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July 2, 1991


The opinion of the court was delivered by: Goettel, District Judge:


This action presents a challenge to New York's Medicaid reimbursement rates as they are applied to private psychiatric hospitals located within the state.


Medicaid is a federal/state program through which the federal government offers financial assistance to enable needy individuals to obtain health care. 42 U.S.C. § 1396 et seq. (1988). See generally Wilder v. Virginia Hosp. Ass'n, ___ U.S. ___, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990) (discussing Medicaid program); Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306 (2d Cir. 1991) (same). The federal government only provides a portion of the necessary funding, with the remainder to be made up by the states and localities. If a state wishes to participate in the Medicaid program, it must comply with federal regulations promulgated by the Department of Health and Human Services ("HHS").*fn1 Included among these regulations is the mandate that the state establish a comprehensive reimbursement scheme for health care providers. The reimbursement methodology has undergone dramatic changes since the Medicaid Act's inception, with a very significant amendment occurring in 1980. This amendment to the Medicaid Act, known as the Boren Amendment (the "Amendment"), states that, inter alia, "[a] State plan for medical assistance must provide for payment . . . of the hospital services . . . provided under the plan through the use of rates . . . which the State finds, and makes assurances satisfactory to the Secretary [of HHS], are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities." 42 U.S.C. § 1396a(a)(13)(A).*fn2 This is not simply a one shot deal. Rather, the states are required, "not less often than annually," 42 C.F.R. § 447.253(b)(1), to make findings that its rates are reasonable and adequate. See Wilder, 110 S.Ct. at 2516.

The rationale behind the Amendment was to provide states with greater flexibility in setting reimbursement rates and to promote efficiency and economy. See Pinnacle Nursing Home, 928 F.2d at 1309-10.*fn3 In response to the Amendment, New York adopted the reimbursement schedules at issue. Specifically, the question in the case at bar relates to the established rates for private psychiatric hospitals in the state, of which there are eleven, seven of which accept Medicaid patients. We note that while New York's Department of Social Services ("DSS") administers the state's overall participation in the Medicaid program, it is the Office of Mental Health ("OMH") that is responsible for setting the reimbursement rates for private psychiatric hospitals.

Among the most important changes OMH adopted in response to the Amendment was the adoption of a "minimum utilization adjustment" (the "Adjustment"). See 14 N.Y.C.R.R. § 577.7(g). The Adjustment, which ultimately became effective on June 1, 1984, works as follows. If a hospital operates at seventy-five percent capacity or greater, its per diem reimbursement rate is calculated by dividing its allowable costs by its actual number of patient days. However, a hospital operating at less than seventy-five percent capacity will have its costs divided by seventy-five percent of its certified capacity regardless of the actual number of patient days. Thus, the permissible costs are divided by a greater number of beds than were actually utilized during the base year, which is two years before the rate year. This results in a decreased per diem reimbursement rate for hospitals operating at less than seventy-five percent capacity. While there are obviously other provisions articulated in the state's reimbursement regulations, it is the Adjustment that is of paramount concern to plaintiff.*fn4

Plaintiff Rye Psychiatric Hospital Center, Inc. has now sued the respective heads of both OMH and DSS for declaratory and injunctive relief pursuant to 42 U.S.C. § 1983 (1988), claiming that the state's plan violates both the Boren Amendment and the regulations promulgated thereunder, as well as the equal protection and due process clauses of the Constitution. While at the time this suit was filed it was unclear whether an action under section 1983 could appropriately raise violations of the Boren Amendment, the Supreme Court's decision in Wilder v. Virginia Hospital Association, ___ U.S. ___, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990), definitively recognizes such a claim.*fn5

Presently before us are cross-motions for summary judgment. For reasons which will become apparent, we need not resolve each of the plaintiff's claims and arguments. However, we will briefly list them for the sake of completeness. As noted, plaintiff's claim focuses on the rates established by OMH, specifically the Adjustment. Plaintiff argues that defendants' failure to conduct any formal studies, as required by the Amendment, before implementing the new reimbursement rates violates the Amendment. Going hand in hand with this argument, of course, are the claims that the rates are neither reasonable nor adequate, nor do they result in economically and efficiently operated hospitals. Defendants, while admitting that no formal studies were conducted, suggest that none were necessary in light of the state's prior experience with minimum utilization adjustments, as well as the general acceptance of such adjustments in the community as a means of encouraging efficiency.

Plaintiff also claims that while the Amendment requires states to "take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs," 42 U.S.C. § 1396a(a)(13)(A), defendants' plan fails to do so. Defendants, in turn, claim that they are exempt from this particular section of the Amendment, but even if it does apply to them, they argue that plaintiff does not serve a disproportionate number of low income people as defined by the Amendment.

An additional argument plaintiff raises is that the state's plan fails to comply with the requirement that the state "provide an appeals or exception procedure that allows individual providers an opportunity to submit additional evidence and receive prompt administrative review, with respect to such issues as the agency determines appropriate, of payment rates." 42 C.F.R. 447.253(c). In essence, plaintiff argues that the state's appeals procedure, which permits appeals for erroneous calculations based on the rates established, but not for appeals of the rates themselves, see 14 N.Y.C.R.R. § 577.9(a), is insufficient. Defendants suggest that New York's regulation regarding appeals is sufficient since the federal regulation upon which it was based gives discretion to the agency to determine those issues that can be appealed. 42 C.F.R. § 447.253(c).

Plaintiff's last two claims are based on the Constitution's equal protection and due process clauses. Plaintiff argues that while general hospitals with psychiatric units are subject to the minimum utilization adjustments adopted by a different state agency, these hospitals are entitled to rate increases based on low volume, so-called "volume adjustments." Since plaintiff is not entitled to a similar adjustment, it raises an equal protection argument, claiming there is no rational reason behind a distinction between psychiatric hospitals and general hospitals with psychiatric units.*fn6 As to its due process argument, plaintiff contends that defendants are applying the minimum utilization adjustment in an effort to force the decertification of some of plaintiff's forty-one beds without affording it an opportunity to be heard. This, it is argued, amounts to a taking of property without due process.

Before turning to the instant summary judgment motions, we note that plaintiff moved for a preliminary injunction while the summary judgment motions were sub judice. Specifically, plaintiff seeks to prevent the state from using the minimum utilization adjustment while this action is pending. The need for such emergency relief is premised on the fact that the federal government recently informed plaintiff that it had been overpaid on reimbursements for Medicare in previous years and that the deficiency will be satisfied through deductions from any Medicare reimbursements to which plaintiff becomes entitled. This debit is entirely unrelated to the case at bar since it involves a completely different federal program, i.e., Medicare as opposed to Medicaid. Nonetheless, plaintiff claims that it was not until the government notified it of the Medicare overpayments that the extent of the damage from the Medicaid reimbursement rates became fully apparent. As we pointed out to the parties at oral argument of the preliminary injunction application, since plaintiff would be required to establish, inter alia, a likelihood of success on the merits or at least serious questions going to the merits before a preliminary injunction could be granted, it would be extremely inefficient for us to decide that issue while the ultimate merits of the case are before us on the summary judgment motions. Thus, we will not address the motion for a preliminary injunction.


The standard governing motions for summary judgment is well established. Rule 56 of the Federal Rules of Civil Procedure states that summary judgment shall be granted if the moving party can "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). If the moving party satisfies this burden, the party opposing the motion "must set forth specific facts showing that there is a genuine need for trial," Fed.R.Civ.P. 56(e), and there must be more than merely "some metaphysical doubt as ...

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