cong., 1st Sess. 294 (1981); H.R. Conf. Rep. No. 

208, 97th Cong., 1st Sess. 962, reprinted in 1981 U.S.C.C.A.N. 

1010, 1324). In developing its reimbursement rates, a state is 

required to take into account the situations of those hospitals 

serving a disproportionate share of low income patients and to 

find that its rates assure Medicaid patients reasonable access to 

inpatient hospital care. With respect to these substantive 

requirements this Court has said: 

We will not presume to declare how the State 

must satisfy these requirements, but neither 

will we defer to the State's judgment that 

the requirements have indeed been met. 

West Va. Univ. Hosps., 885 F.2d at 24. Accordingly, a state's 

compliance with the disproportionate share and reasonable access 

requirements is subject to our plenary review. Id. 

 b. "Reasonable and Adequate" Requirement 

 In addition to the two previously identified 

requirements, a state must find that its rates are reasonable and 
12 

adequate to meet the necessary costs of an efficiently operated 

hospital. However, this Court has said that a court should not 

undertake an independent assessment of what rates it believes are 

reasonable and adequate. Rather, the assessment should concern 

itself with whether the rates are "arbitrary and capricious." Id.

 In West Virginia University Hospitals, it was noted 

that in promulgating the regulations implementing § 1396a(a)(13), 

the HCFA expressly declined to prescribe "reasonable and 

adequate" rates. Id. at 26. The Court observed that "`the term 

is not a precise number, but rather a rate which falls within a 

range of what could be considered reasonable and adequate.'" Id.

(quoting 48 Fed. Reg. 56,046, 56,049 (Dec. 19, 1983)). Thus, a 

state must show a rational basis for its Medicaid program. This 

requires "`a rational connection between the facts found and the 

choices made.'" Id. at 28 (internal quotations omitted)(quoting 

Colorado Health Care Ass'n v. Colorado Dep't of Social Servs., 

842 F.2d 1158, 1167 (8th Cir. 1988)). Accordingly, the Boren 

Amendment contemplates a "deferential" standard of review by the 

courts in assessing compliance with the reasonable and adequate 

requirement. Id. at 23. With the appropriate standards of review 

in mind, we turn to an analysis of New Jersey's Medicaid Plan to 

determine whether NJHA has shown the likelihood that it will 

prevail on the merits of its claim that New Jersey violated the 

Boren Amendment. 

 (i) New Jersey's Consideration of Hospitals Serving a 

 Disproportionate Number of Low Income Patients. 
13 

 Initially, we consider whether New Jersey took into 

account the situations of those hospitals serving a 

disproportionate number of low income patients in developing its 

new rates. The district court seems not to have addressed this 

requirement in reviewing New Jersey's substantive compliance with 

the Boren Amendment, as no mention of it can be found in the 

court's opinion. However, it appears that the State gave some 

consideration to the "disproportionate share" requirement. We, 

therefore, will undertake plenary review of New Jersey's 

compliance with the "disproportionate share" requirement using 

the record before us. 

 In addition to reimbursement as determined by the new 

methodology, hospitals receive disproportionate share ("DSH") 

payments in respect of their Medicaid shortfall and their costs 

of treating the uninsured. See Declaration of John Guhl, 

Assistant Director for Budget Affairs of the Division of Medical 

Assistance and Health Services of DHS ("Guhl Decl.") ¶ 30, Joint 

Appendix ("J.A.") at 340. Hospitals also receive DHS payments 

under the Medicare program by treating a high volume of low 

income patients, including recipients of Medicaid. Id. However, 

even with evidence of these additional payments, the record is 

unclear as to how the new reimbursement program will impact those 

hospitals serving a large number of Medicaid patients. Therefore, 

we are unable to determine the extent or adequacy of the State's 

consideration of the "disproportionate share" requirement. 

Nonetheless, the record before us indicates some evidence of 

compliance, and this Court has no evidence to the contrary. 
14 

Accordingly, we are not prepared to say NJHA has shown the 

likelihood of succeeding on the ground that the "disproportionate 

share" requirement was not satisfied. 

 (ii) Requirement that New Jersey's Rates Assure 

Medicaid Patients Reasonable Access to Quality 

Hospital Care, Taking Into Account Geographic 

Location and Reasonable Travel Time. 

 In developing its reimbursement rates, a state is 

required to find that its rates assure Medicaid patients 

reasonable access to inpatient hospital care. See West Va. Univ. 

Hosps., 885 F.2d at 22-23. NJHA asserts that the State "made no 

bona fide findings concerning the impact of the cuts on access to 

care and quality of care." Brief for Appellants at 34. While 

NJHA attacks this lack of findings on procedural grounds, we 

consider this requirement to be substantive in nature, albeit one 

having procedural prerequisites. Once again, we undertake 

plenary review of New Jersey's compliance with this requirement 

on the record before this Court. 

