              IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT
                           ____________

                              No. 92-3995

               ABBEVILLE GENERAL HOSPITAL, ET AL.,

                     Plaintiffs-Appellants,

                                  v.

                   DAVID L. RAMSEY, Secretary,
          Department of Health and Hospitals, ET AL.,

                         Defendants-Appellees.

                             ____________

          Appeal from the United States District Court
              for the Middle District of Louisiana
                          ____________

                       (September 22, 1993)
Before EMILIO M. GARZA and DeMOSS, Circuit Judges and Zagel1,
District Judge.

ZAGEL, District Judge.

A penny saved is a penny earned.       That is the formula for federal

Medicaid law--hospitals that save dollars by operating

efficiently and economically earn state and federal dollars to

cover all operating costs.    The Medicaid Act,2 specifically the

Boren Amendment, provides that hospitals in participating states

that operate "efficiently and economically" are entitled to

reimbursement of costs which must be incurred.

42 U.S.C. § 1396a(a)(13)(A) (1991).      Louisiana's Medicaid plan

adopts the same formula since Louisiana elected to participate in

     1
      District Judge of the Northern District of Illinois,
sitting by designation.
     2
      Title XIX of the Social Security Act, 42 U.S.C. § 1396 et
seq., is commonly referred to as the Medicaid Act.
the joint federal-state Medicaid program and receive matching

federal funds.    Louisiana's Department of Health and

Hospitals ("LDHH"), under the direction of its secretary,

administers its Medicaid plan.

     As a participating state, Louisiana must comply with the

Medicaid Act and implementing regulations promulgated by the

Health Care Financing Administration (HCFA).         Amisub, (PSL), Inc.

v. Colorado Dep't of Social Servs., 879 F.2d 789, 794 (10th Cir.

1989), cert. denied, 496 U.S. 935 (1990).         The federal structure

gives each state Medicare agency a certain degree of flexibility

in developing its Medicaid plan.         Each plan, however, must

provide for the reimbursement of inpatient hospital services:

     through the use of rates . . . 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).    In fact, the Supreme Court in

Wilder v. Virginia Hosp. Assoc., 110 S. Ct. 2510 (1990), held

that the leeway in adopting a method of computing rates does not

relieve States of their obligation to pay reasonable rates.         Id.

at 2520.   Once developed, each state must submit its plan to HCFA

for approval.    42 U.S.C. § 1396.       To secure HCFA approval, each

state Medicare Agency must make findings and submit assurances to

HCFA that:   (1) the payment rates "are reasonable and adequate to

meet the costs that must be incurred by efficiently and

economically operated providers"; (2) the methods and standards


                                     2
employed "take into account the situation of hospitals which

serve a disproportionate number of low income patients with

special needs"; and (3) the payment rates "are adequate to assure

that recipients have reasonable access, taking into account

geographic location and reasonable travel time, to inpatient

hospital services of adequate quality."    42 C.F.R. § 447.253

(b)(1)(i), (ii)(A), (ii)(C) (1992).    Such findings must be made

and assurances filed with every amendment to established plans;

findings must be made at least annually.    42 C.F.R. § 447.253

(a),(b) (1992).

     LDHH first developed its Medicaid plan for inpatient

hospital services in 1983.    Under the plan, LDHH reimburses

hospitals 100 percent of all capital costs, educational expenses,

and malpractice expenses.    The remaining operating costs are

reimbursed either on a 100 percent basis or at a maximum level

predetermined by each hospital's "target rate."    LDHH set each

hospital's initial "target rate" as the higher of its 1980 and

1981 average operating costs per Medicaid discharge.    The plan

allowed LDHH to increase these target rates in 1982, 1983, and

1984 in accordance with HCFA's inflation index published

periodically.   In 1985 and 1986, LDHH submitted proposed

amendments to freeze the target rates for cost reporting periods

beginning July 1, 1985 through June 30, 1987.    HCFA approved this

freeze.   In 1987, LDHH resumed its plan and increased target

rates up to 2.3% under the HCFA index.    In 1988, LDHH again froze


                                  3
target rates until July 1, 1990, despite HCFA's disapproval of

the proposed amendment.3   Since then, target rates have increased

annually by the amount of the applicable HCFA indices.

     The dispute in Louisiana concerns whether LDHH made findings

and submitted assurances as required by the Boren Amendment.    The

Hospitals4 here complain that LDHH did not apply the "penny

saved, penny earned" formula outlined in the Medicaid Act in

deriving the reimbursement rates set under Louisiana's initial

Medicaid plan and amendments for the years 1985, 1986, 1988, 1989

and 1990.    The Hospitals filed a § 1983 action against the

Secretary of LDHH and other agency officials, claiming their

actions deprived them of rights secured under the Boren

Amendment.    The Hospitals eventually moved for partial summary

judgment declaring that LDHH failed, as a matter of law, to

comply with the Boren Amendment when it established reimbursement

rates and other payment schedules under Louisiana's Medicaid

plan.    In the motion, the Hospitals challenged LDHH's assurances

submitted to HCFA, insisting that LDHH failed to make any

     3
      HCFA rejected LDHH's assurances and disapproved the 1988
amendment, stating that LDHH failed to "provide any information
or data that demonstrates any relationship between [the 60
percent of the] facilities [being reimbursed their costs] and
efficiency and economy. . . . [and] failed to substantiate its
contention that its rates take into account economic conditions
that will occur during the rate year." (Letter dated
December 20, 1989 from Louis B. Hays, HCFA Acting Administrator,
to Carolyn O. Maggio, LDHH Director.)

