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West Virginia University Hospitals Inc. v. Casey

argued: May 22, 1989.


Appeal from the United States District Court for the Middle District of Pennsylvania, D.C. Docket No. Civil 86-0955.

Becker, Stapleton, and Rosenn, Circuit Judges.

Author: Rosenn


ROSENN, J., Circuit Judge

This interesting and complex appeal arises from the cross-fire currently trapping many hospitals across our nation between rising operating costs, on the one hand, and federal legislation aimed at the sharp containment of health delivery costs, on the other. The plaintiff, West Virginia University Hospitals, Inc. (WVUH or the Hospital), brought this action against certain Pennsylvania state officials under the Civil Rights Act, 42 U.S.C. § 1983, alleging that the Pennsylvania program for providing medicaid reimbursement to an out-of-state hospital such as WVUH violated federal medicaid standards encompassed by Title XIX of the federal Social Security Act and violated the equal protection clause of the fourteenth amendment to the United States Constitution. WVUH also claimed that Pennsylvania's administrative appeals system was legally inadequate. The Hospital sought injunctive and declaratory relief invalidating the out-of-state aspects of the State's hospital reimbursement program.

After a bench trial before the United States District Court for the Middle District of Pennsylvania, the district court, in a thoughtful and painstaking opinion published at 701 F. Supp. 496 (M.D.Pa. 1988), granted WVUH's request for relief on all counts. District Judge Rambo concluded that Pennsylvania's reimbursement program as applied to WVUH violated both federal statutory law and the equal protection clause of the Constitution, and held that the state's administrative appeal system was legally inadequate. She ordered Pennsylvania to revise its reimbursement methodology for WVUH and to formulate an adequate and meaningful medicaid administrative appeals system for the Hospital. Additionally, the court held that the State must permit WVUH to avail itself of the new appeals system to challenge its reimbursements from the date the Hospital commenced this action, rather than from the date of judgment. Finally, in an unpublished memorandum and order also issued the day of judgment, the district court awarded attorneys fees to the plaintiff pursuant to 42 U.S.C. § 1988 in the amount of $500,000, of which $104,133 was attributable to expert witness fees and costs.

Pennsylvania appeals, challenging the decision on the merits, the scope of relief, and the award of expert witness fees. We affirm in part and reverse in part.


A. The parties.

The plaintiff WVUH is a university-affiliated teaching hospital located six miles south of the border between West Virginia and Pennsylvania. As a "tertiary care" hospital, WVUH provides a complex level of hospital and medical services not generally found in community hospitals. WVUH is the closest source of tertiary care for many residents in the Pennsylvania counties of Fayette and Greene, and provides services as well to residents of the Pennsylvania county of Washington. Historically, the Hospital has provided significant numbers of Pennsylvania medicaid patients with hospital care. For the years 1984 to 1987, WVUH gave inpatient hospital care to more Pennsylvania medicaid patients than did over one-half of the hospitals located in Pennsylvania. Five percent of all WVUH inpatient admissions are attributable to Pennsylvania medicaid recipients, while overall medicaid patients at WVUH constitute twenty-three percent of all admissions. WVUH is by far the largest out-of-state provider of medical services to Pennsylvania medicaid recipients.

The defendants in this action are Pennsylvania Governor Robert Casey, John F. White, the Secretary of Pennsylvania's Department of Public Welfare (DPW), and David Feinberg, the DPW official responsible for developing the Pennsylvania hospital reimbursement program at issue in this case. Although technically incorrect, for simplicity's sake this opinion may occasionally use the words "Pennsylvania" or "the State" when referring to the defendants.

B. The federal medicaid act.

In 1965 Congress enacted Title XIX of the Social Security Act (known as Medicaid or The Medicaid Act) to provide medical assistance to needy persons. 42 U.S.C. § 1396 et seq. The purpose of the act was to provide a nationwide program of medical assistance for low income families and individuals. Medicaid became the primary source of health care coverage for the poor in America. The program is jointly financed with federal and state funds "and is basically administered by each state within certain broad requirements and guidelines." House Subcomm. on Health and the Environment, Data on the Medicaid Program: Eligibility, Services, Expenditures Fiscal Years 1967-77, H.R.Rep. No. 10, 95th Cong., 1st Sess. 1. The federal unit currently responsible for overseeing the medicaid program is the Health Care Financing Administration (HCFA). Federal law requires that one state agency must be designated as the single state agency responsible for the administration of the program. The state determines the scope of the services offered and generally determines the eligibility level for the programs. Id. at 1-2. Thus, the Act implemented a federal-state joint venture in which participating states receive federal medicaid funds in return for administering a medicaid program developed by the state within the parameters established by federal law and regulations.

