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March 18, 1983


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


Children's Memorial Hospital ("Children's Memorial") sues the Illinois Department of Public Aid ("IDPA") and its Director Jeffrey Miller ("Miller") for declaratory and injunctive relief under 42 U.S.C. § 1983 ("Section 1983"),*fn1 alleging Illinois' Medicaid reimbursement plan and formula, Ill.Rev.Stat. ch. 23, § 5-5.11 ("Section 5-5.11") and IDPA Rule 4.13.8 ("Rule 4.13.8"), 6 Ill.Reg. 8187 (1982), violate the Social Security Act ("SSA"), 42 U.S.C. § 1396a(a)(13)(A) ("Section 13(A)") and applicable federal regulations.*fn2 Children's Memorial has moved for a preliminary injunction prohibiting enforcement of Section 5-5.11 and rule 4.13.8. For the reasons stated and on the terms specified in this memorandum opinion and order, that motion is granted as to enforcement of Section 5-5.11 and Rule 4.13.8 against Children's Memorial itself.*fn3


IDPA administers and supervises the administration of Illinois' Medicaid program, Ill.Rev.Stat. ch. 23, § 1-1, §§ 5-1 et seq., § 12-1; ch. 127, § 48a; 42 U.S.C. § 1396a(a)(5). Under Medicaid the United States provides funds to reimburse states in part for programs of public assistance to persons "whose income and resources are insufficient to meet the costs of necessary medical services." Id. § 1396 ("Section 1396"). Although a state is not required to participate in the Medicaid program, if it chooses to do so and therefore to qualify for federal funds it must comply with SSA and applicable regulations. Harris v. McRae, 448 U.S. 297, 301, 100 S.Ct. 2671, 2680, 65 L.Ed.2d 784 (1980); Smith v. Miller, 665 F.2d 172, 175 (7th Cir. 1981).

Before October 1, 1981 SSA required a state to reimburse hospitals for "the reasonable cost of inpatient hospital services provided under" the state Medicaid plan. 42 U.S.C. § 1396a(a)(13)(D) ("Section 13(D)"), repealed by Pub.L. 97-35, § 2173(a)(1)(A), 95 Stat. 808, Aug. 13, 1981. In effect hospitals were allowed to recover from states their full actual cost of providing inpatient care to Medicaid patients.

In 1981 Congress found "reasonable cost" reimbursement was "inherently inflationary and contain[ed] no incentives for efficient performance." S.Rep. No. 139, 97th Cong., 1st Sess. 478, reprinted in 1981 U.S.Code Cong. & Ad.News 396, 744; see also 2 H.R. Rep. No. 158, 97th Cong., 1st Sess. 293, reprinted in 4 Medicare & Medicaid Guide (CCH) ¶ 24,486, at 8799-33 (1981). Congress therefore enacted Section 13(A), under which a state plan for medical assistance must provide:

  for payment . . . of the hospital, 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) and which, in the case of
  hospitals, take into account the situation of
  hospitals which serve a disproportionate number of
  low income patients with special needs and provide,
  in the case of hospital patients receiving services
  at an inappropriate level of care . . . for lower
  reimbursement rates reflecting the level of care
  actually received . . . 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 and economically operated
  facilities in order to provide care and services in
  conformity with applicable State and Federal laws,
  regulations, and quality and safety standards and to
  assure that individuals eligible for medical
  assistance have reasonable access (taking into
  account geographic location and reasonable travel
  time) to inpatient hospital services of adequate
  quality; and such State makes further assurances,
  satisfactory to the Secretary, for the filing of
  uniform cost reports by each hospital, skilled
  nursing facility, and intermediate care facility and
  periodic audits by the State of such reports.*fn4

As Section 13(A) itself indicates, state efficiency under the Medicaid program was not to be accomplished at the cost of quality and safe care for the needy. As the Senate Report put it, the desired state fiscal flexibility would not justify "arbitrary reductions in payment that would adversely affect the quality of care." S.Rep. No. 139 at 478, reprinted in 1981 U.S.Code Cong. & Ad.News at 744. And the House Report too expressed its concern about arbitrariness:

  The Committee believes that hospitals should be paid
  for the cost of their care to Medicaid patients in
  the most economical manner. The Committee intends
  States to recognize that facilities that provide
  teaching services or other specialized tertiary care
  services [ ] may have operating costs which exceed
  those of a community hospital. The Committee is
  concerned that the reimbursement methods established

  by the States recognize the need to provide a full
  range of both primary care and tertiary care services
  to Medicaid beneficiaries and take into account the
  differences in operating costs of the various types
  of facilities needed to provide this broad scope of
  services. For example, the Committee does not intend
  that the only facility providing a specific type of
  treatment, such as treatment of spinal cord injury,
  not be available to Medicaid beneficiaries because
  the State's payment level is inadequate to meet the
  basic cost of care in that facility.

2 H.R.Rep. No. 158 at 293-94, reprinted in 4 Medicare & Medicaid Guide ¶ 24,486 at 8799-33.

Illinois' General Assembly responded to Congress' complex directive by enacting Section 5-5.11, subsection (f)(1) of which imposed a $797.5 million ceiling on total Medicaid payments to hospitals for inpatient, outpatient and clinic services in fiscal year 1983 (ending June 30, 1983).*fn5 In an effort to carry out that legislative mandate, IDPA adopted and promulgated two new rules:

    1. IDPA Rule 4.13.7 ("Rule 4.13.7"), 6 Ill.Reg.
  15029 (1982), set out a new method for calculating
  hospitals' daily Medicaid reimbursement rate.*fn6
    2. Rule 4.13.8 stated a mechanism for determining
  the maximum number of days of inpatient care a
  hospital could provide Medicaid recipients in fiscal

Though Rule 4.13.8 is typical of complex administrative regulations, its basic outline is nevertheless intelligible:

    1. It lists 214 "primary diagnosis groups." ¶ A(1),
  6 Ill.Reg. at 8189-94. Those groupings identify
  various ailments requiring medical treatment,
  although the groupings vary in specificity (for
  example, "Disorders of the thyroid gland," "Acute
  tonsillitis" and "Burn").
    2. Hospitals are told they will be classified in
  three groups: Rehabilitative, Major Teaching, and
  Other. ¶ A(2), id. at 8194-95.
    3. IDPA announces it will develop (a) a sample of
  lengths of stay for each primary diagnosis group for
  each hospital category and (b) a sample
  representative of the mix of Medicaid recipient
  diagnoses as treated in major teaching and "other"
  hospitals. ¶¶ A(3)-(4), id. at 8195.

Based on that structure, the crux of Rule 4.13.8 is that, with certain immaterial exceptions, the maximum number of reimbursable Medicaid days is set at the statewide 80th percentile of length of stay by primary diagnosis groups and hospital classification. ¶¶ A(5)-(9), id. at 8195-97.*fn7 Rule 4.13.8 thus is essentially an effort to reduce over-utilization of hospitals by denying reimbursement to those that, on average, retain their patients for lengths of stay falling in the highest 20 percentile statewide for specified diagnosed ailments.

Children's Memorial is classified as a Major Teaching Hospital. It is a highly specialized facility, treating only pediatric patients and providing care for many rare or complex conditions.*fn8 Approximately 25% of its patients receive ...

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