     4
      Fifty-eight Louisiana hospitals ("Hospitals") joined to
file this federal suit.

                                  4
"findings" that the rates set were reasonable and adequate to

meet the costs that must be incurred by efficiently and

economically operated hospitals.

     LDHH followed suit and filed a cross motion for partial

summary judgment declaring that it complied with the findings

process mandated in the Medicaid Act and its regulations.     The

district judge granted LDHH's motion for partial summary

judgment, concomitantly denied the Hospitals' motion for summary

judgement, dismissed the case in its entirety, and subsequently

denied the Hospital's motion for a new trial, but amended his

prior ruling.5   The Hospitals now appeal.   This Court has

jurisdiction to hear their appeal under 28 U.S.C. § 1291.

     5
      In their motion for new trial, the Hospitals assigned error
to the district court's dismissal of their claims challenging the
substantive adequacy of the rates not raised in the cross motions
for summary judgment. The district judge denied the motion
without addressing the issue. Rather, in the October 26, 1992
ruling, Judge Polozola stated:

     The Court deletes from its first opinion the reference
     that the HCFA had approved the 1988 "freeze" amendment.
     This is a clerical error on the Court's part and has no
     bearing on the Court's final decision. As noted in the
     first opinion, the approval by the HCFA is not binding
     on the Court, but is evidence which may be considered
     by the Court.

     Both parties concede that summary judgment was sought only
on LDHH's procedural compliance with the Boren Amendment. LDHH
argues that summary judgment, declaring LDHH had made valid
findings, automatically forecloses the Hospitals' challenge to
the substantive adequacy of the rates set. See infra note 11,
discussing propriety of district court's dismissal of case in its
entirety. Still remaining unaddressed at trial are the
Hospitals' claims related to outpatient services (subject of
undecided motion to dismiss) and to the state plan's failure to
provide adequate methods of accounting for changes in cases mix.

                                   5
     On appeal, the Hospitals seek review of the district court's

grant of summary judgment and other adverse rulings.    The

Hospitals maintain that the district court erred when it:

(1) applied the highly deferential "arbitrary and capricious"

standard of judicial review to the procedural issue of whether

the LDHH complied with federal law;   (2) determined that, as a

matter of law, LDHH complied with the Boren Amendment and was

entitled to summary judgment; and (3) dismissed the entire case,

including the substantive issues on the reasonableness and

adequacy of the reimbursement rates, after ruling only on the

preliminary issue of procedural compliance with the Boren

Amendment.

                        STANDARD OF REVIEW

     We review a district court's grant of summary judgment de

novo, employing the same standard as a district court would

employ under Federal Rule of Civil Procedure 56(c).    Harbor Ins.

Co. v. Urban Constr. Co., 990 F.2d 195, 199 (5th Cir. 1993).

Summary judgment is proper only if no genuine issue of material

fact exists and the moving party is entitled to judgment as a

matter of law.   FED. R. CIV. P. 56(c); Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 250 (1986).   All reasonable inferences are

drawn in favor of the nonmoving party.   Harbor, 990 F.2d at 199.

The parties here do not dispute the material facts.    They argue

whether the facts of record support a judgment as a matter of law

that LDHH made appropriate findings and assurances in compliance


                                  6
with the Boren Amendment.    LDHH says "yes"; the Hospitals say

"no."

     LDHH has made its findings and submitted assurances to HCFA

for approval of its initial Medicaid plan in 1984 and all

subsequent amendments to the plan's reimbursement rates.    HCFA

approved the plan and amendments to "freeze" reimbursement rates

until 1988.    LDHH contends that this federal agency action

entitles Louisiana's plan to a presumption of regularity and

warrants application of the arbitrary and capricious standard for

reviewing the record to determine whether LDHH complied with

federal law.    LDHH cites a litany of cases for the indisputable

proposition that a state agency's rate-setting action is entitled

to considerable deference and is reviewable only under the

arbitrary and capricious standard.6   But this rule does not

resolve the specific question presented here.

     There is a fundamental difference under the Medicaid Act

between an agency's discretion to set reimbursement rates and an

agency's mandatory compliance with the findings and assurances

requirements.    It is LDHH's compliance or noncompliance with the

findings requirement that is subject to cross motions for partial

summary judgment.    The findings requirement is both a procedural

     6
      See, e.g., Lett v. Magnant, 965 F.2d 251, 257 (7th Cir.
1992) (plaintiff must establish "that the plan is either
arbitrary and unreasonable or inadequate" and agency's actions
are presumptively valid); West Virginia Univer. Hosps., Inc. v.
Casey, 885 F.2d 11, 23-24 (3rd Cir. 1989) (court must apply
"deferential standard of review in assessing compliance with the
[Boren Amendment's] 'reasonable and adequate' requirement").

