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Bio-medical Laboratories, Inc. v. Trainor





Appeal from the Circuit Court of Cook County, the Hon. Raymond K. Berg, Judge, presiding.


Plaintiff, Bio-Medical Laboratories, Inc., filed suit in the circuit court of Cook County seeking to restrain the defendant, James L. Trainor, Director of the Illinois Department of Public Aid, or his successor from suspending plaintiff's right to participate in the Illinois medical assistance program (Medicaid) (Ill. Rev. Stat. 1975, ch. 23, par. 5-1 et seq.). The trial court granted a "Temporary Restraining Order," and, after briefing and argument, denied defendant's motion to dismiss and entered a preliminary injunction, having found defendant to be without express or implied statutory authority to suspend or terminate plaintiff's participation. Because the issue of the defendant's authority has arisen in other cases presently pending before the circuit court, we ordered defendant's appeal taken directly to this court pursuant to Rule 302(b) (58 Ill.2d R. 302(b)).

Plaintiff has participated in the Medicaid program since 1969. In 1976, after it was discovered that the Department of Public Aid's (Department) reimbursements to plaintiff had increased 58% over a three-month period, defendant ordered an audit of plaintiff's clinic billing and record-keeping procedures. On November 24, 1976, Robert G. Wessel, defendant's chief assistant, notified plaintiff that it would be terminated from further participation if it failed to submit certain business records to the Department within 15 days. Two days later, representatives of both parties met and allegedly reached an agreement regarding plaintiff's duty to disclose certain records. According to the defendant, plaintiff was thereafter notified that no further action would be taken pursuant to the Department's threat of suspension. On November 30, the Department's auditors filed their report citing certain discrepancies in plaintiff's billing procedures which had resulted in alleged overpayments of $9,990.75. By extrapolation, the auditors determined that an estimated $321,291 in overpayments had been paid to plaintiff during an 18-month period. As a result of these alleged improper billing procedures and plaintiff's refusal to turn over records, the Department's auditors recommended to the defendant that plaintiff be suspended from further participation as a Medicaid vendor, and that action be taken to recoup the overpayments.

One week later, plaintiff filed its suit for injunctive relief alleging that defendant had indicated his intention to suspend plaintiff from the program forthwith. It also alleged that 90% of its business involved Medicaid payments, and asserted that defendant was without authority to suspend.

In an affidavit filed with the defendant's motion to dismiss, defendant stated that any action taken by the Department would be subject to the Department's rules and regulations, and that plaintiff would not be terminated until procedural requirements in accordance with those rules had been met.

Defendant has raised several threshold issues challenging plaintiff's legal authority to maintain this action. He asserts plaintiff lacks standing in that no formal notice of intent to terminate had been served pursuant to rule, and that no other formal action had been taken to implement the auditors' recommendation to suspend or recoup overpayments. Despite defendant's characterization of this issue as one involving standing, the real question is whether there is a controversy ripe for adjudication.

It is elementary that a motion to dismiss admits all facts well pleaded. We therefore must assume plaintiff's allegation that "defendant, James Trainor, has informed the plaintiff that he intends to forthwith suspend the plaintiff from the Public Aid Program" is a true statement. The auditors' report recommended that plaintiff be suspended from the program, and all that remained for the defendant to decide was whether action would be taken on the basis of that report.

The basic rationale of the ripeness doctrine as it relates to challenges against unlawful administrative action "is to prevent the courts>, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties." (Abbott Laboratories v. Gardner (1967), 387 U.S. 136, 148-49, 18 L.Ed.2d 681, 691, 87 S.Ct. 1507, 1515.) Absent defendant's announced intention, we would agree that plaintiff's action was premature. Defendant's threat of action, however, along with the recommendation of the auditors, constituted a sufficient final determination to warrant judicial consideration.

