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Washington Hospital and South Hills Health System and All Saints Hospital and Lock Haven Hospital and Andrew Kaul Memorial Hospital v. White

argued: July 25, 1989.

WASHINGTON HOSPITAL AND SOUTH HILLS HEALTH SYSTEM AND ALL SAINTS HOSPITAL AND LOCK HAVEN HOSPITAL AND ANDREW KAUL MEMORIAL HOSPITAL (INTERVENOR IN D.C.)
v.
JOHN F. WHITE, JR., INDIVIDUALLY AND AS SECRETARY OF THE DEPARTMENT OF PUBLIC WELFARE OF THE COMMONWEALTH OF PENNSYLVANIA; AND EILEEN SCHOEN, INDIVIDUALLY AND AS DEPUTY SECRETARY FOR MEDICAL ASSISTANCE OF THE DEPARTMENT OF PUBLIC WELFARE OF THE COMMONWEALTH OF PENNSYLVANIA; AND COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE, PHILADELPHIA GERIATRIC CENTER, APPELLANT



On Appeal from the United States District Court for the Western District of Pennsylvania, D.C. Civil Action No. 80-1106.

Gibbons, Chief Judge, Hutchinson, Circuit Judge, and Wolin, District Judge.*fn*

Author: Hutchinson

Opinion OF THE COURT

HUTCHINSON, Circuit Judge

Philadelphia Geriatric Center (PGC) appeals the denial of its motion to enforce the terms of a court-ordered stipulation of dismissal entered in 1983 as well as the denial of its motion for reconsideration. Although PGC was not a party in the earlier litigation, it was a third-party beneficiary to the stipulated agreement supposedly settling the case. PGC claims that the 1983 stipulation "grandfathered" in a "new construction" exception to certain Pennsylvania Medicaid regulations governing reimbursement for nursing home care that had been in effect before the regulations were amended in 1981. The "new construction" exception would have allowed PGC's Sley Pavilion nursing facility to continue receiving the higher rate of reimbursement that the pre-1981 regulations allowed for new construction of additional nursing home beds whose construction the state had previously approved, apparently on the basis of need, as required by 55 Pa.Code § 9424.7121, 8 Pa.Bull. 2828 (1978). PGC alleged that appellees, certain officials of Pennsylvania's Department of Public Welfare (DPW), violated the terms of the stipulation by discontinuing this higher rate of reimbursement after the 1981 amendments became effective and by seeking partial repayment for post-1981 reimbursements PGC has already received.

We hold that the 1983 stipulation is ambiguous on the "grandfathering" issue. Therefore, we will vacate the district court's judgment and remand this case to the district court to resolve the ambiguity in accordance with the intent of the parties. To do so, the district court, acting as a factfinder, must resolve the question of the parties' intent by interpreting the stipulation on the basis of relevant extrinsic evidence. Only thereafter can the stipulation be construed as a matter of law. In interpreting the parties' intent, relevant extrinsic evidence includes evidence of the parties' negotiations leading up to the stipulation.*fn1 It also includes any evidence of the parties' actions in the course of performing the stipulated agreement that sheds light on whether they intended to "grandfather" the former regulations' "new construction" exception into future regulations for hospitals named in the stipulated agreement. In particular, the information contained in the affidavit of Jane L. Dalton (Dalton), one of the attorneys involved in drafting the stipulation, should be considered if presented in accordance with other applicable evidentiary requirements.

I.

PGC owns and operates licensed nursing home facilities in Philadelphia, Pennsylvania. In 1974, after specific regulatory approval, PGC finished constructing and began operating a new health care institute on its premises. The new construction included a 120-bed nursing home facility called the Sley Pavilion. The Sley Pavilion is designed to meet the needs of severely impaired patients who, in many cases, would otherwise occupy an acute care hospital bed.

