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Christ King Manor, Inc. v. Secretary United States Department of Health and Human Services

United States Court of Appeals, Third Circuit

September 19, 2013

SECRETARY UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES; CHARLENE FRIZZERA, in her official capacity as Acting Administrator of the Centers for Medicare & Medicaid Services (CMS); HARRIET DICHTER, in her official capacity as Secretary of Public Welfare for the Commonwealth of Pennsylvania, Department of Public Welfare CHRIST THE KING MANOR, INC.; BONHAM NURSING CENTER; CATHEDRAL VILLAGE; ELLEN MEMORIAL HEALTH CARE CENTER-HONESDALE, INC.; SUSQUEHANNA VALLEY NURSING AND REHABILITATION CENTER, LLC; RHEEMS NURSING & REHABILITATION, LLC SOUTHWESTERN GROUP, LTD. d/b/a Southwestern Nursing Center; CPSR ASSOCIATES, LLC d/b/a Mon Valley Care Center; KINKORA PYTHIAN HOME CORP.; SIEMON NURSING HOME, INC. d/b/a Siemon's Lakeview Manor Estate; 4114 SCHAPER AVENUE OPERATING CO., LLC d/b/a Presque Isle Rehabilitation & Nursing Center; 890 WEATHERWOOD LANE OPERATING COMPANY, LLC d/b/a The Rehabilitation and Nursing center at Greater Pittsburgh; BRIARLEAF NURSING & CONVALESCENT CENTER, INC.; BROOKMOMT HEALTH CARE CENTER; KUTZTOWN MANOR, INC.; GREENLEAF NURSING AND COVALESCENT CENTER; WINDOSR, INC. d/b/a Snyder memorial Health Care Center; CARBON-SCHUYKILL COMMUNITY HOSPITAL, INC. d/b/a St. Luke's Miner's Memorial Geriatric Center; PICKERING MANOR HOME, Appellants in 12-3401 BALDOCK ASSOCIATES, d/b/a Baldock Health Care Center; HUMBERT LANE ASSOCIATES, d/b/a Humbert Lane Nursing and Rehabilitation Center, Appellants in 12-3501

Argued: May 31, 2013

On Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. No. 09-cv-02007) District Judge: Hon. John E. Jones, III

Daniel K. Natirboff [ARGUED] Capozzi & Associates Counsel for Appellants.

Sheila Lieber United States Dep't of Justice Federal Programs Branch 901 E Street, N.W. Washington, DC 20004 Jeffrey E. Sandberg [ARGUED] United States Dep't of Justice Appellate Section Counsel for Appellees.

Patrick S. Crawley Sean A. Kirkpatrick [ARGUED] Office of Attorney General of Pennsylvania Counsel for Appellee Harriet Dichter.

Before: JORDAN and VANASKIE, Circuit Judges, and RAKOFF [*] , Senior District Judge.


JORDAN, Circuit Judge.

This appeal arises from a challenge to the approval by the Secretary of the United States Department of Health and Human Services ("the Secretary" or "HHS") of a 2008 amendment to Pennsylvania's state plan for administering its Medicaid program. Numerous private nursing facilities that provide services to Medicaid recipients argue that the state plan amendment, or "SPA, " violates Title XIX of the Social Security Act, 42 U.S.C. §§ 1396 et seq. (the "Medicaid Act" or the "Act"). Specifically, they contend that the SPA adjusted Pennsylvania's method for determining Medicaid reimbursement rates to private nursing facilities for the 2008-09 fiscal year without considering quality of care, which they say violates 42 U.S.C. § 1396a(a)(30)(A) ("Section 30(A)"), and without satisfying the public process requirements of 42 U.S.C. § 1396a(a)(13)(A) ("Section 13(A)"). To remedy those alleged violations, Plaintiffs invoke the Administrative Procedure Act (the "APA") and the Supremacy Clause of the Constitution, and seek declaratory and injunctive relief against the Secretary, the Administrator of the Centers for Medicare and Medicaid Services ("CMS") (collectively, the "Federal Defendants"), and the Secretary of Pennsylvania's Department of Public Welfare ("DPW" or the "State Defendant").[1] The District Court granted in part the Defendants' motions to dismiss, and then entered summary judgment in their favor on the remaining claims. For the reasons that follow, we will affirm those rulings in part and reverse them in part.

