                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-29-1995

New Jersey Hosp. Assn v. Waldman
Precedential or Non-Precedential:

Docket 95-5391




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                                                                1


                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT
                           __________

                             No. 95-5391
                              __________

              THE NEW JERSEY HOSPITAL ASSOCIATION,
                                                  Appellant,
                               v.


                    WILLIAM WALDMAN,
                    VELVET MILLER,
                    LEONARD FISHMAN
                         _______________

          Appeal From the United States District Court
                 for the District of New Jersey
                   (D. C. Civ. No. 95-cv-1260)
                         _______________

                    Argued September 15, 1995

Before:   SLOVITER, Chief Judge, ALITO and SEITZ, Circuit Judges.

                    Filed: December 29, 1995
                        ________________


Mark H. Gallant, Esq. (Argued)
Thomas McKay, III, Esq.
Marcy C. Panzer, Esq.
Cozen & O'Connor
1900 Market Street
Philadelphia, PA 19103

   Attorneys for Appellant


Mark H. Lynch, Esq. (Argued)
Covington & Burling
1201 Pennsylvania Ave.
Washington, DC 20044

   Attorney for Appellees
                                                                   2




                      _______________________

                        OPINION OF THE COURT
                      _______________________

SEITZ, Circuit Judge.


           The New Jersey Hospital Association ("NJHA") instituted

this action challenging the reduction of Medicaid reimbursement

for general inpatient hospital services as set by the New Jersey

Department of Human Services, Division of Medical Assistance and

Health Services.   NJHA seeks declaratory and prospective

injunctive relief under 42 U.S.C. § 1983 claiming certain New

Jersey state officials violated the procedural and substantive

requirements of the Boren Amendment to the Medicaid Act, 42

U.S.C. § 1396a(a)(13)(A), in setting the new payment rates

effective March 6, 1995.   Here, NJHA appeals from the district

court's order denying its application for a preliminary

injunction seeking to invalidate the new rates.   The district

court had jurisdiction under 28 U.S.C. § 1331 and 42 U.S.C.

§ 1983.   We have jurisdiction pursuant to 28 U.S.C. § 1292(a)(1).



                                    I.   FACTS

                           A.   The Parties

           NJHA is a non-profit association representing seventy-

one of the eighty-four hospitals in New Jersey that receive

Medicaid reimbursement from the State of New Jersey.   The

defendants in this action are William Waldman, the Commissioner

of the Department of Human Services ("DHS"), Velvet Miller, the
                                                                     3


Director of the Division of Medical Assistance and Health

Services of DHS, and Leonard Fishman, the Commissioner of the New

Jersey Department of Health ("DOH").    The defendants have been

sued in their official capacities.    DHS is the state agency

responsible for New Jersey's Medicaid Program, and the Division

of Medical Assistance and Health Services is the office within

DHS that administers the program.    DOH assists DHS with Medicaid

rate-setting.   In this opinion, the defendants will be referred

to as "New Jersey" or "the State."



                B.   Medicaid and the Boren Amendment
          The Medicaid program "`establishes a joint federal and

state cost-sharing system to provide necessary medical services

to indigent persons who otherwise would be unable to afford such

care.'" Temple Univ. v. White, 941 F.2d 201, 205 (3d Cir. 1991)

(quoting Pinnacle Nursing Home v. Axelrod, 928 F.2d 1306, 1309

(2d Cir. 1991)).     State participants receive federal Medicaid

funds in return for administering a Medicaid program. They are

obligated to comply with certain federal statutory and regulatory

requirements in developing their programs. See West Va. Univ.
Hosps., Inc. v. Casey, 885 F.2d 11, 15 (3d Cir. 1989).

