Appeal from the United States District Court for the Western District of Pennsylvania. D.C. No. 84-00319E
Before: Sloviter, Chief Judge, Cowen and Rosenn, Circuit Judges
This appeal raises issues emanating from the ongoing struggle of the Federal Government and the Commonwealth of Pennsylvania to contain costs in the delivery of health care services under the cooperative federal-state Medicaid program, Title XIX of the Social Security Act, 42 U.S.C.A. § 1396 et seq. (1983 and West Supp. 1991). Plaintiff-appellants, the Erie County Geriatric Center (ECGC or the Center), a non-profit corporation providing long-term health care to aged indigent under Medicaid, and the County of Erie, a guarantor of all of the Center's indebtedness, challenged the validity of the approval by the Secretary of the United States Department of Health and Human Services (the Secretary or HHS) of the 1980 and 1982 amendments to the Pennsylvania medical assistance plan.
As a participant in the Medicaid program, Pennsylvania must comply with the federal statutory and regulatory scheme which requires, inter alia, that it establish a medical assistance program designed to pay skilled nursing facilities (SNFs) and intermediate care facilities (ICFs) rates "which are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities [providing] care and services in conformity with applicable State and Federal laws, regulations, and quality and safety standards." 42 U.S.C. § 1396(a)(13)(A). Plaintiffs filed a complaint against the Secretary and the Pennsylvania Department of Public Welfare (DPW) in 1984 seeking declaratory relief in the United States District Court for the Western District of Pennsylvania on the ground that the Secretary's approval and the State's application of the 1980 and 1982 plan amendments violated the Medicaid law. The district court dismissed the claims against DPW on eleventh amendment sovereign immunity grounds under Green v. Mansour, 474 U.S. 64, 88 L. Ed. 2d 371 , 106 S. Ct. 423 (1985), and DPW is not a party to this appeal.*fn1
The plaintiffs and the Secretary filed cross-motions for summary judgment. The district court granted the plaintiffs relief with respect to the 1980 amendment, but denied their motion as to the 1982 amendment and entered summary judgment for the Secretary. ECGC and the County of Erie appealed from that portion of the judgment denying relief. We reverse.
A. The Parties and Pennsylvania's Medicaid Program
ECGC is a non-profit, long-term care nursing home providing both skilled nursing and intermediate care services to approximately 550 elderly indigent patients in Erie, Pennsylvania. The Center maintains close ties with the plaintiff, Erie County, from whom it receives financial support. The County guarantees all of ECGC's indebtedness and is required to make up any shortfall in the Center's operating costs.
ECGC relies substantially on reimbursements provided by the State through the Medicaid program. See 42 U.S.C.A. § 1396 et seq. States are not required to participate in the Medicaid program but if a state chooses to do so, it must comply with applicable federal law. Harris v. McRae, 448 U.S. 297, 301, 65 L. Ed. 2d 784 , 100 S. Ct. 2671 (1980). The Medicaid statute requires each participating state to submit a state plan containing a comprehensive description of the nature and scope of the state's Medicaid program for approval by the Secretary. 42 U.S.C.A. § 1396a(a). A state submits its plan to the Health Care Financing Administration (HCFA), the agency within HHS that Congress has designated to administer the Secretary's Medicaid responsibilities at the federal government level. Upon HCFA's approval of the plan, a state is entitled to federal government reimbursement for a percentage of the funds it has paid to health care facilities servicing Medicaid recipients. 42 U.S.C.A. § 1396b(a). Medicaid programs are administered by states, not the federal government, and so long as a state complies with the requirements of the Medicaid Act, "it has wide discretion in administering its local program." Lewis v. Hegstrom, 767 F.2d 1371, 1373 (9th Cir. 1985).
In Pennsylvania, the Department of Public Welfare is the agency charged with administering the Medicaid program. Under Medicaid, the State reimburses county nursing homes for their actual allowable costs on a per diem basis up to a ceiling set by DPW. The method that DPW selects for calculating payment rate ceilings can have a substantial financial impact upon nursing home facilities; if the payment rate for a particular facility is less than its actual costs, the facility loses money. In turn, in the case of ECGC, Erie County must make up the fiscal shortfall.
B. The 1980 Amendment and the "Rule of Three"
Prior to 1980, the Medicaid statute required that a state plan provide reimbursement to SNFs and ICFs "on a reasonable-cost related basis," as determined in accordance with methods and standards developed by a state and cost-funding methods approved and certified by the Secretary. Under this standard, Pennsylvania reimbursed county nursing homes for their actual allowable costs subject to a ceiling based on the statewide weighted average of daily allowable costs for all county homes.
In 1980, in response to rapidly rising medical costs, Congress enacted section 962 of the Omnibus Budget Reconciliation Act, Pub. L. No. 96-499, § 962(a), 94 Stat. 2650 (1980), commonly referred to as to the Boren Amendment, amending 42 U.S.C. § 1396(a)(13)(A) to provide:
for payment of the skilled nursing facility and intermediate care facility services provided under the plan through the use of rates (determined in accordance with methods and standards developed by the State) which the State finds, and makes assurances satisfactory to the Secretary, are reasonable and adequate to meet the costs which must be incurred by efficiently economically operated facilities in order to provide care and ...