About seventy percent of PGC's total revenues comes from Medicaid reimbursement by DPW, the state agency that now administers the federal Medicaid program within Pennsylvania. See Joint Appendix (App.) at 196. Pennsylvania has two reimbursement rates for patients entitled to nursing home care under Medicaid. The standard rate is paid for ordinary non-hospital based, freestanding nursing home care, and the significantly higher rate is available for nursing care in converted acute care beds in a hospital-based nursing facility. When the Sley Pavilion began operating, DPW and PGC reached an agreement concerning Medicaid reimbursement. Under that agreement, DPW recognized that up to one-half (sixty beds) of the Sley Pavilion's 120 beds qualified for the higher reimbursement rate, apparently because DPW determined that this number of beds was needed to provide the relatively high level of nursing care then thought to be associated with hospital-based facilities. The other half were classified under the lower rate allowed to ordinary freestanding nursing homes. In November, 1982, DPW unilaterally tried to change this agreement by reducing the number of beds that qualified for the higher reimbursement rate at the Sley Pavilion in the fiscal year ending June 30, 1981 to thirty, but the original sixty-bed figure was reinstated after PGC appealed to DPW's Office of Hearings and Appeals. See Washington Hospital v. O'Bannon, No. 80-1106, slip op. at 3 (W.D.Pa. Feb. 22, 1989).

In the meantime, DPW had begun to enact a stricter nursing home classification scheme that reduced the hospital-based beds that qualified for the higher Medicaid reimbursement rate. Those hospitals that had beds qualified under the old system were not pleased, and in August, 1980 four Pennsylvania hospitals (not including PGC) brought suit in the United States District Court for the Western District of Pennsylvania against DPW and its Secretary and Deputy Secretary in Washington Hospital v. O'Bannon, No. 80-1106. This suit challenged, inter alia, the DPW rate-classifying regulations that had gone into effect on October 1, 1978. These regulations had seriously affected the Medicaid reimbursement the complaining hospitals received.*fn2 The hospitals alleged that these requirements unreasonably denied them hospital-based Medicaid reimbursement because none of them could satisfy the converted acute care bed requirement. In addition, the hospital plaintiffs sought relief on behalf of eighteen other hospitals (including PGC) that also might be excluded from higher Medicaid reimbursement rates because of the 1978 Regulations even though those eighteen presently qualified for the higher rates.

While this suit was still pending, DPW promulgated even stricter regulations. They went into effect on July 25, 1981. See 55 Pa.Code § 1181.42 (1989).*fn3 The 1981 Regulations eliminated previously approved "new construction" from the facilities whose beds qualified for the higher hospital-based reimbursement rate, leaving only converted acute care beds in the class qualifying for the higher reimbursement. The 1981 amendments intensified the concerns of the hospitals involved in the Washington Hospital case.*fn4

In November, 1983, the parties to the Washington Hospital litigation mutually agreed to a settlement and, in order to effectuate it, entered into a Stipulation of Dismissal that was also signed and approved by the district court. See App. at 258. The stipulation was drafted not only to benefit the parties, but also included terms that benefited other hospitals also providing nursing home care. Those other hospitals were listed in Appendices I and II of the stipulated agreement and included PGC. See paras. 4 and 5, id. at 260-61.

For almost three years after the Washington Hospital litigation was settled, DPW continued to reimburse PGC at the higher hospital-based rate. Then it started to take contrary steps. In 1986, DPW notified PGC that it would no longer get the higher Medicaid reimbursement rate for any services at the Sley Pavilion. Id. at 206. On July 1, 1986, DPW began reimbursing PGC at the lower freestanding nursing home rate. The pressure increased as DPW delayed issuing PGC's audited Medicaid cost reports for fiscal years ending 1982 and thereafter, despite its obligation to process them within six months.*fn5 This effectively prevented PGC from appealing DPW's administrative reimbursement determinations to its Office of Hearings and Appeals, where PGC had already successfully contended that it was entitled to the higher reimbursement rate for services rendered in sixty of the Sley Pavilion's 120 beds in fiscal year 1981.

The audited cost reports were not finally issued until the fall of 1988, and then they reflected DPW's administrative determination that PGC was not entitled to the higher reimbursement rate for the Sley Pavilion after July 1, 1981, the beginning of fiscal year 1982. Consequently, DPW demanded that PGC reimburse it almost $1,900,000 for what DPW said were Medicaid overpayments PGC had received at the higher hospital-based rate for costs incurred at Sley Pavilion after July 1, 1981.*fn6 DPW demanded full repayment of this $1,900,000 by March 31, 1989. PGC responded with its motion in the district court to enforce the 1983 stipulation and ...


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