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1111512011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

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BRIDGE VIEW NURSING HOME, INC.; CLIFFSIDE NURSING HOME, INC.; EAST END HEALTH CARE, INC. d/b/a WESTHAMPTON CARE CENTER; FOREST VIEW NURSING HOME, INC.; FULTON COMMONS CARE CENTER, INC.; KENNETH GAUL 11, LLC d/b/a CEDAR LODGE NURSING HOME; LAWRENCE NURSING CARE CENTER, INC.; MAYFAIR CARE CENTER, INC.; MEADOWBROOK CARE CENTER, INC.; MICHAEL MELNICKE d/b/a CATON PARK NURSING HOME; MIDWAY NURSING HOME, INC.; PARK GARDENS REHABILITATION AND NURSING CENTER, LLC; PARK HOUSE CARE CENTER, LLC; PROMENADE NURSING HOME, INC.; RIVER VALLEY CARE CENTER, INC.; ROCKAWAY CARE CENTER LLC; SHEEPSHEAD NURSING AND REHABILITATION CENTER, LLC; SUNSHINE CARE COW. d/b/a HEMPSTEAD PARK NURSING HOME; UNION PLAZA NURSING HOME, INC.; VJJ HOLDING COMPANY, LLC d/b/a WOODHAVEN NURSING HOME; WOODCREST REHABILITATION & RESIDENTIAL HEALTH CARE CENTER, LLC; and FLUSHING MANOR GERIATRIC CENTER, INC. d/b/a WILLIAM 0. BENENSON REHAB PAVILION, d/b/a LYNB AND NURSING; FOREST MANOR CARE CENTER, INC. d/b/a GLEN COVE CENTER FOR NURSING & REHABILITATION; LONG ISLAND CARE CENTER INC.; MONTCLAIR CARE CENTER, INC. d/b/a MARQUIS REHABILITATION & NURSING CENTER, NEW CARLTON REHAB AND NURSING CENTER, LLC; SUFFOLK RESTORATIVE THERAPY AND NURSING, LLC d/b/a MOMENTUM AT SOUTH BAY FOR NURSING AND REHABILITATION; SUTTON PARK CENTER FOR NURSING REHABILITATION LLC; TREETOPS REHABILITATION & CARE CENTER, LLC d/b/a NORTH WESTCHESTER RESTORATIVE THERAPY & NURSING; WHITE PLAINS

Index No. 111914-2011


SECOND AMENDED COMPLAINT FOR INJUNCTIVE AND DECLARATORY RELIEF

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I O 2077
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NOTCOMPARED W H COPY FILE

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FILED
NOV 1 4 2011
COUNTY CLERK'S OF NEW YORK
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NURSING HOME ;and


:

Plaintiffs, -againstANDREW CUOMO, as Governor of the State of New York, and NIRAV R. SHAH, M.D., M.P.H., as Commissioner of the New York State Department of Health, Defendants.
: :

Plaintiffs Bridge View Nursing Home, Inc.; Cliffside Nursing Home, Inc.; East End Health Care, Inc. d/b/a Westhampton Care Center; Forest View Nursing Home, Inc.; Fulton Commons Care Center, Inc.; Kenneth Gaul 11, LLC d/b/a Cedar Lodge Nursing Home; Lawrence Nursing Care Center, Inc.; Mayfair Care Center, Inc.; Meadowbrook Care Center, Inc.; Michael Melnicke d/b/a Caton Park Nursing Home; Midway Nursing Home, Inc.; Park Gardens Rehabilitation & Nursing Center, LLC; Park House Care Center, LLC; Promenade Nursing Home, Inc.; River Valley Care Center, Inc.; Rockaway Care Center LLC; Sheepshead Nursing and Rehabilitation Center, LLC; Sunshine Care Corp. d/b/a Hempstead Park Nursing Home; Union Plaza Nursing Home, Inc.; VJJ Holding Company, LLC d/b/a Woodhaven Nursing Home; Woodcrest Rehabilitation and Residential Health Care Center, LLC; and Flushing Manor Geriatric Center d/b/a William 0. Benenson Rehab Pavilion; East Rockaway Center, LLC d/b/a Lynbrook Restorative Therapy and Nursing; Forest Manor Care Center, Inc. d/b/a Glen Cove Center for Nursing & Rehabilitation; Long Island Care Center Inc.; Montclair Care Center, Inc. d/b/a Marquis Rehabilitation & Nursing Center; New Carlton Rehab and Nursing Center, LLC;

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Suffolk Restorative Therapy and Nursing, LLC d/b/a Momentum at South Bay for Nursing and Rehabilitation; Sutton Park Center for Nursing Rehabilitation LLC; Treetops Rehabilitation & Care Center, LLC d/b/a North Westchester Restorative Therapy & Nursing; White Plains Nursing Home, Inc. d/b/a Bronx Park Rehabilitation and Nursing Center; and Verrazano Nursing Home (together referred to as Plaintiffs or the Facilities), by their attorneys, Duane Morris LLP, for their second amended complaint against Defendants Andrew Cuomo, in his capacity as Governor of the State of New York; and Defendant Nirav R. Shah, M.D., M.P.H., in his capacity as the Commissioner, New York State Department of Health (DOH), allege as follows: NATURE OF THE CASE
1.

This is an action for injunctive and declaratory relief. Plaintiffs are residential

health care facilities which participate in the New York State Medical Assistance (Medicaid) program. They seek to enjoin the implementation and enforcement of certain laws and regulations which drastically reduce, both retroactively and prospectively, the reimbursement Plaintiffs receive for caring for sick and elderly individuals eligible for assistance under the Medicaid program.

2.

In adopting the laws that Plaintiffs seek to enjoin and declare invalid and

unenforceable - Part H, Chapter 59 of the Laws of 201 1 (the Laws of 201 1) - the Legislature and DOH did not take into account or ignored the level of payments that Plaintiffs and other nursing home operators need in order to provide efficient, economical, and quality nursing facility care, nor did the Legislature or DOH consider whether the laws would ensure that Medicaid beneficiaries had access to nursing facility services to the same extent as the general population. These laws were adopted for one reason alone: to meet a budgetary objective. 3. By choosing to participate in Medicaid, New York State obligated itself to

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things, federal law requires that payments for care provided to Medicaid recipients be consistent with efficiency, economy, and quality of care, and sufficient to enlist enough providers that Medicaid recipients are assured of having the same access to care that is available to the general population in the area. 42 U.S.C. 0 1396a(a)(30)(A). 4. Despite the federal requirement that Medicaid reimbursement rates be set at levels

sufficient to ensure quality of care and equal access for recipients, New York State chose to reduce its budget by slashing Medicaid spending by $2.85 billion in 201 1-2012 and by $4.6 billion in 2012-2013. Once the State decided how much it wanted to save, it manipulated its Medicaid reimbursement rates accordingly, without the slightest regard for its obligations under federal law. It also trampled on Plaintiffs due process rights, taking away the right of some (but

. not all) nursing home operators to obtain appellate relief from erroneous reimbursement
calculations, leaving them without any recourse.
5.

Nothing gives states the right to eliminate their budgetary issues by disregarding

their federal obligation to ensure that Medicaid reimbursement rates are sufficient to satisfy the quality of care and equal access requirements imposed by federal law. 6. Absent injunctive and declaratory relief, Plaintiffs will suffer extreme economic

hardship which will inhibit their ability to render quality care to their residents, and create a disincentive for admission of Medicaid patients in the future, increasing the likelihood that Medicaid beneficiaries will face difficulty in finding admission to quality residential health care facilities.
7.

The injunctive and declaratory relief Plaintiffs seek is necessary to keep New

York State from violating federal and state law by depriving Plaintiffs of the reimbursement they

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need in order to provide adequate services, which will cause irreparable harm to Plaintiffs and the Medicaid beneficiaries they care for. JURISDICTION AND VENUE 8. This Court has personal jurisdiction over Defendant pursuant to CPLR 301

because Defendants are domiciled in and regularly transact business in the State of New York. 9. Venue is appropriate in this jurisdiction pursuant to CPLR 503(a) and 503(c). PARTIES 10. Plaintiff Bridge View Nursing Home, Inc. is a residential health care facility

located at 143-10 20th Avenue in Whitestone, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 11. Plaintiff Cliffside Nursing Home, Inc. is a residential health care facility located

at 119-19 Graham Court in Flushing, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 12. Plaintiff East End Health Care, Inc. d/b/a Westhampton Care Center is a

residential health care facility located at 78 Old Country Road, Westhampton, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 13. Plaintiff Forest View Nursing Home, Inc. is a residential health care facility

located at 71-20 110th Street in Forest Hills, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program.

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14.

Plaintiff Fulton Commons Care Center, Inc. is a residential health care facility

located at 60 Merrick Avenue in East Meadows, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 15. Plaintiff Kenneth Gaul 11, LLC d/b/a Cedar Lodge Nursing Home is a residential

health care facility located at 6 Frowein Road in Center Moriches, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 16. Plaintiff Lawrence Nursing Care Center, Inc. is a residential health care facility

located at 350 Beach 54th Street in Arverne, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 17. Plaintiff Mayfair Care Center, Inc. is a residential health care facility located at

100 Baldwin Road in Hempstead, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 18. Plaintiff Meadowbrook Care Center, Inc. is a residential health care facility

located at 320 West Merrick Road in Freeport, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 19. Plaintiff Michael Melnicke d/b/a Caton Park Nursing Home is a residential health

care facility located at 1312 Caton Avenue in Brooklyn, New York that is, and at all times

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relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 20. Plaintiff Midway Nursing Home, Inc. is a residential health care facility located at

69-95 Queens Midtown Expressway in Maspeth, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 2 1. Plaintiff Park Gardens Rehabilitation and Nursing Center, LLC is a residential

health care facility located at 6585 Broadway in Riverdale, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 22. Plaintiff Park House Care Center, LLC is a residential health care facility located

at 128 Beach 115th Street in Rockaway Park, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program.

23.

Plaintiff Promenade Nursing Home, Inc. is a residential health care facility

located at 140 Beach 114th Street in Rockaway Park, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 24. Plaintiff River Valley Care Center, Inc. is a residential health care facility located

at 140 Main Street in Poughkeepsie, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program,

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25.

