Of the Tenth Circuit, sitting by designation. *

United States Court of Appeals

For the First Circuit

No. 08-2550

FRANKLIN MEMORIAL HOSPITAL,

Plaintiff, Appellant,

v.

BRENDA M. HARVEY, in her official capacity as the Commissioner 

of the Maine Department of Health and Human Services,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. George Z. Singal, U.S. District Judge]

Before

 Lynch, Chief Judge,

Ebel and Lipez, Circuit Judges. *

Marc N. Frenette with whom Michael R. Poulin and Skelton,

Taintor & Abbott were on brief for appellant.

Christopher C. Taub, Assistant Attorney General, with whom

Janet T. Mills, Attorney General, and Paul Stern, Deputy Attorney

General, were on brief for appellee.

August 5, 2009
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LYNCH, Chief Judge. Since 1989, Maine has required all

hospitals to provide free medical services to certain low income

patients under a set of statutes and regulations collectively known

as "free care laws." See Me. Rev. Stat. Ann. tit. 22, §§ 1715,

1716; 10-144-150 Me. Code R. § 1.01 et seq. Maine's free care laws

do not reimburse the hospitals for their expenses incurred in

delivering care to low income patients, and the amount of free care

that the hospitals must provide is not limited under the statute.

Separately, Maine pays for the medical treatment provided

to some low income patients through its Medicaid program, called

"MaineCare." Yet the MaineCare reimbursements fall well below the

hospitals' actual cost of providing medical services.

Plaintiff Franklin Memorial Hospital ("FMH") is a nonprofit, general acute care hospital located in Farmington, Maine

with a tradition of voluntarily providing free and reduced price

medical care to low income patients. FMH sued Brenda M. Harvey,

the Maine official charged with enforcing the state's free care

laws and administering MaineCare. In a two-count complaint, FMH

sought a declaratory judgment that both Maine's free care laws and

MaineCare are unconstitutional takings of property. The district

court dismissed the count relating to MaineCare and granted summary

judgment to the state official on FMH's takings challenge to the

free care laws. We affirm.
This is a change from Maine's prior free care scheme, 1

which set the income qualification at 100% of the federal poverty

level.

Historically, Maine law required local towns, not the

medical care providers, to bear the cost of medical treatment for

their indigent residents. See Me. Rev. Stat. ch. 24, § 23 (1871)

("A person residing in a place not incorporated, may provide relief

and medical aid for any person sick, wounded, or dangerously

injured, residing in such place . . . and recover the amount

necessarily expended of the town where such person had a settlement

. . . ."); see also Hutchinson v. Inhabitants of Carthage, 73 A.

825 (1909) (ordering payment by the town for the cost of medical

care rendered to an indigent family with measles). In 1973,

Maine's pauper laws were revised and replaced with a system of

municipal general assistance programs, which required

municipalities to pay the cost of certain medical expenses for

their indigent residents. See Me. Rev. Stat. Ann. tit. 22,

§§ 4301, 4313. These laws remain in effect today.

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I.

Since July 1, 2007, Maine's free care laws have required

hospitals to provide free medically necessary inpatient and

outpatient hospital services to Maine residents who earn incomes at

or below 150% of the federal poverty level. See 10-144-150 Me. 1

Code R. §§ 1.01(A), 1.02(C). Under the regulations, "[n]o hospital

shall deny services to any Maine resident solely because of the

inability of the individual to pay for those services." Id.

§ 1.01(A). Compliance with the free care laws is not a condition

for having a license to operate a hospital in Maine. Instead, the

state obtains compliance with its free care requirement through a

system of fines and enforcement suits brought by the state's

attorney general or any affected patient. See Me. Rev. Stat. Ann.

tit. 22, § 1715(2). Maine's free care laws do provide relief to
Other states, however, have laws that, although not 2

identical to Maine's scheme, require hospitals to give free medical

care to low income patients. Rhode Island, for example, requires

"[a]ll licensed hospitals . . . as a condition of initial and/or

continued licensure . . . [to] meet the statewide community needs

for the provision of charitable care." R.I. Gen. Laws

§ 23-17.14-15(a). The Rhode Island regulations, in turn, state

that "[h]ospitals shall provide full charity care (i.e., a 100%

discount) to patients/guarantors whose annual income is up to and

including 200% of the Federal Poverty Levels, taking into

consideration family unit size." 14-90-28 R.I. Code R. § 11.3(c).

