Heritage Operations Group, LLC v. Norwood et al

Filing 69

MEMORANDUM Opinion and Order Signed by the Honorable John Robert Blakey on 8/12/2019. Mailed notice(gel, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
HERITAGE OPERATIONS GROUP,
LLC, et al.,

Case No. 17-cv-8609

Plaintiffs,
v.

Judge John Robert Blakey

FELICIA NORWOOD, et al.,
Defendants.
ROCK RIVER HEALTH CARE, LLC, et al.,
Plaintiffs,

Case No. 18-cv-06532

v.
PATRICIA R. BELLOCK., et al.,

Judge John Robert Blakey

Defendants.
MEMORANDUM OPINION AND ORDER
In two related cases, Plaintiffs Heritage Operations Group, LLC and Rock
River Health Care, LLC each sued the Director of the Illinois Department of
Healthcare and Family Services (HFS), then Felicia Norwood and now Patricia
Bellock, and the Administrator of the Centers for Medicare and Medicaid Services
(CMS), Seema Verma. Heritage and Rock River (collectively, the Plaintiffs), each
acting on behalf of numerous long-term care facilities that it operates in Illinois,
allege that HFS violated federal Medicaid laws and their due process rights when it
retroactively changed Medicaid’s reimbursement rates for those facilities.

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The

facilities also allege that CMS acted unlawfully by approving the Illinois Medicaid
plan under which HFS changed the reimbursement rates.
Heritage first brought suit in November 2017 and moved for a temporary
restraining order (TRO) shortly thereafter.

Defendants opposed the TRO and

simultaneously moved to dismiss Heritage’s complaint for failure to state a claim; on
September 18, 2018, this Court granted Defendants’ motion to dismiss without
prejudice and denied Heritage’s motion for a TRO. 17-cv-8609 [42] [43]. Heritage
filed an amended complaint in October 2018. 17-cv-8609 [44].
On September 26, 2018, Rock River filed a complaint substantively identical
to that of Heritage on behalf of a different set of nursing homes; the case was
reassigned to this Court as related to Heritage’s case. 18-cv-6532 [1] [4] [8].
On April 5, 2019, Defendant Bellock filed a motion to dismiss both Plaintiffs’
amended complaints. 17-cv-8609 [60]; 18-cv-6532 [18]. Defendant Verma also filed
a motion to dismiss Rock River’s amended complaint. 18-cv-6532 [19]. As is discussed
below, Count IV of Heritage’s amended complaint—its only count against Verma—
remains identical to that which this Court previously dismissed, and according to
Heritage is “repled for purposes of appeal” only.

17-cv-8609 [44] ¶¶ 196−98.

Accordingly, CMS and Heritage agreed to forego an additional round of briefing on
Count IV. 17-cv-8609 [47] ¶ 3.
For the reasons explained below, this Court grants Defendants’ motions with
prejudice.

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I.

The Complaints’ Allegations 1
This Court incorporates by reference, and presumes familiarity with, its prior

opinion addressing Defendants’ motion to dismiss in Heritage’s case, 17-cv-8609 [43],
and thus only briefly revisits the facts from which the parties’ claims arise.
Plaintiffs operate long-term care facilities throughout Illinois. [4] ¶¶ 1−3.
These nursing facilities receive per diem reimbursement for Medicaid beneficiaries
from HFS, which administers the Illinois Medicaid program. Id. ¶¶ 4, 25. CMS
administers Medicaid at the federal level. Id. ¶ 10.
Medicaid is a voluntary program, jointly funded by the federal and state
governments, with the primary purpose of providing medical care for poor, elderly,
and disabled individuals. Id. ¶¶ 7−8. States that choose to fund Medicaid must
administer their programs in accordance with the authorizing legislation in Title XIX
of the Social Security Act, 42 U.S.C. § 1396, et seq., also known as the Medicaid Act.
Id. ¶ 8. To participate in Medicaid, a state must submit its state plan for medical
assistance to CMS for approval. Id. ¶ 9.
The Medicaid Act requires each state plan to include certain procedural and
substantive elements. Id. ¶ 20. Relevant here, state plans must provide “a public
process for determination of rates under the plan” that involves: (1) publishing
proposed rates and the methodologies and justifications underlying the proposed
rates; (2) giving providers, beneficiaries, and “other concerned State residents” a

In this opinion, citations to docket numbers, unless otherwise noted, refer to filings in Rock River’s
case, No. 18-cv-6532. Because Plaintiffs’ complaints contain virtually identical allegations about
Defendants’ practices, this Court, when possible, cites one complaint for a proposition that applies
equally to both Plaintiffs.