Plaintiff Rockaway Care Center LLC is a residential health care facility located at

353 Beach 48th Street in Edgemere, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 26. Plaintiff Sheepshead Nursing and Rehabilitation Center, LLC is a residential

health care facility located at 2840 Knapp Street, Brooklyn, NY 11235 that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 27. Plaintiff Sunshine Care Corp. d/b/a Hempstead Park Nursing Home is a

residential health care facility located at 800 Front Street in Hempstead, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 28. Plaintiff Union Plaza Nursing Home, Inc. is a residential health care facility

located at 33-23 Union Street in Flushing, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 29. Plaintiff VJJ Holding Company, LLC d/b/a Woodhaven Nursing Home

(Woodhaven) is a residential health care facility located at 1360 Route 112 in Port Jefferson Station, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 30. Plaintiff Woodcrest Rehabilitation & Residential Health Care Center, LLC is a

residential health care facility located at 119-09 26th Avenue in College Point, New York that is,

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and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 3 1. Plaintiff Flushing Manor Geriatric Center d/b/a William 0. Benenson Rehab

Pavilion is a residential health care facility located at 36-17 Parsons Boulevard, Flushing, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 32. Plaintiff East Rockaway Center, LLC d/b/a Lynbrook Restorative Therapy and

Nursing is a residential health care facility located at 243 Atlantic Avenue, Lynbrook, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 33. Plaintiff Forest Manor Care Center, Inc. d/b/a Glen Cove Center for Nursing &

Rehabilitation is a residential health care facility located at 6 Medical Plaza, Glen Cove, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 34. Plaintiff Long Island Care Center Inc. is a residential health care facility located at

144-61 38fhAvenue, Flushing, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 35. Plaintiff Montclair Care Center, Inc. d/b/a Marquis Rehabilitation & Nursing

Center is a residential health care facility located at 2 Medical Plaza, Glen Cove, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program.

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36.

Plaintiff New Carlton Rehab and Nursing Center, LLC is a residential health care

facility located at 405 Carlton Avenue, Brooklyn, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 37. Plaintiff Suffolk Restorative Therapy and Nursing, LLC d/b/a Momentum at

South Bay for Nursing and Rehabilitation is a residential health care facility located at 340 East Montauk Highway, East Islip, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 38. Plaintiff Sutton Park Center for Nursing Rehabilitation LLC is a residential health

care facility located at 3 1 Lockwood Avenue, New Rochelle, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 39. Plaintiff Treetops Rehabilitation & Care Center, LLC d/b/a North Westchester

Restorative Therapy & Nursing is a residential health care facility located at 3550 Lexington Avenue, Mohegan Lake, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 40. Plaintiff White Plains Nursing Home, Inc. d/b/a Bronx Park Rehabilitation and

Nursing Center is a residential health care facility located at 3845 Carpenter Avenue, Bronx, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program.

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4 1.

Plaintiff Verrazano Nursing Home is a residential health care facility located at

100 Castle Avenue, Staten Island, New York that is, and at all times relevant hereto, was licensed by DOH under Article 28 of the New York Public Health Law and participated in New York States Medicaid program. 42. Defendant Andrew Cuomo (the Governor) is the Governor of the State of New

York. The Governor maintains an office for the transaction of business in New York County. As Governor, Defendant Cuomo is the States highest elected official and is responsible for ensuring that the laws of the State of New York comply with federal law and is the person with ultimate responsibility for the States legislative enactments. He is being sued solely in his capacity as Governor. 43. Defendant Nirav R. Shah, M.D., M.P.H. (the Commissioner or Shah) is the

Commissioner of Health of the State of New York. Shah maintains an office for the transaction of business in New York County. As Commissioner of Health, Shah is responsible for carrying out the duties assigned by law to him and to DOH, including administration of the Medicaid program. Shah is being sued solely in his capacity as Commissioner of Health since the Commissioner of Health is the person responsible for administering New York States Medicaid program. BACKGROUND A. The Medicaid Program 44. The Medicaid program is a joint Federal-State program created in 1965 under

Title XIX of the Social Security Act and codified at 42 U.S.C. 0 1396 et seq. (the Social Security Act). The purpose of the Medicaid program is to make mainstream medical care available to the poor and disabled. 45.
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Participation by states in the Medicaid program is voluntary. But, if a state


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chooses to participate, it is required to comply with certain federal statutes and regulations. 46. All fifty states, the District of Columbia, and five territories have chosen to

participate in the Medicaid program. Each makes medical services available to Medicaid beneficiaries using private providers who are reimbursed at rates set as part of its Medicaid plan. 47. By electing to participate in the Medicaid program, New York obligated itself to

comply with all applicable federal statutes and regulations. 48. Federal and state government agencies share responsibility for funding the

Medicaid program. States electing to participate in Medicaid are reimbursed by the Federal Government for a portion of the costs they incur in providing health care services and treatment, including nursing facility services, to low-income and disabled residents who qualify for Medicaid assistance. See 42 U.S.C. 49.

0 1396.

The part of the Medicaid cost that the Federal Government reimburses varies from

a statutory floor of 50% of the states outlays to a ceiling of 83%. 42 C.F.R. 0 433.10(b). At present, in excess of 50% of the costs New York incurs in funding nursing facility services under the Medicaid program is reimbursed by the Federal Government pursuant to a formula set forth at 42 U.S.C.

0 1396b.
For a state to be eligible for federal financial participation and assistance under

50.

the Medicaid program, the state has to submit for approval by the United States Secretary of Health and Human Services, Centers for Medicare & Medicaid Services (CMS) a detailed plan outlining the nature and scope of the states Medicaid program.
5 1.

In order to participate in the Medicaid program, a state must also designate as part

of its state plan a single state agency within the state to administer the states Medicaid program. See 42 U.S.C. 6 1396a(a)(5).

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52.

At all times relevant hereto, New York State has had in effect a state plan for

medical assistance (the State Plan) approved by CMS or its predecessor. 53. At all times relevant hereto, New York State has designated DOH as the single

state agency to administer and supervise the State Plan. See N.Y. SOC. Serv. Law

0 363-a.
54. As the single state agency administering and supervising the State Plan, DOH

must maintain the State Plan in conformity with federal law and, in particular, Title XIX of the Serv. Law 3 363-a(1) and 42 U.S.C. 0 1396. Social Security Act. See N.Y. SOC.
55.

While Title XIX gives the states some flexibility to develop their own medical

assistance programs, states are obligated by Title XIX of the Social Security Act to comply with approximately 100 procedural and substantive requirements. 56. One of the requirements with which states are required to comply is known as the

quality of care clause of Section 30(A) of the Social Security Act, 42 U.S.C.
fj

13962(a)(30)(A)(Section 3O(A)). It provides that a states Medicaid plan has to ensure that

reimbursement payments are consistent with efficiency, economy, and quality of care. The relevant part of Section 30(A) states: A state plan for medical assistance must . . . provide such methods and procedures relating to the utilization of, and payment for, care and services available under the plan . . . as may be necessary . . . to assure that payments are consistent with efficiency, economy, and quality of care . . . .
57.

Section 30(A) also has an equal access requirement. The equal access clause

of Section 30(A) requires that states reimburse health care providers at rates that are high enough to ensure that services are no less available to Medicaid beneficiaries than they are to the general public in the same geographic area. The relevant part of Section 30(A) states:

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A state plan for medical assistance must . . . provide such methods and procedures relating to the utilization of, and payment for, care and services available under the plan . . . as may be necessary . . . to assure that payments . . . are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.
58.

Federal regulations promulgated under Section 30(A) expressly require DOH to

ensure that payments to providers of Medicaid services are sufficient to enlist enough providers

so that services under the plan are available to recipients at least to the extent that those services
are available to the general population. 42 C.F.R. 8 447.204. 59. Another of the federal requirements with which state Medicaid plans are required

to comply is set forth in 42 U.S.C. 0 13962a(a)(l9). It requires a states Medicaid plan to provide such safeguards as may be necessary to assure that eligibility for care and services under the plan will be determined, and such care and services will be provided, in a manner consistent with simplicity of administration and the best interest of recipients. 60. When a state seeks to amend its state plan, federal regulations require that it do so

in accordance with 42 C.F.R. 3 430.12(c) which requires that the state submit amendments to CMS promptly so that CMS can determine whether the plan continues to meet the requirements for approval. 61. Federal regulations further require that, in order to obtain approval of a plan

change in payment methods and standards, a state must present findings to CMS establishing that, inter alia, (a) the revised payment rates 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, 42 C.F.R. 9 447.253(b)(l)(i); and (b) the state employ procedures under which the

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data and methodology used in establishing payment rates are made available to the public, 42 C.F.R. 3 447.253(b)(l)(iii)(C). 62. In making changes to New York States Medicaid reimbursement methodology to

implement Part H of Chapter 59 of the Laws of 201 1, neither the Legislature nor DOH took into consideration or assessed the effect of the nursing facility Medicaid reimbursement rate cuts on Section 30(A)s quality of care and equal access requirements. They also did not take into account simplicity of administration or the best interest of recipients. Rather, the rate cuts were motivated solely by one thing - a desire to slash the States budget by a predetermined amount.

B.

New Yorks Medicaid Nursing Home Reimbursement Methodology Through 2006 63. Under New York law, the responsibility for determining and establishing the

Medicaid reimbursement methodology and rates based thereon for nursing homes is vested by law in the Commissioner of Health of the State of New York, pursuant to Article 28 of the Public Health Law and, more particularly, $3 2807 and 2808 thereof, except in instances where the New York State Legislature itself has chosen to prescribe such methodology by law rather than regulation. 64. Under $ 2807(3) of the Public Health Law - and in order to comply with federal

law - Defendant was required to establish Medicaid rates for nursing homes that are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. 65. Pursuant to Public Health Law 3 2807(3), DOH must certify the Medicaid rates

for nursing homes to the States Director of Budget. Section 2807(3) provides that, in making such certification, the Commissioner of Health shall certify that the proposed rate schedules for

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payments to hospitals for hospital and health-related services are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. 66. The methodology that the State is required to use to establish and determine

Medicaid reimbursement rates for nursing homes such as Plaintiffs is set forth in regulations adopted by the New York State Hospital Review and Planning Council (now known as the Public Health and Health Planning Council), and approved by the Commissioner of Health. Those regulations are contained in Subpart 86-2 of Title 10 of the Official Compilation of Codes, Rules and Regulations of the State of New York. 10 N.Y.C.R.R. 86-2.1 et seq. (Subpart 86-2). Nursing facilities in New York are reimbursed for providing services to Medicaid recipients based upon rates set on a per-diem per-patient basis. The rates take into account the particular facilitys costs and the acuity level of its patients, known as the facilitys case mix. 67. For rates effective on and after January 1, 1986, the State of New York adopted a

prospective Medicaid reimbursement methodology in which the operating cost component of a nursing homes reimbursement rate (as distinguished from the capital cost component) was based upon costs grouped into direct services (such as nursing and related services), and indirect services (such as housekeeping and administration) that were subject to a corridor, defined by a maximum ceiling and minimum floor or base, such that a facility would be reimbursed its actual costs if those costs were within the corridor. If operating costs were above the ceiling, the operating cost component of a facilitys rate was reduced to the ceiling, On the other hand, if costs were below the base, the operating cost component of a facilitys rate was raised to the minimum base.

