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NEW JERSEY ASSN. OF HEALTH CARE FACILITIES

March 4, 1993

NEW JERSEY ASSOCIATION OF HEALTH CARE FACILITIES, INC., et al., Plaintiffs,
v.
ALAN J. GIBBS, et al., Defendants.



The opinion of the court was delivered by: JOHN C. LIFLAND

 I. INTRODUCTION

 II. THE PARTIES

 III. THE FEDERAL MEDICAID PROGRAM

 IV. THE NEW JERSEY MEDICAID REIMBURSEMENT SYSTEM

 A. GENERAL CONSIDERATIONS

 B. CALCULATION OF NURSING PAYMENTS

 C. ADVISORY STANDARDS FOR NURSE STAFFING

 D. INFLATION ADJUSTMENTS

 V. PRELIMINARY INJUNCTION STANDARDS

 VI. PROCEDURAL COMPLIANCE WITH THE BOREN AMENDMENT

 A. THE PROCEDURAL LAW

 B. THE FINDINGS REQUIREMENT

 C. THE ADEQUACY OF NEW JERSEY'S PROCEDURE

 VII. SUBSTANTIVE COMPLIANCE WITH THE BOREN AMENDMENT

 A. THE SUBSTANTIVE CHALLENGE

 B. THE EXPERTS AND THEIR ROLES

 C. PRESUMPTION OF VALIDITY

 D. COST-RATE ANALYSIS

 E. INDIVIDUAL COMPONENTS OF NEW JERSEY'S PLAN

 
i. NURSE STAFFING ANALYSIS
 
ii. CONTRACT NURSING COSTS
 
iii. INFLATION ADJUSTMENTS
 
iv. GEOGRAPHICAL WAGE EQUALIZATION

 VIII. IRREPARABLE HARM

 A. THE LEGAL STANDARDS

 B. PLAINTIFFS' ALLEGATIONS OF IRREPARABLE HARM

 C. ELEVENTH AMENDMENT CONSIDERATIONS

 IX. BALANCING OF HARDSHIPS AND THE PUBLIC INTEREST

 X. CONCLUSION

 OPINION

 RE: DENIAL OF PRELIMINARY INJUNCTION

 LIFLAND, District Judge

 I. INTRODUCTION

 1. Plaintiffs bring this action under 42 U.S.C. § 1983, alleging that defendants have deprived plaintiffs of rights secured under Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. (commonly referred to as the "Medicaid program"). Specifically, plaintiffs allege that defendants' Medicaid payment rates are not "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 . . . ." 42 U.S.C. § 1396a(a)(13)(A) (commonly) referred to as the "Boren Amendment"); Complaint at P 3. Plaintiffs also allege that defendants have failed to follow certain procedures required by the Boren Amendment. This Court has jurisdiction over plaintiffs' claims pursuant to 28 U.S.C. § 1331.

 2. Plaintiffs filed a motion for a preliminary injunction, seeking the following specific relief: (a) adjustment of the method for calculation reimbursement for nursing costs; (b) inclusion of the costs of contract nursing in the calculation of the limit on nursing costs: (c) modification of the State's salary region groupings: Id. use of a different inflation index in calculating rates: and (e) reimbursement of all allowable costs for all facilities that fall below the statewide median for such costs.

 3. The evidentiary record on the pending motion is extensive. Plaintiffs filed affidavits from representatives of each of the names plaintiff facilities as well as an affidavit from their expert witness, Dr. Barbara Manard ("Dr. Manard"), which was accompanied by a lengthy report prepared by Dr. Manard ("Manard Report"). Defendants filed declarations from Saul Kilstein ("Kilstein"), the Director of the New Jersey Division of Medical Assistance and Health Services ("DMAHS"), the division of the New Jersey Department of Human Services responsible for administering and developing policy for the Medicaid program, Ann Kohler ("Kohler"), the Assistant Director of DMAHS, and defendants' expert witness. Dr. Gretchen Engquist ("Dr. Engquist"). These affidavits and declarations were accompanied by numerous exhibits. The lengthy depositions of both experts and the representatives of the names plaintiffs were also filed as part of the record. A six-day hearing on the preliminary injunction motion was held at which the two experts testified and presented additional exhibits. The parties have also provided the Court with oral argument, extensive briefing and supplemental correspondence relating to relevant cases decided subsequent to oral argument. On the basis of this entire record, the Court finds that the plaintiffs are not entitled to a preliminary injunction.

