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New Jersey Primary Care Association Inc. v. State of New Jersey Department of Human Services

United States Court of Appeals, Third Circuit

July 9, 2013

STATE OF NEW JERSEY DEPARTMENT OF HUMAN SERVICES; JENNIFER VELEZ, ESQ., in her Official Capacity as Commissioner of the State of New Jersey Department of Human Services; STATE OF NEW JERSEY DEPARTMENT OF HUMAN SERVICES, DIVISION OF MEDICAL ASSISTANCE AND HEALTH SERVICES; VALERIE HARR, in her Official Capacity as Director of the Division of Medical Assistance and Health Services, Appellants

Argued: March 20, 2013


Caroline M. Brown, Esq. (Argued) Ze-wen J. Chen, Esq. Covington & Burling, LLP Counsel for Appellants.

Khatereh S. Ghiladi, Esq. (Argued) Rupinderjit S. Grewal, Esq. Feldesman Tucker Leifer Fidell, LLP Counsel for Appellee.

Before: FUENTES, CHAGARES and BARRY, Circuit Judges


BARRY, Circuit Judge

Under the federal Medicaid statute, 42 U.S.C. § 1396 et seq., states participating in Medicaid and implementing a managed care environment are obligated to make, at least every fourth month, supplemental payments (known as “wraparound payments”) to federally-qualified health centers (“FQHCs”) in an amount equal to the difference between a predetermined rate set by the Medicaid statute multiplied by the number of Medicaid patient encounters, and the amount paid to FQHCs by managed care organizations (“MCOs”)[1] for all Medicaid”covered patient encounters. In 2011, concerned that gaps in the FQHCs' claim verification process led to significant overpayments, the New Jersey Department of Human Services (the “State”) changed its methodology for calculating wraparound payments. Under the new methodology, instead of basing the payments solely on the number of Medicaid encounters and their total MCO receipts as self”reported by FQHCs, the State would instead rely on data reported by MCOs absent receipt of certain additional data from the FQHCs. Because MCOs only report encounters that they have approved and paid, prior MCO payment would become a prerequisite to State wraparound reimbursement under the new system.

Plaintiff, the New Jersey Primary Care Association (“NJPCA”), a nonprofit organization under § 501(c)(3) of the Internal Revenue Code and comprised of New Jersey FQHCs, brought the instant action claiming that this change violated the FQHCs' right to due process and federal and state law governing Medicaid wraparound payments, resulting in considerable budget shortfalls. The State moved for summary judgment; NJPCA cross”moved for summary judgment and moved for a preliminary injunction demanding the immediate payment of the amount the State would have paid under the preexisting system and enjoining the State from implementing the change. The District Court granted NJPCA's motions for summary judgment and a preliminary injunction, and denied the State's motion. The State now appeals. We will affirm in part, and reverse in part.


A. Statutory Framework

Title XIX of the Social Security Act authorizes federal grants to states for medical assistance to qualified low”income persons. Harris v. McRae, 448 U.S. 297, 301 (1980). The Medicaid program is jointly financed by federal and state governments but is administered entirely by the states. States that elect to participate in the program must comply with the federal Medicaid statute and implementing regulations promulgated by the Secretary of Health and Human Services (“HHS”). Pa. Pharmacists Ass'n v. Houstoun, 283 F.3d 531, 533 (3d Cir. 2002) (en banc). Among the federal requirements is the requirement that the state adopt an implementation “plan” approved by the federal government, consisting of a “comprehensive written statement submitted by the [state] agency describing the nature and scope of its Medicaid program.” 42 C.F.R. § 430.10; see also 42 U.S.C. § 1396. The federal government will review the proposal and “determine whether the plan can be approved to serve as a basis for Federal financial participation . . . in the State program.” 42 C.F.R. § 430.10. State plans must be amended whenever necessary to reflect changes in the federal law or “[m]aterial changes in State law, organization, or policy, or in the State's operation of the Medicaid program.” Id. § 430.12(c)(ii).