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68.

Under this methodology, set forth in Subpart 86-2, the operating costs reported by

a facility were further adjusted to account for variances in costs among different regions of the State, as well as differences in the case-mix of patients - meaning their acuity of care or how sick they are. 69. Costs were also adjusted by an inflation, or trend, factor to account for inflation

between the base period (when costs were reported) and the actual rate period when rates were to be paid. 70. The calculation resulted in creation of a per diem rate which would be paid to

each facility upon its submission of a bill to the Medicaid program for each day that each Medicaid-eligible patient resided in the facility during the rate period. The per diem rate varied from facility to facility, depending on its particular costs and case mix. 71. Under the methodology described in paragraphs 56 through 59 above, and for all

periods prior to April 1,2009, a facilitys particular case-mix was determined based upon its entire resident population, not just its Medicaid residents. 72. The methodology described above adopted calendar year 1983 as the original

base period. However, new facilities and facilities that underwent transfers of ownership to non-related parties were entitled to have the operating cost component of their rates calculated based on operating costs incurred during the first 12-month period during which they experienced an overall average occupancy of 90%. 10 N.Y.C.R.R. 0 86-2.2(e) as in effect prior to January 1,2007. 73. Upon information and belief, during the period from 1986 through 2006, the

methodology described above, as adjusted from time to time between 1986 and 2006, was used

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to calculate rates, and this methodology, as adjusted from time to time between 1986 and 2006, was approved and accepted by CMS as part of the State Plan, as required by Federal law. C.
The 2006 and 2007 Changes in Methodology

74.

In 2006, the New York State Legislature enacted, and then-Governor Pataki

signed into law, Part C of Chapter 109 of the Laws of 2006 (the 2006 Revision) adding, inter
alia, subdivision 2-b to Public Health Law 2808. This addition significantly changed New

York States methodology for reimbursing nursing homes under the Medicaid program. 75. Subdivision 2-b of 8 2808 of the Public Health Law, as added pursuant to 5 47 of

the 2006 Revision effective January 1,2009, provided that the operating cost components of Medicaid reimbursement rates to be paid to nursing homes in New York State were to be calculated based upon 2002 base year costs (except for any facilities whose rates were already being determined on a base year more recent than 2002 because of a change in ownership or because it was a new facility). This provision, colloquially known as the rebasing provision, was a significant change in New York States reimbursement methodology which previously had based the operating cost component of a facilitys Medicaid reimbursement rate on 1983 reported costs (except for new facilities or those with a qualified change of ownership). 76. The rebasing provision was not applied to all nursing homes. Any facility which,

as a result of the new methodology, would receive a Medicaid reimbursement rate lower than its current rate (as adjusted for inflation) would not be subject to rebasing. This provision was colloquially known as the hold harmless provision. 77. The bill that became the 2006 Revision was passed by the Legislature and in June

2006 it was signed into law by the Governor.

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78.

Pursuant to Public Health Law Q 2808(2-b)(g), as added by Q 36 of Part C of

Chapter 58 of the Laws of 2007 (the Laws of 20077, the operating cost component of nursing homes Medicaid reimbursement rates for periods commencing on and after April 1,2009 was to be further adjusted by using a case-mix comprised only of the number of patients properly assessed and reported in each patient classification group and eligible for [Medicaid], rather than a case-mix of all residents within a facility, as had theretofore been required. 79. Upon information and belief, the Director of the Budget and/or other State

officials estimated that, as a result of the changes adopted by the Legislature and signed into law pursuant to the 2006 Revision, the aggregate State-wide annualized increase in Medicaid reimbursement to all nursing homes in 2009 would be approximately $460 million above the aggregate amount paid in 2006. This increase was due, in large part, to (a) the effect of using 2002 costs instead of 1983 costs pursuant to the rebasing provision, and (b) the implementation of the hold harmless provision. 80. In adopting the 2006 Revision, the Legislature did not place any cap or limit on

the aggregate amount of any increase in the Medicaid reimbursement due nursing homes on and after January 1,2009.

8 1.

The $460 million estimate of the cost of 2009 Medicaid rate increases statewide

did not include an anticipated reduction in expenditures attributable to the changeover from a case-mix based on all patients in the nursing facility to a case-mix based only on the acuity of illness of Medicaid-eligible patients in the facility that would become effective April 1,2009. Upon information and belief, the Director of the Budget and/or other State officials initially estimated that this changeover would save the State approximately $250 million, leaving approximately $2 10 million unfimded.

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82.

Paragraph (a) of subdivision 2-b of Section 2808 of the Public Health Law, as

added by 0 47 of the 2006 Revision, further provided transitional rates for calendar years 2007 and 2008 to bridge the gap between rates paid under the methodology that had existed through December 3 1,2006 and the new rebasing methodology that was to take effect on January 1, 2009. 83. Paragraph (a)@) of subdivision 2-b of 6 2808 of the Public Health Law, as added

by 0 47 of the 2006 Revision, provided that (a) the aggregate additional amount to be paid statewide to nursing homes in 2007 (as distinguished from 2009) would be limited or capped at $137.5 million over and above the aggregate statewide amount paid in 2006, and (b) for 2008
(as distinguished from 2009), the aggregate statewide annual additional amount to be paid was

limited to $167.5 million over and above the aggregate expenditures made to reimburse all nursing homes in New York State during calendar year 2006. D. The 2008 Plan Amendment 84. Upon information and belief, the State of New York obtained approval from CMS

in 2008 of an amendment to the State Plan concerning the changes in the methods and standards for reimbursing nursing homes pursuant to the 2006 Revision, and thereafter Plaintiffs were reimbursed by the Medicaid program for services provided to Medicaid recipients in 2007 and 2008 in accordance with the 2006 Revision.
85.

Under Public Health Law 0 2807(7), the Commissioner of Health is required to

notifj nursing homes at least 60 days in advance of the effective date of their Medicaid reimbursement rates. 86. On or about December 8,2008, DOH advised each of Plaintiffs of its facility-

specific Medicaid reimbursement rates for nursing facility services for the period commencing

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January 1,2009, indicating that the rate reflected the rebasing provisions implemented by the 2006 Revision and made effective January 1,2009. 87. In reliance upon the rates adopted in accordance with the 2006 Revision, the State

Plan Amendment approved by the Federal government in 2008, and the provider agreements they had executed with the State pursuant to 42 U.S.C. 8 1396a(a)(27)and 42 C.F.R. 431.107, each Plaintiff provided nursing facility services to eligible Medicaid recipients for the period commencing January 1, 2009, and each continues to provide nursing facility services to Medicaid recipients. 88. On or about April 7,2009, then-Governor Paterson signed into law Chapter 58 of

the Laws of 2009. Part D of Chapter 58 of the Laws of 2009 enacted the Long-Term Care Reform Act which (a) limited or capped the additional amount to be paid in Medicaid reimbursement to nursing homes pursuant to the 2006 Revision for the period from April 1,2009 through March 3 1, 20 10 at $2 10 million and (b) eliminated the trend factor (or inflation adjustment) that otherwise would have been applied to such rates for the period from April 1, 2009 through March 3 1,2010. (See Exhibit 1 hereto.) To make sure additional reimbursements were capped at $210 million, the statute simply directed the Commissioner of Health and Director of the Budget to make such proportional adjustments to such rates as are necessary to result in an increase of such aggregate expenditures of two hundred ten million dollars

($2 10,000,000). . .
89. Although Chapter 58 of the Laws of 2009 was signed into law, because the

$2 10 million cap and elimination of the trend factor represented changes to the States Medicaid plan, they had to be approved by CMS before they could be put into effect. Upon information and belief, CMS did not approve those changes and, up until June 201 1,they had not been

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implemented. But, in June 20 1 1, these two changes in the States Medicaid reimbursement methodology were implemented retroactively, and a series of other equally drastic changes were made at the same time. Despite CMSs failure to approve the earlier - and less extreme changes that the State had proposed, CMS approved the changes provided for in the Laws of 201 1. E. The Directive to Reduce Medicaid Reimbursement Rates 90. Within days of his inauguration as Governor, Defendant Cuomo issued Executive

Order No. 5 establishing the Medicaid Redesign Team. Executive Order No. 5 states, among other things, that New York faces serious financial challenges in achieving a balanced budget in the 20 11-2012 Fiscal Year and New York States current fiscal constraints necessitate specific budget reductions for Medicaid spending. 91. The Medicaid Redesign Team was given the task of conducting a comprehensive

review of and making recommendations regarding the Medicaid program, which shall include specific cost saving and quality improvement measures for redesigning the Medicaid program to meet specific budget reductions for Medicaid spending. 92. On February 1,2011, the Governor issued his proposed budget. It called for

initiatives that would reduce Medicaid spending by $2.85 billion in 201 1-2012 and by

$4.6 billion in 20 12-2013. Armed with this bottom line, the Medicaid Redesign Team set about
making changes in the States Medicaid plan that would yield the desired reduction in spending. 93. The proposals that the Medicaid Redesign Team made to reduce Medicaid

spending on nursing facilities did not take into account New Yorks obligations under Title XIX of the Social Security Act.

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94.