 The State argues that "[t]he district court had a 

convincing array of evidence on access before it when it 

considered NJHA's request for preliminary injunctive relief." 

Brief for Appellees at 43. Moreover, it asserts that "[t]he 

strength of the record on this issue supports the district 

court's implicit finding that NJHA would be unlikely to succeed 

on the merits of a substantive challenge based upon a lack of 

access." Id. 
15 

 The district court failed to address individually the 

"reasonable access" requirement. Also, it did not articulate the 

plenary standard of review to which we subject a state's 

compliance with either the "disproportionate share" or 

"reasonable access" requirements. Consequently, we are uncertain 

whether the district court would have found implicitly or 

explicitly that New Jersey complied with the "reasonable access" 

requirement had it reviewed the plan for its impact on access 

under the proper standard of review.3 Hampered as we are by the 

district court's failure to address this issue, we turn, in the 

interest of disposing of this matter, to the question of whether 

New Jersey considered access to quality hospital care. 

 In considering access, the record before this Court 

shows that the State took into account what it termed the "high 

cost coverage" of the new system which it estimated to be 90% in 

the aggregate. See Guhl Decl. ¶ 19, J.A. at 336. Thus, it argues 

access should not be affected. The State also presented evidence 

that New Jersey hospitals have excess bed capacity. Presuming 

this to be true, the State asserts that hospitals with excess 

beds will have an incentive to treat Medicaid patients so long as 

the marginal costs associated with these patients are paid and 

some contribution is made toward defraying hospitals' fixed 

costs. Moreover, it has set forth that marginal costs 

 

3

To the extent one might glean from the district court's opinion 

that the standard of review for substantive compliance with the 

Boren Amendment in this Circuit is "arbitrary and capricious," we 

wish to dispel that notion. Such standard of review only applies 

to the substantive requirement that the new rates be "reasonable 

and adequate." 
16 

represented 60% of hospitals' average costs. It contends that 

because all hospitals will be reimbursed their marginal costs 

under the new system, access will not be affected. Id. at ¶ 28, 

J.A. at 339-40; see also Brief for Appellees at 41-43 (discussing 

State's compliance with "access" requirement). 

 Conversely, NJHA points to more recent figures and 

argues that marginal costs are not 60% but 80% of actual costs. 

Brief for Appellant at 36. However, in testimony before the 

district court the State proffered that even if marginal costs 

are 80%, 69 of 84 hospitals will be reimbursed above the margin. 

See Transcript of Testimony of J. Guhl, J.A. at 855-57, 

Appellees' Supplemental Appendix at 5. NJHA challenges this 

proffer and asserts that only 60 hospitals will be reimbursed 

their marginal costs. Reply Brief of Appellant at 19. 

 Even if we were to accept that aggregately 90% of 

hospitals will receive their costs, and marginal costs are 80% so 

that 60 to 69 hospitals will be reimbursed their costs, the 

record remains deficient on the effect of the rates on hospitals 

in various geographic areas in New Jersey, and on travel time as 

dictated by the Boren Amendment and its implementing regulations. 

This deficiency notwithstanding, it is apparent that the State 

gave some consideration to the "reasonable access" requirement. 

Thus, although we cannot say with confidence how access will be 

affected, we still are not prepared to say, in the context of a 

preliminary injunction, that NJHA has shown the likelihood of 

succeeding on its challenge to the State's compliance with the 

"reasonable access" requirement. At the final hearing, the 
17 

record should be developed to determine whether under the new 

system a dangerous number of hospitals in one geographic area or 

a single important medical facility would be forced to close or 

seriously reduce services to the detriment of the communities 

they serve. If the new rates create such dangers, the obvious 

intent that states account for the special circumstances of those 

hospitals serving a large number of Medicaid patients would be 

violated. 

(iii) Requirement that New Jersey's Rates 

are Reasonable and Adequate to Meet the Costs 

of an Efficiently Operated Hospital. 

 We turn to the third substantive requirement, viz., 

whether New Jersey's rates are "reasonable and adequate" to meet 

the costs of an efficiently operated hospital. In the past, we 

have noted that "[w]hereas the substantive dimensions of the 

first two requirements could be easily drawn from the statute and 

its legislative history, discerning legislative intent with 

respect to the substantive element of the reasonable and adequate 

requirement is a more daunting project." West Va. Univ. Hosps., 

885 F.2d at 26. 

 We note, once again, that we exercise a deferential 

standard of review in determining whether the State's actions 

were arbitrary and capricious in formulating the new rates. Under 

this standard, we are cautioned that we should not undertake an 

independent assessment of what rates we believe are reasonable 

and adequate. Rather, we should concern ourselves with whether 
18 

New Jersey's determination was "arbitrary and capricious." 

