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ILLINOIS COUNCIL FOR LONG TERM CARE v. MILLER

December 9, 1980

ILLINOIS COUNCIL FOR LONG TERM CARE, LEON SHLOFROCK, PRESIDENT; CLAYTON RESIDENTIAL HOME, INC., AN ILLINOIS CORPORATION, SUBURBAN TERRACE # 1, A LIMITED PARTNERSHIP; MELVIN SIEGEL AND SHELDON HEIDICH, GENERAL PARTNERS; SUBURBAN TERRACE # 2, A LIMITED PARTNERSHIP, MELVIN SIEGEL AND SHELDON NEIDICH, GENERAL PARTNERS; DOLTON TERRACE, A LIMITED PARTNERSHIP, MELVIN SIEGEL AND SHELDON NEIDICH, GENERAL PARTNERS; TOUHY TERRACE NURSING CENTER, A LIMITED PARTNERSHIP, MARTIN J. WEISS, GENERAL PARTNER; SENN PARK NURSING CENTER, A LIMITED PARTNERSHIP, MARTIN J. WEISS, GENERAL PARTNER; BURNHAM TERRACE CARE CENTER, A LIMITED PARTNERSHIP, MARTIN J. WEISS, GENERAL PARTNER; NORTHEAST HEALTH CARE CENTER, A LIMITED PARTNERSHIP, MARTIN J. WEISS, GENERAL PARTNER; AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
JEFFREY C. MILLER, DIRECTOR, ILLINOIS DEPARTMENT OF PUBLIC AID, AND WILLIAM L. KEMPINERS, DIRECTOR, ILLINOIS DEPARTMENT OF PUBLIC HEALTH, DEFENDANTS.



The opinion of the court was delivered by: Aspen, District Judge:

MEMORANDUM OPINION AND ORDER

This is an action for declaratory and injunctive relief and for reimbursement of capital costs on a reasonable cost-related basis under Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., commonly known as Medicaid.*fn1 Plaintiffs, private nursing homes located in the Chicago area,*fn2 challenge the system of provider reimbursement for capital costs under the Illinois Medicaid plan as violative of the supremacy clause of the Constitution of the United States, art. VI, cl. 2, in that the Illinois plan is alleged to be inconsistent with the reasonable cost-related reimbursement scheme envisioned by 42 U.S.C. § 1396a(a)(13)(E) and certain federal regulations promulgated thereunder by the United States Department of Health and Human Services (HHS), formerly the Department of Health, Education and Welfare (HEW). Plaintiffs also allege that the Illinois plan violates the due process and equal protection clauses of the fourteenth amendment and that it does not comport with the guidelines set forth by the Illinois Legislature in Ill.Rev.Stat. ch. 23, §§ 5-5.1 et seq.*fn3 Defendants are Mr. Jeffrey C. Miller, Director of the Illinois Department of Public Aid (IDPA), the state agency responsible for the administration of the Illinois Medicaid program, and Mr. William L. Kempiners, Director of the Illinois Department of Public Health. (IDPH)*fn4 Jurisdiction is grounded in 28 U.S.C. § 1331(a) and 28 U.S.C. § 2201-02.

Presently before the Court are the parties' cross motions for summary judgment. The questions to be decided are: (1) whether the Illinois system for reimbursing capital costs is reasonably cost-related as mandated by 42 U.S.C. § 1396a(a)(13)(E); and (2) whether the Illinois plan is so arbitrary or unreasonable as to violate the due process or equal protection clauses of the fourteenth amendment.

BACKGROUND

In 1972, Congress amended the existing Medicaid legislation to provide for reimbursement of skilled and intermediate nursing care facilities on a "reasonable cost related basis" for services rendered to Medicaid recipients. Public Law 92-603, § 249; 42 U.S.C. § 1396a(a)(13)(E).*fn5 The 1972 amendment "was apparently a result of Congressional displeasure with widespread state endorsement of flat rate payment systems which were perceived as failing to bring about quality care and the efficient, economical provision of such service." American Health Care Association v. Califano, 443 F. Supp. 612, 614 (D.D.C. 1977). By providing for payment on a "reasonable cost related basis" in 42 U.S.C. § 1396a(a)(13)(E) rather than payment of the "reasonable cost" of services as provided in 42 U.S.C. § 1396a(a)(13)(D) Congress intended to give states greater flexibility in formulating reimbursement methods that would assure quality care for low income nursing home residents while also controlling the spiraling costs of Medicaid. Hempstead General Hospital v. Whalen, 474 F. Supp. 398, 403, 408-9 (E.D.N.Y. 1979), affirmed, 622 F.2d 573 (2d Cir. 1980); American Health Care, supra, 443 F. Supp. at 614. HHS belatedly promulgated regulations implementing the 1972 amendment on July 1, 1976 [41 Fed.Reg. 27300-27308 (1976)], and published a supplementary statement of basis and purpose on February 6, 1978 [43 Fed.Reg. 4861-4864 (1978)], pursuant to the court's order in American Health Care, supra.