Defendant also asserts that plaintiff lacks standing in that it has no protectable interest at stake. It is argued that no vendor, medical or otherwise, has a substantive legal right to do business with the State against the State's will, and that no medical vendor has "a right or interest either recognized by common law or created by statute" to continue participation in the Medicaid program. Defendant cites Perkins v. Lukens Steel Co. (1940), 310 U.S. 113, 84 L.Ed. 1108, 60 S.Ct. 869, for the proposition that no citizen has the "right" to do business with the government, and, therefore, has no standing to challenge the rules and regulations imposed as a condition of doing business. Perkins, however, is not applicable to this case. There, certain iron and steel manufacturers sought to restrain the Secretary of Labor from carrying out an administrative determination that all future government contracts require, as a contractual condition, that the supplier pay its employees the minimum wage prevailing in a given locality. The Supreme Court held that, as prospective bidders, the steel and iron manufacturers did not have standing to challenge the Secretary's determination because (1) the government was entitled to impose contractual conditions on parties it had chosen to contract with, and (2) the steel and iron manufacturers were unable to show that a legal right had been invaded or threatened. Here, however, the plaintiff possesses a legal interest which is threatened, that being its expectation of continuing to receive Medicaid payments on behalf of the Medicaid recipients it services. Contrary to defendant's contention, this "expectation interest" has been recognized as a protectable legal interest. (See, e.g., Hathaway v. Mathews (7th Cir. 1976), 546 F.2d 227, 230; Case v. Weinberger (2d Cir. 1975), 523 F.2d 602, 606.) "Interruption of an existing relationship between the government and a contractor places the latter in a different posture from one initially seeking government contracts and can carry with it grave economic consequences." (Gonzalez v. Freeman (D.C. Cir. 1964), 334 F.2d 570, 574.) In Gonzalez, plaintiff sought to challenge the Secretary of Agriculture's authority to terminate its eligibility to participate in the Commodity Credit Corporation's contracting program. The court there stated:

"Thus to say that there is no `right' to government contracts does not resolve the question of justiciability. Of course there is no such right; but that cannot mean that the government can act arbitrarily, either substantively or procedurally, against a person or that such person is not entitled to challenge the processes and the evidence before he is officially declared ineligible for government contracts. An allegation of facts which reveal an absence of legal authority or basic fairness in the method of imposing debarment presents a justiciable controversy in our view." (334 F.2d 570, 574-75.)

See also Buettell v. Walker (1974), 59 Ill.2d 146, 151-52, wherein this court held a State contractor had standing to challenge the Governor's authority to require him to disclose political contributions as a condition of doing business with the State.

We hold, therefore, that plaintiff has standing to challenge the defendant's authority to suspend.

A challenge is also made on the grounds that plaintiff's action is barred by the doctrine of sovereign immunity. It is argued that, in essence, this action is one against the State, seeking to have it continue to do business with plaintiff. Plaintiff is not attempting to enforce a present claim against the State but, rather, seeks to enjoin the defendant from taking actions in excess of his delegated authority and in violation of plaintiff's protectable legal interests. Such a suit does not contravene the immunity prohibition. (E.g., County of Cook v. Ogilvie (1972), 50 Ill.2d 379, 383; Owens v. Green (1948), 400 Ill. 380, 408-09; People ex rel. Freeman v. Department of Public Welfare (1938), 368 Ill. 505, 506-07.) For reasons the same as expressed above, we also reject defendant's contention that the Court of Claims has exclusive jurisdiction over the subject matter of this action.

A final threshold contention raised by the defendant is the appropriateness of injunctive relief. He argues that plaintiff should have first submitted itself to the hearing procedures established by the Department's rules and regulations, and then sought a review of the Director's authority by writ of certiorari. This argument must be rejected, for a party need not exhaust his administrative remedies where the statute, or in this instance, administrative rule, is attacked on its face. Walker v. State Board of Elections (1976), 65 Ill.2d 543, 551-52; Doe v. Jones (1927), 327 Ill. 387, 392.

It is argued that plaintiff failed to show irreparable harm or the lack of an adequate remedy at law. It was alleged and not denied that 90% of plaintiff's business involved Medicaid payments. From this fact it could reasonably be inferred that wrongful suspension from the Medicaid program, for any length of time, would cause damages of an uncertain magnitude. Any subsequent action against the State by the plaintiff for damages resulting from an unlawful suspension would certainly raise issues of governmental immunity. For there to be an adequate remedy at law which will deprive equity of its power to grant injunctive relief, the remedy "must be clear, complete, and as practical and efficient to the ends of justice and its prompt administration as the equitable remedy." (K.F.K. Corp. v. American Continental Homes, Inc. (1975), 31 Ill. App.3d 1017, 1021.) Plaintiff's entitlement to damages is not only uncertain, but an action for damages in a case of this nature would not be "as practical and efficient to the ends of justice" as an action for injunctive relief. Consequently, we find that plaintiff's complaint did show a threat of irreparable harm and the lack of an adequate remedy at law.

