ALABAMA HOSP. ASS’N v. BEASLEY, 702 F.2d 955 (11th Cir. 1983)

ALABAMA HOSPITAL ASSOCIATION, A CORPORATION; ET AL., PLAINTIFFS-APPELLANTS v. REBECCA BEASLEY, INDIVIDUALLY, AND IN HER CAPACITY AS COMMISSIONER OF THE ALABAMA MEDICAID AGENCY, ET AL., DEFENDANTS-APPELLEES.

No. 81-7965.United States Court of Appeals, Eleventh Circuit.
April 14, 1983.

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Sidney Lavender, Johnston, Barton, Proctor, Swedlaw Naff, Gilbert E. Johnston, Jr., Birmingham, Ala., for plaintiffs-appellants.

Herman H. Hamilton, Jr., Robert Harris, Montgomery, Ala., for Beasley.

Kenneth E. Vines, Asst. U.S. Atty., Montgomery, Ala., Amy Yourman, Jeffrey Golland, Dept. of Health and Human Services, Washington, D.C., for Schweiker.

Appeal from the United States District Court for the Middle District of Alabama.

Before GODBOLD, Chief Judge, FAY and SMITH[*] , Circuit Judges.

GODBOLD, Chief Judge:

[1] This appeal concerns the validity of a plan that the Alabama Medical Services Administration has devised to reimburse Alabama hospitals for the services they provide under the Medicaid program.

[2] The state became dissatisfied with the Medicare reimbursement principles it had previously used and developed an alternative reimbursement methodology, as permitted by the then effective code provision, 42 U.S.C. § 1396a(a)(13)(D) (1976). The essential features of the complicated alternative plan can be summarized as follows. The plan sets “prospective” reimbursement rates, reimbursing hospitals for costs they expect to incur under the Medicaid program.[1] After disallowing some types of costs, the plan distinguishes between educational, capital and operating costs. It departs from the Medicare methodology by inter alia
limiting the amount of reimbursable capital and operating costs. Hospitals whose average unused capacity exceeds 50% of available licensed beds are reimbursed for less than all capital costs. The limitation on operating costs is achieved by dividing hospitals into classes according to their rural or urban locations and licensed bed sizes. Within each class the maximum amount of reimbursable operating costs is measured by the class’s mean operating costs, plus one standard deviation.

[3] Pursuant to the former code provision and accompanying regulations, the Department of Health and Human Services (HHS) formally approved the plan. See 42 U.S.C. § 1396a(a)(13)(D) (1976);[2] 42 C.F.R. §§ 447.261-447.316 (1979). While HHS’s formal approval of the plan was pending, however, Congress had revised the relevant

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code provision. See 42 U.S.C.A. § 1396a(a)(13)(A) (West Supp. 1982).[3]

[4] The new provision, in an attempt to discourage soaring medical costs and upgrade the role of the states, differs from its predecessor in several ways. First, Congress altered the general standard used to assess reimbursement rates devised by the states. Under the former code provision, states must reimburse hospitals for the reasonable costs of Medicaid services. Because Congress considered this reasonable cost standard inflationary,[4] it lowered the threshold of permissible reimbursement rates, requiring that states reimburse “the costs which must be incurred by efficiently and economically operated facilities. . . .” 42 U.S.C.A. § 1396a(a)(13)(A) (West Supp. 1982). Second, Congress identified two special situations to which a state’s reimbursement methodology must speak. The state’s methods must “take into account the situation of hospitals which serve a disproportionate number of low income patients” and “provide, in the case of hospital patients receiving services at an inappropriate level of care . . ., for lower reimbursement rates reflecting the level of care actually received. . . .” Third, the new provision uses different language to describe the role of the Secretary in assessing methodologies proposed by the states. Whereas the former provision stated that state plans shall be “reviewed and approved by the Secretary,” the new provision provides that the state must find and make “assurances satisfactory to the Secretary” that the methodology fulfills statutory requirements.

[5] Shortly after the above changes became law, the Alabama Hospital Association and ten Alabama hospitals filed suit to enjoin implementation of the plan, alleging the invalidity of the plan under the revised statute. Based on HHS’s failure to review the plan in light of the new statute, the district court temporarily enjoined implementation of the plan pending completion of proceedings before it. HHS subsequently approved the plan in light of the new statute, concluding that the state had given satisfactory assurances of compliance. Following a trial on the merits, the district court held that HHS had properly approved the plan under the new statute and dissolved the temporary injunction it had issued.

