*

Honorable Maurice B. Cohill, Jr., Senior U.S. District

Judge for the Western District of Pennsylvania, sitting by

designation. 

United States Court of Appeals,

Eleventh Circuit.

No. 96-2227.

TALLAHASSEE MEMORIAL REGIONAL MEDICAL CENTER, Florida Hospital

Medical Center, Plaintiffs-Appellees,

v.

Douglas COOK, as Director of the Agency for Health Care

Administration, Defendant-Appellant,

Keystone Peer Review Organization, Inc., a foreign corporation

licensed to do business in Florida, H. James Towey, Secretary, The

Department of Health and Rehabilitation Services, Defendants.

April 8, 1997.

Appeal from the United States District Court for the Northern

District of Florida. (No. 93-40463MMP), Maurice M. Paul, Chief

Judge.

Before DUBINA and BLACK, Circuit Judges, and COHILL*

, Senior

District Judge.

PER CURIAM:

This is a Boren Amendment challenge under 42 U.S.C. §

1396a(a)(13)(A). We affirm on the basis of the well-reasoned

district court order published in the Medicare & Medicaid Guide at

page 44,212, and attached as Appendix A, with the following

exceptions.

We vacate paragraph four of the "Ordered and Adjudged"

section, which reads as follows:

Defendant AHCA, through the Florida Legislature, is directed

to amend Florida's Medicaid plan in such a way as to be

non-violative of the Boren Amendment—namely, Florida's

Medicaid must be amended to include reimbursement for

inappropriate level of care services.
See U.S. Const. amend. XI. We also vacate the language of the

opinion that reads as follows: "As such, the Florida Legislature

must amend its Medicaid plan to include reimbursement for medically

necessary inappropriate level of care services, to bring the

Medicaid into compliance with federal law." Id.

We vacate the language of the opinion that reads "pending the

adoption of such reimbursement provision by the Florida

Legislature." Id.

We further vacate the language of the opinion that reads as

follows: "The interim rates shall remain in effect until such time

as the Florida Legislature adopts a permanent inappropriate level

of care reimbursement provision." Id.

AFFIRMED in part and VACATED in part.

APPENDIX A

IN THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF FLORIDA,

TALLAHASSEE DIVISION

TALLAHASSEE MEMORIAL REGIONAL

MEDICAL CENTER, INC., and

FLORIDA HOSPITAL MEDICAL CENTER,

Plaintiffs,

v.

DOUGLAS COOK, et al.,

Defendants.

CASE NO. TCA 93-40463-MMP

FINDINGS OF FACT AND CONCLUSIONS OF LAW
PAUL, Chief Judge.

This is a Boren Amendment challenge under 42 U.S.C. §

1396a(a)(13)(A). Plaintiffs in this action are two hospitals,

Tallahassee Memorial Regional Medical Center, Inc. ("TMRMC"),

located in Tallahassee, Florida and Florida Hospital Medical Center

("FHMC"), located in Orlando, Florida, which are fully qualified to

provide in-patient psychiatric care for adults and adolescents

under Florida's Medicaid program. Defendant Douglas Cook is the

Director of the Florida Agency for Health Care Administration, the

single designated agency responsible for the operation of Florida's

Medicaid program. See 1993 Fla.Laws ch. 93-129, § 58;

Fla.Admin.Code Ann. r. 59G-4.150(1)(b), r. 59G-4.160(1)(c) (1994).

Plaintiff also named as defendants H. James Towey, Secretary of the

Florida Department of Health and Rehabilitative Services ("HRS"),

and Keystone Peer Review Organization ("KEPRO"), a non-profit

corporation under contract by AHCA to review Medicaid claims for

adolescent psychiatric patients. These defendants were dismissed

in the Court's January 12, 1995 order (Doc. 67).

A two day bench trial was concluded in this matter on August

15, 1995. The Court now sets out its findings of fact and

conclusions of law based upon all admissible evidence presented at

trial, or otherwise contained in the record.

I. THE PARTIES' POSITIONS:

A. Plaintiffs' Claims:

The State pays the Plaintiffs an established per diem rate for

the days in which medically necessary, in-patient psychiatric care

is provided to adolescent patients. Plaintiffs do not dispute the
adequacy of these rates per se, as they directly coincide with the

number of medically necessary days for each patient. However, when

the medical necessity for in-patient services ends, the patients

medically require a discharge into an alternative setting

facility—not to their homes or elsewhere. AHCA does not dispute

the need for these patients to be thus placed, and it compensates

the alternative facilities with Medicaid dollars. However, due to

insufficient funding by the State for these alternative settings

and bureaucratic admission hurdles, patients often have to wait

weeks or even months for an opening in such a facility. In the

meantime, the hospitals cannot discharge the patients, even though

in-patient care is no longer medically necessary. KEPRO, and

ultimately, AHCA, denies any reimbursement for these "grace days."

