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Hathaway v. Mathews

decided: December 21, 1976.


Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. IP 76-175-C - Cale J. Holder, Judge.

Tom C. Clark, Associate Justice (Retired),*fn* Swygert and Cummings, Circuit Judges.

Author: Swygert

SWYGERT, Circuit Judge.

In this case appellant challenges the decision of the Department of Health, Education and Welfare (HEW) to terminate Medicaid benefits allocated for patients in the nursing home that she operates because the home allegedly does not comply with federal standards. She contends that HEW may not cut off Medicaid payments without first granting her notice of the alleged violations and a hearing in which she can attempt to demonstrate that the home is in fact in compliance with federal standards. We agree, and reverse the judgment of the district court.


Appellant Laura Hathaway owns and operates the R.N. Nursing Home in Walkerton, Indiana. The Home has approximately 36 residents, all of whom rely on Medicaid to pay their bills. These payments are made pursuant to a provider agreement, required under the federal Social Security Act, between the Home and the State of Indiana. The Home has for some time been licensed as an intermediate health care facility by the State of Indiana. This license was renewed for a period of one year on December 17, 1975, indicating that the State found the Home to be in compliance with state and federal standards.

In December 1975, HEW, acting on complaints that the R.N. Nursing Home failed to satisfy federal regulations for intermediate care facilities, sent an inspection team to examine the premises of the Home. Further inspections were made in February 1976. On the basis of these investigations, HEW concluded that the Home was not in compliance with federal law. In accordance with established procedures, the Department on March 17, 1976 sent a letter to Wayne Stanton, the Administrator of the Indiana Department of Public Welfare, notifying him that federal Medicaid payments on behalf of the residents of the Home would cease after April 20, 1976.

On March 18, 1976, Stanton sent a letter to appellant informing her that because of the federal action, the State had no alternative but to decertify the R.N. Nursing Home as a provider of intermediate services. A copy of the letter from HEW was enclosed.

On March 26, 1976, Hathaway filed suit in the United States District Court for the Southern District of Indiana, seeking damages, injunctive relief, and a temporary restraining order. She contended that she had a property interest, cognizable under the due process clause of the fourteenth amendment, in the continuation of Medicaid payments to the Home and that the payments therefore could not be terminated without notice of the specific areas in which the Home was deficient under federal law and a hearing in which she could have an opportunity to rebut HEW's allegations. The district court, in denying the motion for a temporary restraining order and granting the defendants' motion to dismiss, relied on three factors. First, it held that because Hathaway's relationship was with the State alone, she could not seek a remedy against the federal government. Second, it found that any requirements of due process could be satisfied by a post-termination hearing. Finally, it held that Hathaway had failed to exhaust administrative remedies available under state law. Hathaway appeals from the district court's decision.


The correct resolution of this case depends upon an understanding of the mechanics of the Medicaid program. Under Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., Medicaid is a cooperative arrangement between the states and the federal government. Both the states and HEW provide a portion of the funds to pay claims, with the exact percentage determined by the applicable State plan. 42 U.S.C. § 1396a(a)(2). Under the Indiana State plan, Indiana pays 47.1 percent of each claim, with the remainder paid for by the federal government.

The statute calls for the states to administer the program, and to evaluate whether a particular institution is qualified to receive payments for services which it renders to Medicaid recipients. 42 U.S.C. § 1396a(a)(33)(B). Before a state can certify an institution as qualified, it must find that that institution meets all requirements for licensure under state law, see 45 C.F.R. § 249.10(b)(15)(i)(A), as well as the criteria laid down by federal regulations. See 45 C.F.R. § 249.12. After certification, the state and the institution enter into a provider agreement that formalizes the arrangements for the provision of services by the institution and the payment of claims by the state. 45 C.F.R. § 249.10(b)(15)(i)(E). HEW pays the state for the portion of each claim for which it is responsible. The state in turn pays those funds, as well as its share of each claim, directly to the institution.*fn1

HEW, however, retains the power to independently verify through its own inspection that the institution complies with federal requirements. If HEW determines that the institution is out of compliance, it can refuse to pay the federal share of Medicaid payments.45 C.F.R. § 249.10(b)(15)(vi).

HEW therefore followed the procedure contemplated by the regulations promulgated under the Social Security Act in refusing to continue Medicaid payments on behalf of residents of the R.N. Nursing Home because it found that the Home did not comply with federal standards. Moreover, the regulations do not provide for notice or a hearing before funds are cut off. Appellant's only ...

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