 II. THE PARTIES

 4. The names plaintiffs in this class action are two non-profit associations of nursing facilities and four individual facilities. Three of the names plaintiff facilities are non-profit facilities: Greenwood House Home for the Jewish Aged, Inc. ("Greenwood House"); Presbyterian Homes of Northern New Jersey, Inc., d/b/a Robert Wood Johnson, Jr., ("Robert Wood Johnson"); and Mega Health Care Center, Inc., d/b/a Llanfair House ("Llanfair House"). The fourth facility, Holiday Medical Center, d/b/a Medicenter of Lakewood ("Medicenter"), is a for-profit facility. The proportion of for-profit and non-profit facilities among the names plaintiffs is not reflective of the industry as a whole; approximately two-thirds of New Jersey nursing homes are for-profit. Hearing Transcript ("Tr.") at 3.84-3.85.

 By Memorandum and Order dated March 11, 1991, the Court granted plaintiffs' motion for class certification under Fed. R. Civ. P. 23(a) and 23(b)(2). The class is comprised of all proprietary and not-for-profit nursing facilities which render care to beneficiaries of the New Jersey Medicaid program.

 III. THE FEDERAL MEDICAID PROGRAM

 5. The Medicaid program is a joint federal-state program designed to provide medical assistance to individuals "whose income and resources are insufficient to meet the cost of necessary medical services." 42 U.S.C. § 1396. Although a state is not required to participate in the program, once a state has been accepted into the program it must comply with the Medicaid statute and federal regulations. Harris v. McRae, 448 U.S. 297, 301, 65 L. Ed. 2d 784, 100 S. Ct. 2671 (1980).

 6. Payment rates for nursing facilities are governed by an amendment to the Medicaid Act known as the Boren Amendment. Enacted as part of the Omnibus Budget Reconciliation Act of 1980 ("OBRA '80"), Pub. L. No. 96-499, § 962(a), 94 Stat. 2599, 2650 (1980), the Amendment requires that states pay rates:

 
which the State finds, and makes assurances satisfactory to the Secretary [of the Department of Health and Human Services], 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 law, regulations, and quality and safety standards . . . .

 42 U.S.C. § 1396a(a)(13)(A).

 7. In 1987, as part of the Omnibus Budget Reconciliation Act of 1987 ("OBRA '87"), Congress enacted extensive nursing home reform legislation. Pub. L. No. 100-203, § 4211, 101 Stat. 1330-160. OBRA '87 mandated that nursing facilities meet numerous requirements relating to patient care, staffing levels and training, facility administration, resident assessment and related plans for care, and residents' rights generally. All of these requirements were designed "to attain or maintain the highest practicable level of physical, mental and psychosocial well-being of each resident." Id., § 4211(a), 100 Stat. 1330-185. States were required to bring their Medicaid programs into compliance with these new requirements no later than October 1, 1990. 42 U.S.C. § 1396r.

 8. OBRA '87 also amended the Boren Amendment to require that reimbursement rates for nursing facilities take into account the costs of complying with the specific new staffing and service provisions established by OBRA '87. Pub. L. No. 100-203, § 4211(b)(1)(A), 100 Stat. 1330-203 (1987).

