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Com. of Pa., Dept. of Public Welfare v. U.S. Dept. of Health and Human Services

filed: March 28, 1991; As Amended May 9, 1991.


On Appeal from the United States District Court for the Middle District of Pennsylvania; D.C. Civil No. 86-01608.

Dolores K. Sloviter, Chief Judge,*fn* Becker and Weis, Circuit Judges.

Author: Sloviter


SLOVITER, Chief Judge



The Commonwealth of Pennsylvania appeals from the district court's order of summary judgment sustaining the Department of Health and Human Services' (HHS) disallowance of $501,274.42 in federal Medicaid funds. The sanction resulted from Pennsylvania's failure to show for a total of five fiscal quarters in 1984 and 1985 that it had conducted annual reviews of the medical care provided to every long stay Medicaid patient as required by the Social Security Act. 42 U.S.C. § 1396b(g)(1) (1988). While conceding that it missed several patients in 1984 and 1985, Pennsylvania argues that the disallowance was improper because its quarterly showings satisfied the safe harbor exceptions to the total inspection requirement. This appeal requires us to interpret the statutory language of those exceptions and the regulation adopted by the Secretary of HHS implementing them, which Pennsylvania challenges as impermissibly restrictive in several respects.


Statutory and Regulatory Scheme

Title XIX of the Social Security Act establishes the joint state-federal Medicaid program in which the federal government reimburses participating states for a percentage of the cost of providing medical care to indigent persons. 42 U.S.C. § 1396 (1988). To be eligible for Medicaid funds, the state agency responsible for administering the program must comply with federally established standards regarding Medicaid eligibility, the scope of medical coverage, and the adoption of a system to monitor utilization of the Medicaid program. 42 U.S.C. § 1396a.

This case involves the requirement that states have an effective utilization control program in which the medical care provided to all Medicaid patients receiving long stay care*fn1 in institutional settings "is reviewed and evaluated at least annually by independent professional review teams." 42 U.S.C. § 1396b(g)(1). In 1972, Congress amended the Act to require the Secretary to reduce federal Medicaid funds unless in every fiscal quarter for which a state submits a request for federal reimbursement funds the state makes a showing to the Secretary that it has reviewed the care provided to each such patient within the last year. See H.R. Rep. No. 393, 95th Cong., 2d Sess., 84, reprinted in 1977 U.S. Code Cong. & Admin. News (USCCAN), 3039, 3086. The Secretary validates a state's quarterly showing by conducting sample on-site surveys of state institutions in which long stay Medicaid patients receive medical care. 42 U.S.C. § 1396b(g)(2). If the validation survey reveals that any long stay Medicaid patient was not inspected in the last year, the federal Medicaid funds for all patients at the same level of care*fn2 in that fiscal quarter will be substantially reduced. Under the 1972 Act, the Secretary had no discretion in determining whether a state's incomplete showing warranted the reduction of federal funds. H.R. Rep. No. 393 at 85, reprinted in USCCAN at 3088.

As part of the Medicare-Medicaid Anti-Fraud and Abuse Amendments of 1977, Congress revised the formula for reduction of reimbursement and added two safe harbor exceptions to the strict requirement that states review every Medicaid recipient in order to avoid reduction in federal reimbursements. 42 U.S.C. § 1396b(g)(4)(B). According to the House Report which accompanied the final bill, the exceptions were included to provide "a standard of reasonableness" so as to avoid the imposition of "penalties on States which failed to review only two or three homes out of hundreds of homes subject to review within the annual time limit." H.R. Rep. No. 393 at 85, reprinted in USCCAN at 3088.

The first of the safe harbor exceptions applies if the state demonstrates that it completed on-site inspections during the last year in at least 98 percent of all facilities requiring review and in all facilities with 200 or more certified Medicaid beds [the 98%/200 bed showing], and exercised "good faith and due diligence" in attempting to inspect all Medicaid patients. 42 U.S.C. § 1396b(g)(4)(B).*fn3 The other exception applies if the state's failure to conduct the required inspection was due to "failings of a technical nature only." Id.