Rhode Island's free care requirements are enforceable by the

state's attorney general, and noncompliance may result in

revocation of the hospital's license, up to a $1 million fine, and

5 years in prison. See R.I. Gen. Laws § 23-17.14-30.

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hospitals for which compliance with the regulations would have

ruinous financial consequences. Specifically, in any legal action

brought to enforce Maine's free care laws, the hospital may avoid

liability by showing that its "economic viability . . . would be

jeopardized by compliance." Id. § 1715(2)(D).

The parties agree that Maine's free care laws are unique

in that 

(1) the laws mandate that a hospital provide

free/uncompensated care to persons deemed

eligible by the state through a penalty

enforcement scheme, (2) the hospital is not

reimbursed any amount for the provision of

care, [and (3)] the provision of free care is

not a license condition or is not linked to

the state's certificate of need process. 

To the parties knowledge, no other state has a system of free care

with each of those three features.2

FMH operates in one of the poorest counties in Maine, and

the amount of free medical services it provides in compliance with
FMH has not received funds under the Hill-Burton Act, 42 3

U.S.C. § 291 et seq., and so is not subject to that statute's free

care requirements.

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Maine's free care laws has grown over the past several years. In

2004, FMH provided $131,280 in mandatory free care. During the

eleven months preceding May 31, 2008, FMH spent $890,212 to meet

its free care obligations.3

Still, these expenditures represent only a small fraction

of FMH's overall budget. Indeed, the roughly $661,000 in mandatory

free care that FMH provided during fiscal year 2007 amounted to

only 0.51% of the hospital's gross revenues for that year, and FMH

has not alleged that the level of free care that it currently

provides threatens its continued economic viability.

Although Maine provides no payment for the medical

services rendered in compliance with its free care laws, FMH

recovers some of the costs it incurs in treating certain low income

patients through reimbursements from the MaineCare program. Yet

reimbursements through MaineCare fall well short of FMH's actual

costs in treating patients. For example, in fiscal year 2007, FMH

received reimbursement under MaineCare at a rate of $2646.95 per

discharge for inpatient services, but FMH's actual cost per

discharge had historically been approximately $4796. MaineCare's

reimbursement rate for outpatient services is more favorable to FMH

but still only covers 89.7% of the hospital's outpatient costs.
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On August 21, 2007, FMH sued Harvey in her capacity as

the Commissioner of the Maine Department of Health and Human

Services, seeking a declaratory judgment that both Maine's free

care laws and the MaineCare program constitute uncompensated

takings of property. On October 22, 2007, Harvey filed a motion to

dismiss the count in FMH's complaint relating to the MaineCare

program. The district court granted Harvey's motion to dismiss the

MaineCare count on January 28, 2008, holding that FMH could not

state a takings claim because it voluntarily participates in the

MaineCare program. The parties filed cross-motions for summary

judgment on the remaining count relating to Maine's free care laws.

On September 24, 2008, a magistrate judge recommended granting

Harvey's motion for summary judgment. The magistrate judge,

applying an ad hoc analysis, held that Maine's free care laws did

not constitute a regulatory taking. On November 14, 2008, the

district court adopted the magistrate judge's recommended decision

and granted Harvey's motion for summary judgment. FMH timely

appealed.

II.

We first address FMH's takings challenge to Maine's free

care laws, which the district court rejected on summary judgment.

We review the grant of a motion for summary judgment de novo,

drawing all reasonable inferences in favor of the non-moving party.
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See Sullivan v. City of Springfield, 561 F.3d 7, 14 (1st Cir.

2009).

