A federal appeals panel says Chicago’s cash-strapped St. Anthony Hospital can sue the state over alleged shortfalls in Medicaid reimbursements, though the judges split on whether allowing similar lawsuits against the state would only make the problem worse.
The U.S. Seventh Circuit Court of Appeals weighed in July 5 on a dispute that stems from the state’s strategy of moving its Medicaid program from a model where a state agency directly pays providers of medical care to a managed care approach, under which private insurers pay medical bills.
Seventh Circuit Judge David Hamilton wrote the opinion; Judge Diane Wood concurred. Judge Michael Brennan partially concurred, but wrote a substantial dissent.
U.S. Seventh Circuit Court of Appeals Judge David F. Hamilton
| law.columbia.edu
According to Hamilton, St. Anthony said it has lost 98 percent of its cash reserves in four years, which it attributed to managed care organizations that “have repeatedly and systematically delayed and reduced Medicaid payments.”
U.S. District Judge Steven Seeger dismissed the hospital’s lawsuit — in what Hamilton called “a thoughtful opinion” — for failure to state a claim for relief. But the panel's majority disagreed with Seeger's ruling, saying St. Anthony had done enough at the pleadings stage to be allowed to continue.
“We appreciate the potential magnitude of the case and the challenges it may present,” Hamilton wrote. “Like the district judge and Judge Brennan, we can imagine forms of judicial relief that would be hard to justify. We can also imagine some poor ways to handle this case going forward in the district court. But we need not and should not decide this case by assuming that the worst‐case scenarios are inevitable.”
Because the state has the ability to address slow payment, Hamilton explained, if St. Anthony can prove its claims a court could order the Department of Healthcare and Family Services to intervene.
Under the managed care program, the state pays a flat, per-patient monthly fee to a private insurer, and the insurer then pays the providers for whichever services it delivers to beneficiaries. The managed care organization keeps any difference between its state income and expenses paid to providers. That arrangement, Hamilton explained, means “MCOs have a powerful profit incentive to delay and underpay hospitals.”
Hamilton said Illinois introduced managed care in 2006. In 2010 Illinois spent $251 million on managed care, by 2019 the total was $12.73 billion. In that same span, the number of care organizations operating in Illinois dropped from 12 to seven.
St. Anthony, which is one of 40 “safety-net” hospitals in Illinois — so named because it accepts an outsized percentage of Medicaid patients compared to a typical hospital — said the care organizations are ignoring timely payment obligations under federal law. Rather than pursue arbitration with each care organization, the hospital opted to seek a court order forcing state officials to ensure the care organizations meet contractual obligations.
The majority concluded the state has a duty to make sure care organizations follow a federal law that 90 percent of Medicaid claims are paid within 30 days and 99 percent within 90 days, and that St. Anthony has thus far plausibly alleged its situation represents a deprivation of a federal right, not just the failure to follow a law.
“If St. Anthony can prove systemic failures by MCOs to comply with the 30/90 payment schedule with reasonably transparent payment information, we would expect the district court to explore with the parties what steps the State officials could reasonably be expected to take to correct those systemic failures before framing an appropriate and effective injunction,” Hamilton wrote. “And if such an injunction later needed to be modified based on experience, the district court would have ample power to do so at the request of a party or on its own motion.”
In his dissent, Brennan explained his reading of the situation to be the difference between deadlines written into managed care contracts and “a privately enforceable statutory duty to proactively guarantee timely managed care payments to health care providers.”
Brennan said St. Anthony “attempted to bypass” the care organizations by suing the state instead of following contractual obligations to either litigate or pursue arbitration directly. He sided with the state’s argument that its only legally enforceable obligation is to make sure contracts between providers and care organizations have prompt payment clauses, not to actively ensure the insurers make those payments.
When Congress wrote legislation governing the managed care relationship, Brennan continued, it didn’t expressly require states to guarantee prompt payments. Adding the managed care option under the Medicaid Act, he continued, was an attempt “to alleviate the burden on states of managing the ‘day‐to‐day’ functions previously performed by states under a fee‐for‐service system.” And while states are allowed to impose punitive measures, he said, the majority’s opinion holds states are required to do so, up to and including termination of a care organization’s contract.
Following that logic, Brennan said, ultimately would obligate trial courts to essentially become Medicaid claims processors, resolving disputes about whether claims meet 30/90 requirements and addressing litigation over payment timeliness. He further said the majority opinion relies on a determination that states would only have a duty if care organizations “are systematically late in paying,” despite there being no statutory mention or definition of what constitutes systematic failures in this context.
“Paradoxically, the attempt to limit this holding to systemic MCO noncompliance, designed to alleviate the burden on district courts, will add to it,” Brennan wrote. “Tens of thousands of untimely payments might signal a ‘systemic’ problem while a handful of unpaid claims might not, but between these extremes lies a vast expanse of undefined terrain.”
Saint Anthony Hospital has been represented by attorneys Michael L. Shakman, Edward W. Feldman, William J. Katt, Mary Eileen Cunniff Wells and Rachel Ellen Simon, of the firm of Miller Shakman Levine & Feldman, of Chicago.
The Illinois Attorney General's Office represented the state defendants.