I. Background

A. Factual and Statutory Background

Medicaid is "a cooperative federal-state program that provides medical care to needy individuals." Douglas v. Indep. Living Ctr. of S. Cal., 132 S.Ct. 1204, 1208 (2012). States that choose to participate in the program are responsible for developing and implementing a state Medicaid plan and have considerable control over the plan's details and administration. Pa. Pharmacists Ass'n v. Houstoun, 283 F.3d 531, 533 (3d Cir. 2002) (en banc) (citing Wilder v. Va. Hosp. Ass'n, 496 U.S. 498, 502 (1990)). In order to qualify for federal funding, however, a state plan must comply with the requirements of the Medicaid Act. 42 U.S.C. § 1396a (defining the requirements a state plan must satisfy for approval); id. § 1396b(a) (providing for federal payments "to each [s]tate which has a plan approved"). Those requirements include, among other things, the so-called "equal access provision" of Section 30(A), which mandates that a state plan provide "methods and procedures" to assure that the state pays participating nursing facilities and other Medicaid providers at rates that are consistent with efficiency, economy, quality of care, and adequate access to providers by Medicaid beneficiaries. 42 U.S.C. § 1396a(a)(30)(A); see Ark. Med. Soc'y, Inc. v. Reynolds, 6 F.3d 519, 522 (8th Cir. 1993) (explaining that Section 30(A) "is typically called the equal access provision"). State plans must also satisfy Section 13(A) of the Act, which requires that rates of payment to hospitals and nursing facilities be determined using a public process similar to notice-and-comment rulemaking. 42 U.S.C. § 1396a(a)(13)(A).

CMS is the division of HHS tasked with ensuring that state plans comply with those and other requirements of the Medicaid Act. States must submit their proposed plans to CMS, and the agency must review each plan, "make a determination as to whether it conforms to the requirements for approval, " 42 U.S.C. § 1316(a)(1), and "approve any plan which fulfills the conditions specified" in the Medicaid Act, 42 U.S.C. § 1396a(b). See also 42 C.F.R. § 430.12 (describing the submittal of state plans to CMS). A state may later amend an approved plan, but any amendments must also be submitted to CMS, and the agency must "determine whether the [amended] plan continues to meet the requirements for approval." 42 C.F.R. § 430.12(c)(2)(i). States are required to amend their plans "whenever necessary to reflect, " among other things, "[m]aterial changes in State law, organization, or policy, or in the State's operation of the Medicaid program." Id.

Pennsylvania has elected to participate in the Medicaid program, and it has designated DPW as the "single [s]tate agency" responsible for creating and administering the state's Medicaid plan.[2] See 42 U.S.C. § 1396a(a)(5) (requiring states to establish or designate "a single [s]tate agency to administer … the plan"). Since 1996, Pennsylvania, in accordance with an approved state plan, has paid participating nursing facilities for Medicaid-related services using an "annual prospective payment rate" often referred to as the "case-mix rate."[3] See 55 Pa. Code § 1187.95 ("Prices will be set prospectively on an annual basis … ."); Christ the King Manor v. Pennsylvania, 911 A.2d 624, 630 (Pa. Commw. Ct. 2006) ("Since July 1996, DPW compensated both public and private nursing facilities through its [Medicaid] program under what is known as the case-mix payment system."). DPW calculates the "case-mix rate" using a complex formula that produces an individualized per diem reimbursement rate for each facility based on the "allowable costs" incurred by facilities, [4] the acuity level of residents, [5] and other factors. See 55 Pa. Code § 1187.96 (describing the "[p]rice and rate-setting computations"). (See also J.A. At 232-242 (Pennsylvania's State Plan).) The rate is effective for one year, from July 1 through the following June 30, and it is adjusted quarterly, based on resident acuity. 55 Pa. Code § 1187.95(a).

Under that methodology, Pennsylvania's reimbursement rates to nursing facilities have risen steadily each year, and, beginning in 2000, the state grew concerned that the pace of that inflation was creating unsustainable costs. In June 2005, DPW announced that reimbursement rates had increased by 29.4% over the previous five years, and that, unless rates were somehow limited, there would be "insufficient funds available to make case-mix payments to [Medicaid] nursing facilities in accordance with the existing case-mix payment methodology." 35 Pa. Bull. 3267 (June 4, 2005). Therefore, after soliciting public comments and receiving input from Pennsylvania's Medical Assistance Advisory Committee, [6] DPW proposed using a budget adjustment factor, or "BAF, " to slow the increasing rates.

