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

Heading: compliance with procedural requirements of the boren amendment

Text: The central dispute in this case is whether the State complied with one of the procedural requirements of Boren  whether it made sufficient findings before setting maximum limits on certain rates. In addressing this issue, it is useful to briefly examine the history of the Medicaid reimbursement scheme and Boren. As originally enacted in 1965, the Medicaid Act required states to reimburse facilities for their reasonable costs in providing care to Medicaid patients. Pub.L. 89-97, § 1902(a)(13)(B), 79 Stat. 286, 346 (1965). Because of rapidly escalating Medicaid costs, Congress reevaluated this approach in the early 1980s. Congress eventually concluded that the complexity, rigidity and inflationary nature of the reasonable cost reimbursement system was to blame for the program's rising costs. Wilder, 496 U.S. at 506, 110 S.Ct. at 2515. Accordingly, Congress enacted Boren in 1981, replacing the reasonable cost provision with a provision requiring States to reimburse hospitals at rates ... that are reasonable and adequate to meet the cost which must be incurred by efficiently and economically operated facilities... . S.Rep. No. 139, 97th Cong., 1st Sess. 478 (1981), reprinted in 1981 U.S.C.C.A.N. 396, 744. In shifting to this new, more flexible approach, Boren expressly delegated authority to the states to alter their Medicaid plans and to establish the rates under which providers will be paid. For example, states are free to establish statewide or classwide rates, establish rates based on a prospective cost, or include incentive provisions to encourage efficient operation. Wilder, 496 U.S. at 506-07, 110 S.Ct. at 2515-16 (footnote omitted). Commenting on Congress's intent in enacting Boren, one federal appeals court noted that: The Boren Amendment was enacted with two specific purposes in mind: (1) to provide the states with greater flexibility in developing methods of reimbursing skilled nursing facilities, intermediate care facilities, and inpatient hospital services; and (2) to increase the economy and efficiency of all plans. Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1309-10 (2d Cir.1991). While states have considerable flexibility in establishing rates under Boren, it is clear that this flexibility is not absolute. As the United States Supreme Court noted, [i]n passing the Boren Amendment, Congress sought to decentralize the method for determining rates, but not to eliminate a State's fundamental obligation to pay reasonable rates. Wilder, 496 U.S. at 515, 110 S.Ct. at 2520. Accordingly, states must still comply with certain procedural and substantive requirements. Boren requires states to make findings and give assurances to the federal government that the rates they set are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. 42 U.S.C. § 1396(a)(13)(A) (1988). In addition to these procedural requirements, the Supreme Court has held that the rates adopted must be actually reasonable and adequate. [4] Wilder, 496 U.S. at 514-15, 110 S.Ct. at 2519-21. Boren therefore creates a tension between the need to creatively cut costs and stimulate the efficiency of providers, and the obligation to provide adequate care to Medicaid patients. The difficulty in resolving this tension is exacerbated by the failure of Boren to define any of its terms (such as reasonable and adequate, or efficiently and economically operated facilities), and the refusal of the Health Care Financing Administration (HCFA) to require the states to define the terms. See Lett v. Magnant, 965 F.2d 251, 253 (7th Cir.1992); 48 Fed.Reg. 56049 (December 19, 1983). Not surprisingly, the ambiguity of these terms, as well as the conflicting goals of increasing efficiency and providing adequate care, has created considerable litigation between providers and state agencies. See, e.g., James J. Kennedy III, The Medicaid Program: Vague Standards Breed Litigation, 28 St. Louis U.L.J. 351 (1984).
