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

DEFINITIONAL ISSUES

The terms of the Boren Amendment most frequently litigated are "efficiently and economically operated" facility and "costs that must be incurred." Very few States have explicitly defined these terms in their Medicaid plans, but the terms are often defined implicitly through the plan's operations. Moreover, only a few courts have based their decisions explicitly on such definitional issues.

Defining Efficiently and Economically Operated

The term that is most difficult to define, because of lack of Federal guidance, is efficiently and economically operated facility. In one case, Multicare Medical Center v. State of Washington, 768 F.Supp. 1349 (W.D. Wash. 1991), the State of Washington capped its base rates at the 50th percentile of operating expenses for each of its hospital peer groups and froze capital costs at the base-year level, implicitly defining these as the reasonable costs of an economic and efficient provider. The district court, in finding this approach impermissible, concluded that "[t]he State chose this measure of relative efficiency without considering whether it had any relevance whatsoever to efficient and economic hospital operations in the State" (Multicare Medical Center, 768 F.Supp. at 1394).

Virginia used median operating costs per hospital peer group, adjusted for wage variations in different standard metropolitan statistical areas, to set ceilings under an incentive system somewhat akin to that under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 (Mary Washington Hospital, 635 F.Supp. 891). The district court, in finding the use of median costs permissible in implicitly defining "efficiently and economically operated hospital," did not accept the hospital's argument that using the median implies that "all hospitals above the median are uneconomical and inefficient." The court seems to have accepted the State's argument that "if half of the hospitals in a grouping can operate at or below a certain level, then certainly an efficient and economic hospital can" (Mary Washington Hospital, 635 F.Supp. at 899).

In another case (Michigan Hospital Association v. Babcock, 736 F.Supp. 759 [W.D. Mich. 1990]), the State of Michigan reduced its base rates by 7 percent, and only 14 of its 182 hospitals received full reimbursement for their costs under the State plan. In its decision, the court found that ". . . such an inference [that only 7.7 percent of hospitals are efficiently and economically operated] is implausible for two reasons. It is hard to give credence to the idea that only 14 of 182 hospitals and only hospitals with high indigent volume are efficiently and economically operated" (Michigan Hospital Association, 736 F.Supp. at 763). Although this opinion does not offer firm insight as to how low is too low, it suggests that courts will be uncomfortable if some minimal threshold percentage of efficiently and economically operated providers is not reached, particularly in the absence of analysis justifying the low percentage.