          Historically, states paid hospitals the "reasonable

costs" of services actually provided. See Wilder v. Virginia

Hosp. Ass'n, 496 U.S. 498, 507 n.7 (1990).    This amounted to

payment for the actual costs incurred by hospitals in providing

care to Medicaid recipients, regardless of disparities in costs

or efficiencies among hospitals.    However, in 1981 Congress
                                                                     4


enacted the Boren Amendment to the Social Security Act, which

gave state participants the ability to alter the Medicaid

repayment methodology.    States were given more flexibility to

formulate their rates.    Programs could include statewide or

classwide rates, rates based on a prospective cost, or incentive

provisions to encourage efficiency.    Flexibility was ensured by

limiting federal oversight. See id. at 507.    The Amendment

"replaced the `reasonable cost' standard with the current

standard of `reasonable and adequate to meet the costs which must

be incurred by efficiently and economically operated

facilities.'" West Va. Univ. Hosps., 885 F.2d at 15.

          In order to qualify for federal financial support, a

participating state must submit a "State Plan" or a change in

payment methods and standards to the Heath Care Financing

Administration of the Department of Health and Human Services

("HCFA"). See 42 U.S.C. § 1396a(a).   The state must make findings

and give assurances to the HCFA that its program comports with

federal requirements. Id.    Such findings and assurances also must

be made whenever a state changes its payment methods and

standards. See 42 C.F.R. § 447.253(a) & (b).


               C.     New Jersey's Medicaid Program

                 1.    1993 Repayment Methodology

          In 1993, New Jersey formulated a standardized,

predetermined, statewide payment amount for over 700 separate

Diagnosis Related Grouping's ("DRGs").    DRGs represent groups of

patients that are clinically similar to one another and
                                                                      5


relatively homogeneous with respect to resource utilization.      For

each hospital serving the state, rates were set for each DRG and

a statewide "mean" for each DRG was established.       To determine

the "mean," the State used 1988 hospital costs and 1991 billing

data.   Inflation factors were used to update 1988 hospital costs

to 1993 levels.    In addition, the mean-based DRGs were increased

by a 2.5% "operating margin" factor to create a margin surplus.

DRG payments included a capital cost allowance and a 9.15%

adjustment designed to ease the transition from the pre-1993

system, which provided higher payments.      The payment that a

hospital received for a "medicaid discharge" depended on the DRG

into which it fell.



                  2.     Revision of the 1993 System

            In early 1994, New Jersey decided to overhaul its 1993

Medicaid payment system.      Basically, the new Medicaid rate-

setting methodology made four changes to the previous repayment

system.   Payments of the 9.15% transition adjustment, 2.5%

operating margin, and capital cost allowance were eliminated. The

fourth change consisted of a "median-plus 5%" DRG standard in

place of the 1993 "mean-based" DRG standard.      Once again, 1988

hospital costs, adjusted for inflation, were the benchmarks for

each DRG.



                    D.    District Court's Opinion
            NJHA's complaint seeks, inter alia, an injunction
prohibiting use of the new rate-setting methodology, as well as a
                                                                   6


requirement that the State return to the methodology used in the

1993 system.   This action presently is pending before the

district court.   NJHA also sought a preliminary injunction. After

a hearing thereon, the district court ruled that substantial

compliance had been shown with respect to both the procedural and

substantive requirements of the Boren Amendment. On that basis,

it found that NJHA failed to demonstrate a reasonable likelihood

of success on the merits.    It thereupon denied a preliminary

injunction solely on that ground.     NJHA appeals.



                            II.   ANALYSIS

                   A. Preliminary Injunction
          In reviewing the district court's order denying NJHA's
motion for a preliminary injunction, "`[w]e review the district
court's conclusions of law in a plenary fashion, its findings of
fact under a clearly erroneous standard, and its decision to
grant or deny the injunction for an abuse of discretion.'" AT & T
v. Winback and Conserve Prog. Inc., 42 F.3d 1421, 1427 (3d Cir.
1994) (quoting Johnson & Johnson-Merck Consumer Pharmaceuticals,
Inc. v. Rhone-Poulenc Rorer Pharmaceuticals, Inc., 19 F.3d 125,
127 (3d Cir. 1994)). Those standards are employed in judging the
following factors:

          (1) the likelihood that the plaintiff will
          prevail on the merits at the final hearing;
          (2) the extent to which the plaintiff is
          being irreparably harmed by the conduct
          complained of; (3) the extent to which the
          defendant will suffer irreparable harm if the
          preliminary injunction is issued; and (4) the
          public interest. The injunction shall issue
          only if the plaintiff produces evidence
          sufficient to convince the district court
          that all four factors favor preliminary
          relief.