States participating in Medicaid must also offer nonprofit federally”qualified health centers—the FQHCs—known as community health centers, which receive federal grants under Section 330 of the Public Health Service Act (“PHSA”) and provide primary and preventive care to medically underserved communities. 42 U.S.C. § 254b. Where available, such as for Medicaid”eligible encounters, FQHCs must seek reimbursement for their expenses. Id. § 254b(k)(3)(F). The federal Medicaid statute specifically regulates FQHC reimbursement for services provided to Medicaid beneficiaries. Id. § 1396a(bb)(1). Under the Medicaid program, reimbursement payments owed by each participating state to FQHCs are assessed through what is known as the Prospective Payment System (“PPS”). Id. § 1396a(bb)(1)” (3). Stated simply, the FQHCs' reimbursement from the state is calculated by multiplying the number of Medicaid encounters by the average reasonable costs of serving Medicaid patients in 1999 and 2000 (the “PPS rate”), adjusted yearly for inflation by a factor known as the Medicare Economic Index. Id. The system creates risks of both under” and over”payment relative to actual costs. If FQHCs control their costs below the PPS reimbursement, they stand to earn a profit. If costs exceed the PPS reimbursement, FQHCs suffer a loss. [2]

Like many other states, New Jersey has adopted a managed care program, pursuant to which it contracts with managed care organizations—the MCOs—that arrange for the delivery of health care services to individuals who enroll with them. Because MCOs do not typically operate their own facilities, MCOs subcontract with providers, including FQHCs, to provide medical services. In New Jersey, MCOs receive prospective payments from the State based on a fixed monthly fee per patient and the anticipated use of services (the “capitation payment”). The MCOs, in turn, contract with FQHCs to provide medical services, and reimburse FQHCs for Medicaid”covered encounters out of their capitation funds. Though the costs are agreed upon, under the Medicaid statute, MCOs must make to FQHCs at least “the level and amount of payment which the [MCO] would make for the services if the services were furnished by a provider which is not a [FQHC].” Id. § 1396b(m)(2)(A)(ix).

A frequent problem, and the subject of the dispute before us, occurs in a managed care system: the contracted”for payment from the MCO to the FQHC for a Medicaid”covered patient encounter is often less than the amount the FQHC is entitled to receive under the PPS. In this situation, the Medicaid statute requires the state to make a supplemental payment—the wraparound payment—at least once every four months, to make up the difference between the PPS rate and the MCO payment. § 1396a(bb)(5)(B). This payment must be “equal to the amount (if any) by which the [per”visit rate] exceeds the amount of the payments provided under the [managed care] contract.” 42 U.S.C. §1396a(bb)(5)(A). In essence, then: FQHCs are entitled to two discrete payments for Medicaid”covered encounters, the direct payment from the MCO, and the wraparound payment from the state to supplement the former. The MCO payment plus the wraparound payment equals the PPS reimbursement. Critically here, the Medicaid statute does not mandate any particular methodology for calculating the wraparound payment, and different states have implemented different procedures. Compare Three Lower Cntys. Cmty. Health Servs., Inc. v. Maryland, 498 F.3d 294, 299 (4th Cir. 2007) (describing Maryland's practice whereby the FQHCs file claims to MCOs, and MCOs validate and process the claims and report them to the state), with Ohio Admin. Code § 5101:3”28”07 (wraparound payments are calculated based on claim data submitted to states directly by FQHCs).