                                  7
and a substantive requirement--LDHH must find that the rates are

reasonable and adequate and the plan must adopt rates that are

actually reasonable and adequate.      Wilder, 110 S. Ct. at 2519;

Illinois Health Care Assoc. v. Bradley, 983 F.2d 1460, 1463 (7th

Cir. 1993) (distinguishing between the Boren Amendment's

procedural component that the agency make findings and assurances

and its substantive component that the plan implemented result in

adequate payments).    The Hospitals complained below of LDHH's

noncompliance in practice with the findings requirement and the

plan's noncompliance with the substantive findings requirement.

42 C.F.R. § 430.35(C) (1992) ("A question of noncompliance in

practice may arise from the State's failure to actually comply

with a Federal requirement, regardless of whether the plan itself

complies with that requirement.")).

     What standard does a federal court use to determine whether

LDHH complied with the procedural requirements of federal law,

i.e., whether LDHH, in fact, made the "findings" stipulated in

the Boren Amendment?    Whether LDHH complied with the procedural

requirements of the Boren Amendment is a question of law, subject

to de novo review.     Amisub, 879 F.2d at 795.   On this point, most

opinions are clear.7    By conducting such a review of the agency's

     7
      But see Illinois Health Care, 983 F.2d at 1462-63
(reviewing IDPA's procedural compliance with the findings and
assurances requirement under the arbitrary and capricious
standard). The Seventh Circuit states as its reason for
deferential treatment of this issue that the Secretary's approval
of the reimbursement plan renders the plan a "product of state
and federal agency action." This reasoning, however, does not

                                   8
actions, federal courts do not usurp the agency's permissible

authority to balance political and financial interests underlying

the Medicaid plan.

     The opinions are not so clear on the proper standard for

reviewing substantive compliance with the findings requirement.8

The opinions generally recite the boiler plate language--de novo

review of procedural and substantive compliance with federal law

and arbitrary and capricious review of nonadjudicatory agency

actions.   Some opinions then proceed, we think, to conflate the



apply when the state makes findings. The Secretary does not
participate in the agency's findings process. The Secretary's
role is confined to reviewing the reasonableness of the state's
assurances. Wilder, 496 U.S. at 507-08. The Secretary neither
reviews the methodology for reimbursement nor scrutinizes the
underlying findings. Id. LDHH's findings, therefore, are not
the product of state and federal agency action.
     LDHH concedes in its brief that "conceivably a de novo
standard might be appropriate" where no findings are made. Once
bona fide findings are made, however, LDHH's expertise and the
Secretary's approval warrant the same degree of deference to the
rate-setting decision as accorded a federal agency. The court in
Illinois Health Care recognized that determining the median cost
of operating nursing homes that retain a basic level of care and
pass inspection is a matter "for the state to solve by combining
its economic expertise with its practical knowledge." 983 F.2d
at 1465. But this expertise did not excuse the state agency's
obligation to make findings which establish a nexus between the
cost and the proposed reimbursement rates.
     8
      In Mississippi Hosp. Assoc., Inc. v. Heckler, 701 F.2d 511
(5th Cir. 1983), we recognized this bedlam and "assum[ed] without
deciding that by force of statutory or constitutional
requirements, a district court is entitled to review the actions
of a state agency administering federal Medicaid funding as it
would review the actions of a federal agency." Id. at 516. We
then proceeded, without further discussion, to determine whether
both the plan's rates and the state Medicaid agency's findings
were irrational and the product of arbitrary and capricious
decision-making. Id. at 516-519.

                                 9
issues reviewable for substantive compliance with the Boren

Amendment with issues reviewable as otherwise nonadjudicatory

agency action.9   Both involve a review of the underlying factual

foundation and a substantive determination regarding the adequacy

of the payment rates.   Both implicate a balancing of policy and

financial considerations.   Both fall within the auspices of the

state agency's exercise of discretion.   Finally, both are

reviewed to some degree by the Secretary prior to approving a

plan or amendment.   See Illinois Health Care, 983 F.2d at 1465

("rate-setting and the identification of efficiently and


     9
      The court in Amisub reviewed de novo whether the evidence
was sufficient to support the "finding" and assurances that
efficient and economical hospitals are reasonably and adequately
compensated. 879 F.2d at 797-799. The opinion focused on (1)
the expert testimony that no hospital, no matter how efficient,
would be reimbursed for actual costs and (2) the program
director's testimony that the assurances rested solely on the
historical trend concept, i.e., the new system is adequate
because it pays the same as the old system, which was adequate.
The Tenth Circuit said that "[s]ince we find no evidence admitted
at trial to support appellee's 'assurances' on appeal, and find
overwhelming evidence to the contrary, we hold that the Colorado
Medicaid Plan, effective July 1, 1988, is violative of the
substantive provisions of federal Medicaid law." Id. at 799.
     After this holding, the Tenth Circuit reviewed the record to
determine whether the state agency's findings and assurances were
reasonably related to a factual foundation or whether they were
arbitrary and capricious. Id. at 799-801. Here, the court
confined its review to whether the factors considered were
relevant. The court then found that the "record is blatantly
devoid of any effort . . . to make the federally mandated
findings" where the assurances are based solely on budgetary
constraints. Id. at 800. The court ultimately remanded the case
and ordered the state agency "to comply with the procedural and
substantive requirements of the federal Medicaid Act and its
implementing regulations, and to engage in a bona fide findings
process before submitting any new plan and/or assurances to
HCFA." Id. at 801.