 9. In the Omnibus Budget and Reconciliation Act of 1990 ("OBRA '90"), Congress amended the 1987 amendment to the Boren Amendment to specify that states include "the costs of services required to attain or maintain the highest practicable physical, mental, and psychosocial well-being of each Medicaid resident" when taking into account the costs of complying with OBRA '87. Pub. L. No. 1010-508, § 4801(e)(1)(A), 104 Stat. 1388-215 (1990). With the addition of the 1987 and 1990 amendments, the Boren Amendment now reads:

 42 U.S.C. § 1396a((1)(13)(A).

 10. The Secretary of Health and Human Services has delegated responsibility for administering the Medicaid program to the Health Care Financing Administration ("HCFA"). Under HCFA regulations, and consistent with the Medicaid statute, states wishing to participate in the Medicaid program must submit a "state plan" describing the "methods and standards" by which providers of Medicaid services will be reimbursed. 42 C.F.R. § 447.252(b).

 11. In order to receive approval for a state plan, or a change in payment methods and standards, states must submit certain assurances to HCFA. These assurances must be supported by "findings," which need not be submitted to HCFA. However, findings must be made whenever a state changes its methods and standards, and not less often than annually. 42 C.F.R. § 447.253(b). The required finding at issue in this case is one that closely tracks the substantive standard of the Boren Amendment: that payment rates "are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers to provide services in conformity with applicable State and Federal laws, regulations and quality and safety standards." 42 C.F.R. § 447.253(b)(1).

 12. OBRA '87 required each state to submit a Medicaid plan amendment no later than April 1, 1990 "to provide for an appropriate adjustment in payment amounts" for services which were required under that statute to be furnished after October 1, 1990. Pub. L. No. 100-203, § 4211(b)(2), 100 Stat. 1330-203 (1987). With respect to the plan amendments required by OBRA '87, the Secretary of Health and human Services was required "to review" each state's OBRA '87 amendment "for compliance" with the requirements of the Boren Amendment, as amended by OBRA '87, and to approve or disapprove the amendment by September 30, 1990. Id. at 1330-203-204.

 IV. THE NEW JERSEY MEDICAID REIMBURSEMENT SYSTEM

 A. General Considerations

 13. Reimbursement rates for nursing facilities in new Jersey are set using a methodology known as the Cost Accounting and Rate Evaluation ("CARE") system. Kilstein Decl. at P 8. The CARE methodology is codified at N.J.A.C. § 10:63-3.1 et seq.. The CARE system is a prospective system, which means that rates are determined in advance of the rate year in which costs are actually incurred. If an individual facility's costs exceed its prospective rate, the facility must absorb the difference; on the other hand, if the facility maintains its costs below its reimbursement rate, it may keep the difference.

 14. Under the CARE system, reimbursement rates are recalculated annually on the basis of each facility's prior year costs. Kilstein Decl. at P 14. Facilities must submit costs reports to the Health Facilities Rate Setting Unit of the New Jersey Department of Health within 90 days of the close of their individual fiscal years. *fn1" The period for which costs are reported is known as the facility's "base period." Base period costs are used in establishing the prospective per diem rates for each facility for the year beginning six months after the end of month gap between the end of the base year and the beginning of the rate year is necessary to compile the cost reports, process them and calculate the rates. Tr. at 1.48. For most facilities in New Jersey, the report year is the calendar year, id., and the rate year therefore runs from July 1 to June 30.

 15. Cost reports are subjected to a "desk review," a process during which adjustments are made for arithmetical errors, for reclassification of costs from one category to another, or for costs which are clearly unallowable. Tr. at 1.46. The desk review is not designed to remove all costs that might be disallowed in the course of a full field audit. Tr. at 1.106, 3.6, 4.86-4.87; Engquist Written Testimony at P 11.

 16. Following the desk review, adjusted data on the costs reports are entered into a computer system known as "CSNURSE;" the CSNURSE system is used to analyze reported costs and calculate limits or screens on the reported base period costs. Tr. at 1.106, 5.7.