Plaintiffs concede that AHCA cannot be required to build

additional facilities. However, Plaintiffs assert that it is

AHCA's responsibility to provide for a scheme of reimbursement

under the state Medicaid plan so that patient retention by the

hospitals is compensated at an appropriate rate when medical

necessity for in-patient care ceases to exist, yet the

patients—through no fault of the hospitals—cannot be discharged as

an outpatient or to the home, but have no alternative facility

available. Plaintiffs argue that the state's inefficiencies in its

plan—and the fiscal impact of those inefficiencies—have been

transferred from the state to the hospitals. According to

Plaintiffs, since July 1992, the fiscal impact of the recoupment or

anticipated recoupment required by KEPRO's denial of reimbursement

for adolescent psychiatric "grace days" is $836,896.13 for TMRMC,
 1

See generally Fla.Admin.Code R. 59G-4.150(1)(a) (defining

such days as "days a patient remains in the hospital beyond the

point of medical necessity while awaiting placement in a nursing

home or other place of residence"). 

and $389,754.00 for FHMC. Plaintiffs conclude that the resulting

impact on hospital daily per diem rates violates the Boren

Amendment requirements.

Plaintiffs contend that the State's Medicaid plan fails to

comport with the requirements of the Boren Amendment in two

respects: First, Plaintiffs maintain that the Florida plan does

not reimburse hospitals for "administrative" or "grace days" 1

contrary to the mandatory language of 42 U.S.C. § 1396a(a)(13)(A),

which specifies that "in the case of hospital patients receiving

services at an inappropriate level of care" a State plan must

provide "for lower reimbursement rates reflecting the level of care

actually received." Second, Plaintiffs assert that because of

flaws in the State plan which result in the unavailability of

alternative setting care for adolescent psychiatric patients upon

discharge from the hospital, the hospitals are required to retain

such patients within their facilities beyond the point of medical

necessity. The State then disallows any reimbursement for the

"grace days" between the time medical necessity ends and the day

that discharge to an alternative setting is possible, because there

is no medical necessity for in-patient services during this waiting

period. Thus, under the guise of disallowing compensation for lack

of medical necessity, the State effectively shifts the fiscal

impact of its flawed Medicaid program to the hospitals, resulting

in hospital per diem reimbursement rates which are diluted to such
 2

In other words, "[d]enials are the method used by ... AHCA

to compensate for lack of funding by the State when in fact, the

Boren Act ... requires reimbursement" for the psychiatric

services Plaintiffs are providing (Compl. at ¶ 23). 

 3Defendant represents that Plaintiff FHMC has conceded that

two (2) of these patients are placement issues. 

an extent that they are not "reasonable and adequate to meet the

costs ... of efficiently and economically operated facilities,"

contrary to the Boren Amendment requirements.2

Plaintiffs therefore seek an injunction pursuant to the Boren

Amendment to Title XIX, 42 U.S.C. § 1396a(a)(13)(A), and 42 U.S.C.

§ 1983, against the continued operation by the State of this

portion of its Medicaid plan and further seek a declaratory

judgment holding that the State must reimburse Plaintiffs for

adolescent psychiatric patient "grace days," at a rate reflective

of the level of care received by the patients during the grace

period.

B. Defendant AHCA's Case:

AHCA first asserts that there is no case or controversy.

Defendant contends it has not recouped any money previously paid to

Plaintiffs for in-patient adolescent psychiatric care provided to

Medicaid recipients, but later determined by KEPRO to be not

"medically necessary"—in other words, recoupment for

"administrative" or "grace days." According to Defendant, it has

not yet determined whether to recoup funds from Plaintiff TMRMC.

Furthermore, Defendant points out that Plaintiff FHMC has a pending

request for a formal administrative hearing to contest Defendant's

determination that FHMC was overpaid for rendering services to

eight (8) Medicaid recipients3

. As a result, Defendant concludes
 4

Defendant also points out that pursuant to Florida Statutes

Chapter 394, HRS is the designated state agency responsible for

ensuring there are adequate adolescent psychiatric care

facilities available. On the other hand, Defendant points out

that it is only authorized to disburse Medicaid payments for

"medically necessary" services. 

 5See Fla.Stat. § 394.451 (1994), et seq. ("The Florida

Mental Health Act," which provides procedures for commitment of

individuals). 

that Plaintiffs have not suffered any monetary damage, any

prospective damages to or suffered by Plaintiffs are too

speculative, and Plaintiffs have not exhausted their administrative

remedies pursuant to Florida Statutes Chapter 120. Consequently,

Defendant would have the Court hold that there has been no actual

dilution in either Plaintiff's Medicaid per diem rates and,

therefore, there is no violation of the Boren Amendment.

Second, AHCA maintains that HRS, not it, is the proper

defendant in this action. Defendant asserts that HRS delays

placement of Plaintiffs' adolescent psychiatric patients in

outpatient facilities, either because of administrative delays by

HRS or the failure of HRS to provide an adequate number of such

facilities4

. Furthermore, Defendant contends that: (1) a

substantial number of the adolescent patients in question are in

the custody of HRS; or (2) the adolescent patients in question are

still a danger to themselves or others fall and within the care of

HRS under Florida's Baker Act5. Defendant therefore concludes that

HRS is responsible for the reimbursement problems at issue in this

case, and that Plaintiffs have therefore not proven any Boren

Amendment violations.

AHCA next asserts the inappropriate level of care
 6

Defendant represents that it is willing to elect

inappropriate level of care services, subject to authorization

and appropriate funding by the Florida Legislature and HCFA. 

reimbursement provision of the Boren Amendment is optional, and

that Florida has not elected to provide such coverage6. In the

absence of inappropriate level of care coverage, Defendant states

that medical necessity, or the lack thereof, is the only pertinent

criterion for determining the compensability of the "grace days."

