Orthopaedic Hospital v. Belshe

Orthopaedic Hospital (hospital) (plaintiff) challenged the Medicaid reimbursement rates for hospital outpatient services set by the Director of the California Department of Health Services (Department) (defendant), which administered Medi-Cal, California’s Medicaid program. The hospital argued that the Medicaid reimbursement rates set by the Department violated the federal Medicaid Act because the rates did not consider the costs hospitals incurred providing quality and accessible outpatient care to Medicare recipients. Medi-Cal provided hospitals with additional reimbursement to cover room charges but offset that by reducing the reimbursement for outpatient physician services by 20 percent compared to nonhospital providers. The Department countered, arguing that the hospitals’ cost was an irrelevant factor in setting the reimbursement rates because (1) hospitals that accepted Medicaid patients were contractually obligated to provide quality, accessible care to all patients regardless of a patient’s ability to pay; and (2) Medi-Cal should not be required to consider the hospital’s costs because hospitals are the most expensive provider of outpatient services. The district court granted the Department summary judgment, holding that it would be inefficient and uneconomical for Medi-Cal to consider the hospital’s cost in setting reimbursement rates and that Medi-Cal needed to incentivize Medi-Cal recipients to use less expensive care providers. The hospital appealed.