 17. The CARE system recognized two broad categories of costs: operating costs and capital costs. Operating costs are reported in 16 separate cost categories. The 16 operating cost categories consistent of the following: raw food, non-food general services, legal fees, administrator/management, assistant administrator, utilities, property insurance, maintenance and replacement, nursing compensation, medical director, patient activities, pharmaceutical consultant, non-legend drugs, medical supplies, social services, and oxygen. N.J.A.C. § 10:63-3.1 et seq. Limits or "screens" for 10 of the 16 operating cost categories are set at the median cost plus a certain percentage above the median. Kohler Decl. at P 11. The median is defined as that level at which half of the facilities have costs that are higher than the median and half have costs that are lower. Tr. at 1.57. The percentage of the median used to calculate the limit ranges from 100% to 150%, depending upon the cost category. The percentages used for those cost areas where the screen is established solely by percentage of the median are: assistant administrator (125%); raw food (120%); non-food general services (105%); medical director (110%); medical supplies (150%); patient activities (150%); social services (110%); non-legend drugs (110%); pharmacy consultant (110%); and oxygen (110%). N.J.A.C. § 10:63-3.1 et seq.. Limits established using the median are recalculated each year based on the facilities' prior year costs. Kilstein Decl. at P 14; Tr. a 4.36-4.37.

 18. In certain cost categories, the State combines the use of a median with other factors in calculating the reasonableness limits. Kilstein at P 16. One such category of particular importance in this case is the nursing cost category, which is discussed in greater detail below.

 19. Capital costs are reimbursed by means of a Capital Facilities Allowance ("CFA"). This payment is designed to reimburse facilities for such non-operating capital costs as depreciation, interest on indebtedness, amortization of lease-hold improvements, return on equity, and other costs associated with construction, purchase, alteration or leasing of property, buildings, and fixed equipment. Kilstein Decl. at P 32. In contrast to reimbursement for operating costs, the CFA is not calculated on the basis of annually reported costs but rather on the basis of the appraised value of the facility at the time the CARE system was implemented, or in the case of new Medicaid facilities, at the time of the facility's initial Medicaid certification. Kilstein Decl. at P 33.

 20. Facilities report depreciation costs even though such costs are not used in calculating the CFA. Double reporting of depreciation costs can occur if a facility includes as a depreciation expense a cost previously reported as a maintenance and replacement cost. Kilstein Decl. at P 36.

 21. The State makes several adjustments to reported costs before applying the reasonableness limits. Because of the 18-month lag between the commencement of the report year and the beginning of the rate year, the State adjusts the screened base period operating costs to account for inflation. Kilstein Decl. at P 14. New Jersey's inflation factor has two components: (a) the average hourly earnings of manufacturing employees in New Jersey, which comprises approximately 60% of the factor; and (b) the Consumer Price Index, which accounts for the remaining 40%. N.J.A.C. § 10:63-3.18.

 22. The State also makes adjustments in reported salaries in certain operating costs areas to reflect geographical wage differences. Kilstein Decl. at P 27. In connection with these adjustments, the State has been divided into three salary regions -- high, medium and low. Salary costs reported by the facilities are adjusted on the basis of an equalization factor determined by comparing the median salaries for nurses and general services personnel, excluding administrative employees, in each region to the median salaries for each geographical region. Kilstein Decl. at PP 28-29.

 23. Under the CARE system, facilities receive, in addition to a per diem rate based on reported Medicaid patient days, payments for "bed-hold." These are full per diem payments made to facilities to reserve a bed for up to 10 days for a Medicaid patient who is temporarily transferred to a hospital. Bed-hold payments increase facility revenue by an amount roughly equal to 2% of a total reported patient days. Kohler Decl. at P 30; Engquist Decl. at P 18.

 24. Facilities that incur higher costs because of unique needs can increase their level of reimbursement by applying for a "Schedule C" adjustment. Such adjustments are made to the cost data submitted by facilities that expect to incur increased costs in the prospective year in order to meet new legal requirements or to improve quality of care. Facilities that can demonstrate that their rates are inequitable or inadequate because of unique circumstances may also request a "hardship adjusment." Kilstein Decl. at P 38.