Id. (quoting Merchant & Evans, Inc. v. Roosevelt Bldg. Prods.,

963 F.2d 628, 632-33 (3d Cir. 1992)).
                                                                    7


           As a threshold matter, New Jersey argues that NJHA

cannot satisfy the irreparable injury requirement because each

hospital has an adequate state law remedy which should be

pursued.   It points to New Jersey Administrative Code 10:52-

9.1(b)(2) which provides in pertinent part that a hospital may

seek an adjustment to its rates if it can demonstrate that it

"would sustain a marginal loss in providing inpatient services to
Medicaid recipients at the rates under appeal even if it were an

economically operated hospital." (emphasis added).   A hospital

not satisfied with the administrative determination may seek

judicial review in the Appellate Division of the New Jersey

Superior Court. See N.J. Admin. Code tit. 10, § 52-9.1(d)(1995).

           For purposes of these proceedings, New Jersey has

defined marginal cost as 60% of actual costs.   By using 60% as

marginal cost, almost no hospital will be able to seek adjustment

of its rates.   More important, the administrative appeal process

is directed at an individual hospital's reimbursement rates, not

the methodology and implementation of New Jersey's entire

Medicaid Reimbursement Program.   We therefore conclude that the

use of the state's administrative remedy would not preempt this

action.

           We turn now to the application of the Boren Amendment

to this case.   In that respect, we are not without guidance from

this court. See, e.g., Temple Univ., 941 F.2d 201 (reviewing
Pennsylvania's Medicaid reimbursement rates to in-state

hospitals); West Va. Univ. Hosps., 885 F.2d 11 (reviewing
Pennsylvania's Medicaid reimbursement rates to out-of-state
                                                                      8


hospitals).   NJHA appears to appeal only the narrow question of

New Jersey's procedural compliance with the Boren Amendment. This

court has taken the view that the Boren Amendment contains both a

procedural and substantive dimension. Id. at 29.     However, the

line between the two is often blurred.      We, therefore, conclude

that review is facilitated, if not required, by examining both

procedural and substantive aspects of a state's plan.

Accordingly, we will address New Jersey's overall compliance with

the Boren Amendment.1



                        B.   The Boren Amendment

          In undertaking our review of New Jersey's new program,

we begin with the pertinent language of the Boren Amendment:
          A State plan for medical assistance must-- .
          . . provide-- . . . for payment . . . of the
          hospital services . . . provided under the
          plan through the use of rates (determined in
          accordance with methods and standards
          developed by the State . . . and which, in
          the case of hospitals, take into account the
          situation of hospitals which serve a
          disproportionate number of low income
          patients with special needs . . .) 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
1
 While NJHA appears to seek review of procedural compliance
alone, it states: "The central issue raised below and on appeal
is whether DHS properly engaged in an objective review of economy
and efficiency, and rendered bona fide `findings' capable of
supporting assurances that the resulting rates were `reasonable
and adequate' and not likely to impair reasonable `access' to
services." Appellant's Brief at 14. As discussed infra, this
Court has deemed the "reasonable and adequate" and the
"reasonable access" requirements as being substantive in nature.
Thus, NJHA necessarily seeks review of the State's procedural and
substantive compliance.
                                                                     9


          facilities in order to provide care and
          services . . . and to assure that individuals
          eligible for medical assistance have
          reasonable access (taking into account
          geographic location and reasonable travel
          time) to inpatient hospital services of
          adequate quality.


42 U.S.C. § 1396a(a)(13)(A)(emphasis added).      Initially, in

interpreting a state's plan, we note that the legislative history

of the Amendment manifests Congress's strong concern that its

procedural and substantive requirements be "invariably and fully

satisfied." West Va. Univ. Hosps., 885 F.2d at 24.      We turn to

our interpretive task with that caveat in mind.



