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12/01/94 ILLINOIS HEALTH CARE ASSOCIATION AND

December 1, 1994

ILLINOIS HEALTH CARE ASSOCIATION AND HEARTLAND MANOR NURSING CENTER, INC., PLAINTIFFS-APPELLANTS,
v.
ROBERT W. WRIGHT, IN HIS OFFICIAL CAPACITY AS DIRECTOR OF THE ILLINOIS DEPARTMENT OF PUBLIC AID, DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County. Honorable Edwin M. Berman, Judge Presiding.

Rehearing Denied January 5, 1995. Released for Publication January 13, 1995.

Justice Theis delivered the opinion of the court: Hoffman, P.j., and Cahill, J., concur.

The opinion of the court was delivered by: Theis

JUSTICE THEIS delivered the opinion of the court:

We are presented here with a challenge to the State's system of reimbursing Medicaid costs incurred by nursing homes. In this case, the plaintiffs, Illinois Health Care Association (IHCA) and Heartland Manor Nursing Center, Inc., appeal the trial court's decision to direct a finding in favor of the defendant Robert Wright, in his official capacity as Director of the Illinois Department of Public Aid (IDPA). Basically, three issues are raised in this appeal: (1) whether the plaintiffs have established a prima facie case under the Illinois Public Aid Code; (2) whether Carl Lindner should have been permitted to testify as an expert witness; and (3) whether as a matter of law the plaintiffs must demonstrate efficiency and economy of their nursing home operations as part of a prima facie case alleging violations of the Illinois Prompt Payment Act. Upon consideration of the arguments presented in this case, we now reverse the decision of the lower court and remand this case for further proceedings consistent with this opinion.

STATUTORY AND FACTUAL BACKGROUND

"Medicaid is a cooperative federal-state program through which the Federal Government provides financial assistance to States so that they may furnish medical care to needy individuals." ( Wilder v. Virginia Hospital Association (1990), 496 U.S. 498, 502, 110 L. Ed. 2d455, 462, 110 S. Ct. 2510, 2513.) This includes providing funding for long-term care in nursing facilities. ( Illinois Health Care Association v. Bradley (7th Cir. 1993), 983 F.2d 1460, 1461.) States which elect to participate in the Medicaid program must comply with the provisions of the Medicaid Act (42 U.S.C.A. §§ 1396-1396s (1992)) and the applicable regulations promulgated by the Secretary of Health and Human Services. Wilder, 496 U.S. at 502, 110 L. Ed. 2d at 462, 110 S. Ct. at 2513.

The original Medicaid system was adopted in 1965. ( Illinois Health Care Association v. Bradley (N.D. Ill. 1991), 776 F. Supp. 411, 414.) When the Medicaid system was originally adopted, States were reimbursed for "reasonable cost" associated with running a nursing home. ( Wilder, 496 U.S. at 505, 110 L. Ed. 2d at 464, 110 S. Ct. at 2515; Illinois Health Care Association v. Bradley (N.D. Ill. 1991), 776 F. Supp. 411, 414.) This ultimately meant that States received from the Federal government their full actual costs of providing services. ( Illinois Health Care Association v. Suter (N.D. Ill. 1989), 719 F. Supp. 1419, 1420.) However, Congress eventually came to realize that this system of reimbursement was "'inherently inflationary and contained no incentives for efficient performance.'"( Illinois Health Care Association v. Suter, 719 F. Supp. at 1420.) The Medicaid Act was consequently amended and the reasonable cost" approach was replaced by the Boren Amendment, which provides for reimbursement of costs incurred by a nursing facility which is "efficiently and economically operated." 42 U.S.C.A. § 1396a(a)(13)(A) (1992).

Under the Boren Amendment, the State must make findings and give assurances to the Federal government that the reimbursement rates are reasonable and adequate to meet the costs of an economic and efficient nursing facility. ( Wilder, 496 U.S. at 507, 110 L. Ed. 2d at 465-66, 110 S. Ct. at 2516.) The Boren Amendment can therefore be violated both procedurally and substantively. ( Wilder, 496 U.S. at 510, 110 L. Ed. 2d at 467, 110 S. Ct. at 2517.) The procedural provisions entitle providers to enforce the State's obligation to make findings and give assurances. The substantive provision entitles providers to receive reasonable and adequate rates. See, e.g., New Jersey Association of Health Care Facilities v. Gibbs (D. N.J. 1993), 838 F. Supp. 881, 893.

Illinois is a participant in the Medicaid system and, consequently, reimburses nursing homes for the costs of the services which they provide to Medicaid patients. The Illinois statute controlling the reimbursement of costs, which was passed several years before the Boren Amendment became law, reads as follows:

"This amendatory Act establishes certain conditions for the Department of Public Aid in instituting rates for the care of recipients of medical assistance in skilled nursing facilities and intermediate care facilities Such conditions shall assure a method under which the payment for skilled nursing and intermediate care services, provided to recipients under the Medical Assistance Program shall be on a reasonable cost related basis, which is prospectively determined annually by the Department of Public Aid.

The resultant total rate for a specified type of service shall be an amount which shall have been determined to be adequate to reimburse allowable costs of a facility that is economically and efficiently operated. * * *" 305 ILCS 5/5-5.3 (West 1992).

Before we begin our Discussion of the issues raised in this appeal, we find it helpful to review the Federal litigation which arose between these parties concerning the reimbursement of Medicaid rates.

THE FEDERAL LITIGATION

IHCA and Heartland Nursing initiated an action in the Federal court in a similar challenge to the validity of Illinois' Medicaid reimbursement plan for nursing homes. In the Federal action, the plaintiffs charged that the Illinois Medicaid reimbursement system was in violation of the Boren Amendment and sought only a declaratory judgment. Illinois Health Care Association v. Bradley (N.D. Ill. 1991), 776 F. Supp. 411, aff'd (7th Cir. 1993), Illinois Health Care Association v. Bradley, 983 F.2d 1460.

The Decision of the District Court

The district court began its analysis by considering whether Illinois had violated the procedural requirements of the Boren Amendment. It noted that the regulations of the Secretary of Health and Human Services recognize that the Boren Amendment envisions a two-step process, where the State must make both findings and give assurances that its rates are adequate. (See 776 F. Supp. at 417-18.) The court then noted that, when the State undertakes this process, it must identify the "objective benchmark" of an economic and efficient facility and then evaluate the reasonableness of its rates against this benchmark. (776 F. Supp. at 418.) The court further explained that, pursuant to case law, the State must make findings which ...


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