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Dept. of Health and Social Svcs. v. Hospital and Nursing Home Assoc. (7/16/93), 856 P 2d 755
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THE SUPREME COURT OF THE STATE OF ALASKA
THE DEPARTMENT OF HEALTH AND SOCIAL )
SERVICES, State of Alaska, et al., )
) Supreme Court File
Appellants, ) Nos. S-4807/4859
Cross-Appellees, ) Superior Court File
) 3AN-90-859 Civil
ALASKA STATE HOSPITAL AND NURSING ) O P I N I O N
HOME ASSOCIATION, an Alaska non-profit )
corp., acting on its own behalf and on )
behalf of its membership, et al., )[No. 3972 - July 16,
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Karen L. Hunt, Judge.
Appearances: Glenn M. Gustafson,
Assistant Attorney General, Anchorage, and
Charles E. Cole, Attorney General, Juneau,
for Appellants, Cross-Appellees. Stephen D.
Rose and John F. Sullivan, Inslee, Best,
Doezie & Ryder, P.S., Bellevue, Washington,
for Appellees, Cross-Appellants.
Before: Moore, Chief Justice,
Rabinowitz, Burke, Matthews and Compton,
This case arises out of a dispute between the State of
Alaska and the Alaska State Hospital and Nursing Home
Association (ASHNHA) over rates paid to nursing homes
under the Medicaid program. The superior court granted
ASHNHA judgment on the basis that the State's plan
violated the procedural requirements of the Boren
Amendment. We affirm.
I. FACTUAL AND PROCEDURAL BACKGROUND
The federal Medicaid program is designed to provide
medical assistance to low-income persons by granting
federal matching funds to participating states. While
participation in the Medicaid program is optional, a
state that elects to participate must comply with
federal statutory requirements. Wilder v. Virginia
Hosp. Ass'n, 496 U.S. 498, 502 (1990); Colorado Health
Care Ass'n v. Colorado Dep't of Social Servs., 842 F.2d
1158, 1164 (10th Cir. 1988). One of these
requirements, the Boren Amendment (Boren), governs the
method by which states establish payment rates for
facilities providing care under the Medicaid program.
Boren provides in relevant part:
A State plan for medical assistance must-
. . . .
(A) for payment . . . of the hospital
services, nursing facility services, and
services in an intermediate care facility for
the mentally retarded provided under the plan
through the use of rates (determined in
accordance with methods and standards
developed by the State . . .) which the State
finds, and makes assurances satisfactory to
the Secretary, are reasonable and adequate to
meet the costs which must be incurred by
efficiently and economically operated
facilities in order to provide care and
services in conformity with applicable State
and Federal laws, regulations, and quality
and safety standards . . . .
42 U.S.C. 1396a(a)(13)(A)(1988).
In August 1988 the State became concerned that it was
in danger of losing its federal financial participation
because state rates exceeded federal standards. In
response to these concerns, the Alaska Medicaid Rate
Commission (MRC) established an emergency regulation
that provided for maximum limits on routine rates.
7 Alaska Administrative Code 43.685(g) (1993). In
September 1989 thirteen long-term care facilities
challenged this regulation in an administrative appeal
to the Alaska Department of Health and Social Services
(DHSS). While the administrative appeal was pending,
eight of these facilities and ASHNHA filed suit in
superior court, challenging the validity and
application of section 685(g).
The superior court granted the State summary judgment
as to all state law claims, based on ASHNHA's failure
to exhaust its administrative remedies.1 However, the
court denied the State's summary judgment motion as to
ASHNHA's 42 U.S.C. 1983 cause of action alleging that
section 685(g) violated Boren. The superior court
later granted ASHNHA summary judgment against the State
on the basis that the State failed to satisfy the
"findings" requirement of Boren. The court enjoined
the State from giving effect to section 685(g), and
remanded the case to the administrative agency to
revise the Medicaid payment rates.2 The State appeals
and ASHNHA cross-appeals on several related issues.
A. EXHAUSTION OF ADMINISTRATIVE REMEDIES
The State initially argues that ASHNHA was required to
exhaust its administrative remedies prior to bringing
suit under 42 U.S.C. 1983, and that the superior
court thus erred in not requiring exhaustion. In
response, ASHNHA argues that Wilder v. Virginia
Hospital Association, 496 U.S. 498 (1990), disposes of
this issue as it expressly holds that providers need
not exhaust their state administrative remedies prior
to bringing 1983 actions to enforce Boren.
