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ILLINOIS HOSP. ASSN. v. EDGAR

April 25, 1991

ILLINOIS HOSPITAL ASSOCIATION, et al., Plaintiffs,
v.
JIM EDGAR, in his official capacity as Governor of the State of Illinois, et al., Defendants


Charles P. Kocoras, United States District Judge.


The opinion of the court was delivered by: KOCORAS

CHARLES P. KOCORAS, UNITED STATES DISTRICT JUDGE

 This matter is before the court on the defendants' motions to dismiss for lack of subject-matter jurisdiction and failure to state a claim upon which relief can be granted. For the reasons set forth below, the federal defendant's motion is granted in full while the state defendant's motion is granted in part and denied in part.

 BACKGROUND

 The plaintiffs in this suit are the Illinois Hospital Association ("IHA") and three of its member hospitals. The plaintiffs are attempting to challenge various parts of the Illinois Medicaid reimbursement system. The defendants are the Secretary of the Department of Health and Human Services ("Secretary" or "the federal defendant"), and the Director of the Illinois Department of Public Aid ("IDPA") and the Governor of Illinois (collectively "the state defendants"). The defendants have separately moved to dismiss the complaints against them.

 A. Federal Statutory Provisions

 Medicaid is a cooperative federal-state program through which the Federal Government and states provide roughly matching funds to pay the cost of medical services for needy individuals. 42 U.S.C. § 1396 et seq. The medical services covered under the Act include inpatient and outpatient care. 42 U.S.C. § 1396d(a)(1), (2)(A). To qualify for federal assistance, a state must develop a plan which meets the rate setting and other requirements of § 1396a. Those requirements include a guarantee that Medicaid recipients will have equal access to care and services. 42 U.S.C. § 1396a(a)(23) (plan must provide that "any individual eligible for medical assistance . . . may obtain such assistance from any institution . . . qualified to perform the service . . . who undertakes to provide him such services"). The states are also required to establish methods and procedures related to the utilization of and payment for care and services available under the plan "to . . . assure that payments are consistent with efficiency, economy, and quality of care." 42 U.S.C. § 1396a(a)(30).

 Prior to October 1, 1981, the reimbursement rates promulgated by the states had to satisfy the "reasonable cost" standard set by the Secretary. Reimbursement rates for outpatient care and other services were left to state determination. S. Rep. No. 97-139, 97th Cong. 1st Sess., U.S. Code Cong. & Ad. News 396, 739 (1981). In 1981, however, Congress amended the Act in such a way that the burden of developing acceptable rates shifted to the states. Specifically this amendment, known as the Boren Amendment, requires state plans to 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. . . assure that individuals eligible for medical assistance have reasonable access to inpatient hospital services of adequate quality.

 42 U.S.C. § 1396a(a)(13)(A). The methods and standards used to assess the applicable rate must take into account the situation of hospitals that either serve a disproportionately large number of Medicaid recipients or provide an inappropriate level of care to Medicaid recipients. 42 U.S.C. § 1396a(a)(13)(A).

 Along with the Boren Amendment Congress added to the Act a waiver provision which in certain circumstances excuses states from having to satisfy all requirements of § 1396a. To qualify for a waiver, a state must develop alternative regulatory schemes aimed at lowering the cost of medical assistance while at the same time maintaining the level of care. The waiver provision states in part that

 
(b) The Secretary, to the extent he finds it to be cost-effective and efficient and not inconsistent with the purposes of [the Act], may waive such requirements of section 1396a . . . as may be necessary for a State --
 
(4) to restrict the provider from (or through) whom an individual . . . can obtain services . . . to providers . . . who undertake to provide such services and who meet, accept and comply with the reimbursement, quality, and utilization standards under the State plan.

 42 U.S.C. § 1396n(b)(4). The "reimbursement, quality, and utilization standards" must be "consistent with access, quality, and efficient and economic provision of covered care and services," and may "not discriminate among classes of providers on grounds unrelated to their demonstrated effectiveness and efficiency in providing those services." Id.

 These amendments were enacted as part of the Omnibus Budget Reconciliation Act of 1981 in hopes that their implementation would lead to a reduction in federal expenditures on Medicaid. H.R. Rep. No. 97-158, 97th Cong., 1st Sess., reprinted in Medicare & Medicaid Guide (CCH), No. 328 at 5. Congress had found that the price paid by states for services given to Medicaid recipients was frequently higher than the average market price for identical services provided to private consumers. Congress believed that the rigidity of the reasonable cost standard imposed by the Secretary prevented the states from securing health services in the most economic and efficient manner. S.Rep. No. 97-139, 97th Cong. 1st Sess., U.S. Code Cong. & Ad. News 396, 739 (1981). By decreasing the Secretary's regulatory role, the amendments were expected to afford states "greater latitude in the development and implementation of alternative reimbursement methodologies that promote the efficient and economical delivery of [inpatient] services." H.R.Rep. No. 97-158, reprinted in Medicare & Medicaid Guide at 9.

 B. State Implementation

 The Medicaid scheme implemented in Illinois consists of a noncontracting method established pursuant to § 1396a and a contracting method created by virtue of the Secretary's waiver of several § 1396a requirements. This suit challenges the substance and methodology of both programs (Counts I, II and IV), and the waiver of several § 1396a requirements granted by the Secretary for the implementation of the contracting program (Count III).

 In Count II, the plaintiffs state that Illinois adopted a contracting system, the "ICARE program," in 1984 in an attempt to control the rising Medicaid costs through competitive bidding. Under the ICARE program, a hospital that successfully bids for a contract will receive payment from IDPA at a specified rate for a specified number of inpatient days and types of care. The IDPA has obtained successive waivers from the Secretary in order to obtain federal funds for the operation of the ICARE program. Plaintiffs allege that in obtaining a waiver in 1989, IDPA misrepresented the hardships brought on by the ICARE program and failed to accurately describe the program.

 The plaintiffs also claim that hospitals have little choice but to participate in this program and for the most part have little bargaining power. Allegedly because of this relatively weak position, a majority of IHA's members participating in the ICARE program sign a form contract setting reimbursement rates that are even lower than the allegedly unlawful noncontracting rates challenged in Count I. The plaintiffs assert that the system is particularly unfair to disproportionate share hospitals (those that serve a large number of Medicaid patients) which ...


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