Since Plaintiffs do not dispute that in-patient psychiatric care is

not "medically necessary" for the adolescent patients in question,

Defendant argues the hospitals cannot be reimbursed under Florida's

Medicaid for the "grace days" at issue. Accordingly, Defendant

would have the Court hold that Plaintiffs have failed to

demonstrate a violation of the Boren Amendment.

AHCA also argues that the Boren Amendment provides, by

definition, that the Plaintiff hospitals are not efficiently

operated when they continue to treat patients beyond medical

necessity—i.e., when in-patient care is no longer "medically

necessary" for the adolescent psychiatric patients in question.

Defendant therefore states that its failure to pay Plaintiffs for

such services does not violate the Boren Amendment.

Finally, AHCA states that Medicaid per diem rates are

established by it only after a hospital provider submits its cost

of care (including "charity" care), which is then divided by the

reimbursable Medicaid days to produce a per day/per bed cost for

the provider. Defendant reasons that even if this case raises a

Boren Amendment issue, the amount of the services not directly paid

to Plaintiffs will be recalculated as part of the "charity" care
 7

See Fla.Stat. §§ 409.901-409.920 (1991); Fla.Admin.Code

ch. 59G. Under the Florida program, the state contributes 44% of

the funds for indigent care, with the remaining 56% being

contributed by the federal government. 

 8In addition to EPSDT, these services include the following: 

(1) Inpatient and outpatient hospital services; (2) Rural health

clinic services; (3) Laboratory and x-ray services; (4) Skilled

nursing facilities services for individuals 21 years of age and

older; (5) Family planning services for individuals of

child-bearing age; (6) Physician services; (7) Home health

services for individuals who are entitled to receive skilled

nursing facilities services; (8) Nurse midwife services; and

(9) Transportation to receive medical care. 

when any subsequent per diem rates are set. Hence, no Boren

Amendment violation has occurred.

II. FINDINGS:

The factual matters of this case are largely undisputed. The

parties merely differ in their conclusions of whether a Boren

Amendment violation has been demonstrated. The Court now makes the

following findings of fact and law:

A. Florida's Medicaid System:

The Medicaid Act, Title XIX of the Social Security Act, is a

cooperative federal-state program designed to allow states to

receive matching funds from the federal government to finance

medical services to certain low-income persons. Schweiker v. Gray

Panthers, 453 U.S. 34, 36, 101 S.Ct. 2633, 2636, 69 L.Ed.2d 460

(1981). States may voluntarily choose to participate in the

Medicaid program. See 42 U.S.C. § 1396b(a). When a state, like

Florida, has elected to participate in the Medicaid program7

, it

must provide certain services 8, including early and periodic

screening, diagnostic, and treatment services ("EPSDT") for
 9

See 42 U.S.C. §§ 1396d(a)(16), 1396d(h); Fla.Admin.Code

Ann. r. 59G-4.080 (1994). See generally Fla.Stat. § 409.905(2)

(the state "shall pay for early and periodic screening and

diagnosis of a recipient under age 21 to ascertain ... mental

problems and conditions and provide treatment to correct or

ameliorate these problems and conditions...."). 

 10See Fla.Stat. § 409.905(1); Fla.Admin.Code Ann. r. 59G4.080 ("Medically necessary follow-up treatment that is available

through Medicaid includes ... community mental health

services."). The federal guidelines for state EPSDT inpatient

psychiatric services are outlined in 42 C.F.R. §§ 441.150-.182

(1994). 

 11The term "medical necessity" is defined in the Code of

Federal Regulations and at Fla.Admin.Code r. 59G-1.010(167), and

is a part of the regulations adopted by Florida when the state

made its election to participate in the federal Medicaid program. 

qualified aid recipients under age twenty-one9.

 In Florida, EPSDT services include in-patient psychiatric

hospital services for individuals under age twenty-one10, such as

those provided by Plaintiffs. Federal law does not appear to

require states to provide in-patient psychiatric treatment in their

EPSDT programs. See 42 U.S.C. § 1396d(r); 42 C.F.R. § 441.56(c).

However, even when a state elects to provide an optional service,

that service becomes part of the state Medicaid plan and is subject

to the requirements of federal law. See Sobky v. Smoley, 855

F.Supp. 1123, 1127 (E.D.Cal.1994) (collecting citations).

In-patient psychiatric care must therefore be provided by the

hospitals to their patients as long as medical necessity exists11.

An adolescent Medicaid recipient in an acute care facility is

entitled to receive full hospital services of room, board, medical

supplies, diagnostic and therapeutic services, use of the hospital

facilities, drugs, nursing care, and all supplies and equipment

necessary to provide care (Pretrial Stipulation, Doc. 89). There
 12See, e.g., Illinois Health Care Ass'n v. Bradley, 983 F.2d

1460, 1461 (7th Cir.1993), and cases cited therein. 

 13The Boren Amendment was enacted in 1980 as part of the

Omnibus Budget Reconciliation Act ("OBRA") of 1980, Pub.L. No.