The standard of review applicable to this question is
de novo: This court is not bound by a lower court's
resolution of questions of law, and has the duty to
adopt the rule of law most persuasive in light of
precedent, reason and policy. Guin v. Ha, 591 P.2d
1281, 1284 n.6 (Alaska 1979).
We find that ASHNHA's reliance on Wilder is misplaced.
Wilder holds only that the availability of state
administrative remedies does not absolutely foreclose
resort to 1983.3 The Court did not address the
question of whether plaintiffs must exhaust available
remedies before commencing a 1983 action.
The Supreme Court has, however, addressed this issue in
another case and ruled that exhaustion is not required.
In Patsy v. Florida Board of Regents, 457 U.S. 496
(1982), the Court held that "exhaustion of state
administrative remedies should not be required as a
prerequisite to bringing an action pursuant to 1983."
Id. at 516. Accordingly, exhaustion is not required in
this case, and the decision of the trial court is
B. COMPLIANCE WITH PROCEDURAL REQUIREMENTS
OF THE BOREN AMENDMENT
The central dispute in this case is whether the State
complied with one of the procedural requirements of
Boren -- whether it made sufficient findings before
setting maximum limits on certain rates. In addressing
this issue, it is useful to briefly examine the history
of the Medicaid reimbursement scheme and Boren.
As originally enacted in 1965, the Medicaid Act
required states to reimburse facilities for their
"reasonable costs" in providing care to Medicaid
patients. Pub. L. 89-97, 1902(13)(B), 79 Stat. 346
(1965). Because of rapidly escalating Medicaid costs,
Congress reevaluated this approach in the early 1980s.
Congress eventually concluded that the complexity,
rigidity and "inflationary nature"of the reasonable
cost reimbursement system was to blame for the
program's rising costs. Wilder, 496 U.S. at 506.
Accordingly, Congress enacted Boren in 1981, replacing
the reasonable cost provision with "a provision
requiring States to reimburse hospitals at rates . . .
that are reasonable and adequate to meet the cost which
must be incurred by efficiently and economically
operated facilities . . . ." S. Rep. No. 139, 97th
Cong., 1st Sess. 478 (1981), reprinted in 1981
U.S.C.C.A.N. 396, 744.
In shifting to this new, more flexible approach, Boren
expressly delegated authority to the states to alter
their Medicaid plans and to establish the rates under
which providers will be paid. For example, states are
free "to establish statewide or classwide rates,
establish rates based on a prospective cost, or include
incentive provisions to encourage efficient operation."
Wilder, 496 U.S. at 506-07 (footnote omitted).
Commenting on Congress's intent in enacting Boren, one
federal appeals court noted that:
The Boren Amendment was enacted with two
specific purposes in mind: (1) to provide
the states with greater flexibility in
developing methods of reimbursing skilled
nursing facilities, intermediate care
facilities, and inpatient hospital services;
and (2) to increase the economy and
efficiency of all plans.
Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1309-10 (2d Cir.
While states have considerable flexibility in
establishing rates under Boren, it is clear that this
flexibility is not absolute. As the United States
Supreme Court noted, "[i]n passing the Boren Amendment,
Congress sought to decentralize the method for
determining rates, but not to eliminate a State's
fundamental obligation to pay reasonable rates."
Wilder, 496 U.S. at 515. Accordingly, states must
still comply with certain procedural and substantive
requirements. Boren requires states to make findings
and give assurances to the federal government that the
rates they set "are reasonable and adequate to meet the
costs which must be incurred by efficiently and
economically operated facilities." 42 U.S.C.
1396a(a)(13)(A)(1988). In addition to these procedural
requirements, the Supreme Court has held that the rates
adopted must be actually reasonable and adequate.4
Wilder, 496 U.S. at 514-15.
Boren therefore creates a tension between the need to
creatively cut costs and stimulate the efficiency of
providers, and the obligation to provide adequate care
to Medicaid patients. The difficulty in resolving this
tension is exacerbated by the failure of Boren to
define any of its terms (such as "reasonable and
adequate," or "efficiently and economically operated
facilities"), and the refusal of the Health Care
Financing Administration (HCFA) to require the states
to define the terms. See Lett v. Magnant, 965 F.2d
251, 253 (7th Cir. 1992); 48 Fed. Reg. 56049 (December
19, 1983). Not surprisingly, the ambiguity of these
terms, as well as the conflicting goals of increasing
efficiency and providing adequate care, has created
considerable litigation between providers and state
agencies. See, e.g., James J. Kennedy III, The
Medicaid Program: Vague Standards Breed Litigation, 28
St. Louis U. L.J. 351 (1984).
