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December 6, 1983


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


This action has been brought by (1) Illinois Hospital Association ("Association") on behalf of its 243 member hospitals, (2) nine hospitals and (3) two Medicaid recipients against Illinois Department of Public Aid and its Director Jeffrey Miller (collectively "IDPA"). Plaintiffs then moved for a preliminary injunction. After all parties had filed memoranda dealing with a number of issues posed by the Complaint and the preliminary injunction motion, this Court inquired whether any further submissions (either evidentiary or documentary in nature) would be necessary to permit decision of the limited preliminary injunction issue dealt with in the following findings of fact ("Findings") and conclusions of law ("Conclusions").*fn1

All parties agreed (1) no additional submissions were required for that purpose and (2) their prior documentary filings should constitute the record to be considered by this Court. In accordance with Fed.R.Civ.P. ("Rule") 52(a), this Court makes the following Findings and Conclusions based on the evidence now in the record:

Findings of Fact ("Findings")

1. Association and the other plaintiffs already referred to*fn2 have brought this action against IDPA for declaratory and injunctive relief under 42 U.S.C. § 1983 ("Section 1983"), claiming IDPA's payment rates for inpatient hospital services violate the federal Medicaid Act ("Act"),*fn3 Sections 1396a(a)(13)(A) and 1396a(a)(30), and implementing regulations at 42 C.F.R. § 447.250-.257.

Medicaid Programs: The Applicable Standards

3. IDPA administers and supervises the Illinois Medicaid program pursuant to Section 1396a(a)(5) and Ill.Rev.Stat. ch. 23, §§ 1-1, 6-1 et seq. and 12-1. Plaintiff hospitals and substantially all of IHA's member hospitals participate in the Illinois Medicaid program and provide a broad range of inpatient and outpatient services to Medicaid beneficiaries.

4. There is no requirement that a state participate in the Medicaid program. If a state elects to do so, however, it must comply with all requirements of the Act and the implementing regulations.*fn4

5. Under Section 1396a(b) a state becomes eligible to participate in the Medicaid program, and to receive federal matching funds, by submitting to the Secretary (the "Secretary") of the United States Department of Health and Human Services ("HHS") a State Medicaid Plan that meets federal standards prescribed in the Act and its implementing regulations, and by having that plan approved by the Secretary. Any state desiring to make a significant change in an approved State Medicaid Plan must submit that amendment to the Secretary and obtain approval of the proposed change. Section 1396c; 45 C.F.R. §§ 201.3, 205.5(a).

6. Before October 1, 1981 Section 1396a(a)(13)(D) required states to reimburse hospitals their "reasonable costs" of providing covered hospital services to eligible Medicaid recipients. That "reasonable costs" criterion tracked the reimbursement standard used by the federal government in the administration of Title XVIII of the Social Security Act (the "Medicare program"). Effective October 1, 1981 that provision was repealed and the Act was amended to allow states participating in the Medicaid program to reimburse hospitals for services provided to Medicaid beneficiaries at rates "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. . . ." Section 1396a(a)(13)(A). According to the Senate Report that accompanied that amendment, S.Rep. No. 97-139, 97th Cong., 1st Sess. 478 (1981) (emphasis added):

The flexibility given the states is not intended to encourage arbitrary reductions in payment that would adversely affect the quality of care.

7. Section 1396a(a)(30) (emphasis added) requires that state plans "provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan . . . as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency and economy, and quality of care." Section 1396a(a)(23) provides for Medicaid recipients' freedom of choice in the selection and use of health care providers. To that end, regulations provide Medicaid reimbursement levels shall be sufficient to enlist enough providers so that services are available to Medicaid recipients "at least to the extent that those services are available to the general population." 42 C.F.R. § 447.204.

Illinois' Medicaid Program

9. On April 1, 1983 IDPA published Notices of Proposed Rulemaking for rules to become effective July 1, 1983. Those rules proposed a methodology to set reimbursement rates for fiscal year 1984 for hospital inpatient, outpatient and clinic services rendered by participating hospitals on or after July 1, 1983 to Medicaid (as well as the state-funded medical assistance programs) recipients. Those rules no longer provided for the interim-rate-plus-reconciliation-adjustment combination referred to in Finding 8, but rather for the setting of a single final rate (the "Final Rate") complying with the federal standard set by Section 1396a(a)(13)(A). 7 Ill.Regs. 3364-81, 3388-95 (April 1, 1983). Those rules were subsequently adopted as proposed. 7 Ill.Regs. 8271-8307, 8399 (July 15, 1983); 89 Ill.Admin.Code ch. I, §§ 140.116-.117, 140.-360-.375, 140.380.