Before 1980, Title XIX required states to pay hospitals the "reasonable cost" of rendering inpatient hospital services to medicaid recipients. This requirement translated into a retrospective form of reimbursement based on the actual costs incurred by the hospitals in providing medicaid services. In 1981, however, Congress, hoping to contain escalating medicaid costs, enacted as part of the 1981 Omnibus Budget Reconciliation Act (OBRA), P.L. 97-35, a new standard of hospital reimbursement. The OBRA replaced the "reasonable cost" standard with the current standard of "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities." 42 U.S.C.A. § 1396a(a)(13)(A) (West Supp. 1989).

The 1981 OBRA also reduced federal oversight of states' reimbursement methodologies. Pursuant to section 1396a(a)(13)(A), the HCFA will approve a state reimbursement plan based on the state's satisfactory "assurances" that the plan is in compliance with federal requirements. These requirements are reflected both in the statute itself and in its implementing regulations published by the HCFA in interim form in 1981 and in final form in 1983. 42 C.F.R. §§ 447.250-447.280.

C. The Pennsylvania medicaid program: operating cost, direct medical education cost, and capital cost reimbursement.

In Pennsylvania, DPW is the state agency responsible for administering medicaid. The medicaid program developed by DPW for the state is called the "Medicaid Assistance Program" or "MAP."

Consistent with the 1981 federal policy change with respect to hospital reimbursement, Pennsylvania developed a "prospective payment system" (PPS) for reimbursement of hospitals to contain escalating costs associated with medicaid services. This system, effective beginning fiscal year 1984-1985, replaced the retrospective method of reimbursement with a prospective method. Under this system, each hospital admission is classified according to the patient's illness diagnosis into 1 of 477 categories known as Diagnostic Related Groups (DRGs). 53 Fed.Reg. 38,576-89 (1988). A hospital is reimbursed in accordance with the flat fee fixed for the applicable category -- regardless of the number of services used or the patient's length of stay. The DRG system, being prospective in nature, will sometimes undercompensate for a given service and will sometimes overcompensate. The expectation, however, is that in the aggregate an efficiently operated hospital will receive an appropriate amount to reimburse it for medicaid services.

Unquestionably, Pennsylvania's PPS treats in-state hospitals differently than out-of-state hospitals. Rate calculation for in-state hospitals depends on the type of hospital seeking reimbursement and the average cost for that type of hospital. Under the PPS, all participating in-state hospitals, approximately 233 in number, are assigned to one of seven groups. Grouping for in-state hospitals takes into account four concepts: teaching status, medicaid volume, environmental characteristics, and hospital costs. These four concepts are measured by a total of thirteen variables, including such things as the number of resident and intern programs, total number of patients, area wage index, and so on. The actual grouping of in-state hospitals is accomplished by a computer program.

After classifying the in-state hospitals, Pennsylvania then determines a group average cost per case, which is based on actual allowable costs and adjusted for inflation and budget neutrality. The hospitals in Group 1 have the highest group rate, and those in Group 7 have the lowest.

To determine the amount of reimbursement to in-state hospitals under the PPS, Pennsylvania multiplies the relative value of the DRG by the hospital's group average cost per case. The higher the group rate, the higher the payment for a given DRG. Thus, Pennsylvania pays a Group 1 hospital more to treat a given DRG than it pays a Group 2, 3, 4, 5, 6, or 7 hospital to treat that DRG.