The Medicaid Design Teams proposals were enacted into law in the final 201 1-

12 State budget. McKinneys New York Laws, Chapter 59 of Laws of 201 1, $0 3-4. They provide for the following changes, among others, which are described in greater detail below: (a) they impose a retroactive scale back modifying the 2009 and 2010

reimbursement rates to limit the aggregate increase in Medicaid reimbursement payments to $210 million over the payments in the prior rate periods, and provide that, if the increase in payments would otherwise exceed the $2 10 million cap, proportional downward adjustments have to be made to all nursing facilities payments - including the payments to facilities whose reimbursements were reduced, rather than increased, under the changed methodology - SO that the total $2 10 million cap on increases is not exceeded; (b) they establish a new method for determining the facilitys case-mix

index which limits the patients included in the mix to only those actually eligible to receive Medicaid, thereby reducing reimbursement payments by removing patients likely to have higher acuity levels; (c) beginning in 2008; (d) they change the base year used to determine a nursing facilitys expenses they retroactively eliminate the trend factors - or inflation adjustments -

from 1983 to 2002; and (e) they place a $50 million cap on appeals of erroneous rate computations

and allowing the Commissioner to prioritize which appeals may be prosecuted, thereby depriving some nursing facilities of an appellate remedy.

F.

Notice to Plaintiffs of New Rates 95. On June 20,201 1, DOH issued letters to nursing facilities, including Plaintiffs,

describing the changes in the State Plan (the June 201 1 Letter). (A copy of the June 201 1 -23DM2\3090670.1
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Letter is annexed hereto as Exhibit 2.2) The June 201 1 Letter informed each nursing facility about certain aspects of its Medicaid reimbursement rates effective for rate periods April 1,2009, May 1,2009, July 1,2009, January 1,2010, April 1,2010 and January 1,2011, and stated that the rates were available on the Health Commerce System, an internet-based service established by DOH for communications with New York health care providers. 96. The rates reflected in the June 20 1 1 Letter constitute an unprecedented retroactive

promulgation of new rates more than two years after Plaintiffs had already provided services to Medicaid beneficiaries under rates promulgated earlier, and are improper and unlawful in the following respects:
(1)

Scale Back Adjustment

97.

Upon information and belief, the Director of the Budget and/or other State

officials estimated that the cost to the State of the 2009 Medicaid rate increases as a result of rebasing (which, subject to the hold harmless provision, changed the base year used to compute a facilitys costs from 1983 to 2002) was approximately $850 million, not $460 million as had earlier been estimated, and the savings to the State from the changeover to a Medicaidonly case mix was approximately $475 million, not $250 million as estimated. Accordingly, when Defendants realized that the unfunded amount was $375 million, not $2 10 million, they determined to adjust Medicaid reimbursement rates downward by another $165 million so that the increased State spending was limited to $2 10 million - the amount originally projected for the increase.

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98.

As a result, Section 96 of the Laws of 201 1 provides that Medicaid

reimbursement to nursing facilities for the period April 1,2009 through March 31,2010 as a result of rebasing and application of the Medicaid-only case mix methodology is to be limited to $210 million in the aggregate. In addition, Section 96 of the Laws of 201 1 provides that annual rates for the period from April 1,20 10 through March 3 1,20 12 cannot reflect an increase or decrease from the aggregate total expenditures calculated for the period April 1,2009 through March 3 1,2010, ignoring the fact that price inflation will naturally occur during this period. 99. To implement Section 96 of the Laws of 201 1, DOH, in effect, made adjustments

to the reimbursement payment due each nursing home - without regard to quality of care or access - by dividing the total amount it had budgeted for Medicaid reimbursement and adjusting the total in proportion to each nursing homes share of Medicaid revenue as of April 1,2009. Thus, the June 201 1 Letter states at page 8: Chapter 58 of the Laws of 2009 and Chapter 59 of the Laws of 20 11 requires rates for the April 1,2009 through March 3 1,20 10 period include proportional adjustments which reflect the rebasing provisions of Chapter 109 of the Laws of 2006 and Medicaid only case mix implemented by Chapter 58 of the Laws of 2007 do not result in an increase in aggregate total expenditures (excluding capital rates and prior to trend adjustments) that is not more or no less than $210 million. The effective date of the State Plan Amendment related to this provision, in accordance with Federal Public Notice requirements, is May 1,2009. Thus, the April 1,2009 through April 30,2009 rates provided herein do not reflect this adjustment. The rates effective May 1,2009 through March 31,2010 are adjusted such that the aggregate adjustment in rates in effectfor April 1,2009 through March 31,201 0 result in aggregate Medicaid expenditures that are no more or no less than $210 million. The proportional adjustments to such rates were determined using each facilitys proportionate share of their estimated Medicaid revenue from the applicable rates that reflect the impact of rebasing and Medicaid only case mix.

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Those Chapter Laws also provide that annual rates for the April 1, 2010 through March 3 1,2011 and April 1,2011 through March 3 1, 2012 do not reflect an increase or decrease from the aggregate total expenditures calculated above for the April 1,2009 through March 3 1,2010 period. The rate adjustments implemented to adjust spending to the required amount is reflected as the scale back adjustment on the applicable rate sheets. The final calculated scale back adjustments are not subject to subsequent correction or reconciliation. (Emphasis added.) 100. There are two problems with the scale back: (a) First, to satisfl the Governors budget objective, it arbitrarily reduces

reimbursement payments, without regard to quality of care or equality of access. In 20 lo, for example, the amount of the scale back was more than $500 million; and (b) Second, not all nursing facilities operating in New York received an

increase in their reimbursement payments as a result of the change in the Medicaid reimbursement methodology adopted in the Laws of 20 1 1. Some nursing facilities were adversely affected by the change in methodology. However, in implementing the $210 million scale back, New York applied it to proportionately to all nursing facilities in the State, including those whose payments were reduced under the change in methodology. Thus, to limit increases to $2 10 million in 20 10, the Medicaid reimbursement payments that would otherwise have been due nursing facilities in the State had to be reduced retroactively by a total of more than $500 million. Since the scale back was designed to limit the amount of the increases in Medicaid reimbursement that the State has to pay, there is no rational basis for applying the scale back to nursing facilities whose payments were decreased. 101. The scale back does not comply with federal law because it takes the

reimbursement rates that the State determined were appropriate for a particular nursing home

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and cuts them by whatever amount happens to be necessary to ensure that Medicaid spending does not increase by more than $210 million. (2) 102. Medicaid-only Case Mix Methodology

The case mix index measures patient acuity at a nursing facility; the higher the

acuity level, the greater the reimbursement rate, In its June 20 11 Letter, DOH included for the first time adjustments reflecting the Medicaid-only case mix required by Public Health Law $ 2808(2-b)(g). See Exhibit 2, June 201 1 Letter, p. 3. 103. The adjustments to Plaintiffs Medicaid reimbursement rates as a result of the

case-mix changes made pursuant to the Laws of 201 1 do not take into account the mandate of $36 of Part C of Chapter 58 of the Laws of 2007 to use a case mix of Medicaid-eligible individuals in computing the operating cost component of nursing homes Medicaid reimbursement rates for periods beginning April 1,2009. Rather than computing this component of the rate based on individuals who are eligible for both Medicare (the federal program covering nursing facility services for qualified beneficiaries) and Medicaid, Defendant included in the computation only those individuals whose care is actually being paid for by Medicaid - ignoring those who are Medicaid-eligible but whose care is temporarily paid for by Medicare.
104.

The intended effect of this change was to reduce reimbursement payments by

excluding patients likely to require greater care. 105. Moreover, rather than prospectively applying the Medicaid-only case mix

methodology to 201 1 rates, as required by Public Health Law $ 2807-c(10)(c)(3), DOH announced it would instead apply the methodology retroactively beginning April 1,2009, in direct violation of Public Health Law sec. 2807-c( lO)(c)(3). The amounts calculated as owing from the reduction of rates paid to Plaintiffs are being recouped from prospective payments in 201 1. -27DM2\3090670.1
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(3) 106.

Banking AdiustmenUTrend Factor

In Matter of Blossom View Nursing Home v. Novello, 4 N.Y.3d 581 (2005)

(Blossom View 7,the Court of Appeals held that the methodology for establishing Medicaid
reimbursement rates for nursing homes calls for a per diem rate that is prospective in nature and takes into account both capital costs and operating costs. Operating costs consist of direct, indirect and non-comparable items. Blossom View, supra, 4 N.Y. 3d at 585. See also 7 56 above. 107. The changes made pursuant to the Laws of 201 1 do not comport with Blossom

View because, as explained below, they set per diem rates that are not prospective.
(a) 108. The Need to Account for Inflation

The operating cost component of a nursing homes Medicaid reimbursement rate

is required to be based on allowable operating costs incurred and reported in a base year. Those costs are then required to be adjusted to account for inflation between the base year and applicable rate period. See Public Health Law $6 2807-c(10) and 2808(9), and 10 N.Y.C.R.R.

0 86-2.12.
109. There are two components in determining the applicable adjustment for inflation:

the first is the trend factor, which accounts for inflation from year to year, and the other is the roll factor, which is the cumulative result of all the trend factors applicable to the individual years occurring in the interval between a base year period and subsequent rate period. See 10 N.Y.C.R.R. 6 86-2.lO(a)(S)?

To illustrate how the trend factor and roll factor operate, if the per diem allowable operating costs (total allowable operating costs divided by total days of care provided) for a facility in base year No. 1 are $100/day and the annual trend factor for years 2, 3, and 4, are 5% 6%, and 7%, respectively, the roll factor for year 4 would be 1.1909 (1.05, multiplied by 1.06, multiplied by 1.07) to account for inflation between base year 1 and year 4. Accordingly, the (Continued.. .)
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1IO.

Except as otherwise specifically provided by law, the Commissioner must notify

providers of their applicable Medicaid reimbursement rates at least 60 days prior to their effective date. See Public Health Law 5 2807(7). Thus, on or about November 1 of each year, DOH is required to notify facilities of their Medicaid reimbursement rates for the coming year. This enables nursing facilities to budget accordingly.

111.

Rates are provisional until an audit of a facilitys actual costs is performed, but,

by New York State regulation, 18 N.Y.C.R.R.

