Full opinion text
MEMORANDUM OPINION AND ORDER NOWLIN, District Judge. In this-cause, named Plaintiffs, mentally retarded and physically disabled children who are Medicaid recipients eligible under Texas law for placement in intermediate care facilities for the mentally retarded (ICF-MRs), challenge the reimbursement rate scheme for ICF-MRs in the State of Texas administered by the Defendants under the federally funded Medicaid program. Before the Court at this time is Plaintiffs’ motion for preliminary injunction. Having carefully considered the arguments supporting Plaintiffs’ motion, as well as Defendants’ response thereto, and having held an evidentiary hearing with respect to the motion on June 22 and 23,1982, the Court is of the opinion, for the reasons set out below, that Plaintiffs should be granted preliminary injunctive relief. Because of the complexity of the issues raised by Plaintiffs, and because the Court’s basis for entering this preliminary injunction is considerably narrower than the broad-based arguments presented to the Court in support of the motion, a somewhat detailed explanation is required of the issues raised by the parties and the Court’s analysis and resolution of some of those issues. I. INTRODUCTION A. The Parties Each of the named Plaintiffs is a Medicaid recipient eligible under Texas law for ICF-MR placement in a Level V facility. Each is mentally retarded, physically disabled, and has behavioral problems. Each has been professionally evaluated and has an individual habilitation plan developed in conformity with federal regulations. Named Plaintiffs are six of fourteen ICF-MR residents of Ada Wilson Hospital who were notified in January of 1982 by hospital authorities that they would be discharged from the hospital at the end of May of 1982 due to staff cutbacks resulting from a reduction in Ada Wilson’s rate of reimbursement for their care. This reduction in reimbursement resulted from a change in the Texas ICF-MR reimbursement rate structure that became effective December 1, 1981. Named Plaintiffs have resided in Ada Wilson Hospital for periods of time ranging from one and a half to four years. Ada Wilson Hospital’s ICF-MR is a licensed Level V, non-profit children’s facility, admitting ages 6 to 17. The hospital opened its ICF-MR facility in November of 1977, and is one of only two community based ICF-MR Level V facilities serving children in Texas. Ada Wilson Hospital has seventy-two ICF-MR residents, sixty-five of whom are multiply handicapped. These children require a wide range of services in differing amounts, depending upon their individual habilitation plans. Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., commonly known as the Medicaid Act, establishes a cooperative relationship between the federal government and state governments designed to share the cost of medical services to needy individuals with limited incomes and resources. If a state elects to participate in the Medicaid program, it must designate “a single state agency to administer or to supervise the administration of the [state Medicaid] plan.” 42 U.S.C. § 1396a(a)(5). The designated state agency then draws up a medical assistance plan consistent with the guidelines contained in the Medicaid Act and the regulations promulgated thereunder and submits it to the Health Care Financing Administration (HCFA), an agency of the Department of Health and Human Services (HHS) for approval. When HCFA approves the plan, the state becomes eligible for federal matching funds for reimbursement of the cost of specific types of medical assistance, 42 U.S.C. § 1396b(a). Intermediate Care Facilities for the Mentally Retarded (ICF-MRs) are residential facilities providing twenty-four hour care, habilitative services and supervision to persons who are mentally retarded or have related conditions and require an institutional-type setting to benefit from active treatment. See 42 U.S.C. §§ 1396a(c), (d); 42 C.F.R. § 435.1009; 42 C.F.R. § 442.400 et seq. The ICF-MR program is one that a state may elect to provide as an optional medical service to its Medicaid-eligible population and receive federal financial assistance under the terms of the Medicaid Act. 42 U.S.C. § 1396d(a)(15). Texas elected to participate in the Medicaid ICF-MR program beginning in 1976. Defendant Texas Department of Human Resources (TDHR) is the single state agency designated pursuant to 42 U.S.C. § 1396a(a)(5) to administer the Medicaid program in the state of Texas. TDHR contracts with Ada Wilson Hospital and other ICF-MRs to provide covered services to Medicaid recipients such as Plaintiffs. TDHR has overall responsibility for administering the Medicaid program in Texas, including the determination of rates at which ICF-MRs will be reimbursed for providing such services. Defendant Marlin W. Johnston is Commissioner of TDHR and is sued in his official capacity. As Commissioner he is charged with overall responsibility for the administration of TDHR, including the state Medicaid program. Defendant Texas Department of Mental Health and Mental Retardation (TDMHMR) is the agency of the State of Texas charged with administering state facilities for the mentally retarded, and shares certain responsibilities with TDHR and the Texas Department of Health for the State ICF-MR program. Defendant Gary Miller is the Commissioner of TDMHMR and is sued in his official capacity. As Commissioner he is the chief administrative officer of TDMHMR and has general responsibility for administration of the Department and its institutions and programs. B. The Medicaid Act and the Texas Scheme for ICF-MR Reimbursement Initially, the Medicaid Act did not include any specific requirements concerning the methods of reimbursement to be used to pay for ICF-MR services. Individual states were allowed to develop their own payment methods, subject only to the general requirement of 42 U.S.C. § 1396a(a)(30) that payments not exceed reasonable charges consistent with efficiency, economy, and quality of care. Thus, states developed a variety of payment methods ranging from the retrospective, reasonable cost reimbursement system used by Medicare, see 42 C. F.R. Part 405, Subpart D, to prospective rates based upon factors not necessarily directly related to actual facility costs, including state budgetary considerations. In 1972, Congress added a new section to the Social Security Act, 42 U.S.C. § 1396a(a)(13)(E), effective July 1, 1976. This section required that each state Medicaid plan provide for reimbursement of intermediate care facility services on a reasonable cost related basis, as determined in accordance with methods and standards which shall be developed by the State on the basis of cost-finding methods approved and verified by the Secretary[.] Social Security Amendments of 1972, Pub.L. No. 92-603, § 249 (amended 1980) (emphasis added). The Senate Finance Committee report accompanying this amendment stated that under the previous statutory standard, some skilled nursing facilities and intermediate care facilities were being overpaid while others were being paid too little to support the quality of care needed by Medicaid patients. The Committee noted, on the other hand, that the reasonable cost reimbursement method used by Medicare and, in particular, the detailed cost-finding requirements that are an integral part of that method, could cause