An amendment to the Illinois Medicaid plan concerning reasonable cost related reimbursement for skilled nursing and intermediate care facilities was approved by HHS on March 30, 1978, with an effective date of January 1, 1978. The aspect of the amended plan here in issue is the method of reimbursement for capital costs incurred by the facility. Under the Illinois plan, nursing facilities are placed into one of twenty-five groups based upon the facility's age and location. Age is determined by the year of construction or acquisition, whichever is later, prior to July 1, 1977. A facility acquired after that date is placed in a group on the basis of its most recent date of construction or acquisition prior to July 1, 1977. Once placed in a group, the facility remains in that group. Each facility is reimbursed for its capital costs on the basis of a weighted average of the age of the facilities and size of the investments of all the facilities in the group. Facilities below the median receive the median. Facilities above the median receive the median plus 80% of their allowable costs above the median up to 110% of the median.

Plaintiffs contend that the Illinois method of reimbursement for capital costs is not reasonably cost related as mandated by Congress in 42 U.S.C. § 1396a(a)(13)(E) and HHS in 42 C.F.R. § 447.301-306 since it "eliminates from any consideration the actual cost of acquisition of all post-July 1, 1977 acquisitions." Plaintiffs' Memorandum in Support of Summary Judgment at 4. They maintain that the July 1, 1977, cut-off date for consideration of capital costs in making the initial groupings of nursing facilities operates as an impermissible ceiling on consideration of actual out-of-pocket costs, thus making it more difficult for facilities to operate successfully and burdening facilities sold after July 1, 1977, by placing them in an "older" group with a presumably lower median. Plaintiffs also contend that the amended Illinois plan, which was approved by HHS on March 30, 1978, with an effective date of January 1, 1978, but which imposes a July 1, 1977, cut-off for consideration of capital costs, has a retroactive effect that violates the due process and equal protection clauses of the fourteenth amendment in its impact on facilities acquired after July 1, 1977, but before the January 1, 1978, effective date. Plaintiffs further attack the July 1, 1977 cut-off as arbitrary, capricious, and unreasonable, presumably in violation of due process and equal protection principles.

I.

As a preliminary matter, we note that HHS's approval of the Illinois Medicaid plan, as amended, on March 30, 1978, is entitled to substantial deference in this Court. See Quern v. Mandley, 436 U.S. 725, 743-44 n. 19, 98 S.Ct. 2068, 2078-79, 56 L.Ed.2d 658 (1978); New York Department of Social Services v. Dublino, 413 U.S. 405, 421, 93 S.Ct. 2507, 2516, 37 L.Ed.2d 688 (1973). As the United States Court of Appeals for the Seventh Circuit said in Michael Reese Physicians & Surgeons, S.C. v. Quern, 606 F.2d 732, 735-36 (7th Cir. 1979), panel opinion adopted en banc, 625 F.2d 764 (7th Cir. 1980):

  By approving the Illinois Medicaid plan and by
  declining thus far to take any action against the
  modification in the plan, the Department of Health,
  Education and Welfare [now the Department of Health
  and Human Services] has in effect expressed its view
  that the plan is in compliance with applicable
  statutory and regulatory requirements. . . . The
  interpretation of the agency charged with
  administration of the statute is entitled to
  substantial deference.

(citations omitted).*fn6 See also Unicare Health Facilities, Inc. v. Miller, 481 F. Supp. 496, 498 (N.D.Ill. 1979); Hempstead General Hospital v. Whalen, 474 F. Supp. 398, 409 (E.D.N.Y. 1979), affirmed, 622 F.2d 573 (2d Cir. 1980). With these principles in mind, this Court will first consider the plaintiffs' challenge to the Illinois plan as inconsistent with 42 U.S.C. § 1396a(a)(13)(E) and the regulations promulgated thereunder by HHS followed by a discussion of plaintiffs' due process and equal protection challenges to the Illinois plan.

In amending Title XIX in 1972, Congress intended to give the states maximum flexibility to develop creative methodologies for reimbursement of skilled and intermediate nursing facilities on a reasonable cost related basis. 42 U.S.C. § 1396a(a)(13)(E). See generally S.Rep.No.92-1230, 92d Cong.2d Sess. 287 (1972); 43 Fed.Reg. 4861-4864 (1978); 41 Fed.Reg. 27300-27308 (1976). "The legislative history indicates that states are to be free to experiment with methods and standards for payment that would be simpler and less expensive than the complex Medicare reasonable cost formula." Alabama Nursing Home Association v. Harris, 617 F.2d 388, 392 (5th Cir. 1980). As the Seventh Circuit reflected in Michael Reese Physicians & Surgeons, S.C., supra, "Medicaid is an experiment in cooperative federalism . . . which literally abounds with options." 606 F.2d at 735 (citations omitted). Of course, the states may not be arbitrary or capricious in their rate setting, but it is clear that Congress intended to sacrifice some of the precision in cost reimbursement embodied in the Medicare "reasonable cost" formula for the flexibilities of state developed programs in accordance with the "reasonable ...


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