10. While the fiscal year 1984 budget was being debated in the Illinois General Assembly, IDPA issued a June 13, 1983 "Urgent Notice" to Medicaid providers summarizing the changes in the Medical Assistance Programs that would occur "in the event that the Governor's (no tax increase) budget is adopted."*fn6 Pl.Mem. Ex.H.

11. On June 14, 1983 IDPA issued a second "Urgent Notice" to hospital providers, explaining IDPA's proposed inpatient reimbursement methodology for fiscal year 1984 and apprising providers as to "the best current information as to what revenue [they are] likely to receive from Public Aid with or without a tax increase." Pl.Mem.Ex.I at 1. IDPA explained the inpatient reimbursement methodology used to compute each hospital's Final Rates and stated (id. at 2):

  Insufficient funds are available to pay the full
  final reimbursement rate during fiscal year 1984.
  Without a tax increase, it will be necessary to defer
  23.5 percent of the final reimbursement rate into
  later years.

12. Consequently IDPA notified the hospital providers (id. at 1) they would be paid at lesser so-called "interim rates," which would be calculated to stay within the amount ultimately appropriated by the legislature. Thus IDPA anticipated a state budget shortfall that would preclude IDPA from paying hospitals their Final Rates, and it promulgated a "shortfall rule" to deal with that expected result (89 Ill.Admin.Code ch. I, § 140.371) (emphasis added)):

  The Department will pay the final rates calculated in
  Section 140.365-140.370 which represent historical
  costs updated to the midpoint of the rate year,
  subject to available funds in the rate year. To the
  extent that sufficient funds are not available, the
  Department will defer the unaffordable portion of the
  rates into later years, subject to the availability
  of funds in those years, and will reimburse hospitals
  during the rate year at interim payment rates. These
  interim payment rates will equal the final rates
  adjusted according to the proportion of available
  funds to funds necessary to provide for payments at
  the final rates.

Accordingly, for fiscal year 1984 hospitals were assured of payment only at those lower rates ("Shortfall Rates") rather than at the Final Rates IDPA determined were necessary to conform to the statutory mandate under its own rate-setting methodology.*fn7

13. On July 5, 1983 the Illinois General Assembly appropriated $543.9 million for hospital inpatient services during 1984. P.A. 83-23. IDPA's own inpatient reimbursement methodology necessitated an appropriation of $690.9 million to make current payment to hospitals of their Act-mandated Final Rates under IDPA's new system (IDPA Mem. 12). Consequently there was an appropriation shortfall of $147 million.*fn8 Illinois' total appropriation for inpatient services rendered during fiscal year 1983 was $692 million. Id. Thus the assured fiscal year 1984 inpatient services funding is 22% less than the actual funding for those services in fiscal year 1983. This is so despite the fact inflation from fiscal year 1983 to fiscal year 1984, based on IDPA's own inflation index, was 7.1%. Pl.Mem.L, ¶ 9.

14. Based on evidence produced for the preliminary injunction hearing,*fn9 the following chart presents the loss that will be experienced by eight of the plaintiff hospitals in receiving their Shortfall Rates rather than their Final Rates during fiscal year 1984:

                      A         B          C            D          E
                    1984      1984                 Utilization  Shortfall
Hospital            Final   Shortfall   Difference   Cap*fn10      Loss
                    Rate      Rate        (A-B)                   (CxD)
Chicago Osteopathic 488.96   374.30      114.66      29,167     $3,344,288
Loyola              417.63   319.70       97.93      11,991      1,174,279
Mary Thompson       343.77   263.15       80.62      18,177      1,465,430
Mount Sinai         417.63   319.70       97.93      35,740      3,500,018
St. Bernard         325.26   248.99       76.27      22,352      1,704,787
St. Mary's          242.54   185.67       56.87      33,907      1,928,291
St. Francis         367.67   281.45       86.22      19,579      1,688,101
Victory Memorial    331.83   254.02       77.81       5,987        465,848

Additional evidence from 81 Illinois hospitals also reveals their losses caused by the Shortfall Rates as compared with the Final Rates. See Pl.Mem. Vol. 3. Of those 81 hospitals, 18 will suffer losses of over $1 million each, solely due to the Shortfall Rates.

15. IDPA's payment of Shortfall Rates to Illinois hospitals has caused and is causing many such hospitals substantial, immediate and irreparable harm:

    (a) St. Mary's Hospital may close due to the
  inadequacy of IDPA's Medicaid reimbursement rates. It
  estimates it will lose $1,928,291 due to IDPA's
  payment of a Shortfall ...

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