Opinion ID: 1364730
Heading Depth: 3
Heading Rank: 2

Heading: The Procedural Requirement & the AMISUB Test

Text: At issue in this case is whether the State made adequate findings under Boren pursuant to implementing its plan. [7] ASHNHA relies heavily on the interpretation of this requirement announced in AMISUB: The plain language of federal Medicaid law mandates the State Medicaid Agency, at a minimum, to make findings which identify and determine (1) efficiently and economically operated hospitals; (2) the costs that must be incurred by such hospitals; and (3) payment rates which are reasonable and adequate to meet the reasonable costs of the state's efficiently and economically operated hospitals. 879 F.2d at 796. This language is quoted widely by other courts considering this issue, and has emerged as the standard for judging compliance with the findings requirement of Boren. See, e.g., Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1314 (2d Cir.1991); Multicare Medical Ctr. v. Washington, 768 F. Supp. 1349 (W.D.Wash. 1991); Folden v. Washington State Dep't of Social and Health Servs., 744 F. Supp. 1507 (W.D.Wash. 1990). Notwithstanding this wide-spread acceptance, the State argues that the AMISUB test employs an overly rigid three-step analysis that is not warranted by the plain language of Boren. [8] The State contends that under a less rigid application of AMISUB, the record demonstrates that its rate-setting procedures amply satisfied the procedural requirements of Boren. ASHNHA, in contrast, argues that the three-step test of AMISUB correctly reflects the procedural requirements of Boren and that the State failed to comply with these requirements. [9] In our opinion the AMISUB test unnecessarily restricts states' flexibility by requiring a specific approach to determining the reasonableness of rates. In particular, we do not subscribe to the first prong of the test, which requires states to specifically identify which providers are efficiently and economically operated. A requirement that a state identify existing facilities that are efficiently operated assumes a priori that such facilities exist. However, this assumption is not warranted by the Boren Amendment, and may not accurately reflect a given state's situation. For example, a state, after making empirical studies of its facilities, could determine that none of its facilities is efficiently and economically operated. In other words, a state might determine that all of its facilities could further cut costs and increase their efficiency. Under AMISUB 's mandatory language, this state would be in violation of Boren if it failed to classify some of its facilities as efficiently and economically operated. And yet a state in this situation should be in compliance with the procedural requirements of Boren if, after making findings to this effect, it sets rates with reference to a hypothetical facility. In Wilder the Supreme Court noted that Boren requires the State, in making its findings, to judge the reasonableness of its rates against the objective benchmark of an `efficiently and economically operated facility.' Wilder, 496 U.S. at 519, 110 S.Ct. at 2522. Commenting on this concept of an objective benchmark, Justice Blackmun (who formed part of the Wilder majority) stated that: [The Boren Amendment] defines a reasonable and adequate rate by referring to what would be provided by a hypothetical facility  one that operates efficiently and economically, compli[es] with federal and state standards, and ensur[es] `reasonable access' to eligible participants. Suter v. Artist M., ___ U.S. ___, ___, 112 S.Ct. 1360, 1373, 118 L.Ed.2d 1 (1992) (Blackmun, J. dissenting). This language, and the legislatively mandated flexibility provided to States under the statute, 48 Fed.Reg. 56049 (December 19, 1983), allows a state in the above situation to set rates with reference to a hypothetical facility, rather than following the AMISUB approach. The conclusion that the State may set rates with reference to a hypothetical facility does not mean, however, that the State must do so. Boren does not require that the State follow this or any other specific approach to determining the reasonableness of rates. In fact, the State could decide to follow the AMISUB approach and base its rates on an actual facility (or facilities) that it determines to be efficiently and economically operated. [10] Boren grants states the flexibility to set their own methods and standards, and the authority to make their own determinations as to the appropriate factors to be considered in determining rates. Wilder, 496 U.S. at 506-07, 110 S.Ct. at 2515-16. Recently, the United States Court of Appeals for the Seventh Circuit reached a similar conclusion regarding the AMISUB test: The Amisub approach satisfied the Tenth Circuit and deserves consideration, but we do not adopt it as a mandatory test. As the Tenth Circuit recognized, a state is free to create its own method for arriving at the required findings. 