                    1.   Substantive Compliance

          This Court has observed that the Boren Amendment

"authorizes states to develop their own Medicaid reimbursement

standards and methodologies for payment for hospital services,

but subjects those standards and methodologies to three general

federal requirements."   Id. at 22.   Those requirements mandate

that a state's rates
          (1) take into account the circumstances of
          hospitals serving a disproportionate share of
          low income patients;

          (2) are reasonable and adequate to meet the
          necessary costs of an efficiently operated
          hospital; and

          (3) are reasonable and adequate to assure
          medicaid patients of reasonable access to
          inpatient hospital care.


See Temple Univ., 941 F.2d at 210 (citing West Va. Univ. Hosps.,

885 F.2d at 22).   The implementing regulations for
                                                                  10


§1396a(a)(13)(A) reiterate these statutory requirements. See 42
C.F.R. § 447.253(b).2
          a.   "Disproportionate Share" and "Reasonable Access"
               Requirements


          2
           (a) State assurances. In order to receive
          HCFA approval of a State plan change in
          payment methods and standards, the Medicaid
          agency must make assurances satisfactory to
          the HCFA . . . and must comply with all other
          requirements of this subpart.

          (b) Findings. Whenever the Medicaid agency
          makes a change in its methods and standards,
          but not less often then 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; [and]

               . . . .

               (C) 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 (a) & (b) (emphasis added).
                                                                   11


          In enacting the Boren Amendment, there was a

congressional concern that states account for the special

circumstances of those hospitals serving a large number of

Medicaid patients. West Va. Univ. Hosps., 885 F.2d at 23 (citing
H.R. Rep. No. 158, 97th Cong., 1st Sess. 294-96 (1981)).

Moreover, Congress was concerned that a state's rates not be so

low as to cause the closing of a "dangerous number of hospitals

or of a single medically important facility" necessitating

unreasonable travel for Medicaid patients. Id. (citing H.R. Rep.

No. 158, 97th Cong., 1st Sess. 294 (1981); H.R. Conf. Rep. No.

208, 97th Cong., 1st Sess. 962, reprinted in 1981 U.S.C.C.A.N.

1010, 1324).   In developing its reimbursement rates, a state is

required to take into account the situations of those hospitals

serving a disproportionate share of low income patients and to

find that its rates assure Medicaid patients reasonable access to

inpatient hospital care.   With respect to these substantive

requirements this Court has said:
          We will not presume to declare how the State
          must satisfy these requirements, but neither
          will we defer to the State's judgment that
          the requirements have indeed been met.


West Va. Univ. Hosps., 885 F.2d at 24.   Accordingly, a state's

compliance with the disproportionate share and reasonable access

requirements is subject to our plenary review. Id.



          b.   "Reasonable and Adequate" Requirement

          In addition to the two previously identified

requirements, a state must find that its rates are reasonable and
                                                                    12


adequate to meet the necessary costs of an efficiently operated

hospital.    However, this Court has said that a court should not

undertake an independent assessment of what rates it believes are

reasonable and adequate.    Rather, the assessment should concern

itself with whether the rates are "arbitrary and capricious." Id.
            In West Virginia University Hospitals, it was noted

that in promulgating the regulations implementing § 1396a(a)(13),

the HCFA expressly declined to prescribe "reasonable and

adequate" rates. Id. at 26.    The Court observed that "`the term

is not a precise number, but rather a rate which falls within a

range of what could be considered reasonable and adequate.'"      Id.

(quoting 48 Fed. Reg. 56,046, 56,049 (Dec. 19, 1983)).    Thus, a

state must show a rational basis for its Medicaid program.     This

requires "`a rational connection between the facts found and the

choices made.'" Id. at 28 (internal quotations omitted)(quoting

Colorado Health Care Ass'n v. Colorado Dep't of Social Servs.,

842 F.2d 1158, 1167 (8th Cir. 1988)).    Accordingly, the Boren

Amendment contemplates a "deferential" standard of review by the

courts in assessing compliance with the reasonable and adequate

requirement. Id. at 23.    With the appropriate standards of review

in mind, we turn to an analysis of New Jersey's Medicaid Plan to

determine whether NJHA has shown the likelihood that it will

prevail on the merits of its claim that New Jersey violated the

Boren Amendment.


