Full opinion text
FINDINGS OF FACT AND CONCLUSIONS OF LAW BRYAN, District Judge. THIS MATTER came before the Court for trial commencing September 25, 1989. On September 26, October 16 and October 20, 1989, the Court rendered oral rulings, which have been transcribed and filed and are incorporated herein as Findings of Fact and Conclusions of Law by this reference. On the basis of the testimony presented at trial, the documentary evidence admitted, and the trial briefs and oral argument from the parties, and its oral rulings, the Court now enters the following additional findings of fact and conclusions of law. If anything herein is inconsistent with the above-referenced oral rulings of the court, said oral rulings shall control. FINDINGS OF FACT I. INTRODUCTION 1. This action was brought by 14 corporations, partnerships and individuals that have contracted with the Washington Department of Social and Health Services (DSHS or the “Department”) to provide nursing home care to Medicaid patients during all or part of the period from July 1, 1981, to the present. 2. The plaintiffs’ principal federal law claim is that the Medicaid reimbursement rates paid by DSHS under state statutes and the Washington Plans for Medical Assistance (the “State Plans”) in effect since July 1, 1981, have not been “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,” as required by 42 U.S.C. § 1396a(a)(13)(A) (the “Boren Amendment”). The plaintiffs identify several subissues of both federal and state law related to this principal claim. These subis-sues involve challenges to particular aspects of the State's Medicaid reimbursement system. In addition, the plaintiffs claim that the assurances given by DSHS to the Health Care Financing Administration (HCFA) to gain federal approval for the State Plans did not comply with HCFA’s regulations implementing the Boren Amendment and were not supported by adequate findings as required by 42 C.F.R. § 447.253. 3. The plaintiffs also have raised several claims that are not related to the Boren Amendment: 1) The plaintiffs claim that the State’s statute and regulations implementing the federal Deficit Reduction Act of 1984 (DEFRA) violate the equal protection clause of the Fourteenth Amendment by treating providers who purchased their facilities on or after July 18, 1984, differently from those who purchased before that date. 2) The plaintiffs claim that the defendants have violated their authority under state law to amend the regulations that govern scope of audit procedures. 3) They claim that DSHS’s implementation of the temporary “wage enhancement cost center” rate violated state law. 4) They claim that the defendants have exceeded their statutory authority by adopting and applying limits on new construction costs recognized for reimbursement. 5) Finally, the plaintiffs claim that DSHS’s choice for the index of allowable nursing services cost increases recognized for rate-setting violates state law. 4. On the defendants’ motion this action was removed from state court. In the interests of a full resolution of the issues before this Court, the defendants voluntarily waived in writing their Eleventh Amendment immunity in the present suit. 5. On February 19, 1988, the Court certified a class of plaintiffs in this action pursuant to Fed.R.Civ.P. 23(b)(3), described as: All Skilled Nursing Facilities and Intermediate Care Facilities located in the State of Washington licensed by the Washington State Department of Social and Health Services and which have contracted with the Department to provide medical services to needy persons pursuant to Title XIX (Medicaid) program during the period from July 1,1981, through the present. 6. There are approximately 275 private nursing homes currently operating in the State of Washington that participate in the Medicaid program, of which 23 have opted out of the class. In addition, there are a number of plaintiffs in the class who are former owners of nursing homes that have been closed or sold. 7. The Medicaid program is federally created and regulated pursuant to Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. The purpose of the program is to provide medical assistance to low income persons. The financing and administration of the Medicaid program are a cooperative effort between the federal and state governments. In Washington State, the federal share of Medicaid payments is approximately 53% and the State’s share is approximately 47%. The State’s program is administered by DSHS. II. WASHINGTON’S REIMBURSEMENT SYSTEM 8. During the period covered by this lawsuit, DSHS has purchased nursing home care for Medicaid patients through a system of cost reimbursement set forth in RCW Chapter 74.46 (RCW Chapter 74.09 prior to July 1, 1983), WAC Chapter 388-96, and the State Plans. The WAC regulations implement the statute, and the State Plans describe the reimbursement system established by the statute. RCW Chapter 74.46 is quite detailed in setting forth the mechanism for calculating the Medicaid reimbursement rates and leaves little discretion to DSHS. To a large extent, therefore, the reimbursement system in Washington has been fashioned by the Legislature rather than the Department. 9. DSHS enters into a contract with each provider. (Exs. 112 & 113.) The State’s contractual obligations are co-extensive with applicable law. A. Overview of the System 10. DSHS reimburses each provider’s Medicaid costs through the payment of a per-patient-day (PPD) reimbursement rate for each of the provider’s Medicaid patients. The reimbursement system is specific to each provider and involves two steps: rate-setting and settlement. 