1. Standard of Review
The standard applicable to our review of the superior
court's summary judgment order is de novo. McGrath v.
University of Alaska, 813 P.2d 1370, 1371 n.1 (Alaska
1991). We must determine whether a material issue of
fact exists, and whether the moving party was entitled
to judgment as a matter of law. Darling v. Standard
Alaska Prod. Co., 818 P.2d 677, 679 n.5 (Alaska 1991),
cert. denied, 112 S. Ct. 1176 (1992).
Since the central issue in this case is whether the
State complied with federal law, the focus of the
inquiry is on statutory interpretation. The
appropriate standard of review in this context is the
substitution of judgment standard provided the issue
does not involve agency expertise. Phillips v. Houston
Contracting, Inc., 732 P.2d 544, 546 (Alaska 1987).
While conceding that this standard is appropriate for
the questions of statutory interpretation raised by
this appeal, the State nevertheless insists that this
court should give deference to the state agency's
findings because the agency has "specialized knowledge
of Medicaid regulation." Accordingly, the State argues
that the MRC and DHSS "rate-setting functions and
determinations as to the level of Medicaid payments"
should be evaluated under the reasonable basis test.
Responding to a similar argument, the United States
Court of Appeals for the Tenth Circuit held that state
agency determinations are entitled to deference only if
they have met the requirements of federal and state
law. AMISUB (PSL), Inc. v. State of Colorado Dep't of
Social Servs., 879 F.2d 789, 795 (10th Cir. 1989),
cert. denied, 496 U.S. 935 (1990). The court noted:
"Our first inquiry is whether the
payment to the appellants . . . resulted in
noncompliance with the federal statute and
regulations." This is an issue of law,
subject to de novo review in federal court.
Id. (quoting Colorado Health Care Ass'n v. Colorado Dep't of
Social Servs., 842 F.2d 1158, 1165 (10th Cir. 1988)
(emphasis added)).5 Since the issue before this court
is whether the State complied with the procedural
requirements of the Boren Amendment, the agency's
determination of its own compliance is not entitled to
2. The Procedural Requirement & the AMISUB Test
At issue in this case is whether the State made
adequate "findings" under Boren pursuant to
implementing its plan.7 ASHNHA relies heavily on the
interpretation of this requirement announced in AMISUB:
The plain language of federal Medicaid
law mandates the State Medicaid Agency, at a
minimum, to make "findings"which identify
and determine (1) efficiently and
economically operated hospitals; (2) the
costs that must be incurred by such
hospitals; and (3) payment rates which are
reasonable and adequate to meet the
reasonable costs of the state's efficiently
and economically operated hospitals.
879 F.2d at 796. This language is quoted widely by other courts
considering this issue, and has emerged as the standard
for judging compliance with the findings requirement of
Boren. See, e.g., Pinnacle Nursing Home v. Axelrod,
928 F.2d 1306, 1314 (2d Cir. 1991); Multicare Medical
Ctr. v. Washington, 768 F. Supp. 1349 (W.D. Wash.
1991); Folden v. Washington State Dep't of Social and
Health Servs., 744 F. Supp. 1507 (W.D. Wash. 1990).
Notwithstanding this wide-spread acceptance, the State
argues that the AMISUB test employs an overly rigid
three-step analysis that is not warranted by the "plain
language"of Boren.8 The State contends that under a
less rigid application of AMISUB, the record
demonstrates that its rate-setting procedures amply
satisfied the procedural requirements of Boren.
ASHNHA, in contrast, argues that the three-step test of
AMISUB correctly reflects the procedural requirements
of Boren and that the State failed to comply with these
In our opinion the AMISUB test unnecessarily restricts
states' flexibility by requiring a specific approach to
determining the reasonableness of rates. In
particular, we do not subscribe to the first prong of
the test, which requires states to specifically
identify which providers are efficiently and
economically operated. A requirement that a state
identify existing facilities that are efficiently
operated assumes a priori that such facilities exist.
However, this assumption is not warranted by the Boren
Amendment, and may not accurately reflect a given
For example, a state, after making empirical studies of
its facilities, could determine that none of its
facilities is "efficiently and economically operated."