0 517.3, provisional rates become final rate

following an audit. At all times until June 201 1, nursing facilities therefore had an expectation that their provisional reimbursement rates would only be changed based on an audit, and would not be subject to an ex post facto adjustment in order to balance the States budget or for other reasons. 112. Since Public Health Law 5 2807(7) requires that rates be issued 60 days in

advance of their effective date, it is not possible for rate setters within DOH to know precisely what inflation will be for the following year when they set rates on or about November 1 of the preceding year. To address this problem, the Legislature enacted Public Health Law 5 2807-~, subdivision (10), paragraph c, effective for Medicaid reimbursement rates established on and after April 1,2000. Subparagraphs 1,2 and 3 of Public Health Law Cj 2807c( 1O)(c) provide: a. For rate periods on and after April first, two thousand, the commissioner shall establish trend factors for rates of payment for state governmental agencies to project for the effects of inflation except that such trend factors shall not be applied to services for which rates of payment are established by the commissioners of the department of

(Continued.. .) operating costs component of the rate in year 4 would be $1 19.09 ($100 in the base year multiplied by the 1.1909 roll factor).

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mental hygiene. The factors shall be applied to the appropriate portion of reimbursable costs. b. In developing trend factors for such rates of payment, the Commissioner shall use the most recent Congressional Budget Office estimate of the rate years U.S. Consumer Price Index for all urban consumers (CPI-U) published in the Congressional Budget Office Economic and Budget Outlook after June 1 of the rate year prior to the year for which rates are being developed. After thefinal U.S. Consumer Price Index (CPI) for all urban consumers is published by the United States Department of Labor, Bureau of Labor Statistics, for a particular rate year, the Commissioner shall reconcile such final CPI to the projection used in subparagraph (2) of this paragraph and any difference will be included in the prospective trend factor for the current year. (Emphasis added.)
113.

c.

The statutory methodology set forth above requires that, in setting rates for an

ensuing year, DOH shall use as a projected trend factor the estimated Consumer Price Index for all urban consumers (CPI-U) for that next year as forecast by the Congressional Budget Office in June of the year preceding the rate year. See Public Health Law, 0 2807-c( 1O)(C)(~) quoted above.

1 14.

After the rate year is over and the actual rate of increase in the CPI-U is known,

which occurs in early January of the following year and is published by the Bureau of Labor Statistics, the reconciliation of the difference between the estimated and the final CPI-U for the rate year is made as an adjustment to the then-current years rate. See Public Health Law,

0 2807-~(O)(C)(~). 1
115.

The statutory methodology therefore requires that, in setting rates in November of

Year 1 for the upcoming Year 2, DOH must use as a proxy for the trend factor for Year 2 the Congressional Budget Offices estimate made during Year 1 with regard to the anticipated

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change in the CPI-U during Year 2; then, after Year 2 is over, and the CPI-U for Year 2 is finally determined by the Bureau of Labor Statistics and published early in Year 3, the difference between the projected and actual trend factor for Year 2 is reconciled and the adjustment is made to Year 3s trend factor. Such reconciliation is referred to as the banking adjustment. 116. For example, if in June of Year 1, the Congressional Budget Office were to

estimate that the projected growth in the CPI-U for Year 2 was 4%, then in November of Year 1, in calculating and notifying Plaintiffs of their upcoming rates for Year 2, the rate setters at DOH would apply a trend factor of 4% to account for anticipated inflation. If, after Year 2 had concluded, and the Bureau of Labor Statistics determined early in Year 3 that the actual CPI-U increase for Year 2 had been only 3% rather than the originally estimated 4%, DOH would reconcile the two, and the difference of negative 1% would be applied to the trend factor then in effect for Year 3. The reconciliation would therefore be applied prospectively to Year 3, rather than retroactively to Year 2. Thus, if the trend factor in effect for Year 3 would otherwise have been 5%, it would be reduced by 1% to 4% to reflect the reconciliation of the 1% difference between the projected trend factor and the actual final trend factor in Year 2. 117. After 2001 and until 2009, this procedure, as described in the immediately

preceding five paragraphs, was how DOH made the annual banking adjustment.

118.
in law.

DOH subsequently departed from the statutory methodology without any change

(b) 119.

The Original Trend Factor for 2009

By letter dated December 8,2008 (the December 2008 Letter), a copy of which

is annexed hereto as Exhibit 3, DOH advised Plaintiffs of their Medicaid reimbursement rates to be effective January 1,2009. Those rates were based on 2002 base year costs, as mandated by $

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47 of the 2006 Revision, which added subdivision 2-b to Public Health Law 0 2808. This statute is commonly referred to as the rebasing statute. As explained in Paragraph 75 above, Public Health Law 0 2808(2-b) substituted 2002 for 19834as the base year of 1983 for calculating Medicaid reimbursement rates unless any facilitys rate would be adversely affected by the change to 2002. If a nursing facilitys rate would have been reduced as the result of the switch to a new base year, the facility was held harmless and continued to use the 1983 base year. 120. On page 6 of the December 2008 Letter, DOH explained how it had applied the

roll factor for 2009 in accounting for inflation between 2002 and 2009, using 2002 as a base year, as had been mandated by the 2006 Revision, 0 47. 121. The roll factor used was 1.1833, which was the product of all the trend factors

mandated by the Legislature from 2002 through 2009 (1.023 or 2.3% for 2003; multiplied by 1.027 or 2.7% for 2004; multiplied by 1.034 or 3.4% for 2005; multiplied by 1.0295 for 2006 or 2.95%; multiplied by 1.021 or 2.1% for 2007; multiplied by 1.015 or 1.5% for 2008; and multiplied by 1.021 or 2.1% as estimated for 2009). See Exhibit 3, p. 6 , and Exhibit 4, which is a page from a sample 2009 rate sheet issued by DOH. 122.
As set forth on Page 6 of the December 2008 Letter, the estimated CPI-U for 2009

used to calculate the rate was 2.1% even though the actual estimate by the Congressional Budget Office made in June of 2008 for 2009 was 3.1%, as indicated on the top right hand box on the chart on page 6 of the December 2008 Letter.

Prior to the enactment of Chapter 109 of the Laws of 2006, facilities which came into existence after 1983 or had undergone a change of ownership were able to use the year in which that transaction occurred rather than 1983. See 10 N.Y.C.R.R. $0 86-2.2(e), 86-2.10(k)(5) and 86-2.15. -32DM2\3090670.1
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123.

In setting rates for 2009, DOH reduced the projected trend factor by 1% from the

Congressional Budget Office estimate of 3.1% to 2.1% pursuant to Section 5 of Part F of Chapter 497 of the Laws of 2008, annexed hereto as Exhibit 8, which states, in relevant part, as follows: notwithstanding paragraph (c) of subdivision 10 of section 2807-c of the public health law . . . the Commissioner of Health shall apply a trend factor projection equal to the otherwise applicable trend factor projection attributable to the period January 1,2009 through December

3 1,2009 in accordance with paragraph (c) of subdivision 10 of 0 2807-c of the Public Health
Law less one percent (emphasis supplied). 124. Plaintiffs do not contest the use of the 2.1% projection for the 2009 trend factor as

set forth in the December 2008 Letter (Exhibit 3) and the rate sheet that accompanied it. 125. Subsequent to the issuance of the December 2008 Letter setting forth Medicaid

reimbursement rates effective January 1, 2009, however, the Legislature enacted 0 3 of Part I of Chapter 2 of the Laws of 2009 (annexed hereto as Exhibit 5), which amended Public Health Law

3 2808(2-b)(b)(i), as originally added by tj 47 of 2006 Revision, deferring the effective date of


rebasing from January 1,2009 to April 1,2009. 126. As a result of that legislatively-mandateddeferral, DOH recalculated all of

Plaintiffs Medicaid reimbursement rates that had been in effect as of January 1, 2009 and replaced them with rates that had been in effect as of December 3 1, 2006, subject to trending for inflation from 2006 to 2009. See L. 2009, chapter 2, Part I, 0 2, annexed hereto as Exhibit 1. 127. This legislative change meant that DOH had to go back and recalculate the rates

effective January 1, 2009 that had originally been published with the December 2008 Letter, using the old base years that had previously been in effect to calculate Plaintiffs 2006 rates (either 1983 or a subsequent year prior to 2002, if a facility had either subsequently opened for

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the first time after 1983 or had undergone a change of ownership after 1983). See footnote 3,
supra.

128.

Finally, by letter dated September 16,2009 (the September 16,2009 Letter), a

copy of which is annexed hereto as Exhibit 6, and pursuant to L. 2009, Chapter 2, Part I, 9 2, DOH notified Plaintiffs of revised Medicaid reimbursement rates effective January 1,2009 which superseded the rates that had previously been effective as of January 1,2009 pursuant to the Departments December 2008 Letter (Exhibit 3, p. 2). 129. The September 2009 Letter explained that, although the relevant base year had

been changed back from 2002 to 1983 or some other date before 2002 (December 2008 Letter, p. 2), the trend factor incorporated into the roll factor would still be 2.1% pursuant to Chapter 497 of the Laws of 2008. 130. This trend factor was in fact the very same 2.1% that had originally been used to

calculate the roll factor in the publication of the original January 1,2009 rates as described in the December 2008 Letter (Exhibit 3, p. 6). 131. The September 2009 Letter also noted that the 2009 roll factor included the

banking adjustment necessary to reflect the final, as distinguished from the projected, 2008 trend factor, as required by Public Health Law 0 2807-c( 10)(c)(3). 132. For purposes of this case, Plaintiffs have no dispute with how the trend factor for

2009 was applied to calculate the Plaintiffs 2009 rates effective January 1, 2009. As described in the September 2009 Letter, DOH correctly (a) included the projected estimate of the CPI-U by the Congressional Budget Office made in 2008 as required by Public Health Law 5 2807c( 1O)(c)(2); (b) reduced that estimate by 1% as required by Section 5 of Part F of Chapter 497 of

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r)

the Laws of 2008; and (c) adjusted the 2009 trend factor further to apply the reconciled final 2008 trend factor banking adjustment as required by Public Health Law 0 2807-c(10)(~)(3). 133. Those rates were subsequently implemented and paid to Plaintiffs. (c) 134. DOH Announces its Intention to Further Revise the 2009 Banking Adjustment

On April 15,2010, DOH convened a meeting of the so-called Nursing Home

Medicaid Reimbursement Workgroup, which had been established by the Legislature pursuant to