The standard applicable to our review of the superior court's summary judgment order is de novo. McGrath v. University of Alaska, 813 P.2d 1370, 1371 n. 1 (Alaska 1991). We must determine whether a material issue of fact exists, and whether the moving party was entitled to judgment as a matter of law. Darling v. Standard Alaska Prod. Co., 818 P.2d 677, 679 n. 5 (Alaska 1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1176, 117 L.Ed.2d 421 (1992). Since the central issue in this case is whether the State complied with federal law, the focus of the inquiry is on statutory interpretation. The appropriate standard of review in this context is the substitution of judgment standard provided the issue does not involve agency expertise. Phillips v. Houston Contracting, Inc., 732 P.2d 544, 546 (Alaska 1987). While conceding that this standard is appropriate for the questions of statutory interpretation raised by this appeal, the State nevertheless insists that this court should give deference to the state agency's findings because the agency has specialized knowledge of Medicaid regulation. Accordingly, the State argues that the MRC and DHSS rate-setting functions and determinations as to the level of Medicaid payments should be evaluated under the reasonable basis test. Responding to a similar argument, the United States Court of Appeals for the Tenth Circuit held that state agency determinations are entitled to deference only if they have met the requirements of federal and state law. AMISUB (PSL), Inc. v. State of Colorado Dep't of Social Servs., 879 F.2d 789, 795 (10th Cir.1989), cert. denied, 496 U.S. 935, 110 S.Ct. 3212, 110 L.Ed.2d 660 (1990). The court noted: Our first inquiry is whether the payment to the appellants ... resulted in noncompliance with the federal statute and regulations. This is an issue of law, subject to de novo review in federal court. Id. (quoting Colorado Health Care Ass'n v. Colorado Dep't of Social Servs., 842 F.2d 1158, 1165 (10th Cir.1988) (emphasis added)). [5] Since the issue before this court is whether the State complied with the procedural requirements of the Boren Amendment, the agency's determination of its own compliance is not entitled to deference. [6]
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]
The State further argues that (1) the State's compliance with the procedural requirements cannot reasonably be questioned since the rates were set at the maximum allowable rate under federal law and (2) it was error for the court to invalidate the plan without considering whether the regulation resulted in substantively inadequate rates. The State's first argument is based on a recent decision by a federal magistrate which held that when a state sets rates to comply with the federal upper limit, they comply with the Boren amendment as a matter of law. Connecticut Hosp. Ass'n v. O'Neill , No. N-90-714 (WWE), slip op. at 8 (D.Conn. Oct. 31, 1991). Although a federal district court later overruled this decision, the State nevertheless argues that this reversal did not upset the rule of law. See Connecticut Hosp. Ass'n v. O'Neill, 793 F. Supp. 47, 51-52 (D.Conn. 1992). It is difficult to see how a decision by a federal magistrate in Connecticut on a 12(b)(6) motion, which was later overruled, establishes a rule of law which should persuade this court. Further, the conclusion that the State's compliance with Boren cannot be questioned where rates are set at the upper limits ignores Congress's intent that states make findings regarding the operation of their facilities. An agency regulation establishing limits on reimbursement cannot simply do away with the statutory requirements of Boren. In some situations rates found to be necessary under Boren may be higher than the rates allowed under the federal limits. However, a state in this position may qualify for an exception to the upper limits which would allow it to utilize the necessary, higher rate. [15] While state agencies are entitled to deference with respect to their upper limits determination, this deference does not mean that they can ignore the requirements of Boren. The State is not excused from complying with Boren just because the State is concerned that it may have a problem with the federal upper limits. The State's second argument is that the trial court erred by invalidating the plan without considering its substantive compliance with Boren. This argument is likewise without merit. Although the Wilder decision held that Boren granted both procedural and substantive rights, it did not require a court to consider substantive compliance where procedural compliance was lacking. The Court did hold, however, that procedural compliance alone was insufficient, i.e., that courts must consider substantive compliance if the procedural requirements were met. See Wilder, 496 U.S. at 512-15, 110 S.Ct. at 2518-21. In this case, the superior court concluded that since the plan failed to meet the procedural requirements of Boren, the court need not address the issue of substantive compliance. This conclusion is consistent with the approach of other courts and is a correct interpretation of Boren. See Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1316-17 (2d Cir.1991) (invalidating a state plan on the basis that it violated the procedural requirements without considering substantive compliance); Volk v. Oregon, 799 P.2d 658, 662 (Or. App. 1990) (We conclude that the procedural requirements of the Act are separate from the substantive requirement... .). Accordingly, we affirm the superior court's grant of summary judgment to ASHNHA.