                                10
economically operated facilities are all part of the same

process") (quoting Folden v. Washington State Dep't of Social &

Health Servs., 744 F. Supp. 1507, 1533 (W.D. Wash. 1990)).

     It is precisely the agency's exercise of discretion and the

Secretary's approval that warrant application of the arbitrary

and capricious standard of review.     Illinois Health Care, 983

F.2d 1462-63 (reimbursement plan, approved by Secretary and

product of federal-state agency action, must be reviewed with the

same deference accorded federal agency actions); Pinnacle Nursing

Home v. Axelrod, 928 F.2d 1306, 1313 (2d Cir. 1991).     The reason

for the policy of deferential review of a federal agency's

interpretation of federal law is its "expertise and familiarity

. . . with subject matter of its mandate and the need for

coherent and uniform construction of federal law nationwide."

Turner v. Perales, 869 F.2d 140 (2d Cir. 1989).    The joint

federal-state Medicaid program and the rate-setting flexibility

mandated by the Boren Amendment evoke the same policy.    This two-

step review process--de novo review of the state's factfinding

process and arbitrary and capricious review of the findings and

rates--provides the "minimum necessary to assure proper

accountability."    S. Rep. No. 139, 97th Cong., 1st Sess. 478

(1981), reprinted in 1981 U.S. Code Cong. & Admin. News 396,

744.10    It also strikes a balance between Congress's view of the

     10
      In holding that the Boren Amendment creates a right
enforceable under § 1983, the Supreme Court anticipated the
debate over standards of review in this area. It stated, "That

                                  11
federal role under the Medicaid Act and general principles of

federalism, which do not permit states to be final arbiters of

their compliance with federal law.   Accordingly, a presumption of

regularity and deferential standard attaches to LDHH's exercise

of discretion in setting reimbursement rates, but only after a

reviewing court determines that LDHH made bona fide findings.

     The first question then is whether LDHH made findings in

compliance with the Boren Amendment procedural requirements.    If

yes, then and only then will we need to inquire into the

substantive adequacy and reasonableness of these reimbursement

rates using the arbitrary and capricious standard of review.

Wilder, 498 U.S. at 520 n.18; Nebraska Health Care Assoc. v.

Dunning, 778 F.2d 1291, 1294 (8th Cir. 1985), cert. denied, 479

U.S. 1063 (1987).   Even this standard and the presumption of



the Amendment gives the States substantial discretion in choosing
among reasonable methods of calculating rates may affect the
standard under which a court reviews whether the rates comply
with the Amendment, but it does not render the Amendment
unenforceable by a court." Wilder, 110 S. Ct. at 2523. Wilder
did not decide what standard a court should use to review a state
agency's actions under the Boren Amendment. The Court, however,
did acknowledge that the Secretary has "limited oversight" over
the plans. Also, in holding that § 1983 allows for private
enforcement of the Boren Amendment, the Court rejected the
petitioners' argument that Congress gave the Secretary, not the
federal court, power to ensure that the rates are not based on
false findings. Id. at 2520. The Court's decision in Wilder
suggests that Congress intended federal courts to give deference
to a state's reimbursement rate determinations unless the
assurances submitted are based on patently false findings. The
Hospitals here contend any other result would render LDHH's duty
to make findings a mere formality, and LDHH's duty to make
appropriate findings under the Boren Amendment was not intended
by Congress to be a mere formality. Id. at 2520.

                                12
validity do not shield LDHH from a "thorough, probing, in-depth

review" of the Medicaid plan.    Illinois Health Care, 983 F.2d at

1463 (quoting Citizens to Preserve Overton Park, Inc. v. Volpe,

401 U.S. 402, 415 (1971) (reviewing under arbitrary and

capricious standard the Secretary's approval of highway

construction through park)).11

                         LDHH'S FINDINGS

     The Hospitals contend that LDHH never engaged in a findings

process to substantiate its compliance with the Boren Amendment

and its implementing regulations.     In their view, LDHH first

erred by not adopting an objective profile of what constitutes an

economically and efficiently operated hospital and, instead,

arbitrarily defined an economic and efficient hospital as one

whose costs do not exceed the assigned target rate.     Second, LDHH

improperly relied on "subjective, generalized and unsupported

assumptions about the general state of the economy in Louisiana"

in deviating from the state Medicaid plan and imposing target


     11
      The Hospitals also assign error to the district court's
dismissal of the entire case, including the substantive issues on
the reasonableness and adequacy of the reimbursement rates. This
Court agrees that there was error in dismissing the substantive
claims. The summary judgment motions pertained solely to the
issue of procedural compliance with federal law. While
procedural noncompliance renders futile any attempted substantive
compliance, procedural compliance does not guarantee compliance
with substantive federal law. See Mississippi Hosp. Assoc., Inc.
v. Heckler, 701 F.2d 511 (5th Cir. 1983) (reviewing separately
whether the state agency complied with the procedural
requirements and whether the reimbursement rates were adequate in
compliance with the substantive requirements of the Boren
Amendment).

