Lessons for states in inpatient ratesetting under the Boren Amendment - Hospital Payment: Beyond the Prospective Payment System

Health Care Financing Review, Winter, 1993 by Andrew I. Batavia, Ronald J. Ozminkowski, Gary Gaumer, Mary Gabay

INTRODUCTION

Recently, Federal courts have become increasingly involved in setting State inpatient ratesetting policy through the Boren Amendment, a provision of the Medicaid law requiring States to provide assurances that their inpatient rates meet certain specified standards of adequacy. Although initially focusing on the procedural adequacy of State ratesetting processes, the courts have recently become more willing to rule on the substantive adequacy of specific rates and ratesetting methodologies. In this article, we summarize the results of Boren Amendment cases that have been decided by the courts and suggest strategies for States to satisfy the requirements of the amendment.

BACKGROUND

When Medicaid was established in 1965, States were required to reimburse hospitals for their "reasonable costs" of providing inpatient services using the Medicare program's retrospective reimbursement methodology. There has since been a general recognition that retrospective cost-based payment is inherently inflationary and does not encourage cost-effective provision of services. Consequently, amendments to the Social Security Act were passed in 1968 and 1972 that allowed States to obtain waivers from the Health Care Financing Administration (HCFA) to conduct demonstrations applying alternative payment methodologies in their Medicaid programs. In 1981, based in part on the results of the demonstrations, Congress passed the Boren Amendment (section 2173 of the Omnibus Reconciliation Act of 1981, 42 U.S.C. section 1396a[a][13][a]) (section 1902[a][13][A] of the Social Security Act) to reduce Medicaid expenditures and their rate of increase by providing States greater flexibility in developing their own Medicaid inpatient ratesetting systems. However, in granting the States flexibility to develop their own payment systems and reduce costs, Congress insisted that rates be adequate to meet the needs of providers and recipients. Under the amendment, the State Medicaid plan must provide:

"[F]or payment ... of the hospital, nursing

home, and intermediate care facility

services approved under the plan

through the use of rates (determined in

accordance with methods and standards

developed by the State and

which, in the case of hospitals, take

into account the situation of hospitals

which serve a disproportionate number

of low income patients ... ) which the

State finds, and makes assurances satisfactory

to the Secretary, are reasonable

and adequate to meet the costs

which must be incurred by efficiently

and economically operated facilities in

order to provide care and services in

conformity with applicable State and

Federal laws, regulations, and quality

and safety standards and to ensure that

individuals eligible for medical assistance

have reasonable access (taking

into account geographic location and

reasonable travel time) to inpatient hospital

services of adequate quality. . . ."

(Emphasis added to identify the terms

that have been most important in litigation.)

Thus, the Boren amendment includes three basic requirements. The State plan must provide assurances that it pays at rates that: * Are reasonable and adequate to meet

the costs that must be incurred by efficiently

and economically operated

facilities. * Are reasonable and adequate to ensure

that Medicaid recipients will have reasonable

access to inpatient hospital

services of adequate quality. * Take into account the situation of hospitals

that serve a disproportionate

number of low-income patients with

special needs.

If the State provides adequate assurances, supported by findings, that its Medicaid plan or plan amendments meet these requirements (and other applicable requirements), the Secretary of Health and Human Services must approve it (State of New York by Perales v. Sullivan, 894 F.2d 20 [2nd Cir. 1990]). Once approved, the State plan is subject to continual scrutiny to ensure continued compliance.

Because HCFA's regulations at 42 C.F.R. 447 implementing the Boren Amendment do not define or clarify its key terms, and the courts are poorly qualified to apply the amendment's specialized terms of health care economics, the state of the law on what constitutes acceptable payment rates or an acceptable payment methodology is currently highly uncertain. There have been several court opinions on both ratesetting procedure and policy issues but no firm judicial consensus on what the amendment requires. The one legal issue that is certain at this time is that hospitals have a right to sue State Medicaid programs for violations of the Boren Amendment.

In Wilder v. Virginia Hospital Association (110 S.Ct. 2510 [1990]) the Supreme Court decided 5-4 that health care providers are "the intended beneficiaries of the Boren Amendment," in that the law is designed and phrased in terms benefiting providers. Consequently, providers may bring a legal action to enforce their rights under it. Significantly, the Court found that "[t]he right is not merely a procedural one that rates be accompanied by findings and assurances (however perfunctory) of reasonableness and adequacy; rather the Act provides a substantive right to reasonable and adequate rates as well." (The dissent in Wilder argued that, if providers could sue States, the courts would contradict the intent of Congress to give States flexibility to develop methods and standards of ratesetting subject to the review of the Secretary of Health and Human Services.) As a result of Wilder, hospitals and nursing homes have been encouraged to bring Boren Amendment actions against their States, and the courts are increasingly in the business of setting, or at least voiding, State Medicaid policy.