 25. The State's screen on nursing costs, which is central to this dispute, has three components: (a) a median wage standard; (b) an hourly component; and (c) a 115% enhancement factor. The median wage standard is determined by adjusting the statewide median wages for nursing personnel to account for geographic variations in wages. See N.J.A.C. § 10:63-3.3(a)(1)-(8). Wages are equalized for each of three categories of nursing staff: registered nurses ("RNs"), licensed practical nurses ("LPNs") and nurse aides. The hourly standard is based on mandatory licensure standards for nursing facilities as established by the New Jersey Department of Health ("DOH"). The 115% enhancement factor is designed to permit flexibility in staffing patterns. N.J.A.C. § 10:63-3.8(b)(6); Kilstein Decl. at PP 17-18.

 26. In 1990, after several years of study and deliberation in which the nursing home industry participated, the DOH implemented new nurse staffing requirements which generally increased the number of hours of nursing care required in order for facilities to be licensed by the State. The new licensure standards require an average of 2.5 hours of nursing care per day for each patient. *fn2" The new regulations also require that 20% of the required nursing hours be provided by LPNs or RNs, with the remaining 80% or nursing time provided by nurse aides. Defs. Exh. 2 at 323. Supplemental nursing hours are added for patients with one or more of seven special conditions known as "acuities." The additional nursing time ranges anywhere from .75 to 1.5 hours, depending on the severity of the condition. Kilstein Decl. at P 21. *fn3" Patients with more than one acuity receive cumulative additional hours of care for each acuity suffered. Kilstein Decl. at P 21: Defs. Exh. 2 at 333. The supplement acuity hours are revised every six months to reflect changes in patient needs. Kilstein Decl. at P 22; Tr. at 5.48. Because the new DOH licensure standards generally increased the number of nursing hours required of facilities, they also cause DMAHS to change its reimbursement formula so that facilities would be reimbursed for those additional required nursing hours, effective October 1, 1990.

 27. As noted above, OBRA '87 required states to submit by April 1, 1990 a plan amendment demonstrating adequate reimbursement for compliance with that statute's new patient care standards. This requirement coincided with implementation by the New Jersey Department of Health of the new mandatory nursing facility licensure standards and the correspond change in the reimbursement formula. Accordingly, on March 30, 1990, the State submitted written assurances and related information concerning the adequacy of the rates that would result under the revised CARE methodology. Kilstein Decl. at P 10; Defs. Exh. 2. HCFA approved the new plan on September 13, 1990. Kilstein Decl. at P 10; Defs. Exh. 3. Rates calculated under the new system went into effect October 1, 1990. Kohler Decl. at P 7. The change in the hourly standard for calculating nursing reimbursement increased the aggregate annual reimbursement by $ 14 million. Id.

 b. CALCULATION OF NURSING PAYMENTS

 28. In New Jersey, the nursing cost component accounts for approximately 40% of nursing facility costs. Tr. at 2.4.

 29. Unlike most of the other components of its payment system, DHS does not establish a single limit on nursing costs based upon a facility's total nursing costs per patient per day. Rather, DHS applies a series of limits in calculating the maximum payments for nursing services. Tr. at 1.73-1.75. Specifically, there are limits on (i) the maximum number of hours that will be reimbursed, (ii) the proportion of professional or skilled nursing time that will be recognized within the maximum hours reimbursed, (iii) the wage levels that will be recognized for each hour reimbursed, (iv) the categories of wages that will be recognized in computing the wage limits, and (v) the recognition of costs incurred by a facility employing the mandated director of nursing. Id.

 30. The first limit, i.e., maximum hours reimbursed, uses the minimum hours required to maintain facility licensure in the state as promulgated by DOH. N.J.A.C. § 10:63-3.8(b); Tr. at 1.73-1.74. Specifically, DOH has established a minimum of 2.5 nursing hours per day for each patient in a nursing facility, N.J.A.C. § 8:39-25.2(b), with additional hours allotted for acuities. Tr. at 1.75-1.77. Thus, under the first limit, DHS determines a facility's maximum reimbursable hours by multiplying the number of Medicaid patients by 2.5 and adding the additional hours for acuities. After adding the hours for the acuities, maximum reimbursable hours of nursing care per patient per day are about 2.63. Pl. Ex. 40 (Table 22); Tr. at 1.78.

