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February 11, 1997


The opinion of the court was delivered by: SPRIZZO


 Pursuant to 42 U.S.C. § 1983 and 28 U.S.C. §§ 1331, 1343, and 1367, plaintiff The Jewish Home and Hospital for Aged ("Jewish Home") filed the instant action seeking injunctive and declaratory relief under the Medicare Act, 42 U.S.C. § 1395 et seq., with respect to New York's audit methodology for recouping federal Medicare program Part B reimbursements. Pursuant to Federal Rule of Civil Procedure 56(c), Jewish Home moves for summary judgment arguing that it is entitled to recover 100% of its reasonable costs and charges for Medicare Part B services rendered under the Medicare Act. Defendant Brian J. Wing, as Acting Commissioner of the Department of Social Services (the "DSS"), and defendant Patricia A. Woodworth, as Director of the Budget of the State of New York (together "defendants"), cross-move for summary judgment against Jewish Home. *fn1" For the reasons set forth below, Jewish Home's motion for summary judgment is granted as against defendant Wing and denied as against defendant Woodworth, defendant Woodworth's cross-motion for summary judgment against Jewish Home is granted, and defendant Wing's cross-motion for summary judgment against Jewish Home is denied.


 The instant action involves the interplay between the Medicare Act, 42 U.S.C. § 1395 et seq., and the Medicaid Act, 42 U.S.C. § 1396 et seq. Therefore, a brief review of both statutory schemes is warranted.

 Congress enacted the federal Medicare program to provide Americans over the age of sixty-five (65) and certain disabled individuals with an inpatient hospital insurance plan ("Part A") and an optional supplementary insurance plan ("Part B"). See 42 U.S.C. § 1395 et seq. (1991); Plaintiff's Statement of Undisputed Facts Pursuant to Local Rule 3(g) ("Pltf's Rule 3(g) Stmt.") P 7. Part B includes certain physician and ancillary services, hospital outpatient services, and other health services generally not covered under Part A. See Pltf's Rule 3(g) Stmt. P 7. In order to enroll in Part B coverage, a patient must pay an annual deductible and certain premiums. Id. P 9. The patient then pays "co-payments" equal to 20% of the reasonable costs and charges for any services received. Id. The federal government pays the remaining 80%. Id. Medicare reimburses providers retrospectively on a fee-for-service basis in accordance with a cost report and settlement. Id. P 8.

 Congress enacted Medicaid to provide access to health care for indigent individuals. See 42 U.S.C. § 1396 et seq. (1991); Pltf's Rule 3(g) Stmt. P 3. Medicaid is a joint federal and state funded system. Id. States electing to participate in Medicaid must propose a plan for approval by the Secretary of the United States Department of Health and Human Services. See 42 U.S.C. §§ 1396a(a), 1396a(b). The plan includes a schedule of payment rates for different kinds of medical services. See 42 U.S.C. § 1396a(a). Once approved, the federal government agrees to assist the state by providing federal Medicaid funds. Id. Health care providers agree to accept the government rate as payment in full, and may not request that a patient pay any additional charges. See 42 U.S.C. § 1320a-7b(d) (1996). Medicaid prospectively reimburses providers at a per-diem rate. See 42 U.S.C. § 1396a(a). Rates in a given year are set on the basis of costs reported by a facility in a prior period, called the "base year", which are limited by certain ceilings, and trended forward to the rate year to account for inflation. See Pltf's Rule 3(g) Stmt. P 4.

 Under Medicaid, the reimbursement rates for nursing facilities are composed of four components: direct, indirect, noncomparable, and capital. See N.Y. Comp. Codes R. & Regs. tit 10, § 86-2.10 (1996); Pltf's Rule 3(g) Stmt. P 5. The direct component reimburses base year costs related to patient care, including nursing administration, physical, occupational, and speech therapy, patient activities, social services, pharmacy, central services supplies, and transportation services. See 10 N.Y.C.R.R. § 86-2.10(c); Pltf's Rule 3(g) Stmt. P 5. The indirect component reimburses base year costs not directly related to patient care, such as fiscal/administrative services, housekeeping, food services, medical education, and grounds/maintenance. See 10 N.Y.C.R.R. § 86-2.10(d); Pltf's Rule 3(g) Stmt. P 5. The noncomparable component reimburses facility-specific base year costs which, because of their nature, are not subject to comparison with other facilities, including physician services, laboratory services, electrocardiograms, electroencephalograms, radiology, inhalation therapy, podiatry, dental, and psychiatric services, and other ancillary services. See 10 N.Y.C.R.R. § 86-2.10(f); Pltf's Rule 3(g) Stmt. P 5. The capital component reimburses certain building costs, fixed and moveable equipment costs, costs of capital improvements, and mortgage interest expense. See 10 N.Y.C.R.R. §§ 86-2.10(g), 86-2.19 - 86-2.22; Pltf's Rule 3(g) Stmt. P 5.