            (i)   New Jersey's Consideration of Hospitals Serving a
                  Disproportionate Number of Low Income Patients.
                                                                    13


          Initially, we consider whether New Jersey took into

account the situations of those hospitals serving a

disproportionate number of low income patients in developing its

new rates.   The district court seems not to have addressed this

requirement in reviewing New Jersey's substantive compliance with

the Boren Amendment, as no mention of it can be found in the

court's opinion.   However, it appears that the State gave some

consideration to the "disproportionate share" requirement.    We,

therefore, will undertake plenary review of New Jersey's

compliance with the "disproportionate share" requirement using

the record before us.

          In addition to reimbursement as determined by the new

methodology, hospitals receive disproportionate share ("DSH")

payments in respect of their Medicaid shortfall and their costs

of treating the uninsured. See Declaration of John Guhl,
Assistant Director for Budget Affairs of the Division of Medical

Assistance and Health Services of DHS ("Guhl Decl.") ¶ 30, Joint

Appendix ("J.A.") at 340.   Hospitals also receive DHS payments

under the Medicare program by treating a high volume of low

income patients, including recipients of Medicaid. Id.     However,

even with evidence of these additional payments, the record is

unclear as to how the new reimbursement program will impact those

hospitals serving a large number of Medicaid patients. Therefore,

we are unable to determine the extent or adequacy of the State's

consideration of the "disproportionate share" requirement.

Nonetheless, the record before us indicates some evidence of

compliance, and this Court has no evidence to the contrary.
                                                                   14


Accordingly, we are not prepared to say NJHA has shown the

likelihood of succeeding on the ground that the "disproportionate

share" requirement was not satisfied.


          (ii) Requirement that New Jersey's Rates Assure
               Medicaid Patients Reasonable Access to Quality
               Hospital Care, Taking Into Account Geographic
               Location and Reasonable Travel Time.


          In developing its reimbursement rates, a state is

required to find that its rates assure Medicaid patients

reasonable access to inpatient hospital care. See West Va. Univ.
Hosps., 885 F.2d at 22-23.   NJHA asserts that the State "made no

bona fide findings concerning the impact of the cuts on access to

care and quality of care."   Brief for Appellants at 34.   While

NJHA attacks this lack of findings on procedural grounds, we

consider this requirement to be substantive in nature, albeit one

having procedural prerequisites.   Once again, we undertake

plenary review of New Jersey's compliance with this requirement

on the record before this Court.

          The State argues that "[t]he district court had a

convincing array of evidence on access before it when it

considered NJHA's request for preliminary injunctive relief."

Brief for Appellees at 43.   Moreover, it asserts that "[t]he

strength of the record on this issue supports the district

court's implicit finding that NJHA would be unlikely to succeed

on the merits of a substantive challenge based upon a lack of

access." Id.
                                                                   15


          The district court failed to address individually the

"reasonable access" requirement.    Also, it did not articulate the

plenary standard of review to which we subject a state's

compliance with either the "disproportionate share" or

"reasonable access" requirements.    Consequently, we are uncertain

whether the district court would have found implicitly or

explicitly that New Jersey complied with the "reasonable access"

requirement had it reviewed the plan for its impact on access

under the proper standard of review.3    Hampered as we are by the

district court's failure to address this issue, we turn, in the

interest of disposing of this matter, to the question of whether

New Jersey considered access to quality hospital care.

          In considering access, the record before this Court

shows that the State took into account what it termed the "high

cost coverage" of the new system which it estimated to be 90% in

the aggregate. See Guhl Decl. ¶ 19, J.A. at 336.     Thus, it argues

access should not be affected.     The State also presented evidence

that New Jersey hospitals have excess bed capacity.    Presuming

this to be true, the State asserts that hospitals with excess

beds will have an incentive to treat Medicaid patients so long as

the marginal costs associated with these patients are paid and

some contribution is made toward defraying hospitals' fixed

costs.   Moreover, it has set forth that marginal costs

3
 To the extent one might glean from the district court's opinion
that the standard of review for substantive compliance with the
Boren Amendment in this Circuit is "arbitrary and capricious," we
wish to dispel that notion. Such standard of review only applies
to the substantive requirement that the new rates be "reasonable
and adequate."
                                                                  16


represented 60% of hospitals' average costs.   It contends that

because all hospitals will be reimbursed their marginal costs

under the new system, access will not be affected. Id. at ¶ 28,
J.A. at 339-40; see also Brief for Appellees at 41-43 (discussing

State's compliance with "access" requirement).