 31. While DHS directly reimburses a maximum of approximately 2.63 hours per patient per day, nursing facilities in New Jersey provide an average of approximately 30.0 hours per patient per day. Pl. Ex. 40 (Table 22); Tr. at 2.6.

 32. Under the second limit, the maximum hours of care that DHS will reimburse are divided by staff category. Under the DOH licensure regulations, 20% of the hours must be provided by professional licensed personnel, i.e., RNs and LPNs, and the remaining 80% may be provided by nurse aides. See N.J.A.C. § 8:39-25.2(f); Tr. at 1.74. As with total hours, DHS uses these staffing requirements as a ceiling. Tr. at 1.73-1.74. For example, for a patient with no acuities, DHS will recognize a maximum of 2.5 hours of care, with a maximum of 20% of that care, or 30 minutes, provided by licensed personnel.

 33. The DOH licensure regulations also require that facilities with more than 150 beds must have at least one RN on duty at all times, whereas facilities with fewer than 150 beds need only have an RN on duty for one eight-hour shift per day. N.J.A.C. § 8:39-25.2(e). DHS likewise uses these requirements as a ceiling on reimbursable RN hours.

 34. On average, the combined effect of these staffing ceilings is that maximum reimbursement for nursing, including acuities, is based on the following staffing pattern: RN (.13 hours); LPN (.40 hours); nurse aide (2.10 hours). Pl. Ex. 40 (Table 11). The actual staffing patterns of facilities in New Jersey are as follows: RN (.50 hours); LPN (.45 hours); nurse aid (1.99 hours). Id.

 35. The third limit is the hourly wage rate for each staff category. Determination of this limit begins with a calculation of the median wage for such staff category. This figure, as adjusted, *fn4" is multiplied by 115% to establish the hourly wage rate limit for each staff category. N.J.A.C. § 10:63-3.8(b)6. This amount is further adjusted to account for the salary differential for the geographic region in which the facility is located. N.J.A.C. § 10:63-3.8(b)4. *fn5" The resulting hourly wage rate in each staff category is multiplied by the maximum nursing hours in that category. The sum of the amounts for each category represents the screen. A facility's payment for nursing services is based on the lower of its actual nursing costs or the screen.

 36. The fourth limitation pertains to the treatment of nursing labor obtained on a contract basis. Because of nurse shortages and other factors, facilities periodically obtain nursing services on a contract basis from nursing agencies or "pools" in order to maintain adequate staffing. Lewin/ICF Report at 34-39; Tr. at 1.74. *fn6" The cost of such contracted labor significantly exceeds the wages paid to salaried staff. id. In calculating the hourly wage rate screen DHS does not include the hourly amounts reported by facilities for labor obtained on a contract basis from nurse staffing agencies. Tr. at 1.74. DHS does reimburse for contract nursing costs, but the lower rate applicable to salaried nurses.

 37. The fifth limitation relates to the costs incurred by a facility in employing a director of nursing. Under DOH regulations, all facilities must have a director of nursing. N.J.A.C. § 8:39-25.1(a). In addition, the State requires that facilities with 150 or more licensed beds have an assistant director of nursing who is an RN. N.J.A.C. § 8:39-25.2(c). As the role of the director of nursing is supervisory, see N.J.A.C. § 8:39-25.1, most directors of nursing have only limited direct patient care responsibility. Tr. at 5.17. While facilities are required to have a director of nursing, there is nothing in the calculation of the nursing screen that directly reflects the non-patient care portion of this cost. Tr. at 1.75. Accordingly, the computation of maximum reimbursable hours under the nursing screen does not account for the mandatory, or non-patient care, duties performed by the director of nursing. Id.