0 48 of the 2006 Revision. The Workgroups mission was to investigate and develop
recommendations pertaining to Medicaid reimbursement for residential health care facilities. 135. That Workgroup consists of DOH staff and representatives of statewide

associations representing the residential health care facility industry in New York State, as well as representatives of organizations representing employees. See L. 2006, Ch. 109, Part C, 0 48. 136. At the April 15,2010 meeting of the Workgroup, DOH distributed a handout, a

copy of which is annexed hereto as Exhibit 7, announcing its intention to make a 3.5% negative banking adjustment to the nursing home Medicaid reimbursement rates that had been issued in conjunction with DOHS September 2009 Letter. See Exhibit 7, pp. 5, 6, 7, and 9. The estimated aggregate impact of this adjustment was $53 million in reduced reimbursement to nursing homes statewide. See Exhibit 7, p. 5. 137. DOH arrived at the negative 3.5% banking factor adjustment by reconciling the

2.1% projected trend factor used to calculate the 2009 rates and the final average CPI-U for 2009 it claimed was determined by the Bureau of Labor Statistics, which was -.4%, resulting in a difference of -2.5% (-.4% minus 2.1%). In addition, DOH deducted another 1% to arrive at -3.5%, by invoking Section 5 of Part F of Chapter 497 of the Laws of 2008 (Exhibit 8 hereto), which it claimed authorized not only a 1% deduction from the projected CPI-U used to

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calculate 2009 rates pursuant to Public Health Law tj 2807-c( 1O)(c)(2), but also another 1% deduction final actual CPI-U, as determined by the Bureau of Labor Statistics as part of the reconciliation process set forth in tj 2807-c( 1O)(c)(3) of the Public Health Law. 138. On January 15,2010, the Bureau of Labor Statistics issued a press release stating

that for the 12-month period ending December 2009, the CPI-U was a positive 2.7% - and not, as DOH claimed, negative .4%. (A copy of the press release is annexed as Exhibit 9.) 139. In addition, rather than prospectively applying the negative banking adjustment to

2010 rates, as required by Public Health Law $ 2807-c(10)(c)(3), DOH announced that it would instead apply the banking adjustment retroactively to the first calendar quarter of 2009 rates, in direct violation of Public Health Law tj 2807-c(10)(c)(3). 140. On information and belief, DOH sought to depart from the provisions of Public

Health Law $ 2807-c( 1O)(c)(3) and apply the banking factor adjustment retroactively to the first calendar quarter of 2009, rather than prospectively to the trend factor applicable to 2010, because it knew no trend factor adjustment would affect the amount actually paid out by DOH after April 1,2009 for the following reasons: a) Pursuant to Section 2 of Part D of Chapter 58 of the Laws of 2009, any

adjustment to rates on and after April 1,2009 and prior to March 3 1, 20 10 would have been negated because that law required that, regardless of any other adjustment, the aggregate amount to be spent on the operating cost component of rates paid to residential health care facilities by the State between April 1,2009 and March 3 1,2010 was to be no more or less than $2 10 million above what would have been the annual expenditures based on rates in effect as of March 3 1, 2009; and

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b)

On December 9,2009, DOH notified the public that it intended not to

apply any trend factor to rates effective on and after January 1,2010 (State Register, Dec. 9, 2009 at 93); and this was, in fact, implemented pursuant to legislation enacted into law on June 9,2010 (L 2010, Ch. 109, Part B, fj 1). 141. Because the 20 10 legislation eliminated the trend factor after January 1,2010,

there was no means available to apply the 2009 banking adjustment to 2010 rates, which would otherwise have been required by Public Health Law 0 2807-c(1O)(c)(3). Accordingly, on information and belief, DOH decided to apply the adjustment to the first calendar quarter of 2009 rates even though it had no legal authority to do so. 142. Defendants decision to apply a -3.5% banking adjustment retroactively to the

rates for the first calendar quarter of 2009 was and is unlawful because: a) it misinterprets the provisions of Section 5 of Part F of Chapter 497 of the

Laws of 2008, which authorized a reduction of 1% only to the otherwise applicable projected trend factor for 2009, but not to the final actual trend factor, which, in any event, was a positive 2.7% rather than a negative .4%; and b) it violates the express provisions in Public Health Law 0 2087-c(10)(~)(2)

and (3) mandating that any reconciled banking adjustment be applied prospectively to trend factors for the current year, rather than retroactively to prior periods; c) it violates the proscriptions against retroactive rate-making embodied in

Public Health Law 6 2807(7); and d) it effectuates an unconstitutional taking of property by retroactively

divesting Plaintiffs of a right to reimbursement that was paid to them for services they have already rendered.

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(4) 143.

Efforts to Remediate Negative Impact of Rate Adjustments

Section 97 of the Laws of 201 1 establishes a mechanism for giving certain

nursing facilities relief from the adverse impact of changes to the Medicaid reimbursement methodology. Facilities experiencing a net reduction in Medicaid reimbursement for the period April 1,2009 through March 3 1,2011 as a result of the 2002 rebasing methodology, the Medicaid-only case mix methodology, and the scale back are entitled to a one-time payment in May 201 1 of an amount equal to 50% of their net reimbursement reduction. See also Exhibit 2, June 201 1 Letter, p. 9. 144. However, pursuant to Sec. 97 of the Laws of 201 1, facilities experiencing a net

reduction in their Medicaid reimbursement for the period April 1,2009 through March 3 1,2011 of more than $6 million are entitled to a fbrther adjustment of their rates such that their net reduction is reduced to zero. See also Exhibit 2, June 201 1 Letter, p. 10. 145. There is no indication in the Laws of 201 1, or anywhere else, as to why a

threshold loss of $6 million was chosen for 100% reduction of the negative reimbursement impact. Under this provision, a facility that had a negative impact of $5,999,999.00 would receive only a 50% adjustment, while a facility with a loss of just $1.OO more would receive a 100% adjustment. The adjustment is therefore arbitrary and has no rational basis.

(5)
146.

Limitation on Appeals

42 C.F.R. 447.253(e), which was promulgated under Title XIX of the Social

Security Act, requires that [tlhe Medicaid agency must provide an appeals or exception procedure that allows individual providers an opportunity to submit additional evidence and receive prompt administrative review, with respect to such issues as the agency determines appropriate, of payment rates.

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147.

10 N.Y.C.R.R. 9 86-2.14 gives residential health facilities such as those operated

by Plaintiffs the right to request revisions to their Medicaid reimbursement rates. 148. Although DOH will only accept rate appeals for the correction of computational

errors or errors in data submitted by a facility prior to the computation of the rate (see 10 N.Y.C.R.R.

86-2.14(a)(3)), computational errors can be significant, and there are no aggregate

monetary limitations on the appeals that DOH can hear. 149. New York States Medicaid Redesign Team proposed an $80 million annual cap on the processing of nursing home rate appeals for a period of four years. See Exhibit 10 hereto, Medicaid Redesign Proposal Number 2 1, effective April 1,201 1. This proposal was adopted as law in Public Health Law 9 2808( 17)(b). 150. Section 98 of the Laws of 201 1 decreased the $80 million cap to $50 million for

rate appeals processed by DOH for rate periods April 1,2011 through March 3 I, 2012. Upon information and belief, the amount awarded in nursing home rate appeals is generally far in excess of $50 million or even $80 million per rate period. 151. In revising rates within the $50 million to $80 million fiscal limits, DOH is to

prioritize the rate appeals based on an amorphous standard that takes into consideration which facilities are facing significant financial hardship as well as such other considerations as the commissioner [of health] deems appropriate. DOH may also promulgate regulations establishing priorities and time frames for processing rate appeals, including rate appeals filed prior to April 1,2011, within available administrative resources and in accordance with the Laws of2011. 152. No mechanism for challenging DOHSpriority determinations exists.

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153.

The cap on appeals leaves some nursing homes without any remedy whatsoever

when their rates are computed incorrectly. This constitutes a violation of federal regulations and due process, and is arbitrary and irrational.

G.

Failure To Comply With Federal and State Laws 154. Under 42 C.F.R. 0 447.253, in order to receive CMS approval of a state plan

change in payment methods and standards, the state Medicaid agency must make assurances satisfactory to CMS that the rates paid for nursing facility services are sufficient to meet the requirements of Section 3O(A). Specifically, 42 C.F.R.

9 448.253 requires the state to make

assurances that the amended rates 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 regulations, and quality and safety standards.
155.

New York did not assure CMS that the rates provided for under the plan

amendment would be sufficient to satisfy state and federal regulations. For example, in response to a CMS inquiry about how the State intended to monitor the impact of the new rates and implement a remedy if those rates were insufficient to guarantee required access levels, New York responded that it could assure that current access levels would be retained because it was currently not aware of any access issues; providers cannot discriminate based on source of payment; and, if access issues arose, it would expect to see a marked increase in complaints which it would then identify and analyze.
156.

Upon information and belief, CMS approved the proposed amendment of the

State Plan despite New Yorks failure to provide the requisite assurances. 157. There is no evidence that New York State considered or otherwise took into

account either the quality of care or equal access provision of Section 30(A) prior to

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adopting Chapter 59 of the Laws of 201 1 or notifying the Facilities of the reduction of their Medicaid reimbursement payments pursuant to such Laws. 158. Plaintiffs have also found no evidence that New York State took any steps to

determine how the reimbursement reduction would affect compliance with either the quality of care or equal access provisions of Section 30(A) or the requirement of 42 U.S.C. 5 1396(a) that a plan be in the best interest of [Medicaid] recipients. 159. Defendants cannot show that the new reduced Medicaid reimbursement rates, and

the scale back, in particular, properly reflect the costs of providing quality nursing facility services to Medicaid-eligible individuals in the State of New York as required by Section 30(A). 160. There is no evidence that the new reduced reimbursement payments are designed

to enlist participation of sufficient providers of Medicaid as required by Section 30(A). 161. By failing to include all Medicaid-eligible individuals (Le., those who are dually

eligible for both Medicare and Medicaid) in the case mix component of the Medicaid reimbursement rate methodology, the State also violated New York law, specifically Public Health Law $2808(2-b)(g), as added by Part 36 of the Laws of 2007. H. Harm To Nursing; Homes And Their Residents 162. Under the Laws of 201 1, the new Medicaid reimbursement methodology applies

retroactively to prior rate periods dating back to April 1,2009 (except that the scale back is only retroactive to May 1, 2009). Thus, some nursing facilities, including all of Plaintiffs, received Medicaid payments that are more than the payments due for the prior periods under the new methodology. These nursing facilities are now being charged back by the State for the overpayments at a rate equal to either 5% or 10% of the amount of their weekly Medicaid payments until the total overpayments are fully recouped. As a result, not only do Plaintiffs

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have to cope with the impact of current reimbursement payments that have been slashed due to the scale back and other reductions, but the slashed payments are being further cut because of the chargebacks repaying the State for the overpayments arising from the retroactive changes. The Laws of 20 11 thus leave Plaintiffs without sufficient reimbursement payments to ensure quality of access or equality of treatment and jeopardize Plaintiffs operations. 163. The chargebacks could also have disastrous collateral consequences for PIaintiffs.