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“reasonable opportunity” to review and comment on the published materials; and (3)
publishing the final rates and the methodologies and justifications underlying the
final rates. Id. (quoting 42 U.S.C. § 1396a(a)(13)(A)). States must also provide public
notice of any “significant proposed change” in their statewide methods and standards
for setting payment rates. Id. ¶ 22 (quoting 42 C.F.R. § 447.205(a)).
Under Illinois’ plan, the per diem reimbursement that nursing facilities receive
from HFS consists of three separate components: (1) support cost; (2) nursing cost;
and (3) capital cost. Id. ¶ 26. This case concerns the nursing component, also known
as the direct care component. See id. ¶¶ 43−72. This component pays for: (1) the
mean wages and benefits of all the licensed staff, registered nurses, licensed practical
nurses, certified nursing assistants, social workers, and nursing supervisors who care
for a resident; (2) direct care consultants; and (3) health care supplies used by or for
a resident in a 24-hour period. Id. ¶ 27.
By the time the state reimburses nursing facilities, they have already provided
their services to residents. Id. ¶ 28. At the time of reimbursement, Plaintiff facilities
have generally already paid their nursing staff as well. Id. ¶ 29.
A.

The Nursing Component and On-Site Facility Reviews

HFS uses a Resource Utilization Group (RUGs) system to calculate
reimbursement rates for nursing facilities. 2 305 ILCS 5/5-5.2. Under this “residentdriven, facility-specific, and cost-based” methodology, HFS updates individual

As it did in its previous motion to dismiss opinion, this Court takes judicial notice of the Illinois
statutes and regulations that establish how HFS calculates reimbursement rates and how HFS audits
nursing facilities. See Demos v. City of Indianapolis, 302 F.3d 698, 706 (7th Cir. 2002).

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reimbursement rates on a quarterly basis. Id. To enable these updates, Illinois
facilities must submit Minimum Data Set (MDS) assessments to HFS quarterly. 89
Ill. Admin. Code § 147.315. MDS assessments provide information about the medical
needs of each resident in a given facility, which allows HFS to classify each resident
under a specific RUG code and establish a given facility’s “case mix.” See id. §
147.325. The facility’s case mix then factors into HFS’ calculation of the facility’s
nursing component, which “shall be the product of the statewide RUG-IV nursing
base per diem rate, the facility average case mix index, and the regional wage
adjustor.” 305 ILCS 5/5-5.2(e-2).
HFS sometimes conducts on-site reviews to verify the accuracy of a facility’s
MDS data. See 89 Ill. Admin. Code § 147.340. HFS may randomly select the facilities
it audits or may audit a facility based upon discretionary factors including, for
example, a facility’s “atypical patterns of scoring MDS items.” Id. During a review,
HFS informs the facility of “any preliminary conclusions regarding the MDS
items/areas that could not be validated,” and the facility then has an opportunity to
present HFS with any documentation supporting its position. Id. § 147.340(o). A
facility must provide all relevant documentation to the HFS team before the team
finishes its on-site review.

Id. § 147.340(p).

If the review team needs more

documentation to validate an area, they “shall identify the MDS item requiring
additional documentation” and give the facility twenty-four hours to produce that
information. Id. § 147.340(m).

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If HFS concludes, based upon its review, that a facility submitted inaccurate
MDS data, HFS reclassifies the necessary residents with correct RUG codes and
determines if accurate data would change the nursing component of the facility’s
reimbursement rate.

Id. § 147.340(s).

HFS may change a facility’s per diem

reimbursement rate “retroactive to the beginning of the rate period” if recalculating
the facility’s nursing component decreases the per diem rate by more than one
percent.

Id.

§ 147.340(t).

A facility may appeal any change to its specific

reimbursement rate within 30 days of receiving notice of the change from HFS; a
facility may not, however, rely upon additional documentation for the appeal that it
failed to present to HFS during the original review. Id. § 147.340(u). HFS then has
120 days to address a facility’s request for reconsideration; “individuals not directly
involved” in the original review determine whether to make further adjustments to
the facility’s reimbursement rate. Id. § 147.340(v).
B.

State Plan Amendment and Facility Audits

In 2017, CMS approved an amendment to Illinois’ state plan, effective
retroactive to January 2016, that provided for the MDS on-site reviews and
retroactive rate adjustments discussed above. [4] ¶ 82. Illinois codified that plan
amendment in section 147.30 of its Administrative Code. See id. ¶ 82.
Throughout 2016 and 2017, HFS audited numerous Rock River and Heritage
facilities pursuant to its authority under section 147.340. Id. ¶¶ 43−72. As a result
of these audits, HFS significantly reduced the nursing component at each one of the

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audited facilities. See id. These per diem rate changes “affected all residents in the
facilities” retroactively. Id. ¶ 80.
II.