difficulty for some long-term care facilities. The amendment required that payments to long-term care facilities be related to the reasonable costs the facilities incur, thus permitting states considerable flexibility, within limits established by HCFA regulations, to develop their own methods and standards for paying these costs. The Omnibus Reconciliation Act of 1980 (Pub.L. 96-499), enacted on December 5, 1980 and effective October 1, 1980, made a significant change in the provisions of the Medicaid law that govern payments for long-term care facilities, including ICFMRs. Section 962 of Pub.L. 96 — 499 amended section 1902(a)(13)(E) of the Medicaid Act to remove the requirement that states pay for these services on a reasonable cost-related basis, and substituted for it a new statutory standard requiring that intermediate care facilities be paid through the use of rates, determined in accordance with methods and standards developed by the state, which the State finds, and makes assurances satisfactory to the Secretary, are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable State and Federal laws, regulations and quality and safety standards.. .. 42 U.S.C. § 1396a(a)(13)(A) (Supp.1982) (emphasis added). The legislative history of this 1980 amendment sheds light upon the reasons for its adoption and Congress’ intent concerning how the new statutory standard should be carried out. The Senate Report accompanying the amendment stated: States have argued that the complex and long-delayed Federal regulations implementing [the reasonable cost-related basis statutory standard] have unduly restrained their administrative and fiscal discretion and that the federal approval process has forced States to rely heavily on medicare principles of reimbursement. Neither of these consequences was intended when [that statutory standard was enacted]. The committee continues to believe that states should have flexibility in developing methods of payment for their medicaid programs and that application of the reasonable cost reimbursement principles of the medicare program for long-term care facility services is not entirely satisfactory. These principles are inherently inflationary and contain no incentives for efficient performance. The committee bill deletes the present language of [42 U.S.C. § 1396a(a)(13)(E) ] and substitutes language which gives the States flexibility and discretion, subject to the statutory requirements of this section [and other statutory requirements], to formulate their own methods and standards of payment. Under the bill, States would be free to establish rates on a statewide or other geographic basis, a class basis, or an institution-by-institution basis, without reference to medicare principles of reimbursement. The flexibility given the states is not intended to encourage arbitrary reductions in payment that would adversely affect the quality of care. Under the bill, the State would be required to find, and make assurances satisfactory to the Secretary, that the payment rates, taking into account projected economic conditions during the period for which the rates are set, are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable State and Federal laws, regulations, and standards. The State would also be required to assure the Secretary that it has provided for the filing by the facilities of uniform cost reports and for their periodic audit by the State. The Congress expects that the Secretary will keep regulatory and other requirements to that minimum necessary to assure proper accountability, and not to overburden the States and facilities with marginal but massive paperwork requirements. It is expected that the assurances made by the States will be considered satisfactory in the absence of a formal finding to the contrary by the Secretary. * sfc ‡ sfc sfc ‡ S.Rep. No. 96-471, 96th Cong., 2d Sess., reprinted in 4 Medicare and Medicaid Guide ¶ 24,407, at 8780-81 (CCH) (1981). The Conference Report accompanying the 1980 amendment stated: The conference agreement follows the Senate amendment with a modification to clarify that, while the States have discretion to develop the methods and standards on which the rates of reimbursement are based, the Secretary retains final authority to review the rates and to disapprove those rates if they do not meet the requirements of the statute. The conferees intend that the Secretary exercise this review in a timely fashion.... The conferees would further note their intent that a State not develop rates under this section solely on the basis of budgetary appropriations. In determining whether the rates proposed by a State are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities, the Secretary is not expected to approve a rate lower than the applicable legal requirements would mandate. H.Conf.Rep. No. 96-1479, 96th Cong., 2d Sess. 154, reprinted in [1980] U.S.Code Cong. & Ad.News 5526, 5594. The Department of Health and Human Services subsequently promulgated regulations implementing the new federal statutory standard. See 42 C.F.R. §§ 447.250 to .272. The above-described change in the federal reimbursement standard in no way altered federal substantive standards relating to the amount and quality of care that ICF-MR facilities must provide. From June of 1976 to December of 1978, the Texas ICF-MR reimbursement rate structure was based upon payment of uniform statewide rates that varied depending upon the “level of care” of residents served by ICF-MR providers. Three levels of ICF — MR care were established, denominated as Levels I, V and VI and covering all ICF-MR residents in the state. Level I is for individuals who are mildly retarded or developmentally disabled, ambulatory, and require a minimal amount of care and supervision. Level V is for individuals with mild to profound levels of mental retardation or related developmental disabilities needing daily supervision and developmental services. Level VI is for severely and profoundly mentally retarded or developmentally disabled persons who require continuous supervision and services in a highly structured setting. Because a wide range of disabilities is covered by each level of care, the conditions and needs of ICF-MR residents in any particular level of care may vary substantially, and the costs of providing for those needs also may vary. State schools and state centers generally provide all three levels of care within one facility. Community based ICF-MRs are certified to provide a single level of care. In January of 1979, in an attempt to encourage expansion of the private ICF-MR program, TDHR altered its previous reimbursement rate structure by eliminating the system of payment of uniform statewide rates depending upon level of care and substituting for it a “facility-by-facility” reimbursement scheme based upon a retrospective determination of actual costs incurred by Texas ICF-MR providers. Between 1979 and 1981, program costs under the facility-by-facility scheme increased at a rate substantially in excess of the rate of inflation. TDHR experienced ICF-MR budget deficits that were overcome only by transferring funds from other programs. Believing that the facility-by-faeility scheme provided no adequate mechanism for cost containment, and having determined that the rising cost of the ICF-MR program endangered the program’s very existence in Texas, TDHR began considering