[6] On appeal plaintiffs argue that viewed in light of the new code provision HHS’s approval of the plan cannot stand because (1) HHS failed to promulgate standards defining the efficient cost standard; (2) the state did not submit to HHS the information required by 42 C.F.R. § 447.255(b) (1981); (3) the plan does not take into account the situation of hospitals serving a disproportionate number of indigent patients; and

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(4) the plan does not reduce rates for patients receiving an inappropriate level of care. We reject the first three arguments and accept the fourth.

[7] I. Standards
[8] The current statute provides that the state must find and make “assurances satisfactory to the Secretary” that its reimbursement rates “are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. . . .” 42 U.S.C.A. § 1396a(a)(13)(A) (West Supp. 1982). Citin Alabama Nursing Home Association v. Harris, 617 F.2d 388 (5th Cir. 1980),[5] appellants argue that HHS’s approval of the plan is invalid because neither the Secretary nor the state has defined “the costs which must be incurred by efficiently and economically operated facilities.” We find it unnecessary to decide the merits of appellants’ contentions because, assuming arguendo that the contested phrase requires further definition, the failure to formulate such a definition constitutes harmless error.

[9] Courts have not hesitated to apply a harmless error rule where the agency has committed an error that clearly had no bearing on its substantive decision.[6] See, e.g., 5 U.S.C. § 706 (1976) (court reviewing agency action shall take “due account . . . of the rule of prejudicial error”);[7] U.S. Steel Corp. v. EPA, 595 F.2d 207, 215 (5th Cir. 1979); EEOC v. Exchange Security Bank, 529 F.2d 1214, 1216-17 (5th Cir. 1976); Dodson v. National Transportation Safety Board, 644 F.2d 647, 652 (7th Cir. 1981) Consolidated Gas Supply v. Federal Energy Regulatory Commission, 606 F.2d 323, 328-29 (D.C. Cir. 1979).[8] Here it is clear that the plan’s reimbursement levels will satisfy whatever standards the Secretary adopts to define “costs which must be incurred by efficiently and economically operated facilities.”

[10] HHS approved the plan under the “reasonable cost” standard contained in the former code provision, a standard which is more generous from the appellants’ perspective. Congress, in replacing the reasonable cost standard with one based on considerations of efficiency and economy, intended to give the states flexibility to lower reimbursement levels below those required by the reasonable cost standard. Because the new “efficient cost” standard is designed to lower the threshold of permissible reimbursement rates,[9] rates properly approved under the reasonable cost standard will satisfy the new efficient cost standard.

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Appellants, however, do not contend that HHS’s approval of the plan’s reimbursement rates under the reasonable cost standard was based on flawed regulations or an inadequate application of its regulations.[10] In fact, they offer no plausible reason why the agency, after approving the plan under the more restrictive reasonable cost standard, might reach a different result under a suitably defined efficient cost standard.

[11] Appellants, for instance, dispute the reasonableness of the plan’s low occupancy penalty and its rural/urban and bed size classifications. In approving the plan under the reasonable cost standard, however, HHS, after explicitly analyzing these issues, specifically found the low occupancy penalty and the challenged classifications reasonable. See Memorandum from Robert Streiner, Director of HHS Division of Alternative Reimbursement Systems, to George R. Holland, HHS Regional Administrator (Aug. 7, 1981) (recommending plan’s approval). Yet appellants do not explain why the agency’s presumptively valid conclusion, see Johnson’s Professional Nursing Home v. Weinberger, 490 F.2d 841, 844 (5th Cir. 1974), is invalid under the reasonable cost standard or, more to the point, the efficient cost standard.

[12] Appellants also object to the plan’s failure to allow reimbursement for bad debts and telephone services, costs which the appellants argue must be incurred by an efficiently and economically operated hospital. This argument is devoid of merit. The Medicare reimbursement methodology that serves as the absolute upper limit on repayment under the former reasonable cost standard generally disallows both types of costs. See 42 C.F.R. §§ 405.420, 405.451 (1979). In revising the statute Congress sought to move away from the inflationary Medicare reimbursement methodology.

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Appellants’ argument ignores the intent underlying the recent enactment. Congress intended the efficient cost standard to reduce, not increase, the permissible level of reimbursement below that available under Medicare principles.