                                 13
rate "freezes."     Third, LDHH violated federal law because it

implemented and continued the rate freezes in 1989 and 1990,

after HCFA disapproved the TN 88-12 proposed freeze, and because

LDHH did not submit assurances to HCFA for the years 1989 and

1990.     LDHH responds that it made the appropriate findings and

points to the affidavits of Carolyn O. Maggio (director of LDHH

Bureau of Health Services Financing) and LDHH employee

Helene Robinson (policy and program manager of Louisiana Medical

Assistance Program).

     Courts generally agree that a state can develop its own

methodology for arriving at the required findings.     Amisub, 879

F.2d at 797; Illinois Health Care, 983 F.2d at 1464.     Regardless

of the methodology, an agency still must make the required

findings.12     What constitutes a Medicaid Act "finding" has been

     12
          Federal regulations provide:

     (b) Findings. Whenever the Medicaid agency makes a
     change in its methods and standards, but not less often
     than annually, the agency must make the following
     findings:
     (1) Payment Rates. (i) The Medicaid agency pays for
     inpatient hospital services and long-term care facility
     services through the use of rates that are reasonable
     and adequate to meet the costs that must be incurred by
     efficiently and economically operated providers to
     provide services in conformity with applicable State
     and Federal laws, regulations, and quality and safety
     standards.
     (ii) With respect to inpatient hospital services--
     (A) The methods and standards used to determine
     payment rates take into account the situation of
     hospitals which serve a disproportionate number of low
     income patients with special needs;
          . . . .
     (C) The payment rates are adequate to assure that

                                   14
defined in different ways in the last decades.    Some opinions

suggest that a finding simply consists of a "reasonably

principled analysis."     Folden, 744 F. Supp. at 1532.   Others,

ostensibly in the spirit of the Boren Amendment's flexible rate-

setting scheme, pose that a finding is any showing of a "nexus"

between reimbursement rates and efficiently and economically

operated hospitals.     Pinnacle Nursing Home, 928 F.2d at 1314.

The most detailed definition of a finding appears in Amisub.

     [T]he 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.

Amisub, 879 F.2d at 796 (emphasis in original).

     Whether a court chooses to require a "reasonably principled

analysis" or a "nexus" or a profile of efficiently and

economically operated hospitals is not crucial to determining

compliance with the findings requirement.    All three of these

cases adopt their own terminology to answer the same question.

That is, what is the minimum quantum of evidence that an agency

must possess in its cognition to substantiate its assurances that

the reimbursement rates in the Medicaid plan and any proposed


     recipients have reasonable access, taking into account
     geographic location and reasonable travel time, to
     inpatient hospital services of adequate quality.


42 C.F.R. § 447.253(b) (1992).

                                  15
amendments (1) reasonably and adequately meet the costs that must

be incurred by efficiently and economically operated hospitals,13

(2) accommodate hospitals serving a disproportionate number of

low income patients with special needs, and (3) adequately ensure

that Medicaid recipients have reasonable access to inpatient

hospital services of adequate quality.   42 C.F.R. § 447.253(b)

(1)(i), (ii)(A), (ii)(C) (1992).

     The evidence clearly need not consist of the state agency's

own comprehensive study of all state hospitals.   In Illinois

Health Care, the Seventh Circuit aptly observed that a sample of

nursing homes as "paradigms of efficiency" may be impossible,

waste money better spent on patients, and lead to more

controversy.   Illinois Health Care, 983 F.2d at 1464-65.   On the

other hand, the findings requirement is not a mere formality that

can be satisfied simply by having a state officer think a bit

about hospital costs and then copy out the statutory language on

a piece of paper, put the heading "assurances" on that piece of

paper, and send it to HCFA.   Wilder, 110 S. Ct. at 2520; Amisub,

879 F.2d at 797; see Pinnacle Nursing Home, 928 F.2d at 1313-14

(procedural requirements are not "mere surplusage" but restrict

the state's flexibility in formulating its reimbursement plan).

The state agency must show it conducted an objective analysis,

     13
      Part and parcel of this requirement is that a state find
that lower rates are imposed on hospitals providing inappropriate
levels of care as mandated in 42 C.F.R. § 447.252(a)(3)(ii).
Mississippi Hosp. Assoc., Inc. v. Heckler, 701 F.2d 511, 521-22
(5th Cir. 1983).

                                16
evaluation, or some type of factfinding process to determine the

effects of the rates on the level of care Medicaid patients

receive.    Nebraska Health Care, 778 F.2d at 1294.    As part of the

factfinding process, the state agency must "judge the

reasonableness of its rates against the objective benchmark of an

'efficiently and economically operated facility' providing care

in compliance with federal and state standards while at the same

time ensuring 'reasonable access' to eligible participants."

Wilder, 496 U.S. at 519.      This objective benchmark can be a

"relative rather than an absolute concept."      Illinois Health

Care, 983 F.2d at 1467.    It also can be implicit in a rate-

setting methodology.    Id.