Legal Standard
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6),

a complaint must provide a “short and plain statement of the claim” showing that the
pleader merits relief, Fed. R. Civ. P. 8(a)(2), so the defendant has “fair notice” of the
claim “and the grounds upon which it rests,” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint must also
contain “sufficient factual matter” to state a facially plausible claim to relief—one
that “allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 570). This plausibility standard “asks for more than a sheer
possibility” that a defendant acted unlawfully. Williamson v. Curran, 714 F.3d 432,
436 (7th Cir. 2013). Thus, “threadbare recitals of the elements of a cause of action”
and mere conclusory statements “do not suffice.” Limestone Dev. Corp. v. Vill. of
Lemont, 520 F.3d 797, 803 (7th Cir. 2008).
In evaluating a complaint under Rule 12(b)(6), this Court accepts all wellpleaded allegations as true and draws all reasonable inferences in the plaintiff’s
favor. Iqbal, 556 U.S. at 678. This Court does not, however, accept a complaint’s
legal conclusions as true. Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009).

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III.

Analysis
Plaintiffs assert four claims. Count I alleges that HFS violated Plaintiffs’

substantive and procedural due process rights when HFS audited their facilities and
retroactively adjusted the facilities’ per diem reimbursement rates. [4] ¶¶ 100−22.
Count II alleges that HFS violated the Medicaid Act and its implementing regulations
by changing Plaintiffs’ reimbursement rates. Id. ¶¶ 123−39. Count III, brought
under 42 U.S.C. §§ 1983 and 1988, seeks declaratory and injunctive relief against
HFS based upon its alleged violations of the Medicaid Act. Id. ¶¶ 112−27. Count IV
alleges that this Court, pursuant to the Administrative Procedure Act (APA), 5 U.S.C.
§ 706, should set aside CMS’ approval of Illinois’ state plan amendment as “based on
errors of law” and “unsupported by substantial evidence.” Id. ¶¶ 154−56.
A.

Count I: Due Process Violations

Count I alleges that HFS violated Plaintiffs’ substantive and procedural due
process rights by auditing the facilities and retroactively adjusting their per diem
reimbursement rates. Id. ¶¶ 100−22. HFS argues that both the substantive and
procedural portions of Count I fail because Plaintiffs cannot identify any protected
property interest with which HFS interfered. [18] at 2−4. Like its prior opinion, this
Court agrees with HFS, and finds that Plaintiffs do not possess a protected property
interest in its per diem Medicaid reimbursement rates.
Protected property interests must arise from an independent source, such as
state or federal law. See Gen. Auto Serv. Station v. City of Chicago, 526 F.3d 991,
1000 (7th Cir. 2008). For a property interest to merit due process protection, the

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plaintiff must have “a legitimate claim of entitlement” to that property interest, not
simply “a unilateral expectation of it.” Bd. of Regents of State Colls. v. Roth, 408 U.S.
564, 577 (1972). And the interest itself must be “substantive rather than procedural
in nature.” Manley v. Law, 889 F.3d 885, 890 (7th Cir. 2018).
This Court has already addressed many of the cases upon which Plaintiffs rely
in its previous motion to dismiss opinion. See 17-cv-08609 [43] at 8−9 (discussing BT
Bourbonnais Care, LLC v. Norwood, 866 F.3d 815 (7th Cir. 2017); Tekkno
Laboratories, Inc. v. Perales, 933 F.2d 1093 (2d Cir. 1991); Oberlander v. Perales, 740
F.2d 116, 120 (2d Cir. 1984); and Yorktown Med. Lab., Inc. v. Perales, 948 F.2d 84 (2d
Cir. 1991)). In addition to these cases, Plaintiff fail to identify any controlling case
law to support their claim to a protected property interest, and the cases that they do
identify remain distinguishable.
First, Plaintiffs rely upon White Plains Nursing Home v. Whalen, 385 N.Y.S.2d
392 (N.Y. App. Div. 1976), in which the court found the plaintiff nursing facility held
a property right in Medicaid rates.

But there, the state health commissioner

attempted to recoup past overpayments for services performed by the facility at a rate
previously certified by the State.

Id. at 393−94.

But unlike the White Plains

plaintiffs, the Plaintiffs do not allege that they have already received payments from
HFS, nor that they relied upon a rate previously certified by the State. See generally
[4]. Rather, the relevant regulation explains that a facility’s rate “shall be subject to
change” based upon MDS data recalculations. 89 Ill. Admin. Code § 147.340(t). See
also St. Joseph’s Hosp. Health Ctr. v. Dep’t of Health of State of N.Y., 677 N.Y.S.2d

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194, 204 (N.Y. App. Div. 1998) (“There is no protected property interest in those
Medicaid payments that may be adjusted at a later time, either as the result of an
audit or a statutory adjustment to the rate”). Accordingly, this Court does not find
the White Plains court’s decision applicable.
Second, Plaintiffs rely upon Family Rehabilitation, Inc. v. Azar, No. 3:17-CV3008-K, 2018 WL 3155911, *4 (N.D. Tex. 2018), in which the court held that the
plaintiff facility held a property interest in Medicare payments for services rendered.
[21] at 5. But there, a third-party contractor used statistical sampling during a “postpayment review” to determine that CMS overpaid the facility. Again, the case before
this Court does not involve a post-payment review, nor a third-party review of CMS
overpayments; rather, the Illinois MDS review process expressly permits retroactive
rate adjustments based upon MDS data reviews.