Thus, the State need only show a rational basis for its Medicaid 

program. Therefore, we will examine New Jersey's plan as a 

whole. 

 As the district court found, in determining the 

statewide median for each DRG category, the State used the same 

1988 hospital cost reports that it used to calculate the 

statewide mean for each DRG in development of the 1993 rates. It 

then employed various inflation factors to raise the 1988 median 

costs for each DRG to the most current year costs. The district 

court was not persuaded that the 1988 cost data was stale or 

outdated. New Jersey Hosp. Ass'n v. Waldman No. 95-1260, 1995 WL 

465664, at *10 (D.N.J. May 25, 1995). The 1995 median-based 

reimbursement methodology also includes additional payments for 

high length of stay outlier4 cases to remunerate hospitals for 

extraordinary costs sometimes incurred in treating Medicaid 

patients. NJHA, while arguing that use of 1988 costs adjusted by 

the various inflation factors is improper, nevertheless asks us 

to maintain the 1993 mean-based methodology which employs the 

same 1988 costs similarly adjusted for inflation. The 

difference, as we see it, is that the payout using the 1993 

methodology produces a more favorable result for NJHA members. 

 In West Virginia University Hospitals we noted: 

It follows from the departure from a costdriven reimbursement standard that a state's 

 

4

"Outlier" cases are those that have either an extremely long 

length of stay or extraordinarily high costs when compared to 

most discharges classified under the same DRG. See 48 Fed. Reg. 

39752, 39776 (September 1, 1983). 
19 

plan does not violate the substantive 

provision of the reasonable and adequate 

requirement simply because it fails to 

reimburse one efficiently operated hospital 

its actual costs. What matters, rather . . . 

is whether the reimbursement rates . . . in 

the aggregate are arbitrary and capricious. 

885 F.2d at 26 (emphasis added). The district court found that 

one of NJHA's own experts estimated under the 1995 median-based 

system that New Jersey hospitals will be reimbursed in the 

aggregate 83.36% of the costs they incur in treating Medicaid 

patients in 1995. Another NJHA expert compared 1993 Medicaid 

costs to 1993 Medicaid payments using the 1995 median-based 

system and found that in the aggregate 81.75% would have been 

reimbursed using the new system. The State asserts that upon 

comparing hospitals' 1993 Medicaid costs to 1993 payments under 

the new methodology, cost coverage would be over 90% in the 

aggregate. New Jersey Hosp. Ass'n, 1995 WL 465664, at *12. 

 Moreover, the district court noted that the changes 

made to New Jersey's Medicaid program were prompted by the 

following: 

DHS found that New Jersey hospitals' costs 

per discharge are the third highest in the 

nation. DHS also discovered that New 

Jersey's inpatient hospital payments per 

Medicaid recipient are the third highest in 

the nation. Moreover, DHS found that New 

Jersey hospitals' average length of stay for 

Medicare patients is 11.07 days as compared 

to the national average of 8.0 days. Lastly, 

DHS determined that under New Jersey's thencurrent Medicaid payment system, New Jersey 

hospitals were paid in excess of their actual 

costs (113% of costs in the aggregate). Thus, 

DHS was concerned that the then-current 

medicaid system violated the federal upper 
20 

limit. As a result, DHS determined that the 

mean-based DRG system was ripe for change. 

Id. at *3 (citations omitted). 

 Based on the foregoing findings of fact made by the 

district court concerning the State's findings, which we cannot 

say are clearly erroneous, and giving deference to the State, we 

are not prepared to say that NJHA has shown, for preliminary 

injunction purposes, that New Jersey's rates overall are 

unreasonable and inadequate. We so conclude because we cannot 

say on this record that the rates were developed in an arbitrary 

or capricious manner. Thus, we hold that NJHA has not shown the 

likelihood of succeeding on its challenge to the State's 

substantive compliance with the Boren Amendment. While aggregate 

coverage is telling, it is not dispositive. Among other things, 

at a final hearing on the merits, further analysis might provide 

evidence as to whether a large percentage of the unreimbursed 

costs must be incurred by efficiently and economically operated 

facilities. If this is true, evidence of aggregate cost 

coverage, as shown on this record, would not suffice to show 

compliance with the federal requirement that the rates be 

reasonable and adequate. Finally, we turn to the question of 

whether NJHA showed the likelihood of succeeding on its claim 

that the State failed to comply with the procedural requirements. 

2. Procedural Compliance 

 In reviewing New Jersey's procedural compliance with 

the Boren Amendment, our review is plenary. Temple Univ., 941 

F.2d at 209. 
21 

 Procedurally, the State is required to give assurances 

that its Medicaid plan complies with the federal requirements. 

