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ILLINOIS HEALTH CARE ASSN. v. SUTER

August 4, 1989

ILLINOIS HEALTH CARE ASSOCIATION, et al., Plaintiffs,
v.
SUSAN SUTER, etc., et al., Defendants


Milton I. Shadur, United States District Judge.


The opinion of the court was delivered by: SHADUR

MILTON I. SHADUR, UNITED STATES DISTRICT JUDGE

 Illinois Health Care Association and Heartland Manor Nursing Center, Inc. have sued Illinois Department of Public Aid Director Susan Suter ("Suter") and United States Secretary of Health and Human Services Louis Sullivan ("Secretary") *fn1" asserting a number of violations of the Medicaid Act ("Act"), 42 U.S.C. §§ 1396-1396s. *fn2" Both Suter and Secretary are sued only in their official capacities.

 Suter and Secretary have filed separate motions to dismiss under Rule 12(b)(6). *fn3" For the reasons stated in this memorandum opinion and order, Secretary's motion is granted and resolution of Suter's motion is deferred.

 Medicaid is a joint federal-state program under which 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" (Section 1396). *fn5" States are not required to participate in the program, but if they choose to do so they must comply with the Act and applicable regulations ( Harris v. McRae, 448 U.S. 297, 301, 65 L. Ed. 2d 784, 100 S. Ct. 2671 (1980); Wisconsin Hospital Ass'n v. Reivitz, 820 F.2d 863, 864 (7th Cir. 1987) (" Wisconsin Hospital II ")).

 Until 1980 the Act required a state to reimburse nursing homes for "the reasonable cost of inpatient hospital services provided under" the state's Medicaid plan. Essentially nursing homes were permitted to recover from states their full actual cost of providing inpatient care to Medicaid patients.

 But Congress found such "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 Medicare & Medicaid Guide (CCH) para. 24,486, at 8799-38 (1981)). It therefore replaced that approach with the Boren Amendment, *fn6" under which a state plan for medical assistance must provide (Section 1396a(a)(13)(A)):

 
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. *fn7"

  Colorado Health Care Association v. Colorado Department of Social Services, 842 F.2d 1158, 1165 (10th Cir. 1988) explains the two principal purposes of the Boren Amendment:

 
First, that the States set their own reimbursement rates without stifling and expensive federal oversight of the methodology used; and second, that Medicaid expenses be reduced by allowing the states to develop payment systems which would encourage efficiency."

 Our own Court of Appeals has similarly characterized the Boren Amendment as "provid[ing] for both more stringent cost containment and less federal oversight of state reimbursement methodologies" ( Wisconsin Hospital Ass'n v. Reivitz, 733 F.2d 1226, 1228 (7th Cir. 1984) (" Wisconsin Hospital I ")).

 But state efficiency was not to be achieved at the cost of quality care for the needy. Thus the Senate Report said 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), a concern echoed by the House Report (2 H.R. Rep. No. 158 at 293-94, reprinted in Medicare & Medicaid Guide para. 24,486 at 8799-35 to -36):

 
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.

 To meet the already-described multiple (and potentially conflicting) goals, Congress emphasized the adequacy of payments so long as the providers of services were efficient (H.R. Conf. Rep. No. 208, 97th Cong., 1st Sess. 962, reprinted in 1981 U.S. Code Cong. & Ad. News 396, 1324):

 
The conferees intend that State hospital reimbursement policies should meet the costs that must be incurred by efficiently-administered hospitals in providing covered care and services to Medicaid eligibles as well as the costs required to provide care in conformity with State and Federal requirements. It also is recognized that States may limit increases to the increases that result from price increases for goods and services purchased by hospitals, as measured by such indices as the national hospital input price index, for example.

 House Senate Conference Report to OBRA, reprinted in Medicare & Medicaid Guide (CCH) para. 24,407 at 8785-29 added this:

 
The conferees would further note their intent that a State not develop rates under this section solely on the basis of budgetary appropriations.

 This action's principal -- but not sole -- focus is the Boren Amendment, codified as Section 1396a(a)(13)(A). That provision is only one component of the Act's complicated scheme. Under Section 1396a each participating state must develop a plan containing a variety of provisions (at least 50 separate requirements are set out in the statute). Besides Boren's Section 1396a(a)(13)(A), three other provisions are relevant here:

 
1. Section 1396a(a)(2) requires the state to "provide for financial participation. . . . which will assure that the lack of adequate funds from local sources will not result in lowering the amount, duration, scope, or quality of care and services available under the plan."
 
3. Section 1396a(a)(37)(B) requires "procedures of prepayment and postpayment claims review . . . to ensure the proper and efficient payment of claims and management of the program."

 In turn, Section 1396c requires Secretary "after reasonable notice and opportunity for hearing to the State agency administering . . . the State plan" to withhold payment to the State if he finds the plan or the State's administration of the plan does not comply with the Act. Congress expressly provided that Secretary may make rules and regulations necessary to carry out the Act (Section 1302). Those regulations are set out at 42 C.F.R. § 447.

 Positions of the Parties

 Plaintiffs' action against Suter mainly charges Illinois' reimbursement rates paid to participating nursing homes are insufficient "to meet the costs which must be incurred by efficiently and economically operated facilities" and thus violate Section 1396a(a)(13)(A). Plaintiffs also claim Suter has violated three earlier-described provisions of the Act -- Sections 1396a(a)(2), 1396a(a)(30) and 1396a(a)(37)(B). Suter responds with a three-pronged motion to dismiss:

 
1. Federal jurisdiction is barred by the Eleventh Amendment.
 
2. Plaintiffs have no "enforceable rights" under the Act so as to permit suit under 42 U.S.C. ...

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