879 F.2d at 797. We agree. In particular we reject the notion that a state must identify a reasonable sample of particular existing nursing homes as paradigms of efficiency; such a task may be impossible... . A state must determine in its own way what it would consider to be efficient and economic nursing facilities and must make findings which establish a nexus between the costs of operating those facilities and the proposed reimbursement rates under the state plan. Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1314 (2d Cir.1991). Illinois Health Care Ass'n v. Bradley, 983 F.2d 1460, 1464-65 (7th Cir.1993). On the basis of our analysis, we decline to read the findings requirement of Boren as mandating the exclusive three-part test set out by AMISUB. This conclusion is consistent with Congress's intent to give States greater latitude in developing and implementing alternative reimbursement methodologies that promote the efficient and economical delivery of such services. H.R.Rep. No. 158, 97th Cong., 1st Sess., Vol. 2, at 293 (1981). Although Boren does not require a specific findings process, it does set out several factors which a state must consider in determining methods for calculating rates: (1) the unique situation (financial and otherwise) of a hospital that serves a disproportionate number of low-income patients, (2) the statutory requirements for adequate care in a nursing home, and (3) the special situation of hospitals providing inpatient care when long term care at a nursing home would be sufficient but is unavailable. Wilder, 496 U.S. at 519 n. 17, 110 S.Ct. at 2522 n. 17 (citing 42 U.S.C. § 1396a(a)(13)(A) (1988)). At the very least, these factors require states to inquire into the actual operation of existing facilities before establishing an objective benchmark. [11] The Second Circuit has held that the state must make findings which establish a nexus between the costs of operating efficient and economic nursing facilities and the proposed reimbursement rates under the state plan. Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1314 (2d Cir.1991). [12] In our view, the findings requirement of Boren is designed to ensure that rates are not set arbitrarily, i.e., without proper consideration of the costs of operating a facility in the state. Therefore, we conclude that states must make concrete findings, based on studies of existing facilities, and use these studies to establish, with reference to either existing or hypothetical facilities, an objective benchmark of an `efficiently and economically operated facility.' Wilder, 496 U.S. at 519, 110 S.Ct. at 2522. Applying this approach to the facts of this case, we reach the same conclusion that the trial court reached: [13] The State failed to comply with the findings requirement of Boren. The State simply did not make sufficient findings to be able to establish an objective benchmark of an efficiently and economically operated facility. The testimony of the State's witnesses indicates that the State began with an assumption that whatever costs were incurred by a facility in its base year were costs that it reasonably incurred as an efficiently and economically operated facility. That is, staff assumes that a facility operated efficiently and economically in its base year. The State then inflated the base year costs to the rate year in question, compared these costs to the weighted average of costs from other facilities in the same class, and set the actual total rates on this basis. The trouble with the State's approach is the assumption on which it is based  that facilities operated efficiently in their base year. Such an assumption may ease the State's rate-setting work by readily providing a point of comparison, but it cannot satisfy the requirement that the states find rates that must be incurred by efficiently and economically operated facilities. The practical result of such an approach would be to arbitrarily set a floor (the base year costs inflated yearly) on the rates paid to Medicaid providers. This approach does not comply with the requirements of Boren and is not consistent with its goal of lowering the system's costs while continuing to provide reasonable access to quality care. It is apparent that the State has presented no evidence at all that [it] has found any nexus between its chosen percentiles and costs of operating an efficient and economical facility. Illinois Health Care Ass'n v. Bradley, 776 F. Supp. 411, 419 (N.D.Ill. 1991), aff'd, 983 F.2d 1460 (7th Cir.1993). While the choice of certain base year rates may represent the costs that must be incurred by an efficient and economical facility, the State has made no findings that this is so. [14]