In other words, a state might determine that all of its
facilities could further cut costs and increase their
efficiency. Under AMISUB's mandatory language, this
state would be in violation of Boren if it failed to
classify some of its facilities as "efficiently and
economically operated." And yet a state in this
situation should be in compliance with the procedural
requirements of Boren if, after making findings to this
effect, it sets rates with reference to a hypothetical
facility. In Wilder the Supreme Court noted that Boren
"requires the State, in making its findings, to judge
the reasonableness of its rates against the objective
benchmark of an `efficiently and economically operated
facility.'" Wilder, 496 U.S. at 519. Commenting on
this concept of an objective benchmark, Justice
Blackmun (who formed part of the Wilder majority)
[The Boren Amendment] defines a
"reasonable and adequate"rate by referring
to what would be provided by a hypothetical
facility -- one that operates "efficiently
and economically,""compli[es] with federal
and state standards," and "ensur[es]
`reasonable access' to eligible
Suter v. Artist M., 112 S. Ct. 1360, 1373 (1992) (Blackmun, J.
dissenting). This language, and "the legislatively
mandated flexibility provided to States under the
statute," 48 Fed. Reg. 56049 (December 19, 1983),
allows a state in the above situation to set rates with
reference to a hypothetical facility, rather than
following the AMISUB approach.
The conclusion that the State may set rates with
reference to a hypothetical facility does not mean,
however, that the State must do so. Boren does not
require that the State follow this or any other
specific approach to determining the reasonableness of
rates. In fact, the State could decide to follow the
AMISUB approach and base its rates on an actual
facility (or facilities) that it determines to be
efficiently and economically operated.10 Boren grants
states the flexibility to set their own methods and
standards, and the authority to make their own
determinations as to the appropriate factors to be
considered in determining rates. Wilder, 496 U.S. at
506-07. Recently, the United States Court of Appeals
for the Seventh Circuit reached a similar conclusion
regarding the AMISUB test:
The Amisub approach satisfied the Tenth
Circuit and deserves consideration, but we do
not adopt it as a mandatory test. As the
Tenth Circuit recognized, "a state is free to
create its own method for arriving at the
required findings." 879 F.2d at 797. We
In particular we reject the notion
that a state must identify a reasonable
sample of particular existing nursing homes
as paradigms of efficiency; such a task may
be impossible. . . . A state must determine
in its own way what it would consider to be
efficient and economic nursing facilities and
"must make findings which establish a nexus
between the costs of operating" those
facilities and "the proposed reimbursement
rates under the state plan." Pinnacle
Nursing Home v. Axelrod, 928 F.2d 1306, 1314
(2d Cir. 1991).
Illinois Health Care Ass'n v. Bradley, 983 F.2d 1460, 1464-65
(7th Cir. 1993).
On the basis of our analysis, we decline to read the
findings requirement of Boren as mandating the
exclusive three-part test set out by AMISUB. This
conclusion is consistent with Congress's intent to
"give States greater latitude in developing and
implementing alternative reimbursement methodologies
that promote the efficient and economical delivery of
such services." H.R. Rep. No. 158, 97th Cong., 1st
Sess., Vol. 2, at 293 (1981).
Although Boren does not require a specific findings
process, it does set out several factors which a state
must consider in determining methods for calculating
(1) the unique situation (financial and
otherwise) of a hospital that serves a
disproportionate number of low-income
patients, (2) the statutory requirements for
adequate care in a nursing home, and (3) the
special situation of hospitals providing
inpatient care when long term care at a
nursing home would be sufficient but is
Wilder, 496 U.S. at 519 n.17 (citing 42 U.S.C. 1396a(a)(13)(A)
(1988)). At the very least, these factors require
states to inquire into the actual operation of existing
facilities before establishing an objective benchmark.11
The Second Circuit has held that "the state must make
findings which establish a nexus between the costs of
operating efficient and economic nursing facilities and
the proposed reimbursement rates under the state plan."
Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1314
(2d Cir. 1991).12
In our view, the findings requirement of Boren is
designed to ensure that rates are not set arbitrarily,
i.e., without proper consideration of the costs of
operating a facility in the state. Therefore, we
conclude that states must make concrete findings, based
on studies of existing facilities, and use these
studies to establish, with reference to either existing
or hypothetical facilities, an "objective benchmark of
an `efficiently and economically operated facility.'"
Wilder, 496 U.S. at 519. Applying this
approach to the facts of this case, we reach the same
conclusion that the trial court reached:13 The State
failed to comply with the findings requirement of
Boren. The State simply did not make sufficient
findings to be able to establish an objective benchmark
of "an efficiently and economically operated facility."