 Indigent elderly and disabled, known as "dual eligibles", can qualify for both programs. See Pltf's Rule 3(g) Stmt. P 10. Because dual eligibles effectively cannot afford Medicare Part B, Congress established a "buy in" procedure whereby states could obtain Part B coverage for dual eligibles by agreeing to pay Medicare's cost-sharing amounts on their behalf. Id.

 Since Medicare Part B and Medicaid coverage overlap with respect to certain services, particularly physician and ancillary services, the DSS attempts to reconcile the differences between the two systems and recoup any monies paid to a healthcare provider under Medicaid which may be duplicative of federal Medicare Part B payments. See Pltf's Rule 3(g) Stmt. P 12; N.Y.C.R.R. § 86-2.17(m). Under the methodology in effect for the 1975 through 1979 rate years, the DSS recouped the lower of the amount of Medicaid reimbursements or Medicare receipts for Part B services in the audited rate year. See Affirmation of David Adest in Support of Jewish Home's Motion for Summary Judgment dated February 12, 1996, at P 19, attached to Plaintiff's Notice of Motion for Summary Judgment dated February 12, 1996.

 In 1980, in anticipation of the reimbursement expected from the federal government under Medicare, the New York State Department of Health (the "NYSDOH") instituted a graduated reimbursement system with one rate of reimbursement for Medicaid patients with Medicare Part B coverage, and a different higher rate for Medicaid patients without Part B coverage. See Pltf's Rule 3(g) Stmt PP 12, 13. The difference between the two rates, often termed the "carve-out", is a preliminary estimate of the amount of duplicative payments the NYSDOH expects a nursing home to receive from the Medicare program for Part B services rendered to Medicaid patients. Id. P 13. The DSS later conducts final audits to reconcile the payments made by the two programs and to recoup any duplicative payments. Id. P 14. Up until the 1986 rate year, the DSS Medicare Part B audit methodologies permitted providers to retain a portion of their Medicare part B receipts to cover the costs for Part-B eligible services rendered to Medicaid patients in excess of the Medicaid reimbursement. Id. P 15.

 In 1986, the NYSDOH implemented a new audit methodology known as "RUG-II", the substance of which remains in effect, which establishes patient classifications based on the estimated expected amount of resources necessary to care for each patient. See Pltf's Rule 3(g) Stmt. PP 16, 17. A primary goal of the RUG-II methodology is to provide a financial incentive for nursing facilities to admit and provide care to more resource-intensive patients, whose cost of care in a nursing home is less than in a hospital. Id. P 18. The number of resource-intensive patients admitted by a nursing home is reflected in that facility's case mix index ("CMI"). Id. As a facility's CMI rises, the Medicaid reimbursement methodology positively adjusts the direct component of a nursing home's reimbursement rate to reflect increases in the expected resources needed to care for sicker patients. Id. PP 18, 25. However, the RUG-II methodology does not provide any rate adjustment to account for increased noncomparable costs, such as physician and certain ancillary services. Id. P 27.

 Jewish Home is a 514-bed not-for-profit nursing facility certified to provide services under the New York State Medicaid and federal Medicare programs. See Pltf's Rule 3(g) Stmt. PP 1, 2. Since the adoption of the RUG-II audit methodology, Jewish Home altered its admission policies to care for more resource-intensive patients, resulting in its CMI increasing by 25% from 1.021 in January, 1986, to 1.27 in December, 1988. See id. PP 25, 26, 42. Jewish Home also hired three additional physicians and added ancillary services. Id. P 28. Jewish Home's Medicaid reimbursement rate was not adjusted to reflect its increase in staff expenditures. See id. PP 29, 31.

 On August 30, 1989, the DSS announced that it would seek to recoup all federal Medicare Part B reimbursements for any patient eligible for Medicaid in accordance with Medicaid's provision that it is a payor of last resort. See Pltf's Rule 3(g) Stmt. PP 30, 37. This new methodology ...

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