The Takings Clause of the Fifth Amendment, which applies

to the states through the Fourteenth Amendment, prohibits the

taking of private property for public use without just

compensation. Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 536

(2005). Although physical occupation of a person's property is the

paradigmatic taking, the Constitution also guards against certain

uncompensated regulatory interferences with a property owner's

interest in his property. Id. at 537. Here, the challenged

government action, which does not directly appropriate FMH's

property but rather regulates how FMH may use it, is properly

analyzed under the law of regulatory takings, not the law of

physical takings. See Philip Morris, Inc. v. Reilly, 312 F.3d 24,

33 (1st Cir. 2002) (en banc) ("A physical taking occurs either when

there is a condemnation or a physical appropriation of property.");

id. ("A regulatory taking transpires when some significant

restriction is placed upon an owner's use of his property for which

'justice and fairness' require that compensation be given."

(quoting Goldblatt v. Hempstead, 369 U.S. 590, 594 (1962))).

The Supreme Court's regulatory takings jurisprudence has

eschewed bright-line rules. Indeed, in contrast to the law of

physical takings, which typically "involves the straightforward

application of per se rules," Tahoe-Sierra Pres. Council, Inc. v.
-8-

Tahoe Reg'l Planning Agency, 535 U.S. 302, 322 (2002), "regulatory

takings jurisprudence . . . is characterized by 'essentially ad

hoc, factual inquiries,'" id. (quoting Penn Cent. Transp. Co. v.

City of New York, 438 U.S. 104, 124 (1978)), "designed to allow

'careful examination and weighing of all the relevant

circumstances,'" id. (quoting Palazzolo v. Rhode Island, 533 U.S.

606, 636 (2001) (O'Connor, J., concurring)).

Still, the Supreme Court has identified "two categories

of regulatory action that generally will be deemed per se takings."

Lingle, 544 U.S. at 538. "First, where [the] government requires

an owner to suffer a permanent physical invasion of her property --

however minor -- it must provide just compensation." Id. The

Court cited, as an example, Loretto v. Teleprompter Manhattan CATV

Corp., 458 U.S. 419 (1982), where a "state law requiring landlords

to permit cable companies to install cable facilities in apartment

buildings effected a taking." Lingle, 544 U.S. at 538. Second,

the Court has held that per se regulatory takings occur where the

"regulations completely deprive an owner of 'all economically

beneficial us[e]' of her property." Id. (emphasis and alteration

in original) (quoting Lucas v. S.C. Coastal Council, 505 U.S. 1003,

1019 (1992)). Neither of these situations is presented here.

A. Per Se Analysis

FMH argues that Maine's free care laws fall under the

first category of per se takings because "FMH is required to admit
Admittedly, this is not a permanent physical invasion of 4

FMH's real property, but rather periodic and intermittent. But the

temporary nature of the intrusion does not resolve the question of

whether the free care laws violate the Constitution, for even

temporary takings require just compensation. See First English

Evangelical Lutheran Church of Glendale v. County of Los Angeles,

482 U.S. 304, 318-19 (1987).

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and house (and board) patients who need admission to a hospital for

free." In its view, "[t]here is no difference in the government

occupying a room or the government ordering that a room be made

available to someone it designates." And FMH contends that "this

case involves laws that force FMH to give its real property

(hospital rooms) away for free." Additionally, FMH stresses that 4

Maine's free care laws require it to give away its personal

property to the extent that it must purchase and freely provide

expensive medicines and medical supplies to low income patients.

Thus, in FMH's view, Maine's free care laws are not a form of price

control but instead direct the transfer of property from the

hospitals to low income patients.

The Supreme Court, however, has recognized that

regulations of this sort do not effect a per se taking. See Yee v.

City of Escondido, 503 U.S. 519, 527-28 (1992). Yee rejected a

takings challenge to a rent control ordinance for mobile home

parks. It held that the ordinance did not require the property

owner to continue to use his land as a mobile home park and so did

not infringe his right to exclude others from the property. Id. at

528. That is, because the property owner remained free to exclude
We are bound by the Penn Central factors but note that 5

the Penn Central analysis has been the subject of some academic

criticism. See, e.g., R.A. Epstein, From Penn Central to Lingle:

The Long Backwards Road, 40 J. Marshall L. Rev. 602 (2007).