As it has come to be used in Pennsylvania, a BAF is a fraction by which each provider's case-mix payment rate is multiplied, thereby reducing the reimbursement rate by a certain percentage. For example, if a case-mix rate of $100 was multiplied by a BAF of 0.900, the resulting reimbursement rate would be $90, or 10% less than what was called for by the case-mix calculation. Under the methodology proposed by DPW in 2005, the size of the BAF was to be dictated by the funds appropriated by the state legislature for payments to nursing facilities for the 2005-06 fiscal year. Application of the BAF would therefore "cap" payments to providers based on budget allocation decisions by the Pennsylvania legislature. 35 Pa. Bull. 6232 (Nov. 12, 2005). For the 2005-06 fiscal year, the BAF rate cap allowed payments to increase by 2.8% from the previous year. Although the BAF reduces the case-mix rate for a given year, that does not necessarily mean that the adjusted rate will be less than it was the previous year. As described above, rates calculated using the case-mix methodology have steadily increased each year. If an annual increase is larger than the reduction imposed by the BAF in that year, then rates can still increase in absolute terms. For example, if rates increased under the case-mix methodology by five percent from one year to the next, and then the BAF reduced rates by three percent, there would still be an overall increase in rates from the previous year.

Although DPW initially portrayed the BAF as "an interim measure, applicable only to the computation of payment rates for the 2005-2006 fiscal year, " id., BAFs became a fixture of the state's rate-calculation methodology. For each year between 2005 and 2008, the Pennsylvania legislature authorized the use of a BAF, after which DPW submitted the BAF to CMS as a state plan amendment, and the agency approved the change. As a result, the case-mix rate calculated for each of those years was reduced by the amount defined in that year's BAF; the 2005-06 rates were reduced by 4.878%, the 2006-07 rates by 6.245%, and the 2007-08 rates by 6.806%, as compared to what the rates would have been without the application of the BAF.[7]

On June 28, 2008, two days before the prior legislative authorization for a BAF was set to expire, DPW issued a public notice and request for comment announcing the state's intent to "authorize the continued use of a budget adjustment factor" in calculating nursing facility payment rates. 38 Pa. Bull. 3561 (June 28, 2008) (the "June Notice"). The June Notice explained that the continued use of a BAF would ensure that "the aggregate increase in the Statewide day-weighted average payment rate … does not exceed the percentage rate of increase permitted by the funds appropriated for nursing facility services." Id. It defined the formula for calculating the BAF, which, as in years 2005 to 2008, was determined by the amount the legislature allocated for nursing facility reimbursements. The June Notice also projected that for fiscal year 2008-09 the BAF would be 0.90551, meaning that the per diem rates under the case-mix method would be decreased by 9.449% from what they would have been without the application of the BAF. Id. That projection was based on the funds allocated for nursing facility services in the governor's proposed budget.

A week later, on July 4, 2008, the Pennsylvania legislature passed "Act 44, " 62 Pa. Stat. Ann. § 443.1(7)(iii). As if the bureaucratese were not already painfully thick in this field, the Act directed DPW to apply what it called a "revenue adjustment neutrality factor, " which is another term for a BAF, in each fiscal year between July 1, 2008 and June 30, 2011. 62 Pa. Stat. Ann. § 443.1(7)(iii)(A). Act 44 also codified the methodology announced in the June Notice, and provided that "the revenue adjustment neutrality factor shall limit the estimated aggregate increase in the [s]tatewide day-weighted average payment rate … to the amount permitted by the funds appropriated by the General Appropriations Act for those fiscal years." Id. Translation: the BAF would continue to cap annual rates at the amount Pennsylvania decided it could afford to pay. On the same day, the legislature enacted the General Appropriations Act for fiscal year 2008-09, which appropriated slightly more funds for nursing facility services than had been called for in the governor's proposed budget. Soon after those enactments, DPW published another notice and request for comment regarding provider rates. 38 Pa. Bull. 3943 (July 19, 2008) (the "July Notice"). The July Notice announced that DPW had calculated proposed annual per diem rates for 2008-09, and that, "[c]ontingent on CMS approval, " it would apply a BAF to those rates. Id.

