A federal appeals court in Chicago has refused a request from the state of Illinois for a new hearing on an earlier decision the state worries will create a new risk of lawsuits over the state's obligations to ensure hospitals are getting paid through Medicaid.
The decision addresses petitions submitted by the state and the MCOs following a July ruling from the appellate court in a lawsuit brought by Chicago’s Saint Anthony Hospital.
In that case, Saint Anthony sought permission from the court to sue the state because it believed Blue Cross Blue Shield and other MCOs contracted by the state to manage Medicaid payments “have repeatedly and systematically delayed and reduced Medicaid payments.”
Saint Anthony Hospital noted it is one of 40 so-called “safety net” hospitals in Illinois. Such hospitals accept outsized numbers of Medicaid patients compared to other hospitals.
Since 2006, the state of Illinois has shifted its method for paying Medicaid claims from hospitals. Rather than payment coming directly from the state, the payment claims are processed and paid by the MCOs. In 2019, Illinois spent $12.7 billion on managed care, up from $251 million in 2010.
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.
Saint Anthony claims the managed care system has left it financially strapped. The hospital said it has wiped out 98% of its cash reserves in the past four years, stemming from the allegedly slow and reduced payments from Medicaid MCOs.
Saint Anthony asserts this kind of “systematic” underpayment violates federal law, which requires 90% of Medicaid claims to be paid within 30 days and 99% within 90 days.
Ordinarily, Saint Anthony and other hospitals would be required to take such claims to arbitration. However, the hospital argued the responsibility for ensuring prompt, full Medicaid payments falls on the state.
So, the hospital sued the state, saying it should be allowed to sidestep that prescribed arbitration path, to seek a court order requiring the Department of Healthcare and Family Services to intervene.
A federal district judge sided with the state and dismissed the case, finding the arbitration process cannot be bypassed.
The majority concluded the state has a duty to make sure MCOs follow the law, and that Saint Anthony has so far demonstrated the state may have violated its rights, not merely failed to follow a law.
The decision prompted the state and MCOs to petition for a rehearing.
In that petition, the state argued the majority decision flew in the face of Supreme Court precedent in interpreting such a federal law, as they argued the law imposed no “unambiguous” duty on states to supervise MCO payments.
The state argued it marked the first time anywhere in the U.S. that a court had determined states had an obligation under federal law to ensure full, timely Medicaid payments to health care providers.
And more importantly, the state argued it marked the first time a court had ruled private parties, like Saint Anthony Hospital, had a right to sue in court to force the state to live up to those alleged statutory obligations.
In cases in which private rights of enforcement are recognized, more lawsuits often follow, as private party plaintiffs seek to get paid.
The state argued the ruling would be place a significant new burden on the state, while also violating the MCOs arbitration rights under their contracts.
The state’s arguments, however, fell flat at the Seventh Circuit.
In the order denying the petitions for rehearing, the court noted no Seventh Circuit judge outside of the panel that earlier heard the case agreed to call for a rehearing on the case before the full Seventh Circuit court. Of that panel, only one, Circuit Judge Michael Brennan, believed the state and managed care organizations should get a new chance to argue for dismissal of Saint Anthony Hospital’s lawsuit.
Brennan had also dissented from the earlier 2-1 decision.
In explaining the denial, Seventh Circuit Judges David Hamilton and Diane Wood chided the state for what they called its “exaggerated accounts” of the earlier decision to allow Saint Anthony to continue its case.
Judges Hamilton and Wood noted the decision did not yet impose any additional obligations on the state, nor did it “offer any path” for Saint Anthony or other hospitals to demand payment directly from the state.
“The panel recognizes the potential complexity and challenge of this case for the district court, but also its importance for plaintiff and other providers of health care to Medicaid patients, as well as for the patients themselves,” Hamilton and Wood wrote.
“The panel concluded that the case should not be dismissed on the pleadings but should proceed toward substantial discovery. That course will allow the district court to consider actual facts rather than just allegations in weighing whether injunctive relief is appropriate and what forms it might take.”
Brennan, however, again dissented. He said the majority continued to downplay the system-altering significance of their ruling.
“To say the majority opinion only provides a new way under (federal law) to enforce existing obligations does not mitigate the substantial changes and alterations to the Medicaid landscape this decision creates,” Brennan wrote.
“… Because this decision will create tremendous burdens and complex practical problems, and federal courts will now have to consider and decide payment disputes between MCOs and providers that can be framed as involving ‘systemic failure,’ the proper interpretation of (federal law) is a question of extraordinary significance which we should rehear.”
At the same time, however, all parties and judges involved acknowledged the dispute over Saint Anthony’s rights to sue could quickly become academic in the face of pending action from the U.S. Supreme Court.
In the case docketed as Talevski v Health and Hospital Corp, the high court could decide whether federal law under the U.S. Constitution’s so-called Spending Clause – which gives Congress the power to apportion and regulate the spending of federal revenues, like Medicaid – provides patients and other private parties with rights to sue to enforce such Medicaid requirements.
That case, arising out of Indiana's federla courts, had also been decided on appeal by the Seventh Circuit. Judge Wood also had served on that panel.
Hamilton and Wood said the pending action in Talevski argues against a rehearing, instead allowing Saint Anthony’s case to proceed at the district level, while awaiting action from the Supreme Court.
Brennan, however, reached the opposite conclusion, saying the court should grant the state’s and MCOs’ petitions for a rehearing, and place the hearing on hold while they await the decision in Talevski.
“Given the broad and deep impact of the majority opinion, it would be best to resolve these petitions for rehearing with the counsel of Talevski, which could significantly change the legal landscape…,” Brennan wrote.
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.