-10-

others from his property if he ceased using his property as a

mobile home park, the Supreme Court found that ordinance did not

require the occupation of the property by unwanted tenants. Here

too, FMH is not required to serve low income patients; it may

choose to stop using its property as a hospital, which is what

makes it subject to Maine's free care laws.

Moreover, the second category of per se taking is not

presented on these facts. There is no allegation that the

regulations remove all economically beneficial uses of the

property; FMH merely says that it faces higher operating costs as

a result of the free care laws.

B. Ad Hoc Analysis

Because the challenged government action does not fall

under either category of regulatory taking invoking a per se rule,

we apply an ad hoc analysis. Our analysis is guided by the three

Penn Central factors: (1) "[t]he economic impact of the regulation

on the claimant"; (2) "the extent to which the regulation has

interfered with distinct investment-backed expectations"; and (3)

"the character of the government action." 438 U.S. at 124. 5

"[T]he Penn Central inquiry turns in large part, albeit not

exclusively, upon the magnitude of a regulation's economic impact
-11-

and the degree to which it interferes with legitimate property

interests." Lingle, 544 U.S. at 540. Ultimately, this inquiry

"aims to identify regulatory actions that are functionally

equivalent to the classic taking in which the government directly

appropriates private property or ousts the owner from his domain."

Id. at 539.

1. Economic Impact of the Regulations

In response to those three factors, FMH argues that the

economic impact of the regulations is severe because "[t]he amount

of goods and services being confiscated by the State under the Free

Care Laws [is] significant and potentially unlimited." And the

cost of providing medical care is undisputably high. According to

FMH, each inpatient on average requires "approximately $1,200 in

medical goods, such as medical and surgical supplies, pharmacy

drugs, anesthesia gases, and intravenous therapy supplies, about

$1,700 in room and board services, and . . . about $1,800 for

doctors, nurses, and other staff to provide care to the client."

Moreover, the financial burden on FMH under Maine's free care laws

has increased nearly five fold since 2006 under the new

regulations.

Yet the potentially harsh economic consequences to

hospitals of Maine's free care laws are ameliorated somewhat by the

statutory defense to enforcement of the free care requirements

against hospitals whose "economic viability . . . would be
Our case does not involve a hospital whose claim that its 6

economic viability would be jeopardized by compliance with the free

care laws has been rejected by state authorities.

-12-

jeopardized by compliance." Me. Rev. Stat. Ann. tit. 22,

§ 1715(2)(D). And there is no allegation that FMH is presently

facing any threat to its economic viability on account of the free

care laws. We do not suggest that there can never be a taking 6

based upon an adverse economic effect short of jeopardizing the

economic viability of a plaintiff; we only note that this case is

not at that end of the spectrum.

We do agree with one of FMH's arguments regarding how to

assess the economic impact of the regulation. The magistrate

judge's recommended decision speculated that "[i]t is not difficult

to imagine, for example, that Franklin Memorial's revenue from

other public programs, or better yet, the profits from such

programs, exceeds the financial burden imposed by Maine's Free Care

Laws." This factor is not relevant to the question of whether

Maine's free care laws constitute a taking and plays no part in our

analysis.

2. Effect on FMH's Investment-Backed Expectations

As for FMH's investment-backed expectations, we first

reject an argument made by the defendant. Harvey argues the

hospital's non-profit status eliminates any influence this factor
Harvey also argues that we should adopt a new test for 7

charitable organizations, which finds a taking only where the

regulation interferes with the organization's charitable purpose.

We reject Harvey's invitation to adopt such a standard and adhere

to the usual regulatory takings analysis under Penn Central.

Maine law does not forbid a non-profit entity from 8

earning a return on its investment. It merely restricts how nonprofits may dispose of any profits they earn. For example, a nonprofit may not pay dividends or distribute its profits to its

members, directors, or officers. See Me. Rev. Stat. Ann.

tit. 13-B, § 407. And upon dissolution or liquidation of a nonprofit, the entity's assets must go to an organization involved in

"substantially similar" activities. Id. 

Moreover, as a non-profit hospital, FMH is considered a

"public charity," subject to additional regulations. See Me. Rev.