96-499, § 962(a), 94 Stat. 2599, 2650 (1980), and originally only

set the standard for reimbursement of nursing and intermediate

care facilities. In 1981, Congress applied the same standard for

reimbursement to hospitals. OBRA of 1981, Pub.L. 97-35, § 2173,

95 Stat. 808 (1981).

Congress passed the Boren Amendment in response to

rapidly rising Medicaid costs. The Amendment was designed

to minimize the inflationary spiral caused by the existing

complex and rigid reimbursement regulations. Congress gave

the states greater flexibility in calculation of

reimbursement rates in order to promote efficient and

economical delivery of services. Under the Amendment,

participant states could adopt prospective reimbursement

rates, based on their own formulation of what the services

could cost. Federal oversight was primarily limited to

determination of the reasonableness of the states'

assurances for what the medical services should cost. See

Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 506-08, 110

S.Ct. 2510, 2515-17, 110 L.Ed.2d 455 (1990). 

are no financial caps imposed upon such services when provided to

patients under the age of 21 years. See Fla.Stat. § 409.908(1)(a).

Moreover, in administering EPSDT programs, participant states,

such as Florida, must comply with the Medicaid regulations,

particularly the 62 conditions set forth in 42 U.S.C. § 1396a(a)12.

Specifically, the Boren Amendment13 to Title XIX dictates that

although administration of Medicaid plans is the responsibility of

the states, a participating state must make payments for hospital

services

through the use of [reimbursement] rates ... which the State

finds, and makes assurances satisfactory to the Secretary [of

HHS], 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 ... and to assure that

individuals eligible for medical assistance have reasonable

access ... to in-patient hospital services of adequate

quality....
 1442 C.F.R. § 430.10 (1994). 

 15The Agency For Health Care Administration took over the

reimbursement part of the Medicaid Program for Florida in 1993

(Pretrial Stipulation, Doc. 89). 

42 U.S.C. § 1396a(a)(13)(A). In other words, a participant State

must do two things to be in compliance with the Boren Amendment:

first, ensure individuals have "reasonable access" to facilities of

"adequate quality"; and second, reimburse health care providers in

a manner that is "reasonable and adequate" to meet the costs of

"efficiently and economically operated" facilities. The Secretary

of HHS, through the Health Care Financing Administration ("HCFA")14,

then either approves or disapproves the State's proposed

reimbursement system. See 42 U.S.C. § 1396a(b).

In Florida, AHCA establishes and applies the methodology for

determining the per diem rate that a hospital receives for

psychiatric medicaid patients15. This formula is based upon

allowable cost and divided by allowable days, which results in the

per diem rate for each individual hospital. The per diem rate is

not determined for each service in a hospital which the hospital

provides or performs, but is an average of all services provided in

that hospital from a prior year plus an inflation factor for the

current year; therefore, the per diem rate is different for each

hospital, and will change every year. Since the Medicaid hospital

reimbursement rate reflects an average cost of all hospital

services for each facility, the rate over-compensates for some

services and under-compensates for other services (Pretrial

Stipulation).

A state agency with oversight over an approved Medicaid
 16A single state agency must be established or designated to

administer or to supervise the administration of state Medicaid

plan. See 42 U.S.C. § 1396a(a)(5). 

reimbursement system16 is authorized to contract with peer review

organizations ("PROs") to carry out its duty to promote "the

effective, efficient, and economical delivery of health care

services ... and the quality of services of the type for which

[Medicaid] payment may be made." 42 U.S.C. § 1395y(g). See also

id. at § 1320c-7(a) (authorizing states with approved Title XIX

plans to contract functions to PROs). PROs are only permitted to

recommend making Medicaid payments for services that are

"reasonable and necessary for the diagnosis or treatment of illness

or injury." See 42 U.S.C. § 1395y(a)(1)(A). In addition, in

determining whether Medicaid services are necessary, PROs must

review

some or all of the professional activities in the area ... of

institutional ... providers of health care services in the

provision of health care services and items for which payment

may be made ... for the purpose of determining whether ... (A)

such services and items are or were reasonable and medically

necessary ...; (B) the quality of such services meets

professionally recognized standards of health care; and (C)

in case such services and items are proposed to be provided

... on an in-patient basis, such services and items could,

consistent with the provision of medical care, be effectively

provided more economically on an outpatient basis or in an

in-patient health care facility of a different type.

....

42 U.S.C. § 1320c-3(a)(1). The PRO determines through its review

whether Medicaid payments are to be made for the services reviewed.

42 U.S.C. § 1320c-3(a)(2). The PRO's determination is conclusive,

unless the "determination is changed as the result of any hearing

or review of the determination." 42 U.S.C. § 1320c-3(a)(2)(C).
See id. at § 1320c-4.

KEPRO is under contract with the State of Florida for this

purpose. On a retrospective basis, KEPRO reviews provider claims,

utilizing criteria which have been established by the State of

Florida, to determine whether payment for the services should be

allowed, disallowed or allowed for a reduced number of days.

Florida's Agency for Health Care Administration ("AHCA"), relying

on the KEPRO determination, makes the final decision regarding

reimbursement for the services. In the meantime, the provider

receives reimbursement for the services provided on a monthly

basis, so at the end of the fiscal year, if there has been an

adverse determination by KEPRO so that certain days or admissions

are denied, AHCA sends a recoupment letter to the provider

requesting that payment be disgorged. The provider either repays

the state, or funds are deducted from future payment, after

administrative remedies are exhausted.

Florida does not reimburse providers in any amount for what it

terms "administrative" or "grace days," which are defined by

regulation as "days a patient remains in the hospital beyond the

point of medical necessity while awaiting placement in a nursing

home or other place of residence." Fla.Admin.Code r. 59G4.150(1)(a).