The amount of the chargeback is being treated as a revenue reduction in 201 1. As such, it reduces a Facilitys retained earnings for the year. In the case of some nursing facilities, the reduction of their retained earnings will render them insolvent and constitute a default under their loan covenants, impairing their ability to borrow or requiring them to accelerate payments on outstanding loans. 164. Unless enjoined, the effect of the reduction in Medicaid reimbursement rates will

be catastrophic for Medicaid recipients throughout New York, as well as service providers like Plaintiffs. The rate reductions will result in reimbursement being cut so drastically that nursing facilities may be forced to curtail services; lay off employees, risking compromise to the quality of care; where possible, discourage Medicaid admissions in favor of Medicare or private insurance paid patients whose rates are not subject to these drastic reimbursement cuts; file for Chapter 11 bankruptcy protection, clearly posing a danger to the orderly care of patients; or, in some cases, cause the Facilities to cease operations altogether. 165. Unlike most private businesses, nursing homes are regulated and, in response to

drastic reductions in Medicaid reimbursement, cannot simply reduce costs proportionately. And they obviously cannot reduce costs retroactively. There are limitations on the cost controls that

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facilities can put in place; certain staff are mandated by regulation; and, of course, when dealing with human lives and frail elderly residents, some economies are simply impossible. 166. To avoid having to provide services for which they will not be fairly

compensated, nursing homes in New York cannot simply opt not to accept Medicaid patients. The State effectively requires nursing homes to accept Medicaid patients because it will not issue a Certificate of Need authorizing a nursing facility to operate or approve a change in ownership unless the facility agrees to accept a certain percentage of Medicaid admissions. 167. DOH, acting through the Public Health Council (now the PHHPC), has adopted

regulations requiring facilities which have submitted applications for change of ownership to comply with so-called Medical Access Regulations requiring that they admit Medicaid patients at a rate at least equal to 75% of the county-wide Medicaid average of Medicaid admissions. 10 N.Y.C.R.R.

0 0 670.3(~)(2).Thus, most facilities, including all of Plaintiffs, cannot simply

refuse to admit Medicaid patients. 168. The licensed operator of Plaintiff Park Gardens and its accountants have stated

that the Medicaid reimbursement rates fall far short of covering the costs of providing nursing home services to Park Gardens Medicaid-eligible patients. The operator has stated that he cannot afford services sufficient to provide the level of care required by Federal regulations to Medicaid patients where the reimbursement paid is below the actual cost of providing such care. For the rate period commencing May 1,2009, the Medicaid reimbursement payments that Park Gardens actually received exceeded $247 per patient per day. According to the rate sheets provided by the State, based on the change in methodology due to the scale back and use of Medicaid-only case mix, Park Gardens Medicaid reimbursement rate was reduced to about $235.56 per patient per day from May 1,2009 to December 3 1,2009, and to about $225.31 in

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20 10. Even after giving effect to mitigation, these retroactive changes result in an overpayment to Park Gardens between May 1,2009 and December 3 1,2010 of $1,748,790 which the State is recouping from the current Medicaid reimbursement payments made to Park Gardens - which are already about 10% lower than the 2008 Medicaid reimbursement rates - at the rate of 10% of the weekly Medicaid reimbursement payment. 169. Absent the injunction Plaintiffs seek, frail, elderly Medicaid-eligible individuals

may lose access to the quality 24-hour skilled nursing care they require in order to attain or maintain the highest practicable physical, mental and psychosocial well-being of each resident, as required by 42 U.S.C. 3 1395i-(b)(2). See also 42 C.F.R. 3 483.25. 170. In short, there is real and immediate risk of harm to the Facilities and Medicaid

recipients due to the Medicaid reimbursement reduction implemented pursuant to the Laws of 2009. FIRST CLAIM FOR RELIEF (Laws of 201 1 - Injunctive Relief Based on Violation of 42 U.S.C. and the Supremacy Clause) 171. 172.

3 1396a(1)(30)(A)

Plaintiffs repeat and reallege Paragraphs 1 through 170 as if set forth fully herein. Under the Supremacy Clause of the United States Constitution, U.S. Const. art.

VI, cl. 2, the Constitution and the Laws of the United States which shall be made in Pursuance thereof. . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding. 173. By choosing to participate in Medicaid, the State of New York obligated itself to

comply with certain Federal statutes and regulations, including Sections 30(A). 174. Pursuant to Section 30(A), the State had a duty to consider efficiency, economy,

quality of care, and equality of access when establishing reimbursement rates. Specifically,

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Section 30(A) required New York to provide such methods and procedures relating to . . . payment for, care and services available under the plan . . . as may be necessary

. . . to assure

that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available . . . at least to the extent that such care and services are available to the general population in the geographic area. 175. New York State violated Section 30(A) by implementing a Medicaid reimbursement rate reduction without giving sufficient weight to - or even considering -the impact of the rate reduction on quality of care or equality of access for Medicaid beneficiaries. It also violated 42 U.S.C. 3 1396a(a)(l9) by failing to take into account the best interests of Medicaid recipients. 176. There is no evidence that Defendants intend to comply with the requirements of

Section 30(A) or 42 U.S.C. 0 1396a(a)(19). 177. New York States new Medicaid reimbursement rates in general, and the scale back adjustment in particular, do not satisfy the requirements of Section 30(A) because reimbursement rates will not be sufficient to assure quality of care and equality of access to services. 178.

In establishing the new Medicaid reimbursement rates, New York State took

nothing into account other than budgetary considerations. The State decided the amount by which it wanted to reduce Medicaid spending and, based solely on that number, it backed into the reimbursement rates referred to in its June 201 1 Letter. 179. New York States reimbursement methodology violates the Supremacy Clause and is therefore preempted by Federal law. By virtue of the foregoing, enforcement of the Laws of 201 1 should be enjoined.

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180.

There is no administrative remedy available to challenge the statutory and

regulatory promulgation complained of herein. 181. Plaintiffs have no adequate remedy at law.

SECOND CLAIM FOR RELIEF (Appeal Cap - Injunctive Relief Based on Violation of 42 C.F.R. 6 447.253 and the Supremacy Clause) 182. 183. Plaintiffs repeat and reallege Paragraphs 1 through 181 as if set forth fully herein. Federal regulations require that the Medicaid agency must provide an appeals or

exception procedure that allows individual providers an opportunity to submit additional evidence and receive prompt administrative review, with respect to such issues as the agency determines appropriate, of payment rates. 42 C.F.R. 0 447.253. 184. Section 2808( 17)(b) of the New York Public Health Law is in direct conflict with

42 C.F.R. 0 447.253. By preventing the Conmissioner of Health from considering rate appeals in excess of an aggregate annual amount of $50 million or $80 million (depending on the year), and permitting the Commissioner to prioritize such rate appeals, including consideration of which facilities the commissioner determines are facing significant financial hardship as well as such other considerations as the commissioner deems appropriate, Section 2808(17)(b) does not comply with the requirement of 42 C.F.R. 0 447.253 that the Medicaid agency provide a procedure allowing providers to submit additional evidence and receive prompt review. 185. Section 30(A) requires that a state Medicaid plan provide methods and procedures

relating to the utilization of, and payment for, care and services under the plan as may be necessary to assure that payments are consistent with efficiency, economy, and quality of care. By giving priority to appeals filed by nursing facilities which are facing significant financial hardship, Section 2808( 17)(b) penalizes those facilities which are operating efficiently and

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economically, and gives them no incentive to continue to do so. Accordingly, Section 2808(17)(b) also conflicts with Section 30(A). 186. Section 2808( 17)(b) of the New York Public Health Law violates the Supremacy

Clause and is therefore preempted by Federal law. By virtue of the foregoing, enforcement of Section 2808(17)(b) of the New York Public Health Law should be enjoined. 187. There is no administrative remedy available to challenge the statutory and

regulatory promulgation complained of herein. 188. Plaintiffs have no adequate remedy at law.

THIRD CLAIM FOR RELIEF (Appeal Cap - Injunctive Relief Based on Violation of the Equal Protection and Due Process Clauses of the United States Constitution and the New York State Constitution) 189. 190. Plaintiffs repeat and reallege Paragraphs 1 through 188 as if set forth fully herein. By imposing an annual cap on rate appeals of $50 million rate period April 1,

201 1 through March 3 1,2012, and $80 million for the three years thereafter, Section 2808(17)(b) of the New York Public Health Law treats certain nursing homes differently from others without any rational basis. There is no reason why some nursing homes should have the right to appeal erroneous rate determinations while other nursing homes, whose rates have also been calculated improperly, are denied the right to any remedy. There is also no correlation between the validity of an appeal and whether it will be acted upon, processed, and paid under Section 2808(17)(b) of the New York Public Health Law. 191. By reason of the foregoing, Section 97 of the Laws of 20 11 violates the Equal

Protection Clause of the Constitutions of the United States and New York State.

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192.

Denying some nursing facilities any right to relief from the erroneous

computation of their reimbursement rates constitutes a violation of the Due Process Clause of the Constitutions of the United States and New York State. 193. There is no administrative remedy available to challenge the statutory and

regulatory promulgation complained of herein. 194. Plaintiffs have no adequate remedy at law.

FOURTH CLAIM FOR RELIEF (Mitigation - Injunctive Relief Based on Violation of the Equal Protection Clause of the United States Constitution and the New York State Constitution) 195. Plaintiffs repeat and reallege Paragraphs 1 through 194 as if set forth fully herein.

196. New York State apparently recognized that the changes it made in its reimbursement methodology would have a serious adverse effect on nursing facilities. However, the mechanism it put in place in an attempt to remedy this harm - Section 97 of the Laws of

20 11 - violates the Equal Protection Clause of the Constitutions of the United States and New
York State because there is no rational basis for its differential treatment of similarly situated nursing facilities. 197. While nursing facilities experiencing a net reduction of more than $6 million in

their Medicaid reimbursement from the rebasing and scaleback for the period April 1,2009 through March 3 1, 201 1 are entitled to a further adjustment of their rates such that their net reduction is reduced to zero, facilities with a negative reduction of $5,999,999.00 or less receive only a 50% adjustment. There is no rational basis for this two-tier adjustment, nor is there any reason why a threshold loss of $6 million was selected in order to receive a 100% reduction of the negative impact.