See also Alpha Home Health

Solutions, LLC v. Sec’y of U.S. HHS, 340 F. Supp. 3d 1291, 1303 (M.D. Fla. 2018)
(finding that the contingent nature of Medicare payments subject to audit “makes
clear that a health care provider lacks a constitutionally protected interest in an
overpayment of federal funds.”). In short, as this Court previously noted, HFS did
not retroactively change a duly promulgated reimbursement rate for payments
already made; instead, “it retroactively changed a reimbursement rate contingent
upon quarterly patient data that was subject to MDS audits and resulting
adjustments per the terms of the Illinois state plan,” and thus did not trigger a
legitimate claim of entitlement. 17-cv-0609 [43] at 9.

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In addition to the above cases, Plaintiffs cite to three cases that discuss
whether Medicaid reimbursements can be “used as a security interest” that can be
“transferred to others as payment for a debt.”

[21] at 5 (citing DFS Secured

Healthcare Receivables Trust v. Caregivers Great Lakes, 384 F.3d 338 (7th Cir. 2004);
In re Woodstock Associates I, Inc., 120 B.R. 436 (N.D. Ill. 1990); Credit Recovery
Systems LLC v. Heike, 158 F. Supp. 2d 689 (E.D. Va. 2001)). Simply put, none of
these cases pertain to whether plaintiffs maintain a constitutionally protected
entitlement for purposes of the due process clause.
Absent any authority to support the facilities’ claim to a protected property
interest in their per diem Medicaid reimbursement rate, Count I fails to state a claim.
Accordingly, this Court dismisses Count I.
B.

Counts II, III, & IV

Counts II through IV fail in conjunction with Count I. First, Count II of
Heritage’s amended complaint contains no substantive changes from its original
complaint. Compare 17-cv-8609 [44] ¶¶ 165−81 with 17-cv-8609 [1] ¶¶ 84−92.
Heritage’s amended complaint notes that it repleads Count II solely for purposes of
appeal. See 17-cv-8609 [44] ¶¶ 165−81. And Rock River’s Count II is identical to that
of Heritage’s original and amended complaints. See [4] ¶¶ 123−139. Accordingly,
this Court dismisses Count II for the reasons stated in its previous opinion, 17-cv8609 [43] at 10−13.
Second, because this Court has dismissed Counts I and II, Plaintiffs cannot
obtain the declaratory or injunctive relief requested by Count III. For this reason,

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and for the detailed reasons explained in its previous opinion, this Court dismisses
Count III. See 17-cv-8609 [43] at 13−16.
Finally, Plaintiffs’ response, [21] at 13, moves to dismiss Defendant Verma and
Count IV—in Rock River’s case—pursuant to Federal Rule of Civil Procedure 41(a).
Accordingly, this Court grants Plaintiffs’ motion to dismiss Count IV and Defendant
Verma from the Rock River case. Further, Count IV of Heritage’s amended complaint
remains identical to the claim this Court already dismissed in its previous order, [1]
¶¶ 108−110, and states that it is “repled for purposes of appeal” only. [44] ¶¶ 196−98;
see also [47] ¶ 3 (representing that Plaintiffs’ counsel confirmed “no further briefing
is needed or expected on plaintiff’s claim against the federal defendant.”).
Accordingly, this Court dismisses Count IV of Heritage’s amended complaint for the
reasons explained in its previous opinion. 17-cv-8609 [43] at 19−20.
IV.

Leave to Replead
Although, in general, Federal Rule of Civil Procedure 15(a) states that trial

courts “should freely give leave [to amend] when justice so requires,” that command
can be outweighed by factors such as “undue delay, bad faith, and futility.” Fish v.
Greatbanc Trust Co., 749 F.3d 671, 689 (7th Cir. 2014). Here, this Court finds that
the record does not warrant giving Plaintiffs leave to replead, due to futility and
Heritage’s multiple attempts to amend, without success (and the substantively
identical allegations contained in Rock River’s amended complaint). Accordingly, this
Court dismisses Counts I through IV of both Heritage and Rock River’s amended
complaints with prejudice.

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V.

Conclusion
For the reasons explained above, this Court grants Defendants’ motions to

dismiss each Plaintiff’s complaint, [18] [19], with prejudice. All dates and deadlines
are stricken. Civil cases terminated.

Dated: August 12, 2019

______________________________
John Robert Blakey
United States District Judge

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