On the other hand, Florida reimburses Plaintiffs and the 23

other Medicaid providers of in-patient hospital care for the

provision of medically necessary psychiatric treatment to these

patients. Florida also reimburses providers of medically necessary

psychiatric care in alternative, lower level care facilities once
 17The State has established or approved certain alternative

settings for psychiatric Medicaid patients, and the Agency

reimburses for services in entities which are approved as

alternative settings for these patients for the medically

necessary services provided therein (Pretrial Stipulation, Doc.

89). 

 18In addition to the frequent unavailability of bed space in

alternative setting facilities when needed by the adolescent

patients, there is an evaluation process which must take place

prior to patient placement in the alternative setting. If a

Medicaid psychiatric patient is discharged because medical

necessity no longer exists, then before a Medicaid psychiatric

patient can be eligible for placement in an alternative setting,

the process requires that the person be evaluated by the Case

Review Committee ("CRC"), a committee of Social Services Health

Care Professionals that is funded by HRS. The usual procedure

for the CRC is that this committee meets on a monthly basis and

approves placement, which may take weeks, months, or be

intermediate. Due to the infrequency of the CRC meetings,

additional delays are often experienced in placing the adolescent

psychiatric patient in an alternative setting. 

the medical necessity for in-patient treatment ends17. However, due

to organizational18 or funding deficiencies in the state's medical

assistance program, there is an extreme shortage of available

spaces at alternative care facilities for the adolescent

psychiatric patients.

B. The Case At Bar:

Plaintiffs have therefore repeatedly found themselves forced

into the posture of retaining and caring for adolescent psychiatric

patients after the medical necessity for in-patient, acute care

services ceases, because treatment at an alternative facility was

medically necessary for the patient, but placement in such an

alternative setting was impossible or greatly delayed. Under these

circumstances, the Plaintiffs may not discharge the patients to the

home, since they are not medically able to return to such an

unsupervised setting. In addition, as Medicaid providers, the
Plaintiffs cannot discriminate against adolescent psychiatric

patients at the point of admission, even though the providers are

aware of the possibility or likelihood of an extended period of

"grace days" for these patients once medical necessity for

in-patient services ends (Pretrial Stipulation). Thus, the

hospitals are forced, through no fault of their own, to retain

these patients until placement in an alternative setting is

possible.

On retrospective review, KEPRO abides by Medicaid guidelines

by denying Plaintiffs payment for in-patient psychiatric services

for adolescents at the point those services are no longer medically

necessary. However, Florida's failure to adopt a provision for

payment of inappropriate level of care services causes AHCA to deny

any reimbursement to the two hospitals for those "grace days,"

regardless of the duration the adolescent patient has to wait

before an alternative out-patient setting is available. AHCA,

through its denial of reimbursement to Plaintiffs for adolescent

psychiatric patient "grace days," thereby shifts the deficiencies

of the State's medical assistance program, and the resulting fiscal

impact of the same, to the Plaintiff hospitals.

The Court heard testimony about the disproportionate number of

denials by KEPRO for in-patient psychiatric services (both adult

and adolescent). For example, although psychiatric Medicaid

services only comprise 7.3 percent of all admissions and 15.2

percent of all patient days, they comprised 65.4 percent of all

denials and 78.3 percent of all denial days (Pls.' Ex. 11). The

large number of denials are probably a byproduct of the 100%
 19Again, these figures include both adult and adolescent

psychiatric patients receiving Medicaid. It is somewhat

troubling that Plaintiffs attempt to introduce evidence of adult

psychiatric patients, when the only issue before the Court is the

adequacy of reimbursement for adolescent psychiatric patients. 

However, the Court does not find this lack of precision to be

fatal to Plaintiffs' case. 

retrospective review that KEPRO does for all in-patient psychiatric

services (Pretrial Stipulation). Again, however, the net effect of

the large number of denials is that the Plaintiff hospitals recover

only a portion of their costs of providing in-patient psychiatric

care, either through immediate reimbursement by AHCA, or as

reflected in the adjustment of the successive year's overall

in-patient reimbursement rate.

Plaintiffs also presented evidence of the fiscal impact of the

denials on each of the two hospitals.

Carl Mahler, Administrator of TMRMC's psychiatric facility,

testified that 25 percent of TMRMC's psychiatric patients were on

Medicaid, includes 40 percent of all adolescent patients. Mr.

Mahler further stated that the average length of stay for all

psychiatric patients was 12 days. Annette Hurst, Director of

Utilization Management and Discharge Planning for Plaintiff TMRMC,

testified that between 1989-1991, TMRMC had a total of 4 Medicaid

denials out of 15 Medicaid recoupments by HRS, out of 429

psychiatric admissions19 for the same period. Although the number

of psychiatric admissions was constant, there were a total of 146

denials for psychiatric patients during the 1992-1995 period.

While not all of these denials during 1992-1995 were adolescent

patients, Ms. Hurst testified that the denials for adolescent

patients during this period totalled over $654,000.00. As of June,
 20Ms. Schimpf stated that the average was 32 days for all

psychiatric patients, including one patient who stayed for 573

days at a cost of more than $230,000. Without this patient, the

average length of stay for psychiatric patients was 14 days. 

 21Again, these figures include $232,911.00 for the one

patient noted above. 

1995, TMRMC had an in-patient reimbursement rate of $723.00 per

patient, per day. However, AHCA had not attained any recoupment

from TMRMC since 1992.