the adoption of a new reimbursement rate structure. By the Spring of 1980, TDHR was considering implementing a uniform reimbursement rate scheme. In the Fall of 1980, TDHR published a proposed uniform rate structure in the Texas register and conducted public hearings. Implementation of the proposed uniform rate scheme was delayed, however, until the Summer of 1981, when an amended version of the proposed scheme was published in the June 16, 1981 Texas Register and later adopted, with some changes, and published in the August 18, 1981 Texas Register. Implementation of the new plan was further delayed by a lawsuit in federal court in the Southern District of Texas in which the district judge entered a preliminary injunction restraining TDHR from implementing the new reimbursement rate structure prior to formal written approval by HCFA. On November 20,1981, HCFA approved the new plan, and the new rates became effective December 1, 1981. The current reimbursement rate structure, along with the TDHR rules concerning allowable and unallowable costs, are set out in Part I of Appendix A of this opinion. The central feature of the current reimbursement rate structure is its use of uniform statewide payment rates depending upon level of care and provider classification. The rate structure distinguishes between two provider classes: (1) state schools for the mentally retarded and state centers for human development, and (2) community based providers. Both of these provider classifications are then subdivided into the three levels of ICF-MR care — Levels I, V and VI — established under the original reimbursement rate structure. Thus, six categories are established, each with a separate uniform rate of reimbursement. Rates for each category are determined based upon previous year costs as reported by providers. These cost reports are subjected to a desk verification, including the adjustment of reported costs to remove any unallowable costs that may be reported. Detailed restrictions on allowable and unallowable costs are set out in the TDHR rules published in the November 3, 1978 volume of the Texas Register and appear in Part II of Appendix A of this opinion. Within each level of care, after unallowable costs are removed and certain adjustments to reported costs are made, per diem costs are divided into four projected cost areas: (1) patient care costs; (2) dietary costs; (3) facility costs; and (4) administrative costs. The per diem costs within each of these four cost areas are then rank-ordered from low to high. After unallowable costs are removed and the costs in each cost area are arrayed from low to high, the final rate for each category is set by selecting the projected per diem expense from each cost area which corresponds to the 60th percentile Medicaid day of service, and summing the amounts of the four cost areas to arrive at a per diem reimbursement rate. Because a number of costs included in the raw data base were excluded as unallowable based on TDHR’s determination that they were excessive, the calculation of the 60th percentile Medicaid day of service based upon the refined data base resulted in a reimbursement rate equivalent to the cost of the 40th percentile Medicaid day of service of the raw data base. How and why TDHR made the decision to set reimbursement rates at, in effect, the 40th percentile level is one of the central issues in this case and will be discussed more fully below. Under the new reimbursement rate structure, the current rates of reimbursement for ICF-MR care at Levels V and VI are as follows: State School Community Based ICF-MR V $56.95 $39.51 ICF-MR VI $62.56 $44.88 The state school rate includes an ancillary cost of approximately $5 per day to reimburse for additional medical expenses borne by the state schools. Ada Wilson Hospital’s reimbursement rate for its first year of operation was $28.39 per Medicaid patient day. With the facility-by-faeility scheme in 1979, the rate changed to $46.67 for fiscal year (FY) 1979, $49.38 for FY 1981, and $52.72 for the months of September through November of 1981. The change to a uniform reimbursement rate scheme, effective December 1, 1981, resulted in a reduction in the reimbursement rate for Ada Wilson from $52.72 to $39.51, or a $29,010.00 per month reduction for the 72 children served at the facility. C. The Issues On May 14, 1982, five named Plaintiffs— Royal Thomas, Bradley Depuy, Scott Szust, Tracy Martin, and Brandon Knute Ostrum — by and through their parents, filed a complaint in this Court challenging the current Texas ICF-MR reimbursement rate structure as violative of state and federal law and seeking preliminary and permanent injunctive and declaratory relief invalidating the current rate structure, requiring that it be revised to conform to applicable federal law, and immediately reinstituting the previous reimbursement rate structure until such time as the rate structure is revised to conform to applicable law. Named Plaintiffs sought to bring the action on their own behalf and, pursuant to Fed.R.Civ.P. 23(a) and 23(b)(2), on behalf of all others similarly situated. On May 20, 1982, Plaintiffs applied for a temporary restraining order enjoining Defendants from continuing to reimburse Ada Wilson Hospital at the rate of $39.51 per Medicaid patient day and requiring Defendants to return to the prior rate of $52.72 per Medicaid day for Plaintiffs and nine other residents of Ada Wilson Hospital scheduled to be discharged by the hospital on May 31, 1982. The application for TRO was supported by an affidavit of John Dean, Administrator of Ada Wilson Hospital. According to this affidavit, the hospital had scheduled for discharge on May 31, 1982 a group of fourteen children, including the five, named Plaintiffs; these fourteen children were selected for discharge because they are very active and require more supervision and services to deal with their behavior than other residents of the hospital. The affidavit stated that although the hospital had made staff cuts in response to the reduction of its reimbursement rate brought about by implementation of the new ICF-MR reimbursement rate structure, additional reductions in the hospital’s direct care staff would have to be made on June 1,1982 in order to bring the hospital’s expenses down to the level of the new reimbursement rate, resulting in a situation in which the hospital could no longer provide the fourteen children with necessary services. The affidavit further stated that upon discharge of the fourteen children, their beds eventually would be filled by other persons whose needs for staff supervision and services are less than the children discharged. Finally, Mr. Dean’s affidavit stated that in his opinion the hospital was currently operating in the most efficient and economical manner possible consistent with providing quality care for its residents, and that it was experiencing losses of $15,-000 per month under the new reimbursement rate structure. Also attached to Plaintiffs’ application for TRO was an affidavit of Jan Ackerman, mother of named Plaintiff Scott Szust. In her affidavit, Ms. Ackerman stated that she had been notified by Ada Wilson Hospital that Scott would be discharged the last week in May of 1982 due to cutbacks in funding of the hospital and the hospital’s subsequent inability safely to take care of Scott. She stated that since