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July 26, 1983


The opinion of the court was delivered by: MCGLYNN

 McGLYNN, District Judge.

 Hearings were held on May 10 and May 19, 1983. After careful consideration of the evidence presented and the arguments of the parties, I have determined that plaintiffs have not demonstrated that their claims merit preliminary injunctive relief. In support of this decision I make the following


 1. Plaintiffs are non-profit corporations organized and existing under the laws of the Commonwealth of Pennsylvania. All are licensed hospitals and are providers of hospital services under the Pennsylvania Medical Assistance ("Medicaid") Program.

 2. Defendant Walter W. Cohen is the Secretary of the Department of Public Welfare, the state agency charged with responsibility for the administration of Pennsylvania's Medicaid Program.

 3. The Commonwealth of Pennsylvania participates in the Medicaid program established by Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. ("the federal Medicaid law"), a cooperative federal-state program to provide payment for necessary medical services rendered to certain needy individuals whose income and resources are insufficient to meet the costs of these services.

 4. To be eligible to receive federal matching funds, a state must submit a State Plan for Medical Assistance to HHS for its approval. The state plan must provide for reimbursement of hospital inpatient services in accordance with the federal Medicaid law and the regulations implementing the law.

 5. Prior to August 13, 1981, the federal Medicaid law required that states pay hospitals the "reasonable cost" of rendering inpatient hospital services. On August 13, 1981, § 2173 of the Omnibus Budget Reconciliation Act of 1981 ("the 1981 Medicaid amendments") removed the requirement that states pay the "reasonable cost" of inpatient services and substituted the more flexible requirement that states pay for inpatient services:

through the use of rates (determined in accordance with methods and standards developed by the State and which, in the case of hospitals, take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs . . .) which the State finds, and makes assurances satisfactory to the Secretary [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, regulations, and quality and safety standards and to assure that individuals eligible for medical assistance have reasonable access (taking into account geographic location and reasonable travel time) to inpatient hospital services of adequate quality. . . .

 42 U.S.C. § 1396a(a)(13)(A) as amended.

 6. The federal regulations implementing 42 U.S.C. § 1396a(a)(13)(A) are codified in 42 C.F.R. part 447. The regulations require that when a state Medicaid agency wishes to make a significant change in its methods and standards for determining reimbursement rates, it must submit certain enumerated findings, assurances, and related information to the Secretary of HHS ("the Secretary") 42 C.F.R. § 447.255.

 7. The necessary findings, id. § 447.252(c), and related information, id. § 447.255(b), (hereafter collectively referred to as "assurances") are designed to inform the Secretary that the new rates are reasonable and adequate under the federal Medicaid law.

 8. The assurances must be "satisfactory to the Secretary". Id. § 447.252(c).

 9. The Secretary has delegated authority to the Health Care Financing Administration ("HCFA") to administer the federal side of the Medicaid program. HCFA reviews the assurances submitted by the state agency and notifies the state agency within 60 days as to whether they are acceptable. If HCFA does not notify the agency within 60 days, the assurances are deemed accepted. Id. § 447.256(a).

 10. A proposed payment rate supported by assurances that have been accepted or deemed accepted is effective on the date specified by the state agency in the assurances, id. § 447.256(b)(1), but in no event will the effective date be earlier than "the first day of the calendar quarter in which the agency submits the assurances and related information described in § 447.255." Id. § 447.256(b)(2).

 11. DPW makes periodic interim payments for inpatient hospital services over the course of the fiscal year. Such interim payments are determined by multiplying the hospital's Medicaid "interim per diem rate" by the number of days of care rendered to Medicaid beneficiaries for the applicable period.

 12. Before the implementation of the regulations at issue here, DPW derived a hospital's "interim per diem rate" from the hospital's Blue Cross per diem rate. Blue Cross bases its hospital rates on cost data submitted periodically by each hospital.

 13. A hospital's total allowable costs for a fiscal year are determined on the basis of an audit of the costs submitted by the hospital to DPW. A final "audited per diem rate" is calculated by dividing total allowable costs by total allowable Medicaid days for the fiscal year.

 14. Based on a comparison of final audited costs and the amount of interim payments already received, DPW determines whether it has overpaid or underpaid a hospital with its interim payments.

 15. The parties agree that under the current audit process, it may take as long as three years for a hospital that is overpaid or underpaid in a given fiscal year to reach final settlement with DPW on total reimbursable costs for the fiscal year.

 16. An internal DPW study of the 106 hospitals whose 1980-81 costs had been audited as of May 12, 1983, revealed that 45 hospitals had been underpaid a total of approximately $2.7 million and 61 hospitals had been overpaid a total of ...

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