Karen Schimpf, Assistant Director of Systems Development for

Plaintiff FHMC, stated that the average length of stay for

psychiatric patients was 14 days20. FHMC had a total of $311,310.00

in recoupment denials, and $475,985.00 in reconsideration denials

for all psychiatric patients21. Out of 9 psychiatric care cases

pending before AHCA's Division of Administrative Hearings, 2

involve care for adolescent patients totalling $257,000.00. FHMC

has had a total of 120 psychiatric denials through June 20, 1995,

including both adult and adolescent patients. At the time of

trial, FHMC's in-patient reimbursement rate was $833.90 per

patient, per day. Again, it does not appear that AHCA had attained

any recoupment from FHMC for the cases in question.

C. Conclusions:

Plaintiffs, as health care providers under the Florida

Medicaid program, have standing to sue AHCA for declaratory and

injunctive relief under 42 U.S.C. § 1983, for an alleged violation

of the Boren Amendment of the federal Medicaid Act. Wilder, 496

U.S. at 498, 110 S.Ct. at 2510. This Court has jurisdiction

pursuant to 28 U.S.C. § 1331 to consider such a challenge.

 As an initial matter, the Court rejects out of hand Defendant
AHCA's contention that there is no case or controversy because

Plaintiffs have failed to exhaust the state administrative appeals

process for denials of adolescent psychiatric care by AHCA and

KEPRO. It is well established that a claim under 42 U.S.C. § 1983

cannot be barred by a plaintiff's failure to exhaust state remedies

with respect to unreviewed administrative actions. E.g., Patsy v.

Florida Bd. of Regents, 457 U.S. 496, 516, 102 S.Ct. 2557, 2568, 73

L.Ed.2d 172 (1982); Thornquest v. King, 61 F.3d 837, 841 n. 3

(11th Cir.1995). The courts that have considered the exhaustion

argument in the context of the Boren Amendment have found this rule

applies with equal force to cases under the Amendment. See, e.g.,

Virginia Hosp. Ass'n v. Baliles, 868 F.2d 653, 660-61 (4th

Cir.1989), aff'd, Wilder, 496 U.S. at 498, 110 S.Ct. at 2510;

Department of Health and Social Serv. v. Alaska State Hosp. &

Nursing Home Ass'n, 856 P.2d 755, 758 (Alaska 1993); Indiana State

Bd. of Pub. Welfare v. Tioga Pines Living Ctr., Inc., 575 N.E.2d

303, 307 (Ind. 4th Ct.App.1991). Moreover, even if exhaustion were

required, AHCA's posture in this case indicates that reliance on

administrative action would be futile because Plaintiffs' claims

would likely be denied in whole or in part. See generally Deltona

Corp. v. Alexander, 682 F.2d 888, 893 (11th Cir.1982) (no

exhaustion of administrative action required where it would be

futile); Linfors v. United States, 673 F.2d 332, 334 (11th

Cir.1982) (same).

 The Court similarly rejects AHCA's argument that HRS is the

proper party defendant. As this Court noted in its January 12,

1995 order, the Court cannot enter any relief against HRS under a
Boren Amendment claim fashioned as a § 1983 claim because HRS is

not the designated Medicaid authority for the State of Florida (see

Doc. 67 at 14-15). In addition, the Court further found "that HRS

does not promulgate rules governing Medicaid reimbursement,

semireimbursement rates for Medicaid providers, or make assurances

to HCFA that those rates comply with the provisions of the Boren

Amendment" (Id. at 15). Rather, AHCA has the responsibility for

each of these tasks. The Court further disagrees with AHCA's

contention that Plaintiffs have a monetary recourse against HRS for

all the adolescent psychiatric patients in question. The trial

testimony shows that only a very small proportion, if indeed any

proportion at all, of the adolescent psychiatric patients at issue

would fall within the purview of HRS through the Baker Act or some

other scheme. The fact that Plaintiffs' losses are exacerbated by

HRS's failure to provide an adequate number of alternative

outpatient facilities to which Plaintiffs can discharge these

patients, does not defeat Plaintiffs' claims against AHCA under the

Boren Amendment.

 The Court also disagrees with AHCA's contention that the

provision of "inappropriate level of care services" are optional

under these circumstances. Although the federal regulation

governing payment for "grace days" (which the Boren Amendment terms

"inappropriate level of care reimbursement") indicates that a

state's reimbursement for such time is optional, 42 C.F.R. §

447.253(b)(1)(ii)(B), the legislative history of this regulation

indicates that it is mandatory under the scenario at issue before

this Court. The Boren Amendment to the Medicaid Act, 42 U.S.C. §
1396a(a)(13)(A), mandates reimbursement to in-patient hospital

providers who provide lower level care to patients once the medical

necessity for in-patient, acute care ceases, but the required

alternative care setting is unavailable. The reimbursement must be

at a lower rate than that received for in-patient services,

commensurate with the level of care provided.

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

Cir.1983), the Eleventh Circuit expressly held that the Alabama

Medicaid reimbursement plan was deficient for failing to provide

for lower payment rates for patients who did not need in-patient

care. Id. at 961-62. The Beasley court therefore remanded the

case to the district court to impose an appropriate remedy

accounting for inappropriate level of care services, without

requiring the suspension of the entire state Medicaid plan. Id. at

962.

