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May 20, 2004.


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



  Plaintiffs New York Association of Homes and Services for the Aging, Inc., a non-profit corporation, on behalf of its membership, which includes approximately 300 residential health care facilities, and certain individual nursing facilities ("plaintiffs" or "providers"), brought this action against New York State and various of its agencies and employees ("defendants"), alleging that a number of cost-control measures enacted as part of the State's annual budget violate providers' rights under certain statutory sections of and regulations promulgated under the Medicaid Act, 42 U.S.C. § 1396 et seq.*fn1 and the substantive due process, procedural due process, and equal protection clauses of the Constitution.*fn2

  Plaintiffs and defendants have both moved for summary judgment pursuant to Fed.R.Civ.P. 56. Oral argument was heard on July 25, 2003, in Albany, New York. Decision was reserved.


  A. Relevant Medicaid Act Sections

  Before outlining the challenged measures enacted by the State through budget legislation, it is helpful to briefly describe the relevant statutory and regulatory sections of the Medicaid Act, under which most of plaintiffs' federal claims are asserted pursuant to 42 U.S.C. § 1983.

  Medicaid is a federal program that provides funding to States choosing to reimburse health care facilities for services provided to and medical costs incurred by those in need. The rate at which facilities are reimbursed is set by the State, subject to various Medicaid Act provisions and regulations, with which the State is required to comply if it opts to participate in the program and desires federal funding.

  In 1980, Congress amended the Medicaid Act by passage of what is commonly referred to as the Boren Amendment, former 42 U.S.C. § 1396a(a)(13)(A). Under the amendment, providers had a substantive right to reasonable and adequate reimbursement rates, and a procedural right to have such rates accompanied by findings and assurances, made by the State, as to their reasonableness and adequacy. In 1987, added to the Boren Amendment was the requirement that States, in setting reimbursement rates, take into account providers' compliance with several quality-related requirements that were then imposed. 42 U.S.C. § 1396r(b).

  The Boren Amendment was repealed effective October 1, 1997, by Congress through the Balanced Budget Act of 1997, Pub.L. 105-33, § 4711(a)(1), 111 Stat. 251, 507-08 (1997). In its stead stands the requirement that a State plan must provide for a public process with respect to its determination of reimbursement rates, including most notably a notice and comment procedure, current 42 U.S.C. § 1396(a)(13)(A). Pursuant to federal regulation, the public notice of proposed changes in the methodology to determine reimbursement rates is to give an estimate of any expected increase or decrease in aggregate expenditures. Federal regulations also require that States must provide an appeals procedure by which providers can submit additional evidence and receive prompt administrative review of reimbursement rates.

  Also relevant in setting reimbursement rates is 42 U.S.C. § 1396a(a)(30)(A), which has been in existence since 1981 and was not affected by repeal of the Boren Amendment. The section mandates that States provide methods and procedures as may be necessary to safeguard against unnecessary utilization of care and services, and to assure that any reimbursement rates it pays to providers are consistent with what is needed by facilities to maintain efficient, economic, and quality care. In 1989, Congress added the requirement that payments under a State plan were to be sufficient to enlist enough providers so that care is available under the plan at least to the extent that it was available to the general population in the relevant geographic area. 42 U.S.C. § 1396r.

  B. Challenged Measures

  In this case, plaintiffs — a non-profit organization representing its Medicaid provider members and certain individual Medicaid providers — challenge certain cost-control measures enacted by the State over the years as part of annual budget legislation that allegedly impact the methodology by which the Medicaid reimbursement rates of providers are set. While for the purposes of this opinion the parameters of the State's reimbursement methodology and the challenged measures need not be extensively detailed, some mention is appropriate to place the case into better context.

  1. Reimbursement Methodology

  Since 1986, the New York State Department of Health has used the "RUG-II Methodology" to calculate Medicaid reimbursement rates to be used in paying Medicaid providers. Under RUG-II, each facility receives a facility-specific, per patient, per day reimbursement rate made up of four components. Rates are calculated using costs incurred in a prior year, called the "base year." The base year used at least throughout the 1980's and 1990's was 1983. Base year costs are trended forward to a particular rate year by the addition of percentage increases in an effort to account for inflation.

