Appeal from the Order of Department of Public Welfare, in the case of Appeal Of: Citizens General Hospital, No. 32-85-026.
Andrew E. Thurman, Berkman, Ruslander, Pohl, Lieber & Engel, for petitioner.
Bruce G. Baron, Assistant Counsel, for respondent.
Judges Craig and Palladino, and Senior Judge Narick, sitting as a panel of three. Opinion by Judge Craig.
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Citizens General Hospital (Citizens or the hospital) appeals from an order of the Office of Hearings and Appeals of the Department of Public Welfare (DPW)*fn1
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that denied the hospital's appeal from DPW's disallowance of certain costs claimed by the hospital for reimbursement under the Pennsylvania Medical Assistance Program for the fiscal year ending June 30, 1983.
Specifically, Citizens challenges the application to it of DPW regulations in effect for the period in question that (1) established a cap on the final audited per diem rate of reimbursement for a "regular" hospital such as Citizens*fn2 of 9.8% over the hospital's audited per diem rate for the preceding fiscal year*fn3 and (2) excluded from that rate cap depreciation and interest expenses relating to a newly constructed project that began operating during the year being audited, but only if the hospital's overall audited costs increased by more than 15% over those of the preceding fiscal year.*fn4
The issue is whether, as the hospital contends, DPW's disallowance of costs relating to patient care and to the construction of a new energy plant was arbitrary and capricious or violated the mandate in the federal legislation establishing the Medicaid program*fn5 that state plans implementing the program must provide for rates of reimbursement that are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities in order to provide appropriate care and medical services to Medicaid patients, where
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the attorney examiner expressly found that Citizens was an efficient provider.
After a hearing and the submission of briefs by the parties, the attorney examiner issued a recommendation in which he found that Citizens was an efficient health care provider compared with others both locally and nationally, according to several sources (Findings of Fact Nos. 1-3), that Citizens had added a new and more efficient energy plant in 1983 (F.F. No. 4), and that the hospital had reduced the average length of stay for obstetrical/maternity patients in 1983 (F.F. No. 5). He found further that the hospital experienced an increase in reimbursable costs for 1983 over those of 1982 that was 62% higher than any other year-to-year increase from fiscal 1981 through fiscal 1984 (F.F. No. 6), that the hospital paid medical malpractice claims attributable to Medicaid patients during fiscal 1983 (F.F. No. 7), that it incurred substantial new costs in the construction of its energy plant (F.F. No. 8) and experienced an increase of over 70% in the costs of high intensity Medicaid patients during that year (F.F. No. 9). By contrast, fiscal 1982 was an unusually low cost year, in which the hospital paid no medical malpractice claims, incurred no capital costs for new construction and served a low number of high intensity Medicaid patients (F.F. No. 10). Although the referee made no express finding on the point, DPW did not contest the hospital's claim that its overall audited costs for 1983 were 14.9% higher than those for 1982.
After summarizing the arguments of the parties, the attorney examiner concluded: (1) There was no authority to support the hospital's claim that the regulatory cap on reimbursement of 9.8% over the costs for the preceding fiscal year was arbitrary and capricious because it failed to provide for a representative base year (determined by
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averaging costs for several years), and the regulations could not be invalidated simply because a method different from the one chosen by the agency would produce a result more beneficial to a particular hospital or might appear to be a better method for addressing the subject matter; (2) the 15% threshold for reimbursement of capital costs could not be held to be irrational where a federal district court had considered the provision and had stated that it was more than federal law would require in terms of accommodating hospitals with exceptional circumstances; and (3) where DPW's regulations had been duly promulgated and had been held by a federal court to have been properly accepted by the Department of Health and Human Services (HHS) -- the federal agency empowered to enforce Medicaid standards -- the regulations were presumptively reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities as required by the federal legislation, in that Congress did not intend that any particular provider found to be efficient must be reimbursed for all costs it actually incurred.
Between 1972 and 1981 federal law required states to pay hospitals the "reasonable cost" of rendering inpatient hospital services.*fn6 On August 13, 1981, section 2173 of the Omnibus Budget Reconciliation Act of 1981*fn7 replaced the reasonable cost standard for payments to hospitals with that contained in the "Boren Amendment" (adopted by Congress the previous year with regard to payments to
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skilled nursing and intermediate care facilities). As so amended, 42 U.S.C. § 1396a(a)(13)(A) requires that a state plan for medical assistance must provide for payments to hospitals
through the use of rates (determined in accordance with methods and standards developed by the State) . . . which the State finds, and makes reasonable 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 ...