As the Eleventh Circuit recognized in Beasley, the history of

42 C.F.R. § 447.253(b)(1)(ii)(B) indicates that HCFA intended for

the option of reimbursing for inappropriate level of care be

available only in situations where lower level care facilities were

available, but hospitals elected to retain patients in the

in-patient setting beyond the point of medical necessity. 52

Fed.Reg. at 28,143 (1987); 51 Fed.Reg. at 5, 730 (1986); 48

Fed.Reg. at 56,048 (1983). The history of this rule, taken

together with the mandatory language of the Boren Amendment and the

holding in Beasley, requires that the Plaintiff hospitals be

reimbursed for the "grace days" spent by adolescent psychiatric

care patient in their in-patient facilities, when the sole reason
for retaining the patients in the upper level facility is the

unavailability of alternative settings to which the patient may be

discharged.

To the extent that the legislative history of 42 C.F.R.

Section 447.253(b)(1)(ii)(B) may be read to sanction the state's

refusal to reimburse the Plaintiff hospitals at any rate under this

scenario, HCFA's determination is directly contrary to the express

mandate of the Boren Amendment and is accordingly not entitled to

deference by this Court. Chevron, U.S.A., Inc. v. Natural

Resources Defense Council, 467 U.S. 837, 842-43, 104 S.Ct. 2778,

2781-82, 81 L.Ed.2d 694 (1984). As already discussed, the Boren

Amendment requires that states participating in the Medicaid

program reimburse in-patient hospital providers at a rate which is

"reasonable and adequate" to meet the costs 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 ..."

The wholesale failure to reimburse any monies to two in-patient

providers of psychiatric care for adolescents, when such care is

only medically necessary on an outpatient basis, does not comport

with the strictures of the Boren Amendment.

 Plaintiffs do not challenge the adequacy of the per diem

rates reimbursed to them for the days in which adolescent

psychiatric patients receive medically necessary in-patient

services; however, Plaintiffs do assert that by denying any

reimbursement to the hospitals during the "grace days" which are

necessitated through no fault of the Plaintiffs, the state is so
diluting the otherwise adequate per diem rates as to make them

unreasonable and inadequate to meet the costs of the efficient and

economical operation of the facilities. The Court does not

entirely agree with Plaintiffs on this point.

The Court disagrees with Plaintiffs' conclusion that AHCA's

failure to provide reimbursement for medically necessary outpatient

psychiatric services to adolescents in an in-patient setting,

dilutes the in-patient per diem rate that the Plaintiffs receive.

All parties stipulate that the initial in-patient per diem rate is

adequate, and the Court agrees with that stipulation. The Court is

simply unwilling to mix apples with oranges by saying that the per

diem rate for all in-patient services must be increased to account

for the lack of compensation for medically necessary outpatient

services. At least one circuit has held under somewhat similar

circumstances that outpatient costs should not be included in

calculating reimbursement rates for in-patient services. See New

York v. Bowen, 811 F.2d 776, 777-79 (2d Cir.1987).

Instead, AHCA has effectively created a situation where, in

the absence of the inappropriate level of care compensation,

in-patient psychiatric providers such as Plaintiffs are providing

medically necessary outpatient psychiatric services to adolescents

in an in-patient setting, but receiving an outpatient reimbursement

rate of zero. The Boren Amendment applies to outpatient rates, in

addition to in-patient rates. See generally Ohio Hosp. Ass'n v.

Ohio Dep't of Human Serv., 62 Ohio St.3d 97, 579 N.E.2d 695, 698

(1991) ("Although Wilder involved a challenge to per-diem charges

for in-patient care, the selfsame analysis applies to the
outpatient fees involved in this case."), cert. denied, 503 U.S.

940, 112 S.Ct. 1483, 117 L.Ed.2d 625 (1992). Accord, Orthopaedic

Hosp. v. Kizer, No. 90-4209, 1992 WL 345652 (C.D.Cal.1992) (same).

The failure to compensate Plaintiffs at an appropriate outpatient

rate therefore violates the Boren Amendment.

While the Boren Amendment was intended to grant states a

greater degree of flexibility in establishing the methodology for

their reimbursement rates, the amendment was "not intended to

encourage arbitrary reductions in payment that would adversely

affect the quality of care." S.Rep. No. 139, 97th Cong., 1st Sess.

478, reprinted in 1981 U.S.Code and Cong. & Admin.News 396, 744.

In this case, due to an inadequate level of funding for

inappropriate level of care services, AHCA and the State of Florida

have impermissibly shifted the deficiencies of Florida's Medicaid

program, and the resulting fiscal impact of the same, to the

private sector hospitals. As discussed above, since Plaintiffs are

qualified providers under the Medicaid Act, they cannot lawfully

choose to discriminate against the adolescent patients in question

by refusing to admit them on the basis that Plaintiffs may not

recover all—or for that matter, any—of the costs of providing

psychiatric services from AHCA. Plaintiffs are therefore left with

a Hobson's choice: either accept the adolescent psychiatric

patients, and risk recoupment by AHCA later on, or deny admission

to the adolescent psychiatric patients and risk being in

noncompliance with federal guidelines.

Defendant AHCA seems to concede that budgetary constraints and

the failure of the Legislature to adopt a provision for
inappropriate level of care services, have left it incapable of

compensating Plaintiffs for medically necessary outpatient

psychiatric services provided in an in-patient setting. However,

as the Tenth Circuit has held:

While budgetary constraints may be a factor to be considered

by a state when amending a current plan, implementing a new

plan, or making the annually mandated findings, budgetary

constraints alone can never be sufficient. Illinois Hosp.