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198.

By reason of the foregoing, Section 2808( 17)(b) of the New York Public Health

Law violates the Equal Protection Clause of the Constitutions of the United States and New York State. 199. There is no administrative remedy available to challenge the statutory and

regulatory promulgation complained of herein. 200. Plaintiffs have no adequate remedy at law. FIFTH CLAIM FOR RELIEF (Injunctive Relief Based on Violation of New York State Law) 20 1. 202. Plaintiffs repeat and reallege Paragraphs 1 through 200 as if set forth fully herein. Under New York law, Medicaid reimbursement rates for nursing homes are to be

set on a per diem basis and are to be prospective in nature, taking into account both capital costs and operating costs. The changes made pursuant to the Laws of 201 1 do not comport with New York law because they set per diem rates that are not prospective. 203. In addition, while Medicaid rates are initially provisional, the term

provisional refers solely to the fact that rates may be adjusted upon an audit of a nursing facilitys costs. Thus, 18 N.Y.C.R.R. 5 5 17.3 provides that provisional rates become final following an audit, but it does not establish any basis for retroactively changing rates except by means of an audit. 204. To the extent that the Laws of 201 1 make retroactive changes in the Medicaid

reimbursement rates for nursing homes that are not based on an audit, the Laws of 201 1 violate New York law and are invalid and unenforceable. 205. There is no administrative remedy available to challenge the statutory and

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SIXTH CLAIM FOR RELIEF (Laws of 201 1 - Injunctive Relief Based on Violation of Due Process) 207. 208. Plaintiffs repeat and reallege Paragraphs 1 through 206 as if set forth fully herein. To the extent that the Laws of 201 1 make retroactive changes in the Medicaid

reimbursement rates for nursing homes which are not based on an audit of a nursing facilitys costs, the Laws of 201 1 violate the due process clause of the Constitutions of the United States and New York State because Plaintiffs had a right to expect that their rates could only be altered on the basis of an audit and the Laws of 201 1 deprive Plaintiffs of that right. 209. There is no administrative remedy available to challenge the statutory and

regulatory promulgations complained of herein. 2 10. Plaintiffs have no adequate remedy at law.

SEVENTH CLAIM FOR RELIEF (Injunctive Relief Based on Improper Delegation of Legislative Authority In Violation of the Constitutions of the United States and New York State)

2 1 1.
212.

Plaintiffs repeat and reallege Paragraphs 1 through 2 1 1 as if set forth fully herein. Section 2808( 17)(b) permits the Commissioner to prioritize[e] such rate appeals,

including consideration of which facilities the commissioner determines are facing significant financial hardship as well as such other considerations as the commissioner deems appropriate. By failing to set forth clear standards, Section 2808(17)(b) gives the Commissioner unfettered discretion in determining which nursing homes may pursue appeals of their reimbursement computations, and constitutes an improper delegation of legislative authority in violation of the Constitutions of the United States and New York State. 2 13. There is no administrative remedy available to challenge the statutory and

regulatory promulgation complained of herein. 2 14. Plaintiffs have no adequate remedy at law.

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EIGHTH CLAIM FOR RELIEF (Case Mix - Injunctive Relief Based on Violation of Due Process) 2 15. 216. Plaintiffs repeat and reallege Paragraphs 1 through 2 15 as if set forth fully herein. In other states, nursing facilities can elect not to be providers of Medicaid services

if reimbursement rates are insufficient to cover their costs. But, as a practical matter, nursing facilities in New York do not have that option. In order to be authorized to operate, the State not only requires that they accept Medicaid recipients in their facilities, but it effectively requires that they accept certain levels of Medicaid recipients. New York thus requires nursing facilities to provide services to Medicaid recipients even if the nursing facilities will not be reimbursed for the costs they incur in doing so. 21 7. To the extent that the Laws of 201 1 requires nursing facilities to provide

Medicaid services without just compensation, it constitutes a taking in violation of the due process clause of the United States and New York Constitution. 2 18. There is no administrative remedy available to challenge the statutory and

regulatory promulgations complained of herein. 2 19. Plaintiffs have no adequate remedy at law.

NINTH CLAIM FOR RELIEF (Case Mix - Injunctive Relief Based on Violation of New York State Law) 220. 221. Plaintiffs repeat and reallege Paragraphs 1 through 219 as if set forth fully herein. Defendants violated New York State Public Health Law 0 2808(2-b)(g), as added

by Part 36 of the Laws of 2007, by failing to include all Medicaid-eligible individuals (Le., including those who are dually eligible for both Medicare and Medicaid as well as those whose care is paid for by Medicaid) in the computation of the case mix component of the Medicaid

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reimbursement rate methodology. Accordingly, implementation of the methodology should be enjoined. 222. There is no administrative remedy available to challenge the statutory and

regulatory promulgations complained of herein. 223. Plaintiffs have no adequate remedy at law. TENTH CLAIM FOR RELIEF (Retroactive Banking Adjustment - Injunctive Relief Based on Violation of New York State Law) 224. 225. Plaintiffs repeat and reallege Paragraphs 1 through 223 as if set forth fully herein. Public Health Law 9 2807-c(10)(c)(3) is applicable to Medicaid reimbursement

rates established on and after April 1,2000, and it provides for banking adjustments to be applied prospectively to trend factors for the current year, rather than retroactively to prior periods. 226. 227. Public Health Law $ 2807(7) proscribes retroactive rate-making. By retroactively implementing a negative banking adjustment that eliminated the

trend factor for the period 2008 forward, Defendants violated Sections $5 2807(7) and 2807c( 1O)(c)(3) of the Public Health Law. 228. There is no administrative remedy available to challenge the statutory and

regulatory promulgations complained of herein. 229. Plaintiffs have no adequate remedy at law. ELEVENTH CLAIM FOR RELIEF (Scale Back - Due Process/Equal Protection) 230. 23 1. Plaintiffs repeat and reallege Paragraphs 1 through 229 as if fully set forth herein. To the extent that the scale back is applied proportionally to further reduce the

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States and New York State because it serves no rational purpose. Such nursing facilities did not receive any part of the increase that is being scaled back. Accordingly, as applied to such nursing facilities, including each of the Plaintiffs herein, the scaleback is irrational. 232. There is no administrative remedy available to challenge the statutory and

regulatory promulgations complained of herein. 233. Plaintiffs have no adequate remedy at law. TWELFTH CLAIM FOR RELIEF (Declaratory Judgment that the Medicaid Reimbursement Rate Reduction Pursuant to the Laws of 201 1 Violates Federal and State Law) 234. 235. Plaintiffs repeat and reallege Paragraphs 1 through 233 as if fully set forth herein. By reason of the foregoing, an actual controversy exists between the parties

concerning whether the reimbursement reduction set forth in the Laws of 201 1 violates Section 30(A) of the Social Security Act. Accordingly, to clarify the legal relations of the parties, this Court should issue declaratory relief pursuant to 28 U.S.C. 3 2201. WHEREFORE, Plaintiffs demand judgment as follows: 1) On the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth,

and Eleventh Claims for Relief, preliminarily and permanently enjoining Defendants, their agents, servants, employees, successors, assigns, and all those acting in concert with them from (a) implementing the Medicaid rate reductions applicable to Plaintiffs embodied in Chapter 59 of the Laws of 201 1; (b) retroactively reducing Medicaid reimbursement rates; and (c) restoring the Medicaid reimbursement payments which were improperly recouped and making Medicaid reimbursement payments to Plaintiffs from June 20,201 1 forward at rates that comply with all applicable federal and state law; and

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2)

On the Twelfth Claim for Relief, declaring that the Medicaid rate reductions

applicable to Plaintiffs embodied in Chapter 58 of the Laws of 20 1 1 are unconstitutional, void, and unenforceable; and 3) Granting such other and further relief to Plaintiffs as to the Court may seem just

and proper, including an award of costs and attorneys fees. Dated: New York, New York November 9,201 1 DUANE MORRIS LLP By: Susan V. Kayser 1540 Broadway New York, New York 10036 Tel. (212) 692-1000 Fax: (212) 692-1020 Attorneys for Plaintiffs

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I.

Index No. 111014-2011 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK BRIDGE VIEW NURSING HOME, INC.; CLIFFSIDE NURSING HOME, INC.; EAST END HEALTH CARE, INC. d/b/a WESTHAMPTON CARE CENTER; FOREST VIEW NURSING HOME, INC.; FULTON COMMONS CARE CENTER, INC.; KENNETH GAUL 11, LLC d/b/a CEDAR LODGE NURSING HOME; LAWRENCE NURSING CARE CENTER, INC.; MAYFAIR CARE CENTER, INC.; MEADOWBROOK CARE CENTER, INC.; MICHAEL MELNICKE d/b/a CATON PARK NURSING HOME; MIDWAY NURSING HOME, INC.; PARK GARDENS REHABILITATION AND NURSING CENTER, LLC; PARK HOUSE CARE CENTER, LLC; PROMENADE NURSING HOME, INC.; RIVER VALLEY CARE CENTER, INC.; ROCKAWAY CARE CENTER LLC; SHEEPSHEAD NURSING AND REHABILITATION CENTER, LLC; SUNSHINE CARE CORP. d/b/a HEMPSTEAD PARK NURSING HOME; UNION PLAZA NURSING HOME, INC.; VJJ HOLDING COMPANY, LLC d/b/a WOODHAVEN NURSING HOME; WOODCREST REHABILITATION & RESIDENTIAL HEALTH CARE CENTER, LLC; and FLUSHING MANOR GERIATRIC CENTER, INC. d/b/a WILLIAM 0. BENENSON REHAB PAVILION, Plaintiffs, -againstANDREW CUOMO, as Governor of the State of New York, and NIRAV R. SHAH, M.D., M.P.H., as Commissioner of the New York State Department of Health, Defendants. SECOND AMENDED COMPLAINT FOR INJUNCTIVE . AND DECLARATORY RELIEF DUANE MORRIS LLP 1540 Broadway New York, NY 10036 (2 12) 692- 1000 Attorneys for Plaintiffs

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