Out-of-state hospitals, on the other hand, receive quite different treatment under the PPS. Unlike in-state hospitals, out-of-state hospitals are not grouped according to the concepts of hospital costs, teaching status, medicaid volume, and environment. Instead they are treated on the basis of one factor only: their geographical location outside Pennsylvania. Moreover, the group rate assigned to out-of-state hospitals is not based on the average allowable costs of that group based on historical data, but rather on the average of payments made to in-state hospital providers. To reimburse inpatient operating costs of out-of-state hospitals, Pennsylvania multiplies the relative value of the DRG assigned to the patient's illness by the Pennsylvania statewide average cost per case or pays the hospital's actual charges for treating that illness, whichever is lower.

Aside from operating cost reimbursement under the PPS, the MAP provides in-state hospitals additional hospital reimbursement on the basis of two other considerations: direct medical education costs (DME) and capital costs. Again, out-of-state hospitals are treated differently with respect to these two bases of medicaid reimbursement.

In-state hospitals receive an amount, in addition to their operating cost reimbursements, to reimburse them for the direct medical education (DME) costs (if any) associated with their medicaid service. For the years 1984 to 1986, Pennsylvania reimbursed in-state hospitals for the MAP share of their DME costs on an actual cost basis subject to certain limitations. Beginning fiscal year 1986-1987, Pennsylvania limits reimbursement to in-state hospitals for DME costs to 1.9 percent over the amount paid the hospital for DME costs the previous year, or the hospital's allowable DME costs, whichever is lower.

In contrast, Pennsylvania decided as a matter of policy not to pay out-of-state hospitals for DME costs associated with medicaid. Thus, teaching hospitals such as WVUH receive no DME cost reimbursement from Pennsylvania when they treat Pennsylvania medicaid patients.

Finally, in addition to reimbursement of inpatient operating costs under the PPS and in addition to payments for DME costs, Pennsylvania reimburses in-state hospitals for their allowable capital costs. For the period July 1, 1984, through June 30, 1986, reimbursement of in-state hospitals' capital costs was based on actual capital costs incurred. After that date, Pennsylvania initiated a prospective payment system for reimbursement of in-state hospitals' capital costs, to be phased in between July 1, 1986, and June 30, 1992. During that period, Pennsylvania would pay in-state hospitals for their actual capital costs on a decreasing percentage basis. After July 1, 1992, the state will reimburse all in-state hospitals at the same flat rate for their capital costs.

Out-of-state hospitals are not reimbursed for their capital costs in the same manner. The Pennsylvania medicaid prospective payment system has never reimbursed out-of-state hospitals using actual allowable costs of capital. Pennsylvania pays out-of-state hospitals an "add-on" for capital reimbursement that represents the average capital costs of all Pennsylvania hospitals. That "add-on" bears no relationship to the actual capital costs of out-of-state hospitals. Moreover, although the MAP gave in-state hospitals approximately ten years to adjust to a flat rate payment for capital costs, out-of-state hospitals were allowed no phase-in period to adjust to a prospective payment system for such costs.

D. The MAP appeals system.

Pursuant to federal regulation, the state medicaid agency must provide hospitals with a system by which to appeal. In Pennsylvania the administrative agency division that adjudicates the appeals is the DPW's Office of Hearings and Appeals (OHA). The OHA hearing officer recommends a decision to the Director of OHA, who either adopts or rejects the recommendation. Both parties have the right to request reconsideration from the Secretary of DPW. Outside of the administrative appeals process, review of the decision of the Director of OHA or the Secretary of DPW may be sought through the judicial system of the Commonwealth of Pennsylvania.


WVUH initiated this action on July 16, 1986. After a six-day bench trial in May 1988, the district court concluded that in all aspects -- operating costs, DME costs, and capital costs -- Pennsylvania's reimbursement program fell considerably short of the requirements of Title XIX and violated federal law. Moreover, the court concluded that Pennsylvania's classification of hospitals, affording different treatment to hospitals depending on their location inside or outside the state, violated WVUH's rights under the equal protection clause of the United States Constitution. Finally, the court declared Pennsylvania's administrative appeal system invalid because it allowed a hospital to challenge only the application of the state's methodology, rather than the methodology itself. The court ordered Pennsylvania to revise its medicaid reimbursement program and administrative appeals system as they applied to WVUH and to allow the Hospital to employ the revised appeal system to challenge reimbursements from the date the action was commenced. Pursuant to 42 U.S.C. § 1988, the district court awarded attorneys fees, which included expert witness fees, to WVUH as the prevailing party. The defendants appeal.