The testimony of the State's witnesses indicates that
the State began with an assumption that.
whatever costs were incurred by a
facility in its base year were costs that it
reasonably incurred as an efficiently and
economically operated facility. That is,
staff assumes that a facility operated
efficiently and economically in its base
The State then inflated the base year costs to the rate year in
question, compared these costs to the weighted average
of costs from other facilities in the same class, and
set the actual total rates on this basis.
The trouble with the State's approach is the assumption
on which it is based -- that facilities operated
efficiently in their base year. Such an assumption may
ease the State's rate-setting work by readily providing
a point of comparison, but it cannot satisfy the
requirement that the states "find"rates that must be
incurred by efficiently and economically operated
facilities. The practical result of such an approach
would be to arbitrarily set a floor (the base year
costs inflated yearly) on the rates paid to Medicaid
providers. This approach does not comply with the
requirements of Boren and is not consistent with its
goal of lowering the system's costs while continuing to
provide reasonable access to quality care.
It is apparent that the State has presented "no
evidence at all that [it] has found any nexus between
its chosen percentiles and costs of operating an
efficient and economical facility." Illinois Health
Care Ass'n v. Bradley, 776 F. Supp. 411, 419 (N.D. Ill.
1991), aff'd, 983 F.2d 1460 (7th Cir. 1993). While the
choice of certain base year rates may represent the
costs that must be incurred by an efficient and
economical facility, the State has made no findings
that this is so.14
3. The State's Ancillary Arguments
The State further argues that (1) the State's
compliance with the procedural requirements cannot
reasonably be questioned since the rates were set at
the maximum allowable rate under federal law and (2) it
was error for the court to invalidate the plan without
considering whether the regulation resulted in
substantively inadequate rates.
The State's first argument is based on a recent
decision by a federal magistrate which held that when a
state sets rates to comply with the federal upper
limit, "they comply with the Boren
amendment as a matter of law." Connecticut Hosp. Ass'n v.
O'Neill, No. N-90-714 (WWE), slip op. at 8 (D. Conn.
Oct. 31, 1991). Although a federal district court
later overruled this decision, the State nevertheless
argues that this reversal did not upset the "rule of
law." See Connecticut Hosp. Ass'n v. O'Neill, 793 F.
Supp. 47, 51-52 (D. Conn. 1992). It is difficult to
see how a decision by a federal magistrate in
Connecticut on a 12(b)(6) motion, which was later
overruled, establishes a "rule of law" which should
persuade this court. Further, the conclusion that the
State's compliance with Boren cannot be questioned
where rates are set at the upper limits ignores
Congress's intent that states make findings regarding
the operation of their facilities.
An agency regulation establishing limits on
reimbursement cannot simply do away with the statutory
requirements of Boren. In some situations rates found
to be "necessary"under Boren may be higher than the
rates allowed under the federal limits. However, a
state in this position may qualify for an exception to
the upper limits which would allow it to utilize the
"necessary," higher rate.15 While state agencies are
entitled to deference with respect to their upper
limits determination, this deference does not mean that
they can ignore the requirements of Boren. The State
is not excused from complying with Boren just because
the State is concerned that it may have a problem with
the federal upper limits. The State's second
argument is that the trial court erred by invalidating
the plan without considering its substantive compliance
with Boren. This argument is likewise without merit.
Although the Wilder decision held that Boren granted
both procedural and substantive rights, it did not
require a court to consider substantive compliance
where procedural compliance was lacking. The Court did
hold, however, that procedural compliance alone was
insufficient, i.e., that courts must consider
substantive compliance if the procedural requirements
were met. See Wilder, 496 U.S. at 512-15. In this
case, the superior court concluded that since the plan
failed to meet the procedural requirements of Boren,
the court need not address the issue of substantive
compliance. This conclusion is consistent with the
approach of other courts and is a correct
interpretation of Boren. See Pinnacle Nursing Home v.
Axelrod, 928 F.2d 1306, 1316-17 (2d Cir. 1991)
(invalidating a state plan on the basis that it
violated the procedural requirements without
considering substantive compliance); Volk v. Oregon,
799 P.2d 658, 662 (Or. App. 1990) ("We conclude that
the procedural requirements of the Act are separate
from the substantive requirement . . . .").
Accordingly, we affirm the superior court's grant of
summary judgment to ASHNHA.
