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Kean v. Heckler

argued: April 17, 1986.


Appeal from the United States District Court for the District of New Jersey, D.C. Civ. No. 85-2045.

Author: Seitz

Before: SEITZ, HIGGINBOTHAM, and BECKER, Circuit Judges.

SEITZ, Circuit Judge.

Appellant, the Secretary of Health and Human Services (Secretary), appeals from an order granting summary judgment in favor of appellees. We have jurisdiction under 28 U.S.C. § 1291.


This case stems from a disagreement between the State of New Jersey and the Secretary over the method by which hospitals in New Jersey will be reimbursed for services they perform on an outpatient basis under Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. (1982) (commonly known, and hereinafter referred to as Medicare). New Jersey sought from the Secretary a "waiver " under § 1886(c) of the Act, 42 U.S.C. § 1395ww(c), whereby such reimbursements would be made under a plan devised by the State. The Secretary granted the State's request for a waiver with respect to inpatient services, but denied it with respect to outpatient services. In the absence of a waiver, reimbursing payments are made on the basis of the scheme set forth in the Medicare statute. Although the precise issue raised is narrow, it can be fully understood only against a fairly detailed background of the Medicare statute and its history.

A. The Medicare Statute

The Medicare program, originally established in 1965, provides federal health insurance to the aged and disabled. The program has two components. Coverage under Part A, 42 U.S.C. §§ 1395C to 1395i-2, is generally available automatically to all persons over the age of 64 and to the disabled. Id. § 1395c. Part A principally covers inpatient hospital services, as well as related post-hospital care, home health services, and hospice care. Id. § 1395d. Payments under Part A are made from the Hospital Insurance Trust Fund, which is funded by a wage tax. Id. § 1395i.

Part B of Medicare is a program of "supplementary" medical insurance, also for the aged and disabled. Participation in Part B, unlike Part A, is elective. Services covered by Part B include outpatient hospital services, and others listed in 42 U.S.C. §§ 1395k and 1395x(s). Payments under Part B are made from the Supplementary Medical Insurance Trust Fund, id. § 1395t, which is funded by premiums paid by enrollees and by money appropriated by the Federal government, id. § 1395j. Both Parts A and B are administered by the Health Care Financing Administration (HCFA), under authority delegated by the Secretary.

Payments under both parts of Medicare are made directly to providers of reimbursable services (e.g., hospitals) by the appropriate trust fund. Payments under Part B for outpatient services are generally based on "reasonable charges" for services provided. Id. § 1395l. As originally enacted, Part A also provided for payments based on the reasonable costs of services to the provider. Id. § 1395f(b)(1). This approach to calculating reimbursements is considered "retroactive," because the amount paid by Medicare is largely a function of the costs actually in incurred by the provider. In 1983, however, Congress adopted a prospective reimbursement system for inpatient services and other services reimbursable under Part A. Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 152-62 (codified at 42 U.S.C. §§ 1395ww(d)-(e)) (hereinafter cited as 1983 Amendments). Under this system, reimbursing payments are calculated on the basis of a predetermined fee schedule, irrespective of the provider's actual costs.

In addition to the normally applicable Medicare reimbursement rules, however, Medicare also contains a number of provisions whereby individual states may obtain waivers. Under such waivers, Medicare reimbursements to the hospitals in a state are made on the basis of a state reimbursement scheme, rather than the otherwise applicable federal system.

The first of these waiver provisions to be enacted authorized the Secretary to engage in "experiments and demonstration projects," which might include state waivers. See Social Security Amendments of 1967, Pub. L. No. 90-248, § 402, 81 Stat. 821, 930-31 (hereinafter cited as 1967 Amendments); Social Security Amendments of 1972, Pub. L. No. 92-603, § 222, 86 Stat. 1329, 1390-93 (hereinafter cited as 1972 Amendments) (both codified as amended at 42 U.S.C. § 1395b-1). The purpose of these provisions was to discover ways of controlling costs, see generally H.R. Rep. No. 231, 92d Cong. 2d Sess. (1971), reprinted in 1972 U.S. Code Cong. & Ad. News 4989, 5066-67 (hereinafter cited as H.R. Rep. No. 231), and waivers are available with respect to both inpatient and outpatient costs. Such waivers (hereinafter referred to as demonstration-project waivers) are entirely discretionary with the Secretary.

Congress enacted a second waiver provision in 1982. Medicare § 1886(c)(1), 42 U.S.C. § 1395ww(c)(1). In that section, Congress authorized the Secretary to "provide, in his discretion, that payment with respect to services provided by a hospital in a State may be made in accordance with a hospital reimbursement control system in a State, rather than in accordance with the other provisions of this title," if the State's system met each of five conditions set forth in the statute. Among these conditions is that the state plan be no more costly than the otherwise applicable Medicare system. Medicare § 1886(c)(1)(C), 42 U.S.C. § 1395ww(c)(1)(C).

Finally, in 1983, Congress adopted two further waiver provisions; unlike the earlier provisions, however, these mandate that a waiver be granted as long as certain statutorily-specified criteria are met. First, Congress provided for a mandatory waiver for state reimbursement plans that had previously been granted a demonstration-project waiver, and that met the criteria for a discretionary waiver in section 1886(c)(1). Medicare § 1886(c)(4), 42 U.S.C. § 1395ww(c)(4). Second, Congress provided for a mandatory waiver for any state meeting both the requirements of section 1886(c)(1) and an additional six requirements. Medicare § 1886(c)(5), 42 U.S.C. § 1395ww(c)(5).

B. The New Jersey Hospital Reimbursement Control System

New Jersey's hospital reimbursement system was initially developed under a 1976 contract between the State Department of Health and HCFA, pursuant to the Secretary's demonstration-project authority. In 1979, the State Department of Health adopted regulations for applying the system to all third-party payers and to all general acute-care hospitals in the State. See N.J. Admin. Code tit. 8, § 31B-3.19(a)(3); N.J. Stat. Ann. § 26:2H-1 et seq. The State thereafter ...

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