Stat. Ann. tit. 5, § 194-A(2) ("Any nonprofit hospital and medical

service organization is a charitable and benevolent institution and

a public charity and its assets are held for the purpose of

fulfilling the charitable purposes of the organization.").

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has in FMH's favor. We disagree very much with Harvey's proposed 7

categorical approach. While there may be differences in degree

between expectations for for-profit institutions and non-profit

institutions, there is no categorical exclusion of non-profit

institutions from this prong of the analysis. Like a for-profit

institution, FMH acquires property with the expectation that it may

use it for a particular purpose. Indeed, Maine law expressly

recognizes the right of non-profit corporations to acquire, own,

use, improve, and convey property like any other property owner.8

See Me. Rev. Stat. Ann. tit. 13-B, § 202(1)(I). To the extent that

Maine's free care laws may force FMH to use its property in ways

that it would not otherwise, they may interfere with FMH's

investment-backed expectations.
Despite the second and third prongs of the ad hoc test, 9

it is also true that the extent to which Maine's free care laws

"substantially advance legitimate state interests," Agins v. City

of Tiburon, 447 U.S. 255, 260 (1980), abrogated by Lingle, 544 U.S.

at 541-42, plays no part in our analysis. As Lingle recognized,

this factor sounds in due process, 544 U.S. at 542, and although

there is some overlap between the protections of substantive due

process and the law of takings, see Goldblatt, 369 U.S. at 594

(recognizing, in the context of a due process challenge, that a

regulation may be "so onerous to as to constitute a taking which

constitutionally requires compensation"), consideration of whether

a regulation substantially advances a legitimate state interest "is

not a valid method of discerning whether private property has been

'taken' for purposes of the Fifth Amendment," Lingle, 544 U.S. at

542. FMH has not raised a due process challenge.

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It is true that FMH's investment-backed expectations are

tempered by the fact that it operates in the highly regulated

hospital industry. See United Wire, Metal & Mach. Health & 9

Welfare Fund v. Morristown Mem'l Hosp., 995 F.2d 1179, 1191 (3d

Cir. 1993) (rejecting a takings challenge to New Jersey's system of

setting hospital billing rates, in part, because the plaintiffs'

investment-backed expectations were reduced by "the historically

heavy and constant regulation of health care" in the state). And

the Supreme Court has recognized that heavy government regulation

may diminish a property owner's expectations. See Lucas, 505 U.S.

at 1027-28 ("It seems to us that the property owner necessarily

expects the uses of his property to be restricted, from time to

time, by various measures newly enacted by the State in legitimate

exercise of its police powers . . . . And in the case of personal

property, by reason of the State's traditionally high degree of

control over commercial dealings, he ought to be aware of the
-15-

possibility that new regulations might even render his property

economically worthless . . . ."). 

3. The Character of the Government Action

The third Penn Central factor -- the character of the

government action -- strongly favors finding no taking here. Under

Penn Central, "[a] 'taking' may more readily be found when the

interference with property can be characterized as a physical

invasion by government than when interference arises from some

public program adjusting the benefits and burdens of economic life

to promote the common good." 438 U.S. at 124 (citation omitted).

Thus, in Hodel v. Irving, 481 U.S. 704, 716 (1987), the Supreme

Court found a taking where the character of the government

regulation was "extraordinary" in that it completely extinguished

the property owner's right to pass on the property to his heirs.

By contrast, the free care laws adjust the benefits and burdens of

economic life but leave the core rights of property ownership

intact. Maine's free care laws merely require that hospitals not

refuse to treat patients based on their ability to pay and that

they provide those services freely to those with incomes at or

below 150% of the federal poverty level. FMH may otherwise set the

terms on which it provides access to its facilities and services.

Thus, on these facts, we hold that Maine's free care laws do not

effect a taking.
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III.

FMH separately challenges the reimbursement rate it

receives under the MaineCare program as an unconstitutional taking.

The district court dismissed this count, and we review de novo the

grant of a motion to dismiss, assuming the truth of all wellpleaded facts in the complaint and drawing all reasonable

inferences in FMH's favor. Vernet v. Serrano-Torres, 566 F.3d 254,

258 (1st Cir. 2009). 

