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GREATER NEW YORK HOSP. ASSN. v. BLUM

September 5, 1979

GREATER NEW YORK HOSPITAL ASSOCIATION, LONG ISLAND COLLEGE HOSPITAL and MAIMONIDES MEDICAL CENTER, on behalf of themselves and all other nonprofit hospitals in the Greater New York Hospital Association subject to the New York State Medicaid "demonstration project", Plaintiffs,
v.
BARBARA B. BLUM, Commissioner of Social Services of the State of New York, DAVID AXELROD, Commissioner of Health of the State of New York, and JOSEPH A. CALIFANO, JR., Secretary of the United States Department of Health, Education and Welfare, Defendants.



The opinion of the court was delivered by: PRATT

MEMORANDUM AND ORDER

Plaintiffs challenge the legality of a "demonstration project" instituted by defendants in 46 non-profit New York City hospitals. In 20 of these hospitals since March, 1979, a "demonstration team" of state nurses and doctors has reviewed all hospital claims for Medicaid reimbursement, taking over this function from the Professional Standard Review Organizations (PSROs), and, according to plaintiffs, disallowing hospital claims for reimbursement which would have been routinely approved by the PSROs. To stop this allegedly illegal demonstration project and the financial hardships it imposes, plaintiffs commenced this action on July 16, 1979 and moved for summary judgment 20 days later, August 7, 1979, pursuant to FRCP 56(a). The motion was argued August 22, 1979, and the last of defendants' papers were received by this court on August 30, 1979. For reasons set forth below, plaintiffs' motion for summary judgment is granted.

 FACTS

 The facts are undisputed. *fn1"

 Plaintiff Greater New York Hospital Association (Association) is a not-for-profit New York corporation composed of 74 non-profit hospitals in the New York City metropolitan area. It is the coordinating agency for all major non-profit voluntary and public hospitals in New York City. Plaintiffs Long Island College Hospital (LIC) and Maimonides Medical Center (Maimonides) are not-for-profit New York corporations, located in Brooklyn, New York, providing hospital care to Medicaid patients.

 Defendant Barbara Blum is Commissioner of Social Services and head of the New York Department of Social Services, the department responsible for administering the Medicaid program in New York under the federal Social Security Act. Defendant David Axelrod is Commissioner of Health and head of the New York Department of Health, the department primarily responsible for the "demonstration project" complained of in this case. Defendant Patricia Harris *fn2" is Secretary of the United States Department of Health, Education and Welfare (HEW) and is the federal official ultimately responsible for the lawful administration of the Medicaid program.

 In 1972, Congress amended Title XI of the Social Security Act, 42 U.S.C. § 1301 Et seq., by enacting the Professional Standards Review Law, P.L. 92-603 Title II, § 249F(b), 42 U.S.C. § 1320c-s 1320c-21. The statute was designed to establish effective professional peer review of the necessity and quality of medical care provided to individuals under various federal health care programs including the Medicaid program. The professional review in existence prior to the enactment of the Professional Standards Review Law had not prevented widespread billing for unnecessary treatments, sometimes called "overutilization", which included unnecessary surgery and unjustifiable hospitalization, wasting public funds, and providing poor medical care. The Professional Standards Review Law was enacted to curb such abuses and "to promote the effective, efficient and economic delivery of health care services of proper quality for which payments may be made (in whole or in part) under (the Social Security Act)" 42 U.S.C. § 1320c. See generally, Association of American Physicians and Surgeons v. Weinberger, 395 F. Supp. 125, 127-28 (ND Ill.) Aff'd. 423 U.S. 975, 96 S. Ct. 388, 46 L. Ed. 2d 299 (1975); Public Citizen Health Research Group v. Department of Health, Education and Welfare, 449 F. Supp. 937, 938-39 (DC 1978).

 To this end Congress authorized creation of the PSROs: non-profit organizations, ordinarily made up of physicians, whose main duty is to review reimbursement claims for medical services and items provided to Medicare and Medicaid patients, to determine whether:

 
(A) such services and items are or were medically necessary;
 
(B) the quality of such services meets professionally recognized standards of health care; and
 
(C) in case such services and items are proposed to be provided in a hospital or other health care facility on an inpatient basis, such services and items could, consistent with the provision of appropriate medical care, be effectively provided on an outpatient basis or more economically in an inpatient health care facility of a different type. 42 U.S.C. § 1320c-4(a)(1).

