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Lawsuits on Medicaid Seen a Threat to State Coffers

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A wave of lawsuits by hospitals and nursing homes seeking bigger Medicaid payments may put further pressure on already tight state budgets for education and other programs, according to welfare and state finance officials.

Medicaid lawsuits--which got a major boost from the U.S. Supreme Court in June--are pending in at least 18 states. If successful, they could easily cost the states hundreds of millions of dollars, health-care officials say.

The lawsuits basically contend that the states, which finance Medicaid along with the federal government, are failing to provide adequate reimbursements to cover the costs of health care given to the poor under the program.

While observers are not predicting exactly how high the total could go, they say the reverberations of a medical-funding crisis touched off by the lawsuits would be felt throughout state budgets.

"We haven't done any calculations, but you can expect that, depending on what the settlements are going to be, it could be quite costly," said Karen Farrell, a senior staff associate for the National Association of State Budget Officers.

In Virginia, for example, a suit by the state hospital association seeks at least $52 million a year in additional Medicaid reimbursements.

At the same time, the state is facing a severe budget crunch. Gov. L. Douglas Wilder last month and plans to trim $1.4 billion from state spending, including $173 million in aid to schools.

James Foudriat, information director for the Virginia education department, said the budget crisis comes in the wake of continued belt-tightening for the state's education programs. "There's definitely some blood on the floor," he said.

The looming Medicaid suit could create another setback for the state's ailing fiscal condition, said Paul Spera, a senior analyst in the state budget department. "Reasonable thinking tells you, given what's happening in the Virginia revenue posture, that if the lawsuit goes against us, the hole will be bigger, and [the money] is going to have to come from somewhere," he said.

The Virginia suit is scheduled to go to trial in December in U.S. discourt in Richmond. But welfare advocates say the case may have already had its most significant impact nationally by being the occasion for the Supreme Court's June decision affirming the right of care providers to sue states in federal court over Medicaid reimbursement policies.

The case "looks like a watershed event," said Jane Horvath, director of the American Public Welfare Association's health-policy unit.

In addition to encouraging new lawsuits, Ms. Horvath said, the decision frees a backlog of existing suits that were on hold anticipating the Virginia ruling.

Similar Medicaid suits are pending in California, Colorado, Florida, Illinois, Kansas, Kentucky, Michigan, Missouri, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, Texas, Vermont, and Washington State, according to the American Health Care Association and the American Hospital Association.

One such dispute is in Michigan, where the state this spring lost two cases in federal court that could cost more than $50 million a year. Both rulings are being appealed, but officials say even without the lawsuits, Medicaid is causing a budget crunch.

Michigan officials are anticipating a $150-million to $200-million Medicaid shortfall next year, according to Eileen Ellis, assistant to the director of the state Medicaid program. "And that's before you consider the impact of any lawsuits," she added.

The cases in Michigan and elsewhere challenge states' application of a 1981 law, known as the Boren Amendment, that revamped the Medicaid reimbursement system.

The law left states vulnerable to litigation, noted Tom F. Gilbride, deputy legal counsel for Ohio's human-services department, by giving them a great deal of flexibility in determining how much to pay care providers. The law requires that "reasonable and adequate rates" be paid to hospitals and nursing homes that are "efficiently and economically operated."

"I think you would have these lawsuits any time you reduce rates," he noted. "But the grayness of the Boren Amendment's standard makes it all the more easier to litigate over that issue, and states are being called on the carpet."

Mr. Gilbride noted that a $30-million lawsuit against Ohio, which had been dismissed by a lower court on procedural grounds, has been revived in part by the Virginia decision. The case is pending in the state supreme court.

Mr. Gilbride predicts the Virginia ruling will make states more susceptible to Medicaid suits. "The Supreme Court decision certainly makes it that much easier for lawsuits to be brought and cases to stay in court," he said.

"I think we're just seeing the beginning," added Ms. Horvath of the APWA

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