Of course, where a property owner voluntarily

participates in a regulated program, there can be no

unconstitutional taking. See Garelick v. Sullivan, 987 F.2d 913,

916 (2d Cir. 1993) ("[W]here a service provider voluntarily

participates in a price-regulated program or activity, there is no

legal compulsion to provide service and thus there can be no

taking."); cf. Yee, 503 U.S. at 527-28 (finding no taking because

the property owner voluntarily engaged in the regulated conduct).

FMH's essential argument is that it has no choice but to

participate in MaineCare because otherwise it would be forced to

treat low income patients without any compensation at all under the

state's free care laws.

Under the Maine free care laws, an individual who has

insurance or is eligible for coverage by a state or federal medical

assistance program, like MaineCare, is generally not eligible to

receive free care. See 10-144-150 Me. Code R. § 1.05(B)(1)(b).
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But there is an exception to this rule: if a patient meets the

income requirements to receive free care but has insurance or is

eligible for state or federal medical assistance, the hospital must

treat the patient and "any amount remaining due after payment by

the insurer or medical assistance program will be considered free

care." Id. § 1.05(B)(2). That is, the treating hospital bears the

medical costs for treating low income patients beyond what is

covered by insurance or a government-funded medical assistance

plan.

FMH reads the regulation, 10-144-150 Me. Code R.

§ 1.05(B), to require that if a hospital opts out of MaineCare, it

must pay the entire cost of treating patients who are eligible for

MaineCare. Thus, in FMH's view, hospitals must choose between

receiving inadequate reimbursement by participating in MaineCare or

receiving no reimbursement at all.

Harvey, however, offers a different reading. She argues

that the regulation's use of the phrase "any amount remaining due

after payment by the insurer or medical assistance program" really

means "any amount not covered by insurance or medical assistance

program." Under this reading, if a hospital did not accept

coverage from a particular insurer or government program, it could

still obtain compensation by billing the patient directly for up to

the amount that would be covered by the insurer or medical

assistance program. Harvey defends this reading because the
Nothing in this opinion precludes defendant from moving 10

to revise the literal language of the regulation to make it conform

with the position taken in court.

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regulation's drafters worked from "the assumption that the hospital

participates in, and would receive some payment from, the insurer

or medical assistance program." Harvey says this assumption is

reasonable because, to the state's knowledge, every hospital in

Maine participates in MaineCare.

We owe some deference to an agency's reasonable

interpretations of its own regulations. See Massachusetts v.

United States, 522 F.3d 115, 127 (1st Cir. 2008) ("This court must

also be mindful of the substantial deference required when an

agency adopts reasonable interpretations of regulations of its own

creation."). Yet our level of deference is reduced to the extent

that the agency's interpretation is merely a litigation position.

See Alliance to Protect Nantucket Sound, Inc. v. U.S. Dep't of the

Army, 398 F.3d 105, 112 n.5 (1st Cir. 2005).

Regardless of the level of deference we give Harvery's

interpretation, we accept it as reasonable. Indeed, we view it as

a judicial admission, which will have some binding effect on the

state. See Massachusetts, 522 F.3d at 118 (binding the Nuclear 10

Regulatory Commission to its litigation position). Allowing

hospitals that opt out of MaineCare to seek compensation for the

medical services they provide advances the state's broader goal of

making health care widely accessible. And reading "payment" as
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synonymous with "coverage" is sensible given the background

understanding that all Maine hospitals participate in MaineCare.

Accepting Harvey's reading of the regulation, there is no

coercive financial incentive to participate in MaineCare.

Hospitals are not left with accepting MaineCare's reimbursement

rates to avoid receiving nothing at all. Therefore, we hold that

FMH's participation in MaineCare is voluntary and reject its

takings challenge on that basis.

IV.

In the end, FMH's objection to Maine's free care laws and

MaineCare program is a dispute with the policy choices made by the

state's political branches. As such, FMH's better course of action

is to seek redress through the state's political process.

The district court's judgment is affirmed.