Lawsuit Attempts to Halt Steep Medicaid Cuts

By Barbara A. Gabriel

Larry Gage, president of the National Association of Public Hospitals and Health Systems, announces the UPL lawsuit at a press conference in Washington D.C., as (l to r) Lawrence McAndrews of the National Association of Children's Hospitals, Terry Miles of South Manhattan Network of NYC Health and Hospitals Corporation, Russ Sword of Ashley County Medical Center, and Tom Nickels of the American Hospital Association look on.

Ashley County Medical Center is in trouble. Just four years old, this public hospital in Crossett, Arkansas, is the only such facility in a county with 25,000 residents and an unemployment rate of more than 10 percent. Approximately 12 percent of the 46-bed hospital's revenue is dependent on Medicaid payments, a percentage that is increasing with Ashley's growing indigent patient population.

According to Russ Sword, the hospital's chief executive officer, Ashley County Medical Center has sustained annual operating deficits of between $300,000 and $400,000 over the past two fiscal years. If a new rule proposed by the Department of Health and Human Services (HHS) is implemented, Ashley County will sustain additional annual deficits of $200,000, endangering the existence of the hospital itself. "It will be one more nail in the coffin of this small hospital," says Sword.

The rule threatening Ashley County's only hospital also threatens the vital services and very existence of larger public hospitals across the country. It is a rule being challenged in court by a coalition of national medical and hospital associations including the AAMC, the National Association of Public Hospitals and Health Systems (NAPH), the American Hospital Association (AHA), the National Association of Children's Hospitals, and hospitals and hospital associations in California, Florida, Georgia, Arkansas, and New York. The suit, filed March 7 in the United States District Court for the Eastern District of Arkansas, seeks an injunction against an HHS rule that would reduce the Medicaid upper payment limit (UPL) from 150 percent to 100 percent of what Medicare would otherwise pay for services rendered by non-state government- owned or -operated hospitals. According to parties of the lawsuit, this rule will result in $27 billion in cuts to the Medicaid program over the next 10 years, cuts that Lynne Fagnani, senior vice president of NAPH, calls "devastating" to the services this country's public hospitals provide to the uninsured and medically indigent.

"Lawsuits are always the option of last resort," says Fagnani. "We looked at the legislative landscape and realized there weren't many vehicles to challenge this rule before its effective date." The rule represents a radical shift in the method HHS established for funding Medicaid services in public hospitals just over one year ago. In January 2001, HHS issued a rule, effective March 13, 2001, creating the UPL program specifically to protect public hospitals serving vulnerable patient populations.

At the time, HHS stated in the Federal Register notice of the new rule that it believed that "allowing higher Medicaid payments will fully reflect the value of public hospitals' services to Medicaid and the populations it serves. Public hospitals are established to ensure access to needed care in underserved areas, and often provide a range of care not readily available in the community." HHS went on to say, given the expensive specialized services provided by many public hospitals and the fact that they supply a significant portion of uncompensated care in the nation, the higher UPL was warranted.

This safeguard was adopted as part of a broader regulation to prevent reported abuses in some states regarding the proper use of Medicaid payments. "We certainly concede that there were some abuses that existed before the January 2001 changes were implemented," says Thomas Nickels, AHA senior vice president for federal relations. "There was bipartisan agreement among the Clinton administration, congressional Republicans, congressional Democrats, and the hospital community to try to put an end to inappropriate practices by states, but also to allow for legitimate practices to continue to occur. Subsequent to that, there has been no evidence that we have seen to show that abuses either continue to exist or have begun anew." If alleged abuses do exist, says Nickels, they should be dealt with on a "case-by-case" basis, rather than "simply choosing to abolish the entire program."

The lawsuit alleges that the new HHS regulation is "arbitrary and capricious," violating several congressional acts that serve as safeguards against the imposition of new rules without appropriate comment and review. Specifically, one key argument of the litigants is that HHS relied for its information primarily on a report issued by the HHS Office of the Inspector General that reviewed state UPL programs operating under old regulations that predate, and would be impermissible under, the rule implementing the higher public hospitals limit. The lawsuit also alleges that HHS gave "short shrift," in the words of Fagnani, to the more than 200 comments it received in response to its Federal Register notice announcing its intention to rescind the UPL program. "It's our opinion that the administration did not look at the comments at all," says Sword. "The decision had already been made, and they were simply publishing the regulations to receive comments to meet their legal responsibilities. I think if they really looked at the comments seriously, the regulations would have been withdrawn."

After the coalition won a one-month delay in the implementation of the contested rule from March 19 to April 15, a hearing was held April 10 in Little Rock, Arkansas, in which an Arkansas federal district court judge issued a partial ruling further prohibiting HHS from implementing the rule in question before May 14. The judge agreed with the plaintiffs' argument that HHS had failed to deliver the final UPL rule to the Senate by March 15, 2002, thus failing to comply with the Congressional Review Act, which mandates a 60-day review. The judge has indicated that he will rule on the substantive issues of the case before May 14.

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