[13] Appellants thus make no colorable argument that HHS improperly approved the plan’s general structure under the reasonable cost standard and that HHS, had it properly applied the new efficient cost standard would not have approved this structure. In this context, we hold that HHS’s alleged error in failing adequately to elaborate the efficient cost standard is harmless.[11] We see no reason to require HHS to refine an analysis when, seen in light of appellants’ own contentions, refinement would appear unnecessary, duplicative and wasteful.[12]

[14] II. Informational Requirements
[15] Appellants object to the state’s failure to submit to HHS the information required by HHS’s regulations. 42 C.F.R. § 447.255
(1981).[13] These informational requirements are largely designed to facilitate HHS’s decision regarding whether a state’s reimbursement rates satisfy the efficient cost standard. Consistent with the analysis in the preceding section, we hold that HHS’s approval under the reasonable cost standard, coupled with appellants’ failure to object colorably to HHS’s analysis, render any noncompliance with informational requirements harmless error.[14]

[16] III. Hospitals Serving Low Income Patients
[17] The new statute requires that the reimbursement rates devised by the state “take

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into account the situation of hospitals which serve a disproportionate number of low income patients with special needs. . . .” 42 U.S.C. § 1396a(a)(13)(A). In their initial brief appellants faulted the plan for failing specifically to address the special needs of such hospitals. Since that time, however, the state has amended its plan to accommodate the situation of hospitals serving large numbers of indigent patients. Although appellants, in their reply brief, do not challenge the adequacy of the amendment, they urge this court to hold that the unamended plan violates the statute. Otherwise, they assert, the state might rescind the amendment. Appellants’ objections to the unamended plan are moot, and we decline to evaluate its validity.

[18] Newly promulgated administrative regulations can have the effect of mooting a previously viable case. See Sannon v. U.S., 631 F.2d 1247, 1250-51 (5th Cir. 1980). As articulated by the Supreme Court, the general test is whether “`the issues presented are no longer `live’ or the parties lack a legally cognizable interest in the outcome.'” County of Los Angeles v. Davis, 440 U.S. 625, 631, 99 S.Ct. 1379, 1383, 59 L.Ed.2d 642 (1979) (quoting Powell v. McCormack, 395 U.S. 486, 496, 89 S.Ct. 1944, 1950, 23 L.Ed.2d 491 (1969)). Appellants’ objections to the plan here are no longer “live” because they neither request any relief, such as money damages, for the period during which the unamended and allegedly insufficient plan was in effect nor question the adequacy of the amendment. The mere possibility that the state might rescind its recent amendment does not, for purpose of mootness, enliven the controversy. The issue is moot unless there is a “`reasonable expectation . . .’ that the alleged violation will recur. . . .” 440 U.S. at 631, 99 S.Ct. at 1383 (quoting U.S. v. W.T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 897, 97 L.Ed. 1303 (1953)) (emphasis added). Nor does this issue come within the well-recognized exception for alleged violations “capable of repetition yet evading review.” See Southern Pacific Terminal Co. v. ICC, 219 U.S. 498, 515, 31 S.Ct. 279, 283, 55 L.Ed. 310 (1911). The appellants may, without undue difficulty, assert their objections against the unamended plan if and when the state rescinds the amendment.

[19] IV. Inappropriate Level of Care
[20] The revised code provision declares that “[a] state plan for medical assistance must provide . . . in the case of hospital patients receiving services at an inappropriate level of care . . . for lower reimbursement rates reflecting the level of care actually received . . . .” 42 U.S.C.A. § 1396a(a)(13)(A) (West Supp. 1982) (emphasis added). This language speaks to the situation where the hospital extends inpatient services to a patient who needs less expensive “post-hospital extended care services.” 42 U.S.C.A. §§ 1395x(v)(1)(G), 1396a(a)(13)(A) (West Supp. 1982). The appellants argue that the plan is deficient for failing to address Congress’s concern that reimbursement rates account for patients who receive but do not medically need inpatient treatment. We agree.

[21] The statute’s express language affirmatively obligates the state to provide in its reimbursement plan for lower payment rates for patients who do not need inpatient care. HHS’s regulations, restating the statute, also mandate inclusion of such a provision. 42 C.F.R. § 447.252(a)(3)(ii) (1981).[15] We therefore hold that the statute and its accompanying regulations require that the reimbursement rates specified in the plan account for patients receiving an “inappropriate level of care,” as illuminated by 42 U.S.C.A. § 1395x(v)(1)(G) (West Supp. 1982). To this extent HHS erred in approving the plan, because the plan contains no provision accounting for patients receiving an inappropriate level of care. Even assuming, as

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appellees argue, that the revised provision reduces the level of scrutiny HHS must give state plans,[16] the Secretary has no discretion to approve a plan that on its face fails to fulfill the statute’s plain requirements.[17] We accordingly remand to the district court so that it may devise an appropriate equitable remedy. Because we have upheld the plan’s general structure against appellants’ challenges, the district court may, pending development of an appropriate provision that accounts for patients receiving an inappropriate level of care, choose not to suspend operation of the plan altogether.

[22] We AFFIRM in part, REVERSE in part and REMAND for proceedings consistent with this opinion.