being notified of the planned discharge she had worked to find an alternate placement for Scott, but that her efforts had been unsuccessful. She stated that she had visited the Corpus Christi State School, and that based upon her own observations of the children there, placement in that state school would be harmful to Scott and that he would not get the supervision he needs. Finally, she said that she was unable to care for Scott herself and that, for her own sake, she would not pick him up on the day of his discharge from Ada Wilson. Based upon a review of Plaintiffs’ complaint and application for TRO along with the supporting affidavits, and after hearing Defendants’ informal response to Plaintiffs’ TRO application, the Court issued a temporary restraining order on May 21, 1982, enjoining Defendants from continuing to reimburse the hospital for care and services provided to the fourteen children scheduled to be discharged on May 31, 1982 at the current rate of $39.51 per Medicaid patient day and requiring Defendants to return to the previous reimbursement rate of $52.72 per Medicaid patient day pending a decision on the preliminary injunction. On May 28, 1982, the Court, on its own motion, extended the TRO for ten days and set the hearing on Plaintiffs’ motion for preliminary injunction for June 3, 1982. On June 2,1982, Plaintiffs filed an amended complaint naming an additional Plaintiff, Curtis Lindsey, and citing additional causes of action against Defendants. By agreement of the parties, the Court entered an order on June 7, 1982 continuing the hearing on the motion for preliminary injunction until June 22, 1982, and extending the TRO until the time of the hearing. On June 22, 1982, the Court held an evidentiary hearing on Plaintiffs’ motion for temporary injunction. At the hearing, the parties agreed to continue the TRO in effect until the time of the Court’s ruling on the motion for preliminary injunction. Plaintiffs’ amended complaint, as explained and amplified by Plaintiffs’ briefs and their arguments at the hearing, states nine separate claims against Defendants, seven arising out of federal law and two grounded in state law. Five of these claims are based upon alleged violations of various sections of the Medicaid Act and 42 U.S.C. § 1983; one is based upon alleged violation of the Fourteenth Amendment and 42 U.S.C. § 1983. The remaining federal claim is based upon alleged violation of Section 504 of the Rehabilitation Act of 1973. The two state claims arise from alleged violations of the Texas Mentally Retarded Persons Act and a TDHR Rule. First, Plaintiffs claim that the current Texas reimbursement rate structure violates 42 U.S.C. § 1396a(a)(13)(A) and therefore 42 U.S.C. § 1983 because the rates of reimbursement for ICF-MR services are set so low that they are not reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care for Plaintiffs and their class in conformity with applicable state and federal laws, regulations, and quality and safety standards. Plaintiffs further argue that the manner in which Texas ICF-MR reimbursement rates were set by Defendants was arbitrary, capricious and inconsistent with the basic federal reimbursement standard and the regulations promulgated thereunder. Among the arguments Plaintiffs make with respect to this claim is that Defendants violated the statute and 42 C.F.R. § 447.252(b) by failing to make a proper finding, after consideration of all relevant factors, that the rates are in fact reasonable and adequate to meet the costs necessarily incurred by efficiently and economically operated facilities. Second, Plaintiffs claim that the current reimbursement rate structure violates 42 U.S.C. §§ 1396a(a)(17) & (30) and therefore 42 U.S.C. § 1983 because it results in rates that are inadequate to provide a reasonable standard of medical assistance to Plaintiffs consistent with quality and care and with the other objectives of the Medicaid Act. Third, Plaintiffs claim that the reimbursement rate structure violates 42 U.S.C. § 1396a(a)(23), 42 C.F.R. § 447.204 and therefore 42 U.S.C. § 1983 because, by failing to provide adequate reimbursement to community based ICF-MR facilities, it thereby violates Plaintiffs’ right to obtain medical assistance from any institution qualified to perform the services required, and fails to provide reimbursement adequate to enlist enough ICF-MR providers so that services under the plan are available in a sufficient amount. Fourth, Plaintiffs claim that the reimbursement rate structure violates 42 U.S.C. § 1396a(a)(10)(B) and therefore 42 U.S.C. § 1983 because it fails to provide reimbursement adequate to assure ICF-MR services to Plaintiffs that are equal in amount, duration, and scope to those provided to other ICF-MR-eligible individuals, and violates 42 C.F.R. § 440.-230(b) because it fails to provide reimbursement adequate to assure that ICF-MR services are sufficient in amount, duration and scope reasonably to achieve their purpose. Fifth, Plaintiffs claim that the reimbursement rate structure violates 42 U.S.C. § 1396a(a)(19) and therefore 42 U.S.C. § 1983 because it fails to provide Medicaid care and services in a manner consistent with Plaintiffs’ best interests. Sixth, Plaintiffs claim that the reimbursement rate structure violates the Equal Protection Clause of the Fourteenth Amendment and therefore 42 U.S.C. § 1983 because it arbitrarily and irrationally establishes a classification of community based ICF-MR providers that are reimbursed at' levels substantially lower than the levels of reimbursement to state operated providers and that are insufficient to provide adequate care and services to their residents. Seventh, Plaintiffs claim that the reimbursement rate structure violates Section 504 of the Rehabilitation Act of 1973, 29 U.S.C. § 794 et seq., and the regulations promulgated thereunder, because it discriminates against Plaintiffs on the basis of handicap by denying Plaintiffs’ right to benefit from services in the most integrated setting appropriate to their needs. Eighth, Plaintiffs claim that the reimbursement rate structure violates Sections 7 and 11 of the Mentally Retarded Persons Act, Tex.Rev.Civ.Stat. art. 5547-300, because it fails to provide reimbursement to Ada Wilson Hospital and other ICF-MR Level Y and VI providers in an amount sufficient to provide adequate treatment and habilitative services suited to Plaintiffs’ individual needs, and because it violates Plaintiffs’ right to live in the least- restrictive environment appropriate to their individual needs and abilities. Ninth, Plaintiffs claim that the Defendants’ use of, in effect, the 40th percentile as the rate cap violates TDHR Rule 326.35.99.200(d), which requires that reimbursement rates for each class of service be selected by use of the 60th percentile of Medicaid day of service. Defendants generally deny that the Texas reimbursement rate structure is in any way violative of state or federal laws or regulations. In addition, Defendants argue that Plaintiffs lack standing to raise these issues and that the only proper remedy available to Plaintiffs is an action against Ada Wilson Hospital seeking to prevent Plaintiffs’ discharge from the hospital and requiring the hospital to live up to its agreement with the State to provide Plaintiffs adequate care and services. Having given careful and thorough consideration to