          Conversely, NJHA points to more recent figures and

argues that marginal costs are not 60% but 80% of actual costs.

Brief for Appellant at 36.   However, in testimony before the

district court the State proffered that even if marginal costs

are 80%, 69 of 84 hospitals will be reimbursed above the margin.

See Transcript of Testimony of J. Guhl, J.A. at 855-57,

Appellees' Supplemental Appendix at 5.   NJHA challenges this

proffer and asserts that only 60 hospitals will be reimbursed

their marginal costs. Reply Brief of Appellant at 19.

          Even if we were to accept that aggregately 90% of

hospitals will receive their costs, and marginal costs are 80% so

that 60 to 69 hospitals will be reimbursed their costs, the

record remains deficient on the effect of the rates on hospitals

in various geographic areas in New Jersey, and on travel time as

dictated by the Boren Amendment and its implementing regulations.

This deficiency notwithstanding, it is apparent that the State

gave some consideration to the "reasonable access" requirement.

Thus, although we cannot say with confidence how access will be

affected, we still are not prepared to say, in the context of a

preliminary injunction, that NJHA has shown the likelihood of

succeeding on its challenge to the State's compliance with the

"reasonable access" requirement.   At the final hearing, the
                                                                    17


record should be developed to determine whether under the new

system a dangerous number of hospitals in one geographic area or

a single important medical facility would be forced to close or

seriously reduce services to the detriment of the communities

they serve.    If the new rates create such dangers, the obvious

intent that states account for the special circumstances of those

hospitals serving a large number of Medicaid patients would be

violated.


            (iii) Requirement that New Jersey's Rates
            are Reasonable and Adequate to Meet the Costs
            of an Efficiently Operated Hospital.


            We turn to the third substantive requirement, viz.,

whether New Jersey's rates are "reasonable and adequate" to meet

the costs of an efficiently operated hospital.    In the past, we

have noted that "[w]hereas the substantive dimensions of the

first two requirements could be easily drawn from the statute and

its legislative history, discerning legislative intent with

respect to the substantive element of the reasonable and adequate

requirement is a more daunting project." West Va. Univ. Hosps.,
885 F.2d at 26.

            We note, once again, that we exercise a deferential

standard of review in determining whether the State's actions

were arbitrary and capricious in formulating the new rates. Under

this standard, we are cautioned that we should not undertake an

independent assessment of what rates we believe are reasonable

and adequate.    Rather, we should concern ourselves with whether
                                                                  18


New Jersey's determination was "arbitrary and capricious."

Thus, the State need only show a rational basis for its Medicaid

program.    Therefore, we will examine New Jersey's plan as a

whole.

            As the district court found, in determining the

statewide median for each DRG category, the State used the same

1988 hospital cost reports that it used to calculate the

statewide mean for each DRG in development of the 1993 rates.     It

then employed various inflation factors to raise the 1988 median

costs for each DRG to the most current year costs.    The district

court was not persuaded that the 1988 cost data was stale or

outdated. New Jersey Hosp. Ass'n v. Waldman No. 95-1260, 1995 WL
465664, at *10 (D.N.J. May 25, 1995).    The 1995 median-based

reimbursement methodology also includes additional payments for

high length of stay outlier4 cases to remunerate hospitals for

extraordinary costs sometimes incurred in treating Medicaid

patients.    NJHA, while arguing that use of 1988 costs adjusted by

the various inflation factors is improper, nevertheless asks us

to maintain the 1993 mean-based methodology which employs the

same 1988 costs similarly adjusted for inflation.    The

difference, as we see it, is that the payout using the 1993

methodology produces a more favorable result for NJHA members.