See 42 U.S.C. § 1396a(a)(13)(A); 42 C.F.R. § 447.253(a) & (b). 

This Court has held that in giving such assurances "the federal 

regulations implementing § 1396a(a)(13)(A) `unambiguously require 

the state to make findings' to support its Medicaid plan." Temple 

Univ., 941 F.2d at 208-09 (quoting West Va. Univ. Hosps., 885 

F.2d at 30); see also Wilder, 496 U.S. at 513 n.11 (noting 

requirement that states make findings is a necessary prerequisite 

to the requirement that assurances be made). 

a. Findings and Assurances 

 While assurances must be based on findings, there is no 

absolute mandate as to what is required in terms of meeting the 

"findings" requirement. Logic dictates, however, that whatever 

methods a state uses in arriving at the procedurally required 

findings, such findings must be correct. Id. at 514. Our 

language in West Virginia University Hospitals is particularly 

applicable here: 

The three federal provisions . . . contain 

both a procedural and substantive dimension. 

The procedural dimension is explicit in the 

federal regulations implementing section 

1396a(a)(13)(A). These federal regulations 

condition HCFA approval of a new state plan 

on the state's assurances that it has 

complied with the regulatory requirements. 

One of these regulatory requirements is that 

the State make findings in support of its 

change in medicaid plan. Essentially, the 

State is required to find that its new plan 

complies with the three substantive 

requirements . . . . 
22 

885 F.2d at 29 (citation omitted). 

 In Temple University, we were critical of 

Pennsylvania's failure to make findings as to the reasonableness 

or adequacy of its rates to cover the costs of an efficiently and 

economically operated hospital. 941 F.2d at 210. In the present 

case, the district court noted the State's reasoning behind its 

selection of the median-plus 5% methodology: 

[I]t is reasonable to measure the efficiency 

of hospitals by comparing the costs they 

incur for delivering similar units of service 

. . . . [E]fficiency is defined or understood 

to mean the lowest possible cost per 

comparable inpatient admission. 

New Jersey Hosp. Ass'n, 1995 WL 465664 at *3. Thus, the State 

found that its new rate system implicitly identified efficient 

hospitals and therefore the costs they must incur. This was 

accomplished by concluding that efficient hospitals will keep 

their costs for each DRG at or below the statewide median with 

certain adjustments for inflation, indirect medical education, 

and area wage variation. Id. at *4. 

 Thereafter, the State conducted empirical analyses to 

measure the effects of the payment program. This was 

accomplished by comparing the amounts the new methodology would 

have paid hospitals in 1993 to their actual Medicaid costs 

reported on their Medicare cost reports for 1993. Id. A health 

care consultant also was retained to review the new rate-setting 

methodology and the State's analyses of the new rates. Id. at *5. 

Additionally, the district court noted that various national 

indicators which evidenced inefficiency on the part of New Jersey 
23 

hospitals also played a role in the formulation process. 

Inefficiencies were noted in the areas of cost per discharge and 

average length of stay. Id. at *4. 

 Based on the forgoing, the district court found that 

the use of "1988 hospital cost data, increased to present-day 

costs, represents sufficiently reliable cost data when used to 

identify efficiently and economically operated New Jersey 

hospitals." Id. at *10. We cannot say that this factual finding 

is clearly erroneous. Thus, in light of our holding with respect 

to the State's substantive compliance, we conclude, for purposes 

of disposing of the preliminary injunction request, NJHA has not 

shown that the State failed to meet the procedural requirements. 

 We note, at a final hearing the burden of proof rests 

with NJHA to come forward with credible evidence that the State 

did not comply with the federal requirements of the Boren 

Amendment. See Colorado Health Care Ass'n v. Colorado Dep't of 

Social Servs., 842 F.2d 1158, 1164 (10th Cir. 1988). It is 

noteworthy that no discovery had been conducted prior to the 

hearing on the application for the preliminary injunction. 

Pending the district court's final decision on the merits, the 

findings of fact and conclusions of law made in conjunction with 

the preliminary injunction are indeed preliminary. As such, they 

do not foreclose any findings or conclusions to the contrary 

based on the record as developed at final hearing. See Oburn v. 

Shapp, 521 F.2d 142, 149 n.18 (3d Cir. 1975). 

 The district court denied NJHA a preliminary injunction 

solely on the ground that it had not shown the likelihood that it 
24 

would prevail on the merits. Thus, it found it unnecessary to 

address the other factors to be considered when a preliminary 

injunction is sought. 

 Based solely on the ground invoked by the district 

court, NJHA has not shown on this record the reasonable 

likelihood that it will prevail on the merits. 

 The order of the district court denying a preliminary 

injunction will be affirmed.