The Medicaid statute also requires that states “provide for procedures of prepayment and postpayment claims review, including review of appropriate data with respect to the recipient and provider of a service and the nature of the service for which payment is claimed, to ensure the proper and efficient payment of claims and management of the program.” 42 U.S.C. § 1396a(a)(37)(B). The Centers for Medicare and Medicaid Services (“CMS”), the federal agency responsible for overseeing the Medicare and Medicaid programs, issues the State Medicaid Manual, which interprets federal law and regulations to require “supporting documentation [that] includes as a minimum the following: date of service, name of recipient, Medicaid identification number, name of provider agency and person providing the service, nature, extent, or units of service, and the place of service.” State Medicaid Manual § 2500.2, at 2-112, available at

B. New Jersey Medicaid and Calculation of Wraparound Payments

Following implementation of the PPS in 2000, New Jersey amended its state plan to read as follows:

After the final PPS encounter rates effective January 1, 2001 and July 1, 2001 are calculated, a financial transaction will be processed for the difference between the interim and final PPS encounter rate for encounters provided to Medicaid managed care beneficiaries. Once the PPS rates effective January 1, 2001 and July 1, 2001 have been finalized, all subsequent quarterly wraparound payments will be reconciled at 100% of the PPS encounter rate.

N.J. State Plan, attach. 4.19-B, at 9(c)(10-11). Though the plan amendment was approved by CMS, it does not specify how the State is to verify eligible claims or calculate wraparound payments, leaving this instead to the New Jersey Medicaid statute, N.J. Stat. Ann. § 30:4D-1, et seq., and subsequent regulations.

The New Jersey Medicaid statute requires providers to “maintain such individual records as are necessary to fully disclose the name of the recipient to whom the service was rendered, the date of the service rendered, the nature and extent of each such service rendered, and any additional information, as the department may require by regulation.” N.J. Stat. Ann § 30:4D-12(d). State regulations specify that health care providers agree to “furnish information for . . . services as the program may request.” N.J. Admin. Code § 10:49-9.8(b)(2). The regulations also require FQHCs to “maintain an accounting system, which identifies costs in a manner that conforms to generally accepted accounting principles and maintain documentation to support all data.” Id. § 10:66-1.5(d)(1)(x). The State is authorized to “conduct either on-site or desk audits of cost reports, including financial, statistical, and medical records, ” id. § 10:66-1.5(d)(1)(x)(4), and in connection with such, FQHCs are required to “submit other information (statistics, cost and financial data) when deemed necessary by the Department.” Id. § 10:66-1.5(d)(1)(x)(5).

The New Jersey regulations implementing the quarterly wraparound payment system provide more specific details regarding Medicaid reimbursement and FQHC reporting requirements:

[A]ll quarterly wrap”around reports shall be reconciled at 100 percent of the difference between the final rate and the managed care receipts received for services provided to Medicaid . . . managed care beneficiaries. In the event of an underpayment, the Division shall reimburse the provider 100 percent of the amount due. In the event of an overpayment, the provider shall reimburse the Division 100 percent of the overpayment within 30 days of the due date of the Managed Care Wrap”around Report.

Id. § 10:66-1.5(d)(1)(viii)(4). FQHCs are required to submit two quarterly reports to the New Jersey Department of Human Services—one indicating the number of Medicaid”eligible encounters, id. at § 10:66-1.5(d)(1)(viii)(6), and another indicating “[a]ll Medicaid . . . managed care payments received by the FQHC for the quarter, including capitation, fee-for-service, supplemental or administration fund, and any other managed care payments, ” id. at § 10:66-1.5(d)(1)(viii)(7). FQHCs report these Medicaid encounters and the MCO receipts on reports called the “Medicaid Managed Care Encounter Detail Report” and the “Medicaid Managed Care Receipts Report.” Id. at § 10:66-4, App'x. E. These reports do not require a claim”by”claim breakdown of the data; rather, they require FQHCs only to report the aggregate quarterly encounters and aggregate MCO receipts.

Up until the third quarter of 2011, to calculate the quarterly wraparound payment, the State relied solely on the self-reported Medicaid Managed Care Encounter Detail and the Medicaid Managed Care Receipts reports. Using the FQHCs' reports, the State would multiply the number of Medicaid encounters by the PPS rate, and then subtract from this figure aggregate MCO receipts. In practice, this meant that each FQHC would report all Medicaid-covered encounters on the worksheet, regardless of whether an MCO actually paid its contracted portion of the particular encounter.Therefore, for reported encounters left unpaid by an MCO, ...

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