 Congress also imposed a number of other duties on PSROs, such as approval of elective surgery, 42 U.S.C. § 1320c-4(a)(2)(A), approval of "any other health care service which will consist of extended or costly courses of treatment", 42 U.S.C. § 1320c-4(a)(2)(B), and the responsibility of recommending sanctions against health care practitioners who violate their obligations under the Social Security Act, 42 U.S.C. § 1320c-9(b).

 The Professional Standards Review Law represents Congress's decision to let private medical specialists review claims for reimbursement under the Medicare and Medicaid programs. Since 1972, there has been frequent communication between HEW and New York State officials concerning the scope and boundaries of PSRO authority, as New York State has sought to retain some control over Medicare and Medicaid reimbursement claims. The history of these communications sheds considerable light on various provisions of the Professional Standards Review Law, and their application to defendants in the case at bar.

 On March 31, 1976, Governor Carey signed into law significant legislative changes in the New York State Medicaid program. A memorandum, dated April 29, 1976 from the Acting Regional Commissioner of HEW to the Commissioner of the HEW Medical Services Administration, contains the following comment on these changes:

 
It has been brought to our attention that sections 4, 6, and 8 of the legislation pose a potential conflict with Title XI, Part B of the Social Security Act the Professional Standards Review Organization Legislation.
 
Specifically, the legislation may be interpreted as delegating authority to the Commissioner of Health for determining admission, length of stay and medical necessity standards that the 1972 amendments to the Social Security Act * * * provided to Federally-funded PSROs. The PSRO Act clearly provides that such determinations are to be conclusively made by the PSROs; no payment of Federal funds may be made where the PSRO disapproves of such services subject to its review, and so notifies the paying agency. Affidavit of Franklin Bonem, Ex. A.

 The same New York amendments were the subject of a second memorandum dated July 7, 1976 from the Assistant General Counsel for the Public Health Division of HEW to the Assistant General Counsel of the Human Resources Division of HEW. Commenting on New York's authorization of a state review system parallel to the PSROs, the memorandum stated:

 
(T)he establishment by a State of a peer review system for Medicaid services, does not necessarily result in a conflict with PSRO responsibilities. * * * However, once a PSRO assumes responsibility for a particular institution, the state's responsibility for review of the medical necessity, quality and level of Medicaid health care services is at an end. Id., Ex. B.

 In a memorandum dated February 1, 1977 from the Acting Regional Attorney of HEW to the Regional Director of Region II, it was stated that:

 
(T)he recommended disapproval of the New York Plan Amendment is predicated upon explicit statutory authority, i. e. § 1154 of the Social Security Act. Section 1154 and § 1155 of the Social Security Act require that a conditional PSRO be the exclusive authority for determining whether items and services for which Medicaid reimbursement is claimed were medically necessary, as soon as the Secretary has determined that the PSRO in question is capable of making such determination.
 
Once the Secretary is satisfied that a PSRO has the capacity to perform utilization review determinations, he must permit them to do so. This determination is binding on the states by virtue of the Supremacy Clause, Article VI of the U.S.Constitution. Once the PSRO is actually performing this function, regardless of whether it is conditional or permanent, reimbursement for Title XIX purposes must be made only in accordance with its determinations. Id., Ex. C.

 Subsequent letters from the administrator of the Health Care Financing Administration of HEW to the Commissioner of Social Services of the State of New York restate HEW's disapproval of the New York State Medicaid amendments, insofar as they undermine PSRO review powers. Id., Exs. E & F.

 In October, 1977, Congress significantly amended the Professional Standards Review Law, 42 U.S.C. § 1320c Et seq., clarifying at many points the scope of authority of the PSROs. After these amendments, in March, 1978, the Administrator of the Health Care Financing Administration of HEW again had occasion to consider the legality of the New York Medicaid Plan Amendments:

 
HEW's finding of PSRO competency is made upon conditional designation of the PSRO and approval of the PSRO's schedule for review. HEW is not free to revoke this finding absent subsequent evidence of incompetence. States are required under § 1158(c) (1159(c)) of the Social Security Act to accept for ...

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