Ass'n [v. Illinois Dept. of Public Aid, 576 F.Supp. 360 at 368

(N.D.Ill.1983).] "If a state could evade the requirements of

the [Medicaid] Act simply by failing to appropriate sufficient

funds to meet them, it could rewrite the Congressionally

imposed standards at will." Alabama Nursing Home Ass'n v.

Califano, 433 F.Supp. 1325, 1330 (M.D.Ala.1977), review and

vacated in part on other grounds, sub nom., 617 F.2d 388 (5th

Cir.1980).

AMISUB (PSL), Inc. v. Colorado Dept. of Social Serv., 879 F.2d 789,

800-01 (10th Cir.1989), cert. denied, 496 U.S. 935, 110 S.Ct. 3212,

110 L.Ed.2d 660 (1990). Yet, this is precisely what the State of

Florida has attempted to do in the case at bar.

Having found a violation under the Boren Amendment, the only

remaining question is what remedy is appropriate. There are two

courses that the Court will take.

First, the Court finds that AHCA's failure to provide any

reimbursement for medically necessary inappropriate level of care

services constitutes a Boren Amendment violation. The absence of

such a reimbursement provision renders Florida's Medicaid plan

deficient. As such, the Florida Legislature must amend its

Medicaid plan to include reimbursement for medically necessary

inappropriate level of care services, to bring the Medicaid plan

into compliance with federal law. See Beasley, 702 F.2d at 961-62.

Second, pending the adoption of such a reimbursement provision

by the Florida Legislature, Defendant AHCA is ordered to set an
appropriate outpatient rate for medically necessary outpatient

psychiatric services provided to adolescent Medicaid recipients at

each of the two Plaintiff hospitals. Such interim rates may be

used pending the adoption of permanent reimbursement rates that are

compliance with federal law. See, e.g., Mason Gen. Hosp. v.

Secretary of Dep't of H.H.S., 809 F.2d 1220, 1223 (6th Cir.1987);

New England Memorial Hosp. v. Rate Setting Comm'n, 394 Mass. 296,

475 N.E.2d 740, 745 (1985). In setting the interim outpatient

rate, AHCA shall use the same methodology it applies to achieve

appropriate rates for non-hospital providers of such outpatient

psychiatric services. Kizer, 1992 WL 345652, at *1. The interim

rates shall remain in effect until such time as the Florida

Legislature adopts a permanent inappropriate level of care

reimbursement provision.

Plaintiffs will continue to receive reimbursement for

medically necessary in-patient psychiatric services at their

existing in-patient per diem rates. To the extent that psychiatric

services for adolescent Medicaid recipients are only medically

necessary at an outpatient rate, Plaintiffs shall receive

reimbursement for the appropriate number of days at the outpatient

rate set by AHCA.

Accordingly, it is hereby

ORDERED AND ADJUDGED:

1. The Court finds that Plaintiffs have proven that the

present Medicaid reimbursement scheme overseen by Defendant AHCA

fails to adequately compensate Plaintiffs for medically necessary

outpatient psychiatric services to adolescents, such that the
reimbursement rate is not "reasonable and adequate to meet the

costs ... of efficiently and economically operated facilities," in

violation of the Boren Amendment to Title XIX of the Social

Security Act, 42 U.S.C. § 1396a(a)(13)(A), and 42 U.S.C. § 1983.

2. Based upon the foregoing, Plaintiffs are entitled to a

declaratory judgment holding the State of Florida's Medicaid

reimbursement system to be deficient in that (i) it fails to pay

for the "grace days" spent by adolescent psychiatric care patients

at the Plaintiff hospitals' facilities under the circumstances

described herein, and (ii) the effect of AHCA's refusal to

reimburse the hospitals at a rate reflective of the medically

necessary level of care received by these patients during the

"grace days" is to give Plaintiffs an outpatient per diem rate of

zero for the medically necessary outpatient services provided in an

in-patient setting, such that the outpatient rate is unreasonable

and inadequate to meet the costs of an economically and efficiently

run facility. Both deficiencies constitute violations of the Boren

Amendment, and the Court so holds.

3. Defendant AHCA is enjoined from future violations of the

Boren Amendment, as set forth herein. AHCA shall adopt for each

Plaintiff hospital an interim outpatient reimbursement rate that is

reasonable and adequate to meet the costs of an economically and

efficient run facility. AHCA shall reimburse Plaintiffs in

accordance with the existing in-patient rate, or the interim

outpatient rate, as dictated by the medical necessity of each

individual case. This injunction is to remain in full force and

effect until further order of the Court.
4. Defendant AHCA, through the Florida Legislature, is

directed to amend Florida's Medicaid plan in such a way as to be

non-violative of the Boren Amendment—namely, Florida's Medicaid

plan must be amended to include reimbursement for inappropriate

level of care services.

5. The Court retains jurisdiction for a period of 60 days for

the purposes of assessing attorney fees and costs.

6. Any application for attorney fees must be filed by

Plaintiffs by February 30, 1996.

7. The clerk is directed to enter judgment for Plaintiffs and

close this case, subject to the retained jurisdiction for the

limited purposes herein specified.

DONE AND ORDERED this 18th day of January, 1996.