the difficult and broad-ranging claims raised by Plaintiffs in light of the arguments of counsel and the testimony received at the hearing on the motion for preliminary injunction, and in light of the four factors courts traditionally consider in determining whether to grant pretrial equitable relief, the Court has determined that Plaintiffs have met their burden with respect to each of the four relevant factors and should receive preliminary injunctive relief. The decision to grant the preliminary injunction is based upon the Court’s conclusions with respect to only one of Plaintiffs’ claims — that the manner in which ICF-MR reimbursement rates were set by Defendants, and Defendants’ finding and assurances to HCFA that the rates were reasonable and adequate to meet the costs necessarily incurred by efficiently and economically operated facilities, were arbitrary, capricious and inconsistent with the basic federal reimbursement standard and certain regulations promulgated thereunder. The reasoning utilized by the Court in arriving at this conclusion is set out below. Resolution of the motion for preliminary injunction on the basis of this relatively narrow issue renders it unnecessary for the Court to consider the remainder of Plaintiffs’ claims. II. THE CLAIM AT ISSUE HERE: WHETHER THE MANNER IN WHICH DEFENDANTS SET REIMBURSEMENT RATES WAS ARBITRARY, CAPRICIOUS, AND INCONSISTENT WITH FEDERAL LAW As stated above, the Court has determined that Plaintiffs have met their burden of proof for purposes of preliminary injunctive relief with respect to their claim that TDHR acted arbitrarily, capriciously, and in a manner inconsistent with 42 U.S.C. § 1396a(a)(13)(A) and certain regulations promulgated thereunder in adopting the current reimbursement rate scheme and in finding and relaying assurances to HCFA that the new scheme satisfied the federal statutory standard. Before stating the contentions of the parties and the Court’s analysis with respect to this issue, it is important to set out in greater detail the facts relating to Defendants’ adoption and implementation of the current reimbursement rate structure. A. Background Facts According to the testimony of Merle Mo-den, director of rate-setting for TDHR and the person who supervised development of the current Texas ICF-MR reimbursement rate scheme, the basic decision to change the reimbursement structure from the old “facility-by-facility” scheme to a uniform rate scheme was brought about by TDHR’s experience with rising program costs under the old scheme. According to Mr. Moden, the facility-by-facility structure, which set rates retrospectively on the basis of providers’ actual costs, pushed costs rapidly upward with little or no built-in provision for cost containment. Moden described the facility-by-facility structure as, in essence, “telling a provider, ‘spend what you choose to spend.’ ” By the time TDHR conducted a review of 1979 ICF-MR provider costs reports, it was clear to the agency that costs for the ICF-MR program would be higher than legislative appropriations for the years 1980 and 1981. Moden testified that because of TDHR’s concern with budget overruns, the “cost-push” nature of the facility-by-facility scheme, and the lack of a workable provision for cost containment, TDHR began in early 1980 to consider the possibility of returning to a uniform rate structure. In October of 1980, TDHR published a proposal for a uniform reimbursement rate structure in the Texas Register and conducted public hearings around the state. According to Moden, significant differences in costs reported by similar providers led TDHR to give more study to the problem before making the final decision to adopt the uniform rate scheme. Moden testified that TDHR subsequently engaged the services of a consultant to do a statistical analysis in an attempt to determine why reported costs of providers within the levels of care varied so substantially. According to Mo-den, the consultant’s study was “totally unsuccessful in trying to explain any costs as a result of differences in client needs.” TDHR subsequently concluded that increased costs were, to a large degree, a result of the lack of cost containment measures in the facility-by-facility rate structure. On the basis of these conclusions, TDHR made the decision to move forward with a uniform rate structure. On June 16, 1981, an amended version of the proposed uniform rate scheme was published in the Texas Register; this proposal was adopted, with some alterations not significant to this litigation, in the August 18, 1981 Texas Register. HCFA approved the new reimbursement rate structure in November of 1981 and the new rates became effective December 1, 1981. Moden testified that after TDHR made the basic decision to return to a uniform reimbursement rate structure utilizing a 60th percentile cap but before the determination was made regarding what, if any, costs would be excluded from the cost data base and, therefore, before the final determination was made with respect to the level at which rates were to be set, TDHR was informed that the Texas Legislature had placed a cap of $57,285,473.00 on expenditures for the community based ICF-MR program for fiscal year 1982 and had prohibited transfers of funds from other programs to cover ICF-MR deficits. Moden testified that TDHR’s knowledge of this legislative appropriations cap played a significant role in its decisions with respect to the level at which rates would be set. Moden testified that before costs at the 60th percentile of Medicaid day of service were computed, certain costs were excluded by TDHR from the raw cost data base as excessive, resulting in a situation in which rates were set, in effect, at the 40th percentile rather than at the 60th percentile. According to Moden, TDHR’s authority to exclude certain costs as excessive flowed from a TDHR rule, published in the Texas Register in December of 1978, providing that costs not reasonable and necessary to provide care would be excluded in the rate-making process. Moden stated that TDHR’s determination to exclude certain costs before computation of the 60th percentile was based solely upon a “marketplace analysis.” The central thesis of TDHR’s “marketplace analysis” was that the reported costs of any provider in a given cost area that were significantly higher than the costs of other providers within the same level of care were deemed unnecessary and excessive and unrelated to patient care. Moden’s testimony made it clear that the fact that certain providers’ costs were higher than those of other similar providers was the only reason why those providers’ costs were excluded as excessive. He testified that no specific determination was made that Ada Wilson or any other community based ICF-MR facility was not operating in an economical or efficient manner. He further testified that no studies were made of the costs of any required services, and that no attempt was made to study the forms of treatment offered at the various ICF-MR facilities in order to identify facilities that might be providing unnecessary or redundant services. In sum, according to Moden, TDHR’s conclusion that excessive services were being offered by some facilities and that those facilities’ costs were therefore excessive was based solely upon the fact that certain providers reported significantly higher costs than