  The direct component of the rate reimburses costs directly related to patient care, including nursing, various therapies, transportation services, social services, and patient activities. It is computed by multiplying the allowable base year direct costs per patient per day by the facility's "case mix index." The case mix index is the measure of the resources needed to care for patients relative to other facilities. The resources needed are compared to statewide base and ceiling prices established for that case mix index. If the direct costs exceed the ceiling, the facility is reimbursed in the ceiling amount; if a facility's costs are below the base for the case mix index, they receive the base amount; and if the costs are between the base and the ceiling, the facility receives whatever its costs are.

  The indirect component of the rate reimburses costs not directly related to patient care, such as fiscal and administrative services, housekeeping, food services, and medical education. The reimbursement of indirect costs is also subject to ceiling limits. Facilities are combined into peer groups based on size, affiliation, and case mix index. Allowable costs are then compared to peer group ceilings to arrive at the indirect cost reimbursement.

  The other two components of the methodology reimburse facilities based on non-comparable costs (facility-specific costs, such as supervision of volunteers, lab services, etc.) and capital costs (such as building costs, fixed and movable equipment costs, costs of capital improvements, etc.).

  2. Primary Challenged Measures

  As noted, plaintiffs challenge several measures enacted in annual budget legislation that they claim improperly impact the RUG-11 methodology used for setting reimbursement rates to be used in paying Medicaid providers,
a. the A/F cap
  Beginning in 1995, the State's budget bill has included a measure that places a cap on administrative and fiscal costs ("A/F costs"), which are factored into the indirect component of the State's reimbursement methodology. Plaintiffs claim that, despite already being subject to peer group limits and salary ceilings for administrators, this measure further limited reimbursable A/F costs by disallowing costs that exceeded the statewide average of total reimbursable base year A/F costs. Reimbursable base year A/F costs are those costs remaining after application of all other efficiency standards, including peer group limits.

  b. the trend factor "freeze"

  Also beginning in 1995, the State's budget bill has contained what plaintiffs term a "trend factor freeze." Since New York began using its reimbursement methodology, a trend factor has been utilized in calculating reimbursement rates in order to account for increasing nursing home costs brought on by inflation. According to plaintiffs, defendants have "frozen" the trend factor as it existed on a certain date. Section 23 of the Health Care Reform Act of 2000 ("HCRA") extended the 1996 Budget Bill's trend factor freeze through March 31, 2003, and changed the manner in which the trend factor itself was calculated, according to plaintiffs. Previously, they claim, the trend factor was established by a panel of health care economic experts using, among other things, proxies for labor and non-labor items. Some time after issuing a report in 1995, however, the Department of Health ceased convening the panel, which plaintiffs claim had suggested future modifications to the procedure used to establish the trend factor. Under the HCRA, effective April 1, 2000, the trend factor was to be tied to the Federal Consumer Price Index, rather than specific health care variables.

  c. appeal moratorium/monetary cap

  Also beginning in 1995, the budget bill has included a one-year moratorium on the processing and determination of reimbursement rate appeals. In 1996, Section 2808(15) of the Public Health Law was amended by placing a $47 million monetary cap on reimbursement rates revised through the appeals process during the period of April 1, 1996, to March 31, 1997. Subsequent budget bills essentially combined the moratorium and the monetary cap, imposing the former for a period and then imposing the latter thereafter. d. $56 million reduction for efficiency

  In the 1996 Budget Bill, Section 2808(13) of the Public Health Law was amended to require a $56 million statewide reduction in reimbursement rates for the year 1995. The reduction was purportedly a reflection of the elimination of operational requirements previously imposed on nursing facilities by law and/or regulation. No requirements, however, were eliminated that year, so the reduction did not go into effect. The following year, though, amended Section 2808(16) was enacted, requiring a $56 million reduction, applicable from April 1, 1996, to March 31, 1997, on the basis of encouraging improved productivity and efficiency. Using data from two years prior to the rate year, the ...

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