            In West Virginia University Hospitals we noted:
            It follows from the departure from a cost-
            driven reimbursement standard that a state's

4
 "Outlier" cases are those that have either an extremely long
length of stay or extraordinarily high costs when compared to
most discharges classified under the same DRG. See 48 Fed. Reg.
39752, 39776 (September 1, 1983).
                                                                     19


          plan does not violate the substantive
          provision of the reasonable and adequate
          requirement simply because it fails to
          reimburse one efficiently operated hospital
          its actual costs. What matters, rather . . .
          is whether the reimbursement rates . . . in
          the aggregate are arbitrary and capricious.


885 F.2d at 26 (emphasis added).     The district court found that

one of NJHA's own experts estimated under the 1995 median-based

system that New Jersey hospitals will be reimbursed in the

aggregate 83.36% of the costs they incur in treating Medicaid

patients in 1995.     Another NJHA expert compared 1993 Medicaid

costs to 1993 Medicaid payments using the 1995 median-based

system and found that in the aggregate 81.75% would have been

reimbursed using the new system.     The State asserts that upon

comparing hospitals' 1993 Medicaid costs to 1993 payments under

the new methodology, cost coverage would be over 90% in the

aggregate. New Jersey Hosp. Ass'n, 1995 WL 465664, at *12.
             Moreover, the district court noted that the changes

made to New Jersey's Medicaid program were prompted by the

following:
          DHS found that New Jersey hospitals' costs
          per discharge are the third highest in the
          nation. DHS also discovered that New
          Jersey's inpatient hospital payments per
          Medicaid recipient are the third highest in
          the nation. Moreover, DHS found that New
          Jersey hospitals' average length of stay for
          Medicare patients is 11.07 days as compared
          to the national average of 8.0 days. Lastly,
          DHS determined that under New Jersey's then-
          current Medicaid payment system, New Jersey
          hospitals were paid in excess of their actual
          costs (113% of costs in the aggregate). Thus,
          DHS was concerned that the then-current
          medicaid system violated the federal upper
                                                                     20


          limit. As a result, DHS determined that the
          mean-based DRG system was ripe for change.

Id. at *3 (citations omitted).
          Based on the foregoing findings of fact made by the

district court concerning the State's findings, which we cannot

say are clearly erroneous, and giving deference to the State, we

are not prepared to say that NJHA has shown, for preliminary

injunction purposes, that New Jersey's rates overall are

unreasonable and inadequate.    We so conclude because we cannot

say on this record that the rates were developed in an arbitrary

or capricious manner.     Thus, we hold that NJHA has not shown the

likelihood of succeeding on its challenge to the State's

substantive compliance with the Boren Amendment.       While aggregate

coverage is telling, it is not dispositive.        Among other things,

at a final hearing on the merits, further analysis might provide

evidence as to whether a large percentage of the unreimbursed

costs must be incurred by efficiently and economically operated

facilities.    If this is true, evidence of aggregate cost

coverage, as shown on this record, would not suffice to show

compliance with the federal requirement that the rates be

reasonable and adequate.    Finally, we turn to the question of

whether NJHA showed the likelihood of succeeding on its claim

that the State failed to comply with the procedural requirements.

                     2.    Procedural Compliance

          In reviewing New Jersey's procedural compliance with

the Boren Amendment, our review is plenary. Temple Univ., 941

F.2d at 209.
                                                                    21


          Procedurally, the State is required to give assurances

that its Medicaid plan complies with the federal requirements.