Before assessing the validity of Pennsylvania's medicaid reimbursement program, we first address the preliminary question whether WVUH has a cause of action entitling it to challenge the program.

The threshold issue in this case is whether WVUH can assert a cause of action against the defendant state officials under 42 U.S.C. § 1983 for alleged violation of the federal medicaid statute. Section 1983 provides in relevant part that:

Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or . . . the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress.

42 U.S.C. § 1983. Pennsylvania argues that a hospital cannot state a valid claim under section 1983 for alleged violation of the medicaid statute with respect to hospital reimbursement. This court has not previously had the opportunity to rule on this question of law.

Section 1983 provides a remedy for deprivation under color of state law of "any rights . . . secured by the Constitution and laws." 42 U.S.C. § 1983 (emphasis added). Interpreting this language in Maine v. Thiboutot, 448 U.S. 1, 65 L. Ed. 2d 555, 100 S. Ct. 2502 (1980), the Supreme Court held that the phrase "and laws" does not implicitly refer only to equal rights laws (making only equal rights violations actionable under section 1983), but rather refers generally to all federal statutory law. The plain language of section 1983, together with its legislative history and the Court's past treatment of the provision, compels the conclusion that causes of action under section 1983 are not limited to claims based on constitutional or equal rights violations. 448 U.S. at 6-8.

Thiboutot, however, does not stand for the broad proposition that section 1983 provides a cause of action for any violation of any federal law. As subsequent cases explain, a cause of action under 1983 exists for violation of a federal law if two requirements are met. First, the federal law must create private rights enforceable under section 1983. Pennhurst State School and Hospital v. Halderman, 451 U.S. 1, 67 L. Ed. 2d 694, 101 S. Ct. 1531 (1981). In Pennhurst the Court held that a section 1983 action did not lie for alleged violation of the Developmentally Disabled Assistance and Bill of Rights Act because that Act conferred no substantive rights but merely constituted a congressional declaration of policy. Id. at 18-27. With respect to the existence of the private rights requirement, valid federal regulations as well as federal statutes may create rights enforceable under section 1983. Wright v. City of Roanoke Redevelopment and Housing Authority, 479 U.S. 418, 431-32, 93 L. Ed. 2d 781, 107 S. Ct. 766 (1987) (HUD regulations defining statutory term "rent" as including a "reasonable amount" for utilities grants tenants rights enforceable under section 1983); Alexander v. Polk, 750 F.2d 250, 259 (3d Cir. 1984) (WIC regulation creates enforceable right to notice of fair hearing).

Second, and stated negatively, the federal law must not reflect a congressional intent to foreclose private enforcement. Middlesex Cty. Sewerage Auth. v. National Sea Clammers Ass'n, 453 U.S. 1, 69 L. Ed. 2d 435, 101 S. Ct. 2615 (1981). In Sea Clammers the Court held that a cause of action for violation of two federal environmental statutes did not lie because the comprehensive remedial schemes provided in those statutes reflect a congressional intent to foreclose a private remedy under section 1983. Id. at 21. The burden of proving a congressional intent to foreclose a section 1983 remedy, however, lies with the state actor, and that burden is not easily satisfied. Once it is determined that a federal provision creates an enforceable right, a cause of action exists under section 1983 for violation of that provision "unless the state actor demonstrates by express provision or other specific evidence from the statute itself that Congress intended to foreclose such private enforcement." Wright, 479 U.S. at 423. A court deciding the issue may not "'lightly conclude'" that Congress intended such foreclosure. Id. at 423-24 (quoting Smith v. Robinson, 468 U.S. 992, 1012, 82 L. Ed. 2d 746, 104 S. Ct. 3457 (1984).*fn1

Undertaking the analysis, then, the first question is whether the Medicaid Act, Title XIX of the federal Social Security Act, 42 U.S.C.A. §§ 1396 through 1396s (West 1983 & Supp. 1989), creates private rights in favor of hospitals participating in a state's medicaid program. Following the example set by the Court in Pennhurst, we seek the answer to this question in ...

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