     LDHH admits, with some hesitation, that it conducted no

studies and made no efforts to determine which state hospitals

are efficiently and economically run.      Instead, LDHH functioned

under the premise that every hospital was economically and

efficiently operated in 1981 and used the available cost reports

for that base year to calculate the target rates for each

hospital.   Whether a particular hospital remains efficient and

economical is gauged by whether the hospital stays within the

designated target rate.    Hospitals that exceed the designated

target rate are deemed not efficient or economical and are not




                                   17
reimbursed actual costs.   Rather, the hospitals receive the

maximum payment determined by their respective target rates.14

     14
      Helene Robinson is the policy and program manager of the
Louisiana Medical Assistance Program primarily responsible for
administering the Medicaid plan and assuring compliance with
federal law. Robinson's deposition on this point is worth an
excerpt:

          Pizza [Counsel for the Hospitals]: Now what I'm
     trying to find out is, was any kind of study or
     analysis done to determine that hospitals that met or
     didn't meet their target rate were, in fact, either
     economic or not economic or efficient or not efficient?
          Robinson: Other than the deeming [of economic and
     efficient based on the target rate]--
          Pizza:    Yes.
          Robinson: --as a result of the State plan?
          Pizza:    Right.
          Robinson: I'm not aware of any.
          Pizza:    Now your answer is limited to '82, or is
     that for the whole period that you've been involved in
     the program?
          Robinson: We do ongoing analyses of adequacies of
     the rates.
          Pizza:    I understand that, but I'm talking about
     the previous question. Has any study or analysis been
     done, to your knowledge, since you've been at the
     department concerning what you just answered?
          . . . .
          Robinson: Analyses that hospitals were efficient
     and economic if they were within their target rate?
          Pizza:    Right.
          Robinson: We did those types of analyses. I mean,
     if they were within their target rate, they were deemed
     efficient and economic, even though they might have had
     some continued inefficiencies.
          Pizza:    So then some analyses have been done at
     some time to determine which hospitals are, in fact,
     economically and efficiently operated?
          Robinson: They were deemed efficiently and
     economically operated if they were within--
          Pizza:    I'm still having a problem communicating
     then. I think it's clear so far that up to some period
     of time no studies were done to determine whether or
     not hospitals which met or didn't meet their target
     rate were, in fact, economically and efficiently
     operated?

                                18
     Clearly, the method by which LDHH promulgated the initial

target rates fails the Boren Amendment test.   LDHH did not make

any finding that its plan complied with the three substantive

requirements outlined in 42 C.F.R. § 447.253(b).    Other than the

cost reports, LDHH gathered no information and conducted no

empirical analysis to ascertain whether the target rates

"reasonably and adequately" compensated efficient and economical

hospitals and hospitals servicing a disproportionate number of

low income patients.   "Federal law is not satisfied if a state

merely makes conceptual policy decisions.   A policy predicated

upon provincialism and self-interest, not upon findings of

reasonableness and adequacy, is unacceptable."     West Virginia

Univ. Hosps., Inc. v. Casey, 885 F.2d 11, 30 (3rd Cir. 1989).

     LDHH insists that it engaged in "ongoing analyses of

adequacies of the rates."15   According to Robinson, in deciding


           Robinson: I don't know of any studies.
           Pizza:    Okay. What I'm trying to find out, is
     your answer limited to a particular year or does it
     cover the whole period of time you've been working in
     the Medicare program?
           Robinson: I guess it would cover about the whole
     time.
           . . . .
           Pizza:    But would you say that if you don't know
     of any such studies, then, in fact, there probably were
     no studies?
           Robinson: To any knowledge, there aren't any.




     15
          LDHH argues that it considered numerous factors and
information prior to imposing rate freezes:

                                 19
to freeze the target rates, she "looked at how costs had



     [1] Detailed operating and capital cost data for each
     hospital, including the extent to which individual
     hospitals recovered all or most of their operating
     costs[;]
     [2] [t]he long-term and continuing decline in hospital
     occupancy rates[;]
     [3] [h]ospital staffing levels[;]
     [4] [n]umbers of licensed hospital beds[;]
     [5] [t]he relatively few complaints regarding hospital
     quality of care, and information regarding hospital
     quality of care and information about certification of
     facilities[;]
     [6] [i]nformation concerning continued expansion of
     hospital facilities[;]
     [7] [i]nformation concerning entry and exit from the
     Medicaid program by inpatient hospitals[;]
     [8] [t]he availability of an administrative process for
     reviewing and adjusting upwards the target rates of
     individual hospitals[;]
     [9] [t]he State Plan's many generous features such as
     (i) 100 percent reimbursement of capital costs,
     malpractice and education expenses (ii) no cap on costs
     included in a facility's base year "target rate"
     calculation regardless of whether or not efficient; and
     (iii) generous per diem reimbursement of certain
     specialized care units, including neo-natal, burn,
     psychiatric and drug abuse units[;]
     [10] [d]ata regarding employment, income and other
     economic trends nationally, in the Gulf Region, and in
     Louisiana, including information regarding the
     relatively depressed character of Louisiana's economy[;
     and]
     [11] [t]he need for cost containment incentives.

(Appellee's Brief at 23-24 (record cites omitted).) LDHH cites
only to Helene Robinson's affidavit as proof that it considered
these factors. In determining whether LDHH complied with the
procedural requirements of the Boren Amendment, this Court is not
concerned with the adequacy of these alleged "findings" but with
LDHH's fact-gathering procedures. Helene Robinson's affidavit
indicates that she limited her review to the hospital's audited
cost reports and data "gathered from other agencies and the
media" on the general state of the economy in Louisiana (i.e.,
recession and high unemployment rate) as compared to the nation.
Robinson's deposition testimony clarifies exactly what efforts
she made on behalf of LDHH to satisfy the findings requirement.