 Based on the five limitations applied to the nursing cost center, plaintiffs assert that only 20-35% of facilities receive payments for nursing services that are adequate to cover their nursing services costs. See, e.g., Pl. Ex. 6 (Part III, Section 3c, Table 1); Defendants' Exhibit ("Def. Ex.") 11; Tr. at 5.48-5.49; Lewin/ICF Report at 58.

 C. THE ADVISORY STANDARDS FOR NURSE STAFFING

 38. In addition to the minimum hours required for licensure, the DOH regulations also contain "Advisory Standards" for nurse staffing. N.J.A.C. § 8:39-26.1 et seq.. The preamble to the proposed DOH staffing regulations identified the Advisory Standards as a "major innovation of licensure reform." 20 N.J. 469(a), 470 (1988). The standards "are intended to . . . encourage facilities and their staff to do more than merely meet minimal standards in providing care to patients." Id. While the Advisory Standards for nursing contain several elements, as a general matter, nursing hours per patient per day are 10% higher than under the minimum standards (i.e., 2.75 hours v. 2.5) and assign a higher proportion of that time to licensed nursing personnel (i.e., 30% v. 20%). Under the Advisory Standards, a patient would receive at least 50 minutes per day of professional nursing time as opposed to the 30 minutes provided under the minimum standards. The "unit staffing" Advisory Standard would further increase the recommended amount of professional nursing time. See N.J.A.C. § 8:39-26.3(e). Facilities in New Jersey on average provide about 59 minutes of professional nursing time per patient per day. Pl. Ex. 40 (Table 22).

 D. INFLATION ADJUSTMENTS

 39. DHS uses an inflation factor to adjust the prospective rates (excluding certain capital items) from the midpoint of the base (cost reporting) period to the midpoint of the rate year. *fn7" The inflation factor used by the State is based upon a weighted calculation of two indices:

 
(1) Average hourly earnings of manufacturing employees in New Jersey as published by the Bureau of Labor Statistics (weighted at 60%); and
 
(2) The Consumer Price Index as published by the Bureau of Labor Statistics (weighted at 40%).

 N.J.A.C. § 10:63-3.18; see generally Manard Affidavit at PP 1-5.

 V. PRELIMINARY INJUNCTION STANDARDS

  40. Under relevant Third Circuit precedent, a district court must consider four factors in ruling on a motion for preliminary injunctive relief. Initially, "the moving party must demonstrate both a likelihood of success on the merits and the probability of irreparable harm if relief is not granted." Morton v. Beyer, 822 F.2d 364, 367 (3d Cir. 1987) (emphasis in original). In addition, when relevant, the Court should consider the possibility of harm to other interest persons from the grant or denial of the injunction and the public interest. Id.; Hoxworth v. Blinder Robinson & Co., Inc., 903 F.2d 186, 197-198 (3d Cir. 1990). "Only if the movant produces evidence sufficient to convince the trial judge that all four factors favor preliminary injunctive relief should an injunction issue." Opticians Ass'n of America v. Independent Opticians of America, 920 F.2d 187, 192 (3d Cir. 1990); ECRI v. McGraw-Hill, Inc., 809 F.2d 223, 226 (3d Cir. 1987).

  41. Plaintiffs allege that defendants have violated both procedural and substantive provisions of the Boren Amendment. See generally, Wilder v. Virginia Hospital Ass'n, 496 U.S. 498, 110 S. Ct. 2510, 110 L. Ed. 2d 455 (1990). The substantive provisions entitle providers to rates that are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities in order to provide care and services in compliance with state and federal standards. Id. The procedural provisions entitle providers to enforce the State's obligation to make the assurances and findings required by the Boren Amendment. Plaintiffs contend that the State has violated both of these rights, entitling them to preliminary injunctive relief.

  VI. DEFENDANTS' COMPLIANCE WITH THE PROCEDURAL PROVISIONS OF THE BOREN AMENDMENT

  A. The Procedural Law

  42. As noted supra, the Medicaid statute and its implementing regulations require a state Medicaid agency to make findings regarding the adequacy of nursing facility payment rates whenever the state agency amends its methods and standards, but not less often than annually. 42 U.S.C. § 1396a(a)(13)(A); 42 C.F.R. § 447.253(b). The state is required to submit assurances to the Secretary only when its makes a change in its payment methods or standards. 42 C.F.R. § 447.253(a).