On September 30, 2008, DPW submitted a proposed BAF for 2008-09, designated as "SPA 08-007, " to CMS for approval.[8] In a brief cover letter accompanying the SPA, DPW explained that its purpose was "to authorize the continued use of the budget adjustment factor (BAF) for non-public nursing facility payment rates for the 2008-2009 rate year." (J.A. at 191.) The letter described the formula for calculating the BAF, and said that "the non-public BAF produced by this formula [for rate year 2008-09] is .90891." (J.A. at 192.) It further explained that the BAF served "to moderate the growth of nursing facility payment rates consistent with the fiscal resources of the Commonwealth, while still providing payment rate increases sufficient to assure that consumers will continue to have access to medically necessary nursing facility services." (J.A. at 191.) Finally, the letter assured CMS that Pennsylvania had "provided advance notice of its intent to amend its State Plan" by publishing public notices in the Pennsylvania Bulletin. (J.A. at 192.) With the cover letter, DPW submitted to CMS a SPA submittal form, a chart showing that the total cost of the state's Medicaid program was within the regulatory limits, [9] copies of the June and July Notices, and a description of the methods and standards used to calculate the per diem payment rates. That description did not explain the basis for the particular BAF proposed for 2008-09 but rather referred to Pennsylvania's statutory provisions defining the case-mix method and explained the use of BAFs generally. No other information regarding the reasons behind the new BAF, or its anticipated effect on care, was included in DPW's initial submission.

In November 2008, DPW published a public notice that included the information it had provided to CMS. 38 Pa. Bull. 6343 (Nov. 15, 2008) (the "November Notice"). The November Notice announced that, based on the amounts appropriated by the state legislature, the BAF for the 2008-09 fiscal year would be 0.90891. Id. That BAF was the same as stated in the SPA, but it differed from the estimate included in the June Notice because of the disparity between the governor's proposed budget and the one the legislature actually passed, which increased appropriations to nursing facilities slightly. Still, the proposed BAF represented the largest downward adjustment to the case-mix rate calculation since Pennsylvania had introduced BAFs, reducing each nursing facility's proposed per diem rate by 9.109%.[10]Application of the BAF to the 2008-09 case-mix rates meant that, on average, provider payments would be one percent higher in fiscal year 2008-09 than they had been in fiscal year 2007-08, due to the continuing increase in per diem rates under the case-mix methodology.[11]

Meanwhile, CMS was reviewing SPA 08-007. Keith Leuschner, the CMS employee responsible for reviewing Pennsylvania's SPAs, contacted DPW in November 2008 to clarify what effect the SPA would have on the federal dollars flowing to Pennsylvania. In particular, Leuschner was concerned because the form DPW submitted with its SPA showed negative numbers in the "federal budget impact" box for fiscal years 2008 and 2009, which suggested "that nonpublic nursing facilities would be paid less [under the amended plan] than if the state continued using the existing payment methodology." (J.A. at 180.) Leuschner asked DPW if that was the case, and the agency responded that the numbers on the form were actually incorrect, and "that nonpublic nursing homes were going to be paid more under the proposed rate methodology for state rate-setting year 2008-2009 than they would have been paid if the existing rate structure were not changed." (J.A. at 180.) To demonstrate that assertion, DPW provided a spreadsheet, which Leuschner understood to be comparing the rates for the 2008-09 fiscal year calculated "under Pennsylvania's proposed methodology" with those "calculated in accordance with the methodology Pennsylvania had in place under the existing and (at that time approved) rate-setting method."[12] (J.A. at 181.) Leuschner "concluded that the total payments to private nursing homes were estimated to increase slightly during federal fiscal years 2008 and 2009 under the proposed SPAs, " and so "recommended proceeding with approval." (J.A. at 182.) CMS made a few "pen and ink" changes to the transmittal form to correct the federal budget impact numbers (J.A. at 221), and, on December 12, 2008, it approved the SPA. In doing so, it specifically certified that the SPA conformed with the requirements of Section 13(A) and Section 30(A), and retroactively made the SPA's effective date July 1, 2008.[13]

In March 2009, DPW published a final public notice announcing the finalized annual per diem payment rates, after the application of the BAF, for private nursing facilities for 2008-09. 39 Pa. Bull. 1596 (Mar. 28, 2009). It then sent letters to all participating nursing facilities to notify them of their final individualized rates.