11. An annual interim PPD rate is set prospectively for each provider by DSHS for the period July 1 through June 30 (the “rate year”). The interim rate is based on the provider’s allowable costs for the prior calendar year (the “cost year”) as reported in the provider’s annual cost report, adjusted for inflation. Under the state statute, each nursing home provider must submit a cost report by March 31 of the year following the cost year. RCW 74.46.040. The cost report, which requires a great deal of very detailed information, serves two functions. It provides the data for setting the interim PPD rate for the coming rate year that begins July 1, and it provides the initial data for settlement of final reimbursement for Medicaid costs incurred by the provider during the cost year covered by the report. 12. In the rate-setting process, the interim PPD rate is based on four cost centers — nursing services, administration and operations (A & 0), food, and property-— and also contains a fifth component, return on investment (ROI). The ROI component became effective on January 1, 1985, and replaced a return on equity (ROE) component. In addition, for the period January 1, 1988, through June 30, 1990, the rate contains a sixth component, the wage enhancement cost center, which was created by the Legislature to bring all nursing home employees up to a minimum wage level. 13. The interim rate is established by rate analysts who perform a “desk review” of the provider’s cost report. The desk review basically involves four steps. The rate analyst first determines whether the reported costs are “allowable,” as prescribed in RCW 74.46.190 through .410 and corresponding regulations, and whether they are reported in conformance with DSHS’s technical reporting requirements. Second, the analyst compares the provider’s costs to the costs of the rest of the nursing homes in the State to flag unusually high costs. If the reported cost for a particular expense line item substantially deviates from the industry average for that item, the analyst may request additional information from the provider and may disallow the excess cost. Third, the analyst applies various lids and limitations, prescribed by statute, to the costs reported in certain cost centers. These lids and limitations are discussed in more detail below. Finally, after computing the costs on which the prospective interim rate will be based (the “rate base”), the analyst applies to certain cost centers an inflation adjustment factor (IAF), approved by the Legislature, in order to arrive at the rate that will become effective July 1. (Testimony of Denise S. Gaither.) 14. In the settlement process, the provider’s final reimbursement rate is fixed for a prior cost year. Since interim rates cover the period between July 1 and June 30, each cost year is governed by two different interim rates, which are weighted and averaged for the cost year. As required by RCW 74.46.150(1), the final rate is the lower of the interim rates paid to the provider during the prior cost year or the audited allowable costs actually incurred by the provider during that year. Currently, about two-thirds of providers are audited before final settlement. For those not audited, their reported costs (subject to desk review but not subject to lids) become their audited allowable costs for settlement purposes. 15. Providers whose costs in the prior cost year were less than their interim rate (in the four cost centers, not including ROI) must refund the excess reimbursement. However, the statute provides in the settlement process for “shifting,” which allows the provider to shift a surplus in the rate in some cost centers to a cost center where the rate is less than cost. If, after shifting, the provider still has excess rate in A & O or property, he may retain “cost savings” of between 50 and 75% of the surplus rate in those cost centers. The provider retains the full ROI rate. (Testimony of Denise Gaither.) 16. The “cost savings” feature of the settlement process creates an incentive for providers to contain their costs in the A & O and property cost centers. The State does not allow retention of cost savings in the nursing services and food areas in order to encourage providers to expend fully the funds allocated to those areas, which are the cost centers with the greatest impact on patient well-being. The purpose of encouraging full spending in the nursing services and food areas is to foster higher quality care. 17. At every significant point during the rate-setting and settlement processes— the initial rate setting, the preliminary settlement, the audit (if one is conducted), and the final settlement — providers have an opportunity to appeal the determinations made by DSHS staff. At each of these points, providers may first seek an informal appeal to DSHS staff supervisors. Providers may then pursue a formal appeal through the administrative hearing process and finally in state court. (Testimony of Denise Gaither.) B. Cost Containment 18. The Medicaid program pays for approximately 67% of all nursing home patient days in Washington State. This percentage is comparable to, although slightly higher than, that seen in other states participating in the Medicaid program. Thus, the Medicaid program is the principal payer for nursing home care in the United States. 19. Most states use prospective rate-setting systems which have the effect of helping to control inflation and contain costs. Retrospective cost systems, on the other hand, pay rates equal to the ordinary expenses actually incurred by nursing homes (regardless of whether those expenses are necessary or efficient) and are therefore less effective in controlling the increasing costs of Medicaid care. (Testimony of William Scanlon.) 