C. FAILURE TO AWARD ASHNHA ITS FULL ATTORNEY'S FEES
The standard of review applicable to the trial court's
award of attorney's fees is whether the trial court
abused its discretion. See, e.g., Thorstenson v. ARCO
Alaska, Inc., 780 P.2d 371, 376 (Alaska 1989); Cooper
v. Carlson, 511 P.2d 1305, 1309 (Alaska 1973). Abuse
of discretion will be found where the reviewing court
has a definite and firm conviction that a mistake has
been made. Pugil v. Cogar, 811 P.2d 1062, 1065 n.5
ASHNHA argues that the court erred in applying the
partial award provisions of Alaska Civil Rule 82,
rather than awarding the full amount of attorney's fees
pursuant to 42 U.S.C. 1988 (1988). ASHNHA asserts
that 1988 requires a trial court to award the full
amount of a successful plaintiff's fees. In response,
the State argues that 1988 does not entitle a
successful plaintiff to full attorney's fees, but only
to a reasonable fee determined in the court's
discretion. The State contends that the court properly
exercised its discretion under 1988 and under Alaska
Rule 82 in awarding ASHNHA 40% of its total fees.
The State is correct that 1988 does not guarantee an
award of full attorney's fees. Section 1988 provides
that "the court, in its discretion, may allow the
prevailing party . . . a reasonable attorney's fee as
part of the costs." 42 U.S.C. 1988(b) (1988)
(emphasis added); see also Ferdinand v. Fairbanks, 599
P.2d 122, 126 n.12 (Alaska 1979) ("We cannot, however,
agree with appellants that [ 1988] requires an award
of the full amount of fees claimed, but only those fees
that are reasonable."). However, we have noted that
"[f]ull attorney's fees are the norm under 42 U.S.C.
1988." Moseley v. Beirne, 626 P.2d 580, 581 (Alaska
1981). In addition, this court has stated
[w]hile the award of attorney's fees
under both the Alaska Rule  and the
federal statute [ 1988] remains within the
trial court's discretion, that discretion is
narrowly limited when attorney's fees are
awarded pursuant to the federal act, and will
be reviewed on appeal in light of federal
rather than Alaska law.
Ferdinand, 599 P.2d at 125.
Since the trial court's summary judgment decision was
based on federal law, the award of attorney's fees
should have been made pursuant to 1988. Although the
trial court cited both 1988 and Alaska Rule 82 in its
order awarding 40% of ASHNHA's actual costs, it did not
discuss its reasons for refusing to award 100% of
ASHNHA's fees. The United States Supreme Court has
held that the fee amount must be determined on the
facts of each case, and has noted that Congress has
identified twelve factors appropriate for such a
determination. Hensley v. Eckerhart, 461 U.S. 424, 429-
30 (1983) ("the House Report . . . refers to 12 factors
set forth in Johnson v. Georgia Highway Express, Inc.,
[488 F.2d 714, 717-19 (5th Cir. 1974)]"). The order of
the superior court does not indicate that it looked to
these factors in setting the award. In fact, the order
provides no explanation as to how or why the court
arrived at the 40% figure. Although the court has
discretion in determining the amount of the fee award,
"[i]t remains important, however, for the district
court to provide a concise but clear explanation of its
reasons for the fee award." Hensley, 461 U.S. at 437.
The court's failure to comply with federal law in
setting the fee award constitutes an abuse of
discretion. Accordingly, the case is remanded for a
redetermination of ASHNHA's reasonable fees under
D. STAY OF PROCEEDINGS
Following the superior court's order invalidating
section 685(g), the State obtained a stay of this order
pending resolution of the appeal. On cross-appeal,
ASHNHA challenges the propriety of this stay.
The appropriate standard of review is whether the trial
court abused its discretion in granting the stay.
Powell v. Anchorage, 536 P.2d 1228, 1229 (Alaska 1975).
ASHNHA argues that the court erred in granting the stay
because the State failed to meet any of the
requirements necessary to qualify for a stay. The
State argues that this court should avoid deciding this
issue since this court's decision on the merits will
render the issue moot. This court will
ordinarily refrain from deciding questions "where the
facts have rendered the legal issues moot." Hayes v.
Charney, 693 P.2d 831, 834 (Alaska 1985) (quoting Doe
v. State, 487 P.2d 47, 53 (Alaska 1971)). Under the
public interest exception, however, we will sometimes
reach an otherwise moot issue. Doe, 487 P.2d at 53.
The court considers the following factors in applying
1) whether the disputed issues are
capable of repetition, 2) whether the
mootness doctrine, if applied, may repeatedly
circumvent review of the issues and, 3)
whether the issues presented are so important
to the public interest as to justify
overriding the mootness doctrine.
Hayes, 693 P.2d at 834. These factors are not "strictly
determinative," and the determination of whether to
review a moot question is ultimately within the
discretion of the court. Id.