other providers. Moden further testified that the way in which TDHR ensured that rates set at the 40th percentile would be adequate to cover the costs of economical and efficient facilities operating in conformity with state and federal requirements was its reliance upon the Department of Health’s certification that all facilities, including those whose costs were at or below the 40th percentile, were meeting all applicable federal and state care and safety standards. B. Plaintiffs’ Arguments and Defendants’ Responses Plaintiffs have identified two primary problems with the process that culminated in TDHR’s adoption of the current uniform reimbursement rate structure, each of which they claim renders TDHR’s adoption of the new plan, and its subsequent findings and assurances to HCFA of the plan’s compliance with the statutory standard, violative of federal law and regulations. It is important to understand that Plaintiffs’ arguments with regard to this issue are separate from an issue they also raise but that this Court does not decide — that application of the current reimbursement structure resulted in rates that are actually too low to cover the costs that efficient and economical providers must incur to meet the habilitative needs of their residents. The arguments discussed here relate to the process by which the rates were set rather than the actual adequacy of the rates that resulted from application of the new rate structure. It is also important to note at the outset that Plaintiffs challenge neither the Defendants’ authority to set a uniform reimbursement rate nor their authority to set rates at levels lower than those under the old facility-by-facility rate scheme. Rather, Plaintiffs challenge the Defendants’ decision to set the uniform rate at the 40th percentile level. First, Plaintiffs argue that although Defendants purported to find that the reimbursement rates were adequate to meet the necessary costs of efficiently and economically operated facilities, and made required assurances to HCFA to that effect, Defendants actually made no real attempt to ensure, and thus failed to ensure, that the rates were in fact adequate to meet the necessary costs of efficient and economical providers. More specifically, Plaintiffs argue that in setting reimbursement rates at, in effect, the 40th percentile, TDHR did not adequately take into consideration certain highly relevant factors, most importantly that some providers, such as, Ada Wilson Hospital, are responsible for the care of a greater proportion of persons whose needs are greater, and therefore whose care is more costly, than other providers. Plaintiffs contend that TDHR’s admitted assumption that all providers should have, in effect, average costs because they have populations with similar needs simply does not square with the reality that certain mentally retarded Medicaid recipients within the same level of care have greater needs which are more costly to meet than others, and that some facilities have taken on a greater number of these more costly cases. Second, Plaintiffs argue that Defendants’ exclusion of certain provider costs from its raw data base before applying the 60th percentile cap was an intentional and improper effort to manipulate the community based ICF-MR budget by bringing it down to a level that would fall within the 1982 legislative appropriations cap. 1. Failure to Ensure Adequacy of Rates and the Problem of Provider Specialization As stated above, Plaintiffs’ first contention in support of their argument that Defendants acted arbitrarily, capriciously and in violation of federal law and regulations in adopting the current reimbursement rate structure is that the process used by Defendants in setting rates failed to ensure that the rates were adequate to meet the necessary costs of efficient and economical facilities operated in conformity with federal and state standards, thereby violating 42 U.S.C. § 1396a(a)(13)(A) and 42 C.F.R. § 447.252, which require Defendants to find the rates to be adequate and to submit assurances of the adequacy of the rates to HCFA. Plaintiffs maintain that TDHR’s method of setting rates amounts to a mere assumption that if the group of ICF-MR facilities with costs at or below the 40th percentile could meet the needs of their residents at that rate, then all facilities could do so. Plaintiffs contend that TDHR made no attempt to verify this basic assumption, citing TDHR’s failure to conduct any studies designed to determine the costs of various required services, to determine whether any facilities were offering unnecessary or redundant services, or to determine whether any facilities were in any other way operating inefficiently or uneconomically. Put another way, Plaintiffs fault TDHR for making the decision to exclude certain costs as excessive solely on the basis that they were significantly higher than the costs of other providers and, in addition, applying a 60th percentile cap to this adjusted data base, without determining in some independent manner that the costs were in fact excessive or that the facilities incurring the high costs were operating inefficiently anji uneconomically. In addition, Plaintiffs contend that the primary assumption of the rate structure— that all facilities within the same level of care should incur approximately the same costs because they care for populations of residents that, on the average, require similar services at similar costs — was not properly verified by TDHR and is in fact fallacious. Specifically, Plaintiffs raise the argument that Defendants failed adequately to take into consideration what may, in shorthand terms, be referred to as the special set of problems posed by “provider specialization.” This argument is based upon two basic premises: (1) that some providers' costs are necessarily higher because they are responsible for the care of a greater proportion than other providers of ICF-MR residents whose habilitative needs are greater, and whose care is thus inherently more costly to provide, than other ICF-MR residents; and (2) that because the basic federal statutory standard requires that reimbursement rates be adequate to meet the costs necessarily incurred by efficient and economical facilities and charges state Medicaid agencies with ensuring the adequacy, of the rates they set, Defendants have a duty under that statute to give careful consideration to the problems posed by provider specialization and to make sure that the rates they set are high enough to cover the higher costs necessarily incurred by those efficiently and economically operated facilities that have taken on a greater proportion of more costly cases. Plaintiffs argue that Defendants have failed adequately to perform this duty. Plaintiffs’ primary example of a facility that is responsible for the care of a greater proportion of more needy and therefore more costly ICF-MR residents is Ada Wilson Hospital. Plaintiffs produced undisputed testimony at the preliminary injunction hearing establishing that all of the residents of Ada Wilson Hospital’s ICF-MR facility are children, and that 65 of the hospital’s 72 residents (or approximately 80%) have been identified as having multiple handicaps. According to the testimony, 90% of these children require occupational therapy, 70% require some form of speech therapy, and 40% require physical therapy. Testimony