See 42 U.S.C. § 1396a(a)(13)(A); 42 C.F.R. § 447.253(a) & (b).
This Court has held that in giving such assurances "the federal

regulations implementing § 1396a(a)(13)(A) `unambiguously require

the state to make findings' to support its Medicaid plan." Temple

Univ., 941 F.2d at 208-09 (quoting West Va. Univ. Hosps., 885

F.2d at 30); see also Wilder, 496 U.S. at 513 n.11 (noting

requirement that states make findings is a necessary prerequisite

to the requirement that assurances be made).

                   a.     Findings and Assurances

          While assurances must be based on findings, there is no

absolute mandate as to what is required in terms of meeting the

"findings" requirement.    Logic dictates, however, that whatever

methods a state uses in arriving at the procedurally required

findings, such findings must be correct. Id. at 514.     Our

language in West Virginia University Hospitals is particularly

applicable here:
          The three federal provisions . . . contain
          both a procedural and substantive dimension.
          The procedural dimension is explicit in the
          federal regulations implementing section
          1396a(a)(13)(A). These federal regulations
          condition HCFA approval of a new state plan
          on the state's assurances that it has
          complied with the regulatory requirements.
          One of these regulatory requirements is that
          the State make findings in support of its
          change in medicaid plan. Essentially, the
          State is required to find that its new plan
          complies with the three substantive
          requirements . . . .
                                                                   22


885 F.2d at 29 (citation omitted).

          In Temple University, we were critical of
Pennsylvania's failure to make findings as to the reasonableness

or adequacy of its rates to cover the costs of an efficiently and

economically operated hospital. 941 F.2d at 210.     In the present

case, the district court noted the State's reasoning behind its

selection of the median-plus 5% methodology:
          [I]t is reasonable to measure the efficiency
          of hospitals by comparing the costs they
          incur for delivering similar units of service
          . . . . [E]fficiency is defined or understood
          to mean the lowest possible cost per
          comparable inpatient admission.


New Jersey Hosp. Ass'n, 1995 WL 465664 at *3.    Thus, the State

found that its new rate system implicitly identified efficient

hospitals and therefore the costs they must incur.    This was

accomplished by concluding that efficient hospitals will keep

their costs for each DRG at or below the statewide median with

certain adjustments for inflation, indirect medical education,

and area wage variation. Id. at *4.

          Thereafter, the State conducted empirical analyses to

measure the effects of the payment program.     This was

accomplished by comparing the amounts the new methodology would

have paid hospitals in 1993 to their actual Medicaid costs

reported on their Medicare cost reports for 1993. Id.      A health

care consultant also was retained to review the new rate-setting

methodology and the State's analyses of the new rates. Id. at *5.

Additionally, the district court noted that various national

indicators which evidenced inefficiency on the part of New Jersey
                                                                   23


hospitals also played a role in the formulation process.

Inefficiencies were noted in the areas of cost per discharge and

average length of stay. Id. at *4.
          Based on the forgoing, the district court found that

the use of "1988 hospital cost data, increased to present-day

costs, represents sufficiently reliable cost data when used to

identify efficiently and economically operated New Jersey

hospitals." Id. at *10.   We cannot say that this factual finding

is clearly erroneous.   Thus, in light of our holding with respect

to the State's substantive compliance, we conclude, for purposes

of disposing of the preliminary injunction request, NJHA has not

shown that the State failed to meet the procedural requirements.

          We note, at a final hearing the burden of proof rests

with NJHA to come forward with credible evidence that the State

did not comply with the federal requirements of the Boren

Amendment. See Colorado Health Care Ass'n v. Colorado   Dep't of

Social Servs., 842 F.2d 1158, 1164 (10th Cir. 1988).    It is

noteworthy that no discovery had been conducted prior to the

hearing on the application for the preliminary injunction.

Pending the district court's final decision on the merits, the

findings of fact and conclusions of law made in conjunction with

the preliminary injunction are indeed preliminary.   As such, they

do not foreclose any findings or conclusions to the contrary

based on the record as developed at final hearing. See Oburn v.
Shapp, 521 F.2d 142, 149 n.18 (3d Cir. 1975).

          The district court denied NJHA a preliminary injunction

solely on the ground that it had not shown the likelihood that it
                                                                  24


would prevail on the merits.   Thus, it found it unnecessary to

address the other factors to be considered when a preliminary

injunction is sought.

          Based solely on the ground invoked by the district

court, NJHA has not shown on this record the reasonable

likelihood that it will prevail on the merits.

          The order of the district court denying a preliminary

injunction will be affirmed.
