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New Jersey Hosp. Ass'n v. Waldman

December 29, 1995




Appeal From the United States District Court for the District of New Jersey (D. C. Civ. No. 95-cv-1260)

Before: SLOVITER, Chief Judge, ALITO and SEITZ, Circuit Judges.

SEITZ, Circuit Judge.

Argued September 15, 1995

Filed: December 29, 1995


The New Jersey Hospital Association ("NJHA") instituted this action challenging the reduction of Medicaid reimbursement for general inpatient hospital services as set by the New Jersey Department of Human Services, Division of Medical Assistance and Health Services. NJHA seeks declaratory and prospective injunctive relief under 42 U.S.C. Section(s) 1983 claiming certain New Jersey state officials violated the procedural and substantive requirements of the Boren Amendment to the Medicaid Act, 42 U.S.C. Section(s) 1396a(a)(13)(A), in setting the new payment rates effective March 6, 1995. Here, NJHA appeals from the district court's order denying its application for a preliminary injunction seeking to invalidate the new rates. The district court had jurisdiction under 28 U.S.C. Section(s) 1331 and 42 U.S.C. Section(s) 1983. We have jurisdiction pursuant to 28 U.S.C. Section(s) 1292(a)(1).


A. The Parties

NJHA is a non-profit association representing seventy-one of the eighty-four hospitals in New Jersey that receive Medicaid reimbursement from the State of New Jersey. The defendants in this action are William Waldman, the Commissioner of the Department of Human Services ("DHS"), Velvet Miller, the Director of the Division of Medical Assistance and Health Services of DHS, and Leonard Fishman, the Commissioner of the New Jersey Department of Health ("DOH"). The defendants have been sued in their official capacities. DHS is the state agency responsible for New Jersey's Medicaid Program, and the Division of Medical Assistance and Health Services is the office within DHS that administers the program. DOH assists DHS with Medicaid rate-setting. In this opinion, the defendants will be referred to as "New Jersey" or "the State."

B. Medicaid and the Boren Amendment

The Medicaid program "`establishes a joint federal and state cost-sharing system to provide necessary medical services to indigent persons who otherwise would be unable to afford such care.'" Temple Univ. v. White, 941 F.2d 201, 205 (3d Cir. 1991) (quoting Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1309 (2d Cir. 1991)). State participants receive federal Medicaid funds in return for administering a Medicaid program. They are obligated to comply with certain federal statutory and regulatory requirements in developing their programs. See West Va. Univ. Hosps., Inc. v. Casey, 885 F.2d 11, 15 (3d Cir. 1989).

Historically, states paid hospitals the "reasonable costs" of services actually provided. See Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 507 n.7 (1990). This amounted to payment for the actual costs incurred by hospitals in providing care to Medicaid recipients, regardless of disparities in costs or efficiencies among hospitals. However, in 1981 Congress enacted the Boren Amendment to the Social Security Act, which gave state participants the ability to alter the Medicaid repayment methodology. States were given more flexibility to formulate their rates. Programs could include statewide or classwide rates, rates based on a prospective cost, or incentive provisions to encourage efficiency. Flexibility was ensured by limiting federal oversight. See id. at 507. The Amendment "replaced the `reasonable cost' standard with the current standard of `reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities.'" West Va. Univ. Hosps., 885 F.2d at 15.

In order to qualify for federal financial support, a participating state must submit a "State Plan" or a change in payment methods and standards to the Heath Care Financing Administration of the Department of Health and Human Services ("HCFA"). See 42 U.S.C. Section(s) 1396a(a). The state must make findings and give assurances to the HCFA that its program comports with federal requirements. Id. Such findings and assurances also must be made whenever a state changes its payment methods and standards. See 42 C.F.R. Section(s) 447.253(a) & (b).

C. New Jersey's Medicaid Program

1. 1993 Repayment Methodology

In 1993, New Jersey formulated a standardized, predetermined, statewide payment amount for over 700 separate Diagnosis Related Grouping's ("DRGs"). DRGs represent groups of patients that are clinically similar to one another and relatively homogeneous with respect to resource utilization. For each hospital serving the state, rates were set for each DRG and a statewide "mean" for each DRG was established. To determine the "mean," the State used 1988 hospital costs and 1991 billing data. Inflation factors were used to update 1988 hospital costs to 1993 levels. In addition, the mean-based DRGs were increased by a 2.5% "operating margin" factor to create a margin surplus. DRG payments included a capital cost allowance and a 9.15% adjustment designed to ease the transition from the pre-1993 system, which provided higher payments. The payment that a hospital received for a "medicaid discharge" depended on the DRG into which it fell.

2. Revision of the 1993 System

In early 1994, New Jersey decided to overhaul its 1993 Medicaid payment system. Basically, the new Medicaid rate-setting methodology made four changes to the previous repayment system. Payments of the 9.15% transition adjustment, 2.5% operating margin, and capital cost allowance were eliminated. The fourth change consisted of a "median-plus 5%" DRG standard in place of the 1993 "mean-based" DRG standard. Once again, 1988 hospital costs, adjusted for inflation, were the benchmarks for each DRG.

D. District Court's Opinion

NJHA's complaint seeks, inter alia, an injunction prohibiting use of the new rate-setting methodology, as well as a requirement that the State return to the methodology used in the 1993 system. This action presently is pending before the district court. NJHA also sought a preliminary injunction. After a hearing thereon, the district court ruled that substantial compliance had been shown with respect to both the procedural and substantive requirements of the Boren Amendment. On that basis, it found that NJHA failed to demonstrate a reasonable likelihood of success on the merits. It thereupon denied a preliminary injunction solely on that ground. NJHA appeals.


A. Preliminary ...

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