  43. In Amisub (PSL) v. State of Colorado Department of Social Services, 879 F.2d 789 (10th Cir. 1989), the Tenth Circuit first articulated what has now become the accepted test for procedural compliance under the Boren Amendment. The State must, at a minimum, make findings which identify and determine: (i) efficiently and economically operated facilities; (ii) the costs that must be incurred by such facilities; and (iii) payment rates which are reasonable and adequate to meet the costs of efficiently and economically operated facilities. Amisub 879 F.2d at 796, see also Nebraska Health Care Ass'n v. Dunning, 778 F.2d 1291, 1294 (8th Cir. 1981), cert. denied 479 U.S. 1063, 93 L. Ed. 2d 996, 107 S. Ct. 947 (1987); Missouri Health Care Association v. Stangler, 765 F. Supp. 1413, 1415 (W.D.Mo. 1991). The Third Circuit approved this formulation of the procedural standard in Temple University v. White, 941 F.2d 201, 209, n.10 NUMBER] (3d Cir. 1991).

  44. The Supreme Court has recognized the critical importance of the Boren Amendment's "findings" requirement, noting that such findings are "a necessary prerequisite to the subsequent requirement that the State provide 'assurances' to the Secretary." Wilder v. Virginia Hospital Ass'n, 496 U.S. 498, 110 S. Ct. 2510, 2519, 110 L. Ed. 2d 455 (1990); see also Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1314 (2d Cir. 1991) ("although procedural requirements may reduce some of the state's 'flexibility' in determining their own schemes of reimbursement, this is what the plain language of the statute requires").

  45. While the State is free to create its own method arriving at the required findings, this does not absolve the State from its obligation to make findings. Amisub, 879 F.2d at 797 ("mere recitation of the wording of the federal statute is not sufficient for procedural compliance"); see also Wilder, 110 S. Ct. at 2522-23 (State must judge the reasonableness of its rates against the objective benchmark of an efficiently and economically operated facility); Temple University, 941 F.2d at 209 (finding that State failed to satisfy procedural duties based on failure to conduct "empirical analysis" using objective criteria).

  46. The procedural requirements of the federal regulations are satisfied if the State has engaged in a "bona fide finding process" and has made assurances to HCFA based upon its findings. See Amisub, 879 F.2d at 797; Folden v. Washington State Department of Social and Health Services, 744 F. Supp. 1507, 1532, (W.D.Wash. 1990), aff'd 981 F.2d 1054 (9th Cir. 1992). The State's findings are not proper if the process, rather than being bona fide and objective, is merely an exercise to make the best case to support the State's rates, and the State considers only factors favorable to its position while failing to consider relevant factors that are unfavorable. See Multicare Medical Center v. State of Washington, 768 F. Supp. 1349, 1392 (W.D.Wash. 1991); California Hosp. Ass'n v. Schweiker, 559 F. Supp. 110, 117 (C.D. Cal. 1982), aff'd, 705 F.2d 466 (9th Cir. 1983); Wilder, 110 S. Ct. at 2522-23.

  47. It is important with respect to the procedural challenge to understand Congress' purposes in enacting the Boren Amendment. In addition to fostering cost-containment, the other principal purpose of the statute was to "reduce potentially stifling and expensive federal oversight of state methodologies." West Virginia University Hospitals, 885 F.2d 11, 23 (3d Cir. 1989). Under the Boren Amendment, states were to have "considerable freedom in pursuing ways of limiting Medicaid costs," id. at 23, with the federal role limited to the "minimum necessary to assure proper accountability." S. Rep. No. 139, 97th Cong., 1st Sess. 478 (1981), reprinted in 1981 U.S. Code Cong. & Adm. News 396, 744. HCFA has confirmed that Congress expected the agency to "develop ...


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