B. Procedural History

Following DPW's publication of the final payment rates, Plaintiffs filed timely state administrative appeals with DPW's Bureau of Hearings and Appeals (the "BHA") challenging those rates and asking that DPW "recalculate them consistent with [the] law." (Administrative Appeal, Doc. 20, Ex. A, at 14.) See 55 Pa. Code §§ 41.5 (giving BHA "exclusive jurisdiction over provider appeals") & 41.31 (allowing "[a] provider that is aggrieved by an agency action" to "appeal and obtain review of that action by the [BHA] by filing a request for hearing"). They claimed that DPW had violated the Medicaid Act and its own regulations by providing inadequate notice of and public process for the proposed rate changes, by retroactively setting the 2008-09 rates, and by failing to provide CMS with any information on which that agency of the federal government could base its conclusion that SPA 08-007 satisfied Section 30(A)'s requirements. In particular, Plaintiffs alleged that there was no evidence of any consideration of the SPA's effect on quality of care.

In October 2009, with those state administrative appeals pending, Plaintiffs filed the present action in the United States District Court for the Middle District of Pennsylvania, bringing claims for declaratory and injunctive relief against the Secretary of HHS, the Administrator of CMS, and the Secretary of DPW. Specifically, the complaint asserted a claim under the APA against the Federal Defendants, seeking to have HHS's approval of SPA 08-007 set aside as being contrary to law. The complaint also included a claim under the Supremacy Clause against the State Defendant, seeking to bar the application of SPA 08-007 in the determination of payment rates. Those claims were primarily based on the Federal and State Defendants' alleged violations of Section 30(A) and Section 13(A) in their development and approval of the 2008-09 state plan amendments.

Both the Federal and the State Defendants filed timely motions to dismiss Plaintiffs' claims. The Federal Defendants argued that the APA claim was barred by sovereign immunity, but the District Court disagreed, concluding that the claim fell within the scope of the waiver of federal sovereign immunity provided for in the APA.[14] It therefore denied the Federal Defendants' motion to dismiss. The State Defendant's motion raised three independent bases for dismissal: the abstention doctrine described in Younger v. Harris, 401 U.S. 37 (1971), mootness, and Eleventh Amendment sovereign immunity. The District Court granted the motion in part. It abstained from deciding the Supremacy Clause claim insofar as it related to "conduct occurring prior to CMS approval of the proposed amendments[, ]" as those issues could be adequately addressed in the ongoing state administrative proceeding. Christ the King Manor, Inc. v. Sebelius, No. 1:09-cv-2007, at 19 (M.D. Pa. June 29, 2010) (slip op.). It also dismissed the request for declaratory relief on immunity grounds, explaining that, if it "were to issue a declaratory decree to the effect that State Defendant's implementation of the [SPA] violated federal law, " the decree could have res judicata effect in the state administrative appeals process, which "would leave to the state system 'only a form of accounting proceeding whereby damages or restitution would be computed.'" Id. at 25 (quoting Green v. Mansour, 474 U.S. 64, 73 (1985)).) The District Court held that the case was not moot, however, and it did not dismiss Plaintiffs' claim for injunctive relief regarding the continuing application of the amended state plan.

The parties proceeded to discovery, and subsequently filed cross motions for summary judgment on the remaining claims. The District Court granted the Federal and State Defendants' motions on July 24, 2012, [15] holding that, "[g]iven [the] regulatory framework … and the deference afforded agency decision-making, … there is substantial evidence in the [administrative record] to support the Secretary's approval of the SPAs under [S]ection 30(A)." Christ the King Manor, Inc. v. Sebelius, No. 1:09-cv-2007, 2012 WL 3027543, at *8 (M.D. Pa. July 24, 2012). It further held that CMS could properly conclude that DPW had substantially complied with the public process requirements of Section 13(A). Id. at *15. The Court therefore found that HHS's approval of SPA 08-007 was not arbitrary or capricious, and that the State Defendant's implementation of the SPA was proper. Id. at *16-*17. Accordingly, it denied Plaintiffs' ...

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