The parties have raised many arguments concerning defendant's authority under the Illinois Public Aid Code (Code) (Ill. Rev. Stat. 1975, ch. 23, par. 1-1 et seq.). Given the posture of this case, however, the sole issue before this court is whether defendant has the delegated authority to suspend or terminate Medicaid vendors.

Defendant concedes that the Code does not expressly grant him the authority to either suspend or terminate vendors suspected of committing fraud or abuse. He argues, however, that such authority can and should be implied from both the express provisions of the Code and the requirements of certain Federal regulations.

He asserts Federal regulations require as a condition to the receipt of Federal money that all State agencies adopt methods and procedures for identifying and eliminating Medicaid vendors guilty of fraud or abuse, and that, to the extent the legislature has expressly provided that the Department cooperate with Federal agencies so as to qualify for Federal aid, it was intended that he enact all rules and regulations necessary to meet compliance therewith. (See Ill. Rev. Stat. 1975, ch. 23, par. 12-4.5.) Contrary to defendant's assertion, Federal regulations do not require the State agency to have the authority to suspend or terminate vendors guilty of committing fraud or abuse. Federal regulations require only that the State plan provide for a method of identifying and reporting cases of suspected fraud. (45 C.F.R. sec. 250.80 (1976).) Pursuant to sections 12-4.2 and 12-4.5 of the Code, the legislature has granted defendant the necessary authority to investigate and report suspected fraud. Ill. Rev. Stat. 1975, ch. 23, pars. 12-4.2, 12-4.5.

Prior to 1972, the Secretary of Health, Education and Welfare did not have the authority to suspend or terminate vendors guilty of committing fraud or other abuses under the Medicare program. (1972 U.S. Code Cong. & Ad. News 4989, 5085.) In 1972, Congress vested the Secretary with this needed authority. In its report to Congress in 1972, the House Committee on Ways and Means specifically noted that "States can, and some do, bar from medicaid providers who abuse the program, but they are not now required to do so." (1972 U.S. Code Cong. & Ad. News 4989, 5085.) Section 1396b(i)(2) of the Federal "Grants to States for Medical Assistance Programs" provides for the termination of Federal payments to States for services furnished by a vendor under the Medicaid program if such vendor has been found guilty of committing fraud or abuse under the applicable provisions of the Federal Medicare program. (42 U.S.C. § 1396b(i)(2) (Supp. III 1973).) This section, however, does not require the State to terminate or suspend the vendor as a condition to the State's further participation in the Federal program.

Defendant also argues that the express provisions of the Code, coupled with the Director's broad authority to make all rules and regulations "necessary or desirable for carrying out the provisions of [the] Code" (Ill. Rev. Stat. 1975, ch. 23, par. 12-13), implies the authority to suspend or terminate. The desirability of a regulation, however, must be distinguished from the power to promulgate it. This court has consistently held that, inasmuch as an administrative agency is a creature of statute, any power or authority claimed by it must find its source within the provisions of the statute by which it is created. (City of Chicago v. Fair Employment Practices Com. (1976), 65 Ill.2d 108, 113; Chicago Division of the Horsemen's Benevolent & Protective Ass'n v. Illinois Racing Board, Ill. 407, 410. (1972), 53 Ill.2d 16; Pearce Hospital Foundation v. Illinois Public Aid Com. (1958), 15 Ill.2d 301, 307; Hesseltine v. State Athletic Com. (1955), 6 Ill.2d 129, 131-32; People ex rel. Polen v. Hoehler (1950), 405 Ill. 322, 326-28; People ex rel. Hurley v. Graber (1950), 405 Ill. 331, 340-44, 346-48.) Further, when the legislature vests discretionary authority in an administrative officer, intelligible standards must be provided to guide the officer in the exercise of his discretion. E.g., Cronin v. Lindberg (1976), 66 Ill.2d 47, 59-60; People v. Tibbitts (1973), 56 Ill.2d 56, 57-62; Hill v. Relyea (1966), 34 Ill.2d 552, 555-56; McDougall v. Lueder (1945), 389 Ill. 141, 152-54.

In Horsemen's Ass'n, for example, certain racehorse owner associations brought suit against the Illinois Racing Board to challenge its authority to enact a rule prescribing, by schedule, the minimum fees to be paid jockeys. It was asserted that the board was without authority to regulate the jockeys' compensation. The Board argued that increased compensation would improve the quality of racing, and, therefore, the rule fell within its authority to "prescribe rules, regulations and ...

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