We conclude that the public interest exception to the
mootness doctrine is inapposite. Thus we do not
address the propriety of the stay.16
The superior court was correct in concluding that
exhaustion of administrative remedies is not required
as a prerequisite to filing an action under 42 U.S.C.
1983. Furthermore, we agree that the State failed to
comply with the procedural requirements of Boren. The
court's grant of summary judgment is therefore
The superior court abused its discretion, however, in
awarding ASHNHA 40% of its attorney's fees under 42
U.S.C. 1988. Although 1988 does not require the
award of full fees, the court must apply the factors
provided under federal law, and must articulate its
reasons for reducing the fee award. Accordingly, the
trial court's decision as to attorney's fees is VACATED
and REMANDED for redetermination.
1. The superior court later reconsidered its grant of
partial summary judgment and reinstated some of
ASHNHA's state law claims.
2. This order was stayed, however, pending resolution of
3. In Wilder the Supreme Court noted two situations in
which 1983 claims are not available: (1) where
plaintiffs seek to enforce a statute that does not
create enforceable rights, privileges or immunities,
and (2) where Congress has foreclosed enforcement of
the statute. Wilder, 496 U.S. at 508. The Court
addressed the availability of state administrative
remedies in the context of the second exception.
Virginia had argued that "the existence of
administrative procedures whereby health care providers
can obtain review of individual claims for payment
evidences an intent to foreclose a private remedy in
the federal courts." Id. at 523. The Supreme Court
rejected this argument, holding that "Congress did not
foreclose a private judicial remedy under 1983." Id.
4. In finding this substantive requirement, the Court
[T]he only plausible interpretation of
the amendment is that by requiring a State to
find that its rates are reasonable and
adequate, the statute imposes the concomitant
obligation to adopt reasonable and adequate
Wilder, 496 U.S. at 514-15. The Court went on to note that
"[w]hile there may be a range of reasonable rates,
there certainly are some rates outside that range that
no State could ever find to be reasonable and adequate
under the Act." Id. at 519-20; see also Note,
Medicaid, State Cost-Containment Measures, and Section
1983 Provider Actions Under Wilder v. Virginia Hospital
Association, 45 Vand. L. Rev. 487, 508 (1992).
Since the trial court in this case found that the State
violated the procedural requirements of Boren, the
court did not consider whether the rates adopted were
actually reasonable and adequate. Accordingly, the
issue of the State's substantive compliance with Boren
is not before this court. It should be noted, however,
that a trial court must reach the issue of substantive
compliance if the court finds that the procedural
requirements were met. See Wilder, 496 U.S. at 513-15.
5. The State argues that the AMISUB court's approach
"represents, at most, a minority rule" that is
inconsistent with the decisions of numerous other
courts. While it is true that courts have been less
than consistent in applying standards of review to
Medicaid payment schemes, the cases cited by the State
do not necessarily contradict AMISUB. For example,
although the United States Court of Appeals for the
Fifth Circuit applied a deferential standard to a
payment scheme, it also noted that "[a] district court
can, of course, decide whether federal law has been
violated." Mississippi Hosp. Ass'n, Inc. v. Heckler,
701 F.2d 511, 516 (5th Cir. 1983). If a state agency
has complied with the requirements of federal law, it
is entitled to deference. However, the initial
determination of whether the agency complied with
federal law is not entitled to deference.
6. The standard applicable to a review of a state's
substantive compliance with Boren is somewhat more
deferential. The Supreme Court noted that:
the Courts of Appeals generally agree
that when the State has complied with the
procedural requirements imposed by the
amendment and regulations, a federal court
employs a deferential standard of review to
evaluate whether the rates comply with the
substantive requirements of the amendment.
Wilder, 496 U.S. at 520 n.18. See, e.g., AMISUB, 879 F.2d at 799-
800. Since the superior court in this case did not
reach the question of whether the State's plan met the
substantive requirements of Boren, the deferential
standard of review should not be applied.
7. In addition to the findings requirement, Boren also
requires the State to make assurances to the federal
government that its rates are reasonable and adequate.
42 U.S.C. 1396a (a)(13)(A) (1988). However, primary
responsibility for the development of rates and the
findings on which they are based remains with the
State. The Secretary "reviews only the reasonableness
of the assurances provided by a State and not the
State's findings themselves." Wilder, 496 U.S. at 507-
08 (citing 42 CFR 447.256(2) (1989)).