at the hearing also indicated that other Texas ICF-MR Level V and Level VI providers care for children with specialized problems. According to the testimony, only two Level V facilities serve children. Of these, Crossroads, the other Level V children’s ICF-MR facility (a combination Level V and Level VI facility), serves primarily very active ambulatory adolescents. Testimony indicated that facilities within Level VI also specialize in care of children, with certain types of needs, for example, the Human Development Center in Corpus Christi, which specializes in children with extensive medical needs, and the Denton Development Center, which specializes in children with greater educational and developmental needs. Plaintiffs also produced a significant amount of testimony indicating that the habilitative needs of mentally retarded children generally are greater than those of mentally retarded adults within the same level of care, and that the cost of care for children consequently is higher than the cost of care for adults. According to the testimony, mentally retarded children are more active than mentally retarded adults classified in the same level of care, thus requiring more staff supervision. In addition, testimony indicated that because mentally retarded children, unlike mentally retarded adults, generally have not acquired basic living skills before placement in community ICF-MRs, .they require more developmental training for and more assistance with such basic skills as feeding, toileting, bathing, and dressing than do adults, and that providing this type of care requires a greater number of personnel than would be needed to care for mentally retarded adults. Plaintiffs also produced testimony indicating that mentally retarded persons with habilitative needs related to physical and mental handicaps requiring physical, speech, or occupational therapy, or a combination of such therapies, necessarily require more staff personnel and are thus more costly to serve than persons similar in most respects but having little or no such need for therapy. Plaintiffs note that the requirement for greater numbers of staff members to care for ICF-MR residents with greater needs flows directly from federal regulations, citing, inter alia, 42 C.F.R. § 442.456, which requires an evaluation by an interdisciplinary team of each resident’s needs and development of an individual habilitation plan to meet those needs; 42 C.F.R. § 442.463, which requires ICF-MRs to provide training and habilitation services to all residents regardless of age, degree of retardation, or accompanying disabilities or handicaps; and 42 C.F.R. § 442.464, which requires that ICF-MRs have enough qualified training and habilitation personnel and support staff to carry out the training and habilitation program. In addition, Plaintiffs point to 42 C.F.R. § 442.445(c), which requires the highest staffing ratios for ICF-MR living units serving children under the age of six years, severely and profoundly retarded, severely physically handicapped, or residents who are aggressive, assaultive, or security risks, or who manifest severely hyperactive or psychotic-like behavior. Finally, Plaintiffs introduced testimony indicating that the size of the direct care staff employed by an ICF-MR facility and the resulting staff costs are a very significant component of, and thus may have a dramatic effect upon, the facility’s overall costs. According to the testimony, 67% of Ada Wilson’s costs are in direct care staff costs. Average direct care staff costs in fifteen of the ICF-MRs operated by National Living Center (both children’s and adult’s) are 49.8% of overall costs. Crossroads’ (children’s combination Levels V and VI facility) staff costs are 62.9%, and Den-ton Development Center’s (children’s Level VI facility) staff costs are 69.9%. In connection with this argument, Plaintiffs take the position that Ada Wilson Hospital is operating in an efficient and economical manner to the greatest possible extent consistent with the needs of its residents. They emphasize that no determination has been made that Ada Wilson Hospital or any other community based ICF-MR was not or is not operating in an efficient and economical manner. In an attempt to support their argument that Ada Wilson Hospital is operating efficiently'and economically, Plaintiffs introduced testimony that the hospital has made numerous cost saving program and personnel cuts in an effort to come within the lowered reimbursement rate, including termination of many staff positions. Plaintiffs also introduced expert testimony indicating that the services provided by Ada Wilson to the named Plaintiffs are necessary and minimal, with possible shortcomings in speech and physical therapy. There was testimony that Ada Wilson had never been told in any compliance survey that it was providing too many services but, on the other hand, had been informed repeatedly that the facility was not providing enough services. Plaintiffs’ witnesses testified that the cost saving measures undertaken by Ada Wilson have resulted in a situation in which the facility is no longer meeting all of the active treatment needs for many of its residents, some of whom were in the group of fourteen scheduled for discharge. Testimony further established that future staff cuts of fourteen or fifteen direct care workers were proposed in order to bring costs within the reimbursement level, but that these additional staff reductions have thus far not been made because, in the opinion of the administrators and interdisciplinary team at the hospital, these further staff reductions would make it impossible for the facility to provide active treatment to its current residents and would endanger the safety of Plaintiffs. Plaintiffs’ witnesses testified that the decision to discharge the fourteen children from Ada Wilson was based upon the professional judgment of the hospital’s administrators and interdisciplinary team that the facility could no longer provide them the type of program of active treatment required by federal law under current reimbursement rates, and that the staff of the hospital believed that federal law required the hospital to discharge the children if it could not provide adequate care. See 42 C.F.R. §§ 442.418, 442.404(c)(2). According to testimony and representations of counsel, six of the fourteen children scheduled for discharge in May had been placed in other facilities by the time of the preliminary injunction hearing — five in state schools and one in a state center; at that time eight children had not obtained placement. To the Court’s knowledge, at the time of the hearing none of the named Plaintiffs had obtained placement in another facility. In an attempt to support their argument that Ada Wilson’s situation is representative of other community based ICF-MRs, Plaintiffs introduced the testimony of the Regional Vice-President of National Living Centers, a company operating fifteen ICFMRs in Texas, some of which serve children, including Crossroads, Denton Development Center and Human Development Center. She testified that Crossroads, the other Level V children’s ICF-MR, is currently experiencing financial losses of $29,000.00 per month, and that Denton Development Center, a Level VI children’s facility, is losing $22,600.00 per month. She testified that substantial staffing and other cutbacks