                               20
increased from the base period to the current audited period

versus how the average target rate had increased in that same

period of time.   And that the increases in the target rate were

greater than the actual increases in costs."    The "costs"

compared were the hospitals' total cost per discharge, without

any separation of labor costs or other cost components.    Robinson

retrieved this cost data from audited cost reports available for

the latest time period.    There were hospitals whose data was not

considered.   She did not employ a random statistical sampling or

scientific methodology to determine that the hospitals reviewed

were representative.    Rather, Robinson admits in her deposition

that she didn't do an actual analysis but based the "process" on

what she thought was right based on her experience.    Robinson

further says that no analysis was done to determine if the

uncounted hospitals skewed the results until 1987 or 1988.

     Robinson says she reviewed other data available from the

"Department of Labor and Statistics" and other publications

reflecting general economic conditions.    Robinson recalls in

deposition she "had difficulty obtaining data on Louisiana-

specific" information.    She did manage to review "like weekly

things in the newspaper. . . . things in magazines and so on

regarding, you know, unemployment, drops in personal income, and

so on for the State."    However, this analyses could not be

reproduced because it was an "ongoing process" not reduced

"necessarily [to] a written bound copy of something."


                                 21
     Furthermore, Robinson neither recommended to her staff nor

initiated any efforts to obtain information regarding the

economic conditions in the State as they affect hospitals,

hospital labor costs, or any other costs that would be reflected

in the hospital cost reports.    Nor did Robinson recall having

access to or using any studies or data base concerning such

economic conditions and cost of care, or medical care, throughout

the State.    Finally, Robinson did not investigate the effects of

case mix changes on Louisiana providers, such as increased

outpatient services and longer hospital stays for inpatient

services.    What she says is this:

          Pizza:    [W]as any study done by DHH during the period
     1982 through 1989 to determine whether or not those factors
     influenced inflation for hospitals in Louisiana? [Those
     factors enumerated were the "increase in the hiring of RNs
     as opposed to LPNs, the increasing complexity of patient
     treatments, the trend of treating more outpatients [,] . . .
     that wage rates for hospital employees had climbed higher
     than for other kinds of employees, and finally that
     insurance costs had climbed at a higher rate for hospitals
     than it had for other industries nationwide."]
          Robinson: Studies were done in regard to hospital
     cost increases that would have reflected some of those
     factors.
          Pizza:    I know, but was a study done, though,
     looking at those factors themselves and their effect on
     hospitals in Louisiana, germane just to those factors?
          Robinson: We look at the factors in the aggregate.
          Pizza:    So your answer then is no particular
     study was done to look at those individual factors; is
     that right?
          Robinson: As I stated, we look at the factors and
     the increases in costs in the aggregate.
          Pizza:    Okay. Now when you say you looked at
     them in the aggregate, what did you do to look at them
     in the aggregate?
          Robinson: We review cost data--
          Pizza:    Cost reports?
          Robinson: --from the cost reports.

                                 22
          Pizza:    So you examine cost reports to see how
     that data affected hospitals; is that right?
          Robinson: We examine cost data to review--to
     determine the adequacy of the rates.

     LDHH's purported "ongoing analysis" suffers from the same

faulty logic as its initial rate-setting scheme.    Findings were

not made, instead assumptions were made.    It is circular for LDHH

to set target rates under the assumption that all hospitals are

efficiently and economically operated and then identify

efficiently and economically operated facilities as those whose

costs fall below their own reimbursement rate.    Under these

circumstances, a hospital's ability to keep costs below the

target rate is not a reflection of its efficiency or economy of

operations.   Even Robinson admits this fallacy in LDHH's rate-

setting methodology.   She testified at her deposition that "if

[the hospitals] were within their target rate, they were deemed

efficient and economic, even though they might have had some

continued inefficiencies."   She also acknowledges in her

affidavit that each hospital's target rate initially included all

allowable base year costs, without "limit[] or cap[] in any

respect to remove inefficient, uneconomic or unnecessary costs."

By enacting the Boren Amendment, Congress intended states to

abandon such "reasonable cost" schemes that paid actual hospital

costs, despite obvious disparities in efficiencies and economies,

in favor of reimbursement systems that encourage hospital

efficiency and cost containment.     H.R. Rep. No. 158, 97th Cong.,



                                23
1st Sess. 293 (1981)16; Temple University v. White, 941 F.2d 201,

207 (3rd Cir. 1991); West Virginia Univ. Hosp., 885 F.2d at 23.

             LDHH has reduced its findings process to a simple

exercise of compilation and assumption, completely ignoring the

Congressional mandate that state agencies consider relevant

factors such as efficiency, economy, quality of care, and

reasonable access.     LDHH emphasizes that it has received

relatively few complaints regarding hospital quality of care.

This fact, however, says nothing about the reasonableness or

adequacy of rates to meet the needs of efficiently and

economically operated hospitals where rates initially set assume

that every hospital is efficient and economic.     At most, LDHH's

"findings" process consisted of reviewing general information

regarding the state of the economy and the available cost

reports.     LDHH can point to nothing in the federal Medicaid

scheme that permits it to use the general state of the economy as




     16
          The House of Representatives Report states in pertinent
part:

     In eliminating the current requirement that States pay
     hospitals on a Medicare "reasonable cost" basis for
     inpatient services under Medicaid, the Committee
     recognizes the inflationary nature of the current cost
     reimbursement system and intends 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. 293 (1981) (emphasis
added).