8. While the State does not directly argue that the test
articulated in AMISUB is incorrect, several of its
points lead to that conclusion. This position is
clearly a minority one. Although the United States
Court of Appeals for the Seventh Circuit recently
suggested that AMISUB is not the only test available
under Boren, Illinois Health Care Association v.
Bradley, 983 F.2d 1460 (7th Cir. 1993), no other court
has ever challenged AMISUB. Further, at least one
federal district court has explicitly rejected the
argument that AMISUB misstates the statutory standard
under Boren. Multicare, 768 F. Supp. at 1391.
9. ASHNHA points out that the State's own witnesses
admitted they made no attempt to identify which Alaska
facilities were efficiently and economically operated.
In addition, ASHNHA asserts that the State failed to
make findings that established a nexus between the
costs of operating efficient and economic facilities
and the proposed reimbursement rates.
10. While the State is free to adopt this general approach,
it should avoid interpreting the AMISUB test in a way
contrary to Boren. The third prong of the AMISUB test,
for example, requires states to determine rates that
meet the "reasonable costs of the state's efficiently
and economically operated hospitals." AMISUB, 879 F.2d
at 796. This prong is inconsistent with Boren to the
extent that it suggests that states must pay the
"reasonable costs" of services actually provided by
In this case, for example, ASHNHA interprets the third
prong as follows: "The Boren Amendment requires that
only those facilities which the state determines to be
`efficiently and economically' operated must be paid
rates that are adequate to meet their costs." This
interpretation reflects a misunderstanding of the
language and intent of Boren. Responding to a similar
argument, the United States Court of Appeals for the
Seventh Circuit concluded that the hospital's approach.
rests on the false premise that a state
is required to reimburse any efficient and
economic facility for its reasonable, actual
costs. This merely transmutes the post-Boren
prospective rate-setting approach into the
pre-Boren retrospective "reasonable cost"
Lett v. Magnant, 965 F.2d 251, 256 (7th Cir. 1992); see also Mary
Washington Hosp., Inc. v. Fisher, 635 F. Supp. 891, 899
(E.D. Va. 1985) ("the premise that a hospital is
entitled under the new law to be recompensed its
reasonable costs unless it is inefficient or
uneconomical . . . reflects a misunderstanding of [the
11. For example, the United States Court of Appeals for the
Third Circuit recently found that the findings
requirement was not satisfied where the state had
made no findings based on empirical
studies "on such matters, for example, as the
characteristics of an efficient and
economical hospital operation, the impact of
the proposed reimbursement rates upon
hospitals' ability to survive, etc. . . ."
Temple University v. White, 941 F.2d 201, 210 (3d Cir. 1991)
(quoting Temple University v. White, 729 F. Supp. 1093,
1100 (E.D. Pa. 1990)), cert. denied, 112 S. Ct. 873
12. Although Pinnacle relied on the test articulated in
AMISUB, this reliance does not preclude our use of the
opinion's general reasoning.
13. In reaching its conclusion, the superior court applied
the AMISUB test. As noted, this test essentially
requires states to specifically "identify and
determine" which facilities are efficiently and
economically operated. Since the State in this case
admitted that it did not attempt to concretely identify
which facilities were efficiently operated, the
superior court determined that the State failed to
comply with the findings requirement of Boren.
14. In fact, from a practical standpoint the State's
methodology may be more useful for identifying
inefficient providers than efficient ones. For
example, if a facility has demonstrated costs well
above the weighted average of facilities in the same
class, one might reasonably conclude that it is
inefficient. However, it is more difficult to conclude
that a facility operating at or just below the mean is
efficient. Without more specific information about the
various facilities it is impossible to draw any
meaningful inferences about where the state should set
its objective benchmark of efficiently operated
facilities. See Bradley, 776 F. Supp. at 421 n.22
("[A] showing that the most economically and
efficiently operated firm in an industry can make a go
of it at a stated price tells nothing about whether the
No. 2 firm does or does not meet the objectively stated
15. See 42 C.F.R. 413.30(e), .30(f) (allowing exemptions
and exceptions to the upper limit on reimbursement).
16. ASHNHA also argues as cross-appellant that the court
erred in considering certain affidavits which the State
offered in opposition to ASHNHA's motion for summary
judgment. Since the court granted ASHNHA's motion, it
is not clear why ASHNHA has asked this court to review
this decision, or what type of remedy it seeks. Even
if the admission of the affidavits was erroneous, the
admission was not prejudicial to ASHNHA. See Nome 2000
v. Fagerstrom, 799 P.2d 304, 311-12 (Alaska 1990)
(allegation of erroneous admission of evidence was moot
where evidence did not affect outcome).