had been made in response to the reduction in reimbursement rates, that active treatment could not be provided to Crossroads or Denton residents if further staff or program cuts were made, and that the facilities are operating in an efficient and economical manner. Finally, she stated that although the financial losses of these facilities are currently being absorbed by the National Living Centers chain, both facilities are being very careful about admitting clients with high-cost needs, and are considering the possibility of discharging a part of their population or closing entirely if the reimbursement rate remains at the current level. The second premise of Plaintiffs’ “provider specialization” argument is that Defendants have a duty to give careful attention to the problems posed by provider specialization in order to ensure that the rates they set are high enough to meet the necessary costs of economical and efficient facilities that care for a greater proportion of more costly cases. Support for this argument is drawn from the basic federal statutory standard and its attendant regulations, as well as the legislative history leading to its adoption. Plaintiffs note that the basic federal statutory standard mandates that the state Medicaid plan provide for payment of ICF-MR services through the use of rates that are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with all applicable quality of care and safety standards. The statute charges the appropriate state agency with developing methods and standards for determining rates of reimbursement, and specifically requires the State to find, and to make assurances satisfactory to HCFA, that the resulting rates are in conformity with the statutory standard of reasonableness and adequacy. In addition, Plaintiffs cite 42 C.F.R. § 447.252(a)(1), which tracks the “reasonable and adequate” language of the basic statutory standard, as well as § 447.252(b) and (c), which restate the requirement of the statute that the Medicaid agency find and make assurances satisfactory to HCFA that the rates used to reimburse providers are in fact reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers. Finally, Plaintiffs cite the legislative history of the basic federal statutory standard, arguing that it was the intent of Congress that the discretion given to states in selecting and implementing reimbursement systems would not result in substantive changes in program requirements or quality of care. Plaintiffs particularly emphasize the statement in the Senate Report that “[t]he flexibility given the states is not intended to encourage arbitrary reductions in payment that would adversely affect the quality of care” and the comment in the Conference Report that “[i]n determining whether the rates proposed by a State are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities, the Secretary is not expected to approve a rate lower than the applicable legal requirements would mandate.” Drawing from these sources, Plaintiffs argue that because the state Medicaid agency is charged with a primary duty of ensuring that the rates it develops are adequate and reasonable to meet the costs necessarily incurred by efficiently and economically operated facilities meeting the standards of care embodied in the federal ICF-MR requirement for active treatment, the state Medicaid agency has a concomitant duty to consider all significant and relevant factors bearing upon the adequacy of rates. Because the problem of “provider specialization” outlined above has a significant bearing upon the adequacy of reimbursement rates, it must be considered and taken into account in the State’s ratesetting determination. Finally, Plaintiffs contend that Defendants failed adequately to consider the problem of provider specialization in setting rates, and failed to take into account the effect that the rates it set would have upon economically and efficiently operated facilities whose costs were necessarily higher because they serve a greater proportion than otherwise similar facilities of residents whose care is inherently more costly than others. Plaintiffs argue that Defendants made no meaningful attempt to verify the primary assumption of the rate structure— that all facilities within the same level of care should incur approximately the same costs because they care for populations of similar residents. Plaintiffs cite TDHR’s failure to conduct any studies designed to determine the costs of various required services, to determine whether some facilities serve populations requiring more services, and to study the differences between adult and children’s facilities. They note Mr. Moden’s testimony that TDHR considered neither the possibility of providing a separate rate for children’s facilities nor of utilizing a uniform rate coupled with an opportunity for an individual facility to document the need for additional reimbursement due to the type of residents served. Plaintiffs contend that as a consequence of Defendants’ failure adequately to consider the problems of provider specialization, Defendants have failed to ensure the adequacy of the rates they set, creating a situation in which some providers, unable to provide all federally required habilitative services for their residents, are unable to admit children with high-cost needs and are being forced to discharge some of their most needy residents and to face the ultimate prospect of being forced to close their ICF-MR programs entirely. Plaintiffs maintain that Defendants’ failure to consider the problems of provider specialization and to implement a sufficient mechanism for ensuring the adequacy of reimbursement rates renders Defendants’ reimbursement rate scheme arbitrary, capricious, and in violation of federal law and regulations. Defendants generally deny Plaintiffs’ claim that TDHR did not take appropriate measures to assure the adequacy of ICF-MR reimbursement rates. They emphasize that Defendants were forced by the cost-push problems experienced under the old facility-by-facility reimbursement rate structure to take substantial cost containment measures, and argue that their “marketplace analysis” was a rational and reasonable mechanism for dealing with those problems. They stress that one of the primary purposes of the new basic federal statutory reimbursement standard is to provide states with a great deal of flexibility in ratesetting, and that Defendants have exercised their ratesetting discretion in a reasoned and responsible manner. They argue. that regulations adopted by TDHR in 1978 specifically authorize their exclusion of certain costs as unnecessary and excessive, and contend that they are entitled to rely upon the Texas Department of Health’s certification that all facilities at or below the 40th percentile cost level are operating in conformity with applicable care and safety standards. With regard to Plaintiffs’ “provider specialization” arguments, Defendants made no attempt specifically to refute the thrust of Plaintiffs’ contention that some facilities’ costs are higher than others because they are responsible for a disproportionate number of more needy and therefore more costly clients. Rather, Defendants note that professionals can, and often do, disagree with respect to what type of care and services are required to meet the “needs” of mentally retarded persons eligible for ICF-MR placemen