20. Washington uses a prospective system that establishes rates on an annual basis — where a provider’s actual allowable costs from the previous cost year are the basis for the provider’s next interim rate. This process is termed “rebasing.” Annual rebasing helps rates to reasonably reflect trends and shifts in the types and methods of care provided and in the cost of such care. In practice there is an 18-month lag between the time the base year costs are incurred and the interim rate based on those costs is paid. An inflation adjustment factor partially covers the cost increases expected during the 18-month lag period. C. The Rate Components 21. As noted above, rates are composed of several components. Much of the controversy in this case focused on aspects of the specific components, and therefore it is appropriate to describe each one. 1. The Nursing Services Cost Center 22. The nursing services cost center contains the salaries, benefits and payroll taxes paid for all nursing staff. There are two lids applied to the nursing services cost center in the desk review process — a lid on the number of hours of nursing care reimbursed, and a lid on the rate of increase of nursing costs. If both lids are applicable to a particular provider’s costs, DSHS applies only the one having the greater impact. RCW 74.46.481(6) & (7). (Testimony of Denise Gaither.) 23. The nursing hours lid is designed to remove from the rate base costs paid by a provider for hours of nursing care that are unreasonably excessive in light of the relative debility of the patients served by the provider. Using an index of patient debility developed by the Battelle Institute in the 1970s, DSHS ranks each Medicaid patient in a nursing home at least annually according to the patient’s functional level and need for services, and computes an average Battelle score for the provider. Using average Battelle scores and reported direct care nursing hours for all providers in the State, DSHS then calculates a predicted level of direct care staffing for each Bat-telle score. This calculation is updated every two years. Providers are lidded if their direct care staffing exceeds the predicted level plus 1.75 standard statistical deviations. (Testimony of Elizabeth H. Johnston and Denise Gaither.) 24. Because 1.75 standard deviations provide a wide allowance, the nursing hours lid affects very few providers — only about five percent of Medicaid nursing homes in the State. In the July 1989 rate-setting, this lid affected ten providers, and in both the 1988 and 1987 rate-setting it affected 14 providers. (Testimony of Denise Gaither.) As one of the plaintiffs’ own witnesses testified, any provider whose nursing hours exceed the predicted level for its Battelle score by more than 1.75 standard deviations is “definitely,” “almost categorically” inefficient. (Testimony of Cheryl Hill, CPA, at 35.) 25. Although the Battelle index does not take account of every factor or change in nursing care that may affect the level of care provided to individual patients (testimony of Elizabeth Johnston), it is still as accurate a measure of the relative debility of patients as any other measure available. (Testimony of William Scanlon.) Moreover, the fact that the State updates the calculation of average Battelle scores and predicted levels of staffing every two years means that the nursing hours lid will reasonably reflect current practices in the Washington nursing home industry. DSHS’s use of the Battelle score is innovative in comparison to other states’ Medicaid plans. It is rare for states to devote such effort to collect data on individual patients’ debilities and to calibrate a payment lid to match each provider’s circumstances. (Testimony of William Scanlon.) 26. The second lid in the nursing services cost center is a limit on the rate of increase in costs that the State recognizes for rate-setting. If the provider has reported a rate of increase in nursing costs over the previous two calendar years that is greater than the rate of increase over the same period in the medical care component of the Consumer Price Index (MC-CPI), the nursing cost increase that the State recognizes for purposes of setting the interim rate for the next rate year is limited to the rate of increase in the index. Pursuant to RCW 74.46.481(5), DSHS is required to use the MC-CPI in applying the nursing services cost increase lid unless DSHS determines that another index is more representative of nursing cost increases. 27. The MC-CPI is an index of prices paid for health services, including physicians, hospitals, dentists and drugs. 28. In the last three years, nursing home providers in Washington have experienced a sharp increase in nursing services costs. As a result, a larger number of providers (from 56 in 1987 to 118 in 1989) have been affected by the nursing services cost increase lid. (See Ex. A-578.) The reasons for this increase in nursing costs are unclear. The evidence indicates that part of the increase may be due to changes in the availability of nurses, to a rise in the quality and quantity of care required and given in nursing homes, the need for more highly trained nurses, and to a trend toward an older patient population and patients who are sicker and are released from hospitals earlier than in previous years. (Testimony of Elizabeth Johnston, Cheryl Hill and Charles Hawley.) 