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decided: July 8, 1987.


Appeal from the Order of the Office of Hearings and Appeals of the Department of Public Welfare, in case of Appeal of: Episcopal Hospital Re: Helen Holland Case No. 51KO361 dated April 4, 1986.


Jennifer A. Stiller, Wolf, Block, Schorr and Solis-Cohen, for petitioner.

Diane J. Bartels, Assistant Counsel, for respondent.

Judges Barry, and Palladino, and Senior Judge Kalish, sitting as a panel of three. Opinion by Judge Palladino. Dissenting Opinion by Senior Judge Kalish.

Author: Palladino

[ 107 Pa. Commw. Page 273]

Episcopal Hospital (Petitioner) appeals from an order of the Department of Public Welfare (DPW) denying Petitioner reimbursement for services provided to Helen Holland, a medical assistance (MA) recipient. We affirm.

The facts in this case are not in dispute.*fn1 Holland was admitted for a direct laryngoscopy with biopsy and esophagoscopy on May 7, 1985 and discharged on May 8, 1985. The procedures were medically necessary. Petitioner's claim for payment for these services was rejected by DPW's Bureau of Utilization Review (BUR).

[ 107 Pa. Commw. Page 274]

BUR determined the nature of the services needed and the patient's condition did not require her to be admitted for an overnight stay. Petitioner appealed to DPW's Office of Hearings and Appeals (OHA), which sustained the appeal. DPW's Division of Inpatient Hospital Review requested reconsideration. The Executive Deputy Secretary of DPW vacated OHA's decision and issued a final order denying Petitioner reimbursement. Petitioner now appeals to this court.

Petitioner admits that the services could have been safely provided in a special procedure unit (SPU)*fn2 and that the overnight stay was not necessary for Holland. DPW has stipulated that the amount Petitioner would receive, if reimbursed, would be the same whether the services were provided in an SPU or during an overnight admission. DPW admits that if Holland had been treated in a SPU, Petitioner's request for payment would have been approved. Therefore, the only issue before us is whether DPW can legally deny a hospital reimbursement for medically necessary inpatient services under the MA program solely because the most appropriate place to provide them was in a SPU rather than during an overnight admission.

In order to understand how this conflict arose, it is helpful to examine the changes which have occurred in reimbursement under the MA program and, specifically, the changes in SPU reimbursement. In 1965 the United States Congress amended the Social Security Act to establish the Medicare and Medicaid reimbursement programs.*fn3 The mechanism by which health

[ 107 Pa. Commw. Page 275]

    care facilities were to be reimbursed was a cost basis system. This system essentially allowed the facilities to recover whatever it cost them to provide services (operating and capital) to each MA recipient. Section 2173 of the Omnibus Budget Reconciliation Act of 1981 replaced the cost basis Medicaid reimbursement requirement with a requirement that the state Medicaid agencies provide payment by determining reasonable and adequate rates.*fn4 While this allowed the continuation of the cost basis program, it also gave the states flexibility to adopt alternatives, as long as they met the requirements of the federal regulations.*fn5

DPW, the Pennsylvania state Medicaid agency,*fn6 on February 18, 1984, issued proposed regulations for the purpose of changing its cost basis MA inpatient reimbursement to a "prospective payment system" (PPS). 14 Pa. Bull. 580. Basically, a PPS reimburses hospitals a set amount for each patient admission, regardless of the length of time spent in the hospital and the services required by the patient. The amount is determined according to which "diagnostic related group" (DRG) the patient is placed. Under the DRG system patients are classified into groups which contain clinically similar diagnoses that are comparable with respect to the use of resources.*fn7 The final regulations initiating this change

[ 107 Pa. Commw. Page 276]

    were published June 23, 1984 and were effective July 1, 1984. 14 Pa. Bull. 2209.

Pennsylvania proposed substantial changes in its regulations relating to MA Inpatient Hospital Services on March 17, 1983. 13 Pa. Bull. 1010. Of importance to this case was the proposal to include the regulations covering SPU reimbursement with those on inpatient reimbursement. The changes were made "in the interest of cost containment," Id. at 1008, and were an interim step prior to the adoption of a PPS.*fn8 The final interim regulations were published September 24, 1983, 13 Pa. Bull. 2885, and provided that payment for SPU services was to be made at 100% of cost up to 200% of the current MA inpatient per diem rate. Former 55 Pa. Code ยง 1163.58(c). ...

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