HHS Approval of State's Cuts to Medicaid Reimbursement Rate Ruled Arbitrary & Capricious: 3d Circuit

In 2008, as required by federal law, Pennsylvania submitted proposed amendments to its State Medicaid Plan for approval by the U.S. Health and Human Services (HHS).  The amendments created an across-the-board 9% reduction in the per diem reimbursement to nursing homes for care of residents eligible for Medicaid.  The amendments were approved by HHS. 

In 2009, a group of private nursing homes in Pennsylvania filed suit challenging the cuts, arguing the "BAF" method used to calculate the reductions failed to consider the impact of the cuts on quality of care, particularly after several years of cuts.  The nursing homes sought declaratory and injunctive relief against officials at the federal HHS and Pennsylvania Department of Public Welfare (DPW), as well as monetary relief.

On September 19, 2013, the Third Circuit granted partial relief to the nursing homes, concluding there was no record by which HHS could make a proper review of the modifed state plan.  The Court observed:

"Absent information on how the appropriated amount was determined, or a reasoned explanation for why that amount allows for rates that are 'consistent with' efficiency, economy, quality of care, and adequate access, DPW's description of the BAF methodology provides no insight into whether the [State Plan Amendment] complies with Section 30(A). The state gave no such information, and HHS did not request any. There are no studies or analyses of any kind in the record, and the only 'data' DPW provided was a spreadsheet comparing rates under the proposed SPA with those paid the previous year. HHS therefore had to base its approval decision solely on the proposed methodology itself, a comparison to the previous year's rates, and DPW's unsupported assertion that the new BAF would permit 'payment rate increases sufficient to assure that consumers will continue to have access to medically necessary nursing facility services.'”

While recognizing that state plans approved by federal agencies ordinarily warrant Chevron deference, the Third Circuit concluded deference was inappropriate in this instance. The court could not discern from the record a reasoned basis for the agency's decision and therefore the judges concluded HHS's "approval of the [2008 Amendments] was arbitrary and capricious under the APA."

Cuts to Medicaid reimbursement rates for nursing homes eventually affect residents, of course.  Could states that skip key steps in approval for other changes to State Plans also be subject to due process challenges?

For the Third Circuit's detailed and technical  decision, including reasons for its denial of monetary relief, see Christ the King Manor, Inc, et al v. Secretary of HHS.