Appeal from the United States District Court for the Eastern District of Wisconsin. No. 82 C 1055 -- Robert W. Warren, Judge.
Cummings, Chief Judge, Cudahy, Circuit Judge, and Marovitz, Senior District Judge.*fn*
Plaintiffs, including the Wisconsin Hospital Association ("WHA") and several individual Wisconsin acute general care hospitals, challenged the constitutionality of a Wisconsin statute which continued Medicaid reimbursement rates at their 1982 level for the first three months of the medical assistance providers' 1983 fiscal year. The district court, granting summary judgment for the plaintiffs, held that this Wisconsin statute was unconstitutional under the Supremancy Clause because it conflicted with a federal statute and because a rate freeze is inherently unreasonable. We reverse and remand for further proceedings.
The Medicaid program, Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., provides reimbursement by the federal government of a portion of the payments made by participating states to hospitals and other entities furnishing medical care to the indigent. While participation in the program is voluntary, once a state elects to participate, it must comply with federal statutory requirements. Harris v. McRae, 448 U.S. 297, 301, 65 L. Ed. 2d 784, 100 S. Ct. 2671 (1980). Each participating state administers the program pursuant to a state plan that must be approved by the United States Department of Health and Human Services ("HHS"). Wisconsin has elected to participate in the Medicaid program and has entered into such a state plan with HSS for Medicaid Assistance.
Prior to October 1, 1981, hospital Medicaid reimbursement was based upon a "reasonable cost" standard found in what was then 42 U.S.C. § 1396a(a)(13)(D) (1976) which provided
for payment of the reasonable cost of inpatient hospital services provided under the plan, as determined in accordance with methods and standards, consistent with section 1320a-1 of this title, which shall be developed by the state and reviewed and approved by the Secretary and (after notice of approval by the Secretary) included in the plan. . . .
In 1980, Congress enacted the "Boren Amendment" which changed the federal standard for reimbursement rates for nursing and intermediate care facilities and also provided for both more stringent cost containment and less federal oversight of state requirement methodologies. In 1981, Congress expanded this new standard to apply to hospital reimbursement rates as well in the Omnibus Budget Reconciliation Act ("OBRA"). The relevant statutory provision, as modified by the Boren Amendment and OBRA, requires in pertinent part that a state plan for medicial reimbursement must provide
for payment . . . of the hospital, skilled nursing facility, and intermediate care facility services provided under the plan through the use of rates . . . 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. . . .
42 U.S.C. § 1396a(a)(13)(A) (Supp. V 1981). The shift from reimbursement of all reasonable costs to reimbursement of those "reasonable and adequate . . . costs which must be incurred by efficiently and economically operated facilities" represented a significant change in the federal standard. This change permitted states to alter their plans with the purpose of encouraging cost containment in the medical and health-related fields and allowing the states to cope with reductions in the amount of funds to be paid by the federal government to the states under the Medicaid program. 42 U.S.C. § 1396a(s)(1)(A) and § 1396(t) (Supp. V 1981).
The Wisconsin state plan provides that hospitals receive interim payments at an "Interim Inpatient Rate Per Discharge," established at the beginning of each hospital's fiscal year. "Final Settlement" is made at the end of the hospital's fiscal year based on a "Per Discharge Rate," with the interim payments counting as a credit against the final payment due. The final settlement rate is determined retrospectively by cumulatively applying a hospital cost index, calculated on the basis of actual costs for the past fiscal year, to hospital rates established for a base year. In accordancea with 42 U.S.C. § 1396a(a)(13)(A), Wisconsin made assurances to HHS that the rate increases based on this rate-setting method were "reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers . . . in conformity with applicable State and Federal laws. . . ." These assurances also described the rate increases as "based on inflationary increases for a federally-defined hospital market basket." These latest assurances were submitted to HHS on June 25, 1982, and approved on July 19, 1982.
On April 30, 1982, the Wisconsin legislature enacted the Wisconsin Budget Reconciliation Act, Chapter 317, Laws of 1981, which provided in part for a delay in increases in Medicaid rates for three months beginning July 1, 1982:
Notwithstanding any other law, nursing homes reimbursement rates established for 1982 shall remain in effect to March 31, 1983, and reimbursement rate increases to other providers of medical assistance that are scheduled to take effect on or after July 1, 1982 and before July 1, 1983 are delayed for 3 months after the date that they would otherwise take effect.
Ch. 317, § 2033(5).*fn1 Rate increases were therefore calculated on the basis of the same hospital cost index but were simply delayed for three months, thus keeping reimbursement rates at the 1982 rates for the initial three months. Providers were informed of the rate increase and the delay in the increases at the same time.
The plaintiffs in this suit are the Wisconsin Hospital Association, a Wisconsin not-for-profit corporation representing 142 acute general care Wisconsin hospitals, and three individual acute general care hospitals in Wisconsin. All the plaintiff-hospitals and all members of WHA have entered into "Provider Agreements" with the Wisconsin Department of Health and Social Services ("WDHSS") whereby WDHSS has agreed to reimburse them for services to Medicaid patients according to the terms of the state plan.
These plaintiffs have challenged the Wisconsin Medicaid reimbursement plans twice before. In Wisconsin Hospital Association v. Schmidt, [1976 Transfer Binder] Medicare & Medicaid Guide (CCH) P27,818 (E.D. Wis. April 28, 1976) ("WHA I"), the district court found that a state order freezing Medicaid reimbursement rates, apparently for an indefinite period, which the acting Regional Director of the Department of Health, Education and Welfare considered to be an unacceptable deviation from the Wisconsin plan, was in conflict with federal law requiring reasonable reimbursement.
In Wisconsin Hospital Association v. State of Wisconsin, Department of Health and Social Services, No. 80-C-1012 (E.D. Wis. July 21, 1982) ("WHA II"), WHA again challenged the state plan on the ground that it failed to provide reasonable reimbursement to Medicaid providers. This suit was settled by an Amended Stipulation adopted by the district court in an order signed July 21, 1982. This Stipulation required that the plaintiffs be reimbursed in accordance with the state plan as appended to the Stipulation. This state plan evidently incorporates the anticipated rate increases for the 1983 fiscal year but makes no mention of the postponement of the increases which had already been approved by the Wisconsin legislature. The plaintiffs and the defendants each cite this Stipulation to support their respective postions. The plaintiffs argue that the Wisconsin Omnibus Budget Reconciliation Act, Chapter 317, § 2033(5), violates the district court order entering the Stipulation. The defendant argues that the Stipulation, in referring to applicable state and federal law, incorporates the delay of the increase and that the plaintiffs are estopped to challenge the statute's validity because they waived their right to challenge it by signing the Stipulation after they were aware of the statute's provisions.
In addition to their claim that the "freeze"*fn2 violates the district court's order, the plaintiffs also asserted in the district court that the freeze i s unconstitutional because it violates the Supremacy Clause, impermissibly impairs the obligations of contract, takes property without due process of law and violates the equal protection clause. The plaintiffs' primary argument was that the freeze is by its nature arbitrary and therefore in conflict with the requirement in 42 U.S.C. § 1396a(a)(13)(A) that reimbursement rates be "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. . . ." Plaintiffs also challenged the freeze because the state had not submitted any assurances to HHS which reflected the effects of the freeze. The state of Wisconsin relied primarily on its incorporation and waiver ...