                                   24
the sole justification for setting rates.17     Nor is there

anything that condones a findings procedure that employs only

historical cost data and projected inflation figures.     To the

contrary, courts have condemned similar schemes.

     In Amisub, the state Medicaid agency presented as evidence

of its "findings" process only a "consistency between the current

expenditure for Medicaid provider reimbursement and the amount of

money historically appropriated by the Colorado legislature, and

HCFA's acceptance of the previous Colorado Medicaid Plan."

Amisub, 879 F.2d at 796.      The Tenth Circuit rejected this

evidence as proof of "findings" for three reasons.     First, the

state agency's reliance on HCFA's approval of a previous plan

belies the statutory requirement that agency's make at least

annual findings.     Id. at 797.   Second, there is nothing in the

Medicaid Act from which to infer that an agency may rely solely

on the "historical trends concept" that the new plan is adequate

because the monetary appropriations are identical to the old

plan.     Id. at 797, 799.   Finally, a "record is blatantly devoid

     17
      In Illinois Health Care v. Bradley, 983 F.2d 1460 (7th
Cir. 1993), the Seventh Circuit affirmed the district court's
declaratory judgment invalidating Illinois's Medicaid plan for
failure to make proper findings. The rates allegedly were
premised on time and motion studies conducted in the early 1980's
in other states. Id. at 1466. Skeptical that the unproduced
studies ever existed, the court found that the plan did not
implicitly identify the economic and efficient nursing homes in
Illinois and, thus, did not comply with the Boren Amendment's
procedural requirements. Id. at 1467. The court also determined
that a finding that a rate is adequate and reasonable merely
because a number of nursing homes are profitable does not
constitute a "finding" in compliance with the Amendment. Id.

                                   25
of any effort . . . to make the federally mandated findings"

where the assurances are based solely on budgetary constraints.

Id. at 800.    The Tenth Circuit ultimately remanded the case and

ordered the state agency "to comply with the procedural and

substantive requirements of the federal Medicaid Act and its

implementing regulations, and to engage in a bona fide findings

process before submitting any new plan and/or assurances to

HCFA."    Id. at 801.18   We too remand this case and order LDHH to

engage in a bona fide findings process.

     LDHH likens its case to that in Mississippi Hosp. Assoc.,

Inc. v. Heckler, 701 F.2d 511 (5th Cir. 1983), where we affirmed

summary judgment declaring that Mississippi's Medicaid agency

complied with the federal procedural requirements.     Mississippi

Hosp., however, is inapposite for two reasons.     First, in

Mississippi Hosp., we did not review whether the state agency

engaged in a bona fide findings process.     Rather, Mississippi's


     18
      In Temple University v. White, 941 F.2d 201 (3rd Cir.
1991), the court invalidated the Medicaid plan for failure to
make "critical and required findings." The state agency's review
of its rate scheme was confined to internally-generated reports
identifying hospitals with reported costs above and below the
group rates and to some revenue projections. Id. at 210. The
agency also noted that it received no complaints from Medicaid
recipients regarding their ability to obtain care. Id. Both the
district and appellate courts concluded that the state agency
"made no findings as to the reasonableness or adequacy of its
rates to cover costs of an efficiently and economically operated
hospital or to account for the impact on a hospital of its
across-the-board budget neutrality adjustment and varying
percentage add-ons for disproportionate-share hospitals. . . .
[or to ensure] reasonable access to inpatient hospital care."
Id.

                                   26
Medicaid agency was accused of not complying with federal

procedural requirements based on its failure to consult with the

Medical Care Advisory Committee, its publication of an allegedly

inadequate public notice, and its failure to submit proper

assurances.   Id. at 520.   It is evident from our discussion that

Mississippi engaged in a bona fide findings process and that we

confined our review to the sufficiency of these findings under

the arbitrary and capricious standard.    Id. at 516-18.   We have

not reached this second stage of analysis in this case.

     Second, we find no similarities between the findings

processes adopted by LDHH and those adopted by Mississippi's

agency.   Mississippi based its rate ceiling on two-years and over

300 hours of "careful and objective studies of cost data filed by

Mississippi hospitals . . .[,] methods used by other states and

the federal government. . . .[,] an incredible rage of cost

incurred by hospitals," and statewide occupancy rates.       Id. at

517, 520.   Here, Robinson's review of cost reports was limited to

comparing the available aggregate costs to the hospital's target

rate to determine reimbursement.

     This Court cannot endorse such a pro forma compliance with

the findings requirement of the Boren Amendment.    LDHH's

inability to articulate an orderly process of evaluation or to

identify specific documents reviewed renders suspect its

"findings" and renders meritless its argument that it engaged in

a bona fide findings process.   Because we find that LDHH, as a


                                 27
matter of law, failed to comply in practice with the Boren

Amendment findings requirement, this Court REVERSES the district

court's grant of LDHH's summary judgment motion and denial of the

Hospitals' summary judgment motion.   This case is REMANDED for

proceedings not inconsistent with this opinion.




                               28