In 1979, HHS promulgated regulations implementing the safe harbor provisions. See 42 C.F.R. § 456.653 (1989). The regulation pertinent here provides that the "good faith and due diligence" exception is available only if the state would have completed the review of all facilities "but for events beyond its control which it could not have reasonably anticipated." 42 C.F.R. § 456.653(a)(3).*fn4 The regulation as to the technical failings exception includes a requirement that the state meet the 98%/200 bed showing to qualify, but gives the state thirty days from the end of the quarter to do so. 42 C.F.R. § 456.653(b).


Facts and Procedural History

The Pennsylvania Department of Welfare is the agency responsible for conducting the inspection of care reviews. In conducting reviews, Pennsylvania's inspection of care (IOC) teams rely on the billing and eligibility information provided by each facility to identify patients in need of review. The disallowance resulted from five unsatisfactory quarterly showings made by Pennsylvania, three in 1984 for which $200,462.09 was disallowed and two in 1985 for which $300,812.33 was disallowed.*fn5

For the quarters ending March 31, 1984, June 30, 1984, and September 30, 1984, Pennsylvania failed to review four patients at Valley Crest Home (a facility with over 200 beds) and one patient at Lock Haven Hospital. In addition, for the quarters ending March 31, and June 30, 1984, Pennsylvania failed to review an entire intermediate care facility, Ramsbottom Center. For the quarters ending September 30, and December 31, 1985, Pennsylvania IOC teams missed one patient at Valley Manor Nursing Home and one patient at Camp Hill Nursing Home. Under the total inspection requirement of the statute, these facilities were deemed unreviewed and thus Pennsylvania failed to satisfy its statutory obligation to review the need for and adequacy of covered nursing services "with respect to each patient receiving such services." 42 U.S.C. § 1396a(31)(A) (emphasis added).

Pennsylvania appealed both disallowances separately to HHS' Departmental Appeals Board (Board), arguing that it had made the showings necessary to fall within the statutory safe harbor exceptions to total inspection. Initially, it relied on the exception covering "failings of a technical nature." The Board found that the technical failings exception to the annual review requirement was not available for 1984 because in each of the three quarters Pennsylvania failed to conduct a complete inspection in Valley Crest, a facility with over 200 beds, and thus it had not satisfied the requirement of its regulation that the state make the threshold 98%/200 bed showing by no later than 30 days of the close of the quarter. Board Decision No. 746, App. at 39. The Board found that although Pennsylvania met this threshold in 1985, the technical failings exception was unavailable because the incomplete showings were the result of poor administration and "poor administration or bad record keeping should not be considered a technical failing." Board Decision No. 840, App. at 73.

Pennsylvania appealed both Board decisions to the United States District Court for the Middle District of Pennsylvania.*fn6 Pennsylvania argued that its administrative errors were technical failings and that the Secretary's requirement that a state meet the 98%/200 bed showing within 30 days of the end of the quarter impermissibly restricted the statute. Because no material facts were in dispute, the parties filed cross motions for summary judgment. The district court affirmed the 1984 disallowance, upholding the Secretary's regulation as a reasonable interpretation of the statute. The court remanded the 1985 disallowance to the Board for a determination whether Pennsylvania's showing satisfied the "good faith and due diligence" exception, despite the fact that Pennsylvania had not argued that this exception applied.*fn7

On remand, the Board found the Secretary's interpretation of the "good faith and due diligence" exception as restricted to circumstances outside the state's control to be a reasonable construction of the statute. The Board determined that Pennsylvania's failure to complete the 1985 reviews was "attributable to an inherent weakness in its established system for recipient identification," namely its reliance on information provided by each facility and its failure "to employ [any] mechanism whatsoever to double check the accuracy of that information." App. at 117. Pennsylvania appealed, and the district court affirmed the Board's finding that the "good faith and due diligence" exception did not apply. The court also held that Pennsylvania's inadequate showing for 1985 was not due to technical failings, but was the result of "poor administration." App. at 127. It granted summary judgment to the Secretary, and Pennsylvania filed a timely appeal. We have jurisdiction pursuant to 28 U.S.C. § 1291 (1988).


Discussi ...

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