29. DSHS closely monitors the impact of the nursing services cost increase lid. 30. Increases in the total reimbursement that DSHS has paid for nursing services costs can be partially explained by “rebasing.” Because of rebasing, the impact of the cost increase lid on particular providers is likely to be short term. The lid applies only to the rate of increase in costs from year to year; it is not a lid on how high nursing costs can go. An increase not allowed one year may still be incorporated into the provider's rate the following year due to rebasing, because once the provider’s rate of increase in nursing services costs stabilizes, the higher costs will be fully reimbursed. The decision by the State not to reimburse rapidly increasing nursing costs in the current rate year is an attempt to contain costs prospectively. (Testimony of William Scanlon.) 31. Other provisions in the Washington reimbursement system also explain why, despite the cost increase lid, total reimbursement for nursing services has increased at a faster rate than the MC-CPI. Under the "current funding” provisions of the system, providers may request a prospective rate increase to cover the costs of additional staff or new nursing programs required by DSHS (wage increases for existing staff levels are not so provided). Pursuant to an amendment enacted in 1987, DSHS must respond to current funding requests within 60 days. RCW 74.46.-481(10). Current funding increases are also granted for some costs not included in the nursing services area, such as the costs of capital improvements required by DSHS. Additionally, when new providers enter the system, they are given interim rates on the basis of budgets of their projected costs rather than on the basis of cost reports, since they will not have incurred Medicaid costs in the prior year. New providers’ projected costs are not subject to the cost increase lid, and therefore new provider budgets are another factor in higher nursing reimbursement. (Testimony of Denise Gaither.) 32. As noted above, the State’s Medicaid statute directs the Department to “select” a relevant index of nursing cost increases and, “[i]n the absence of a more representative index,” to use the MC-CPI. RCW 74.46.481(5). The Department has interpreted this statute to require it to select the most representative existing index rather than to develop the Department’s own index. Beginning in at least 1984, the Department from time to time has investigated the possibility of using other indexes for the nursing cost lid. (Testimony of Denise Gaither.) 33. Most recently, in the spring of 1988, a member of the Department staff did an extensive search for a more representative index. As part of this investigation, he solicited suggestions from the nursing home industry. The only index located through this effort that was arguably more representative than the MC-CPI was an index devised by HCFA. This index, however, would result in lidding more costs than does the MC-CPI and was opposed by the industry. Consequently, the Department withdrew its plan to begin using the new and more restrictive index at least for the 1989 cost year. (Testimony of Paul Montgomery). 34. In addition to the regular nursing services cost center rate, DSHS grants some “exceptional care” rates for providers who treat patients with extremely heavy care needs. Exceptional care rates boost the nursing services reimbursement for such providers. There are currently about 50 (of 22,000) patients in the State that are included in the exceptional care category. (Testimony of Denise Gaither.) 2.The Administration and Operations Cost Center 35. The A & O cost center encompasses a variety of operating and administrative costs incurred by providers, including wages, benefits and payroll taxes for the administrators, bookkeepers, accountants, attorneys, laundry staff, housekeeping staff, dietary staff and maintenance staff. Also included are utility costs, property taxes and nursing supplies. There is a lid applied in the A & O cost center based on the 85th percentile of A & 0 costs in all nursing homes. Providers with A & 0 costs per day in excess of the 85th percentile level have the 85th percentile level substituted for their actual costs in setting the next interim rate. The lid is recalculated each year based on the most recent cost reports. (Testimony of Denise Gaither.) 36. There are additional limitations in the A & 0 cost center regarding the amount of allowable salaries for administrative personnel and the amount of management fees allowed. As of July 1, 1989, there is also a limitation on accounting and legal expenses. Providers are free to exceed these limits, and some owners of nursing homes choose to pay themselves and others management fees or salaries as administrators that are in excess of the limits. Since DSHS does not reimburse excess administrative compensation or payments, such payments affect the facility’s income and cash flow. (Testimony of Denise Gaither.) 3.The Food Cost Center 37. The food cost center includes costs of all raw food and beverages. The food rate is a flat rate for all providers. It is based on the average January 1, 1983, rate, inflated forward at each rate-setting by the inflation adjustment factor approved by the Legislature. As of 1986, 193 providers out of approximately 275 received a food rate that exceeded their food costs. (Testimony of Denise Gaither.) 4.The Property Cost Center 38. The property cost center has changed during the period covered by this lawsuit. From before July 1, 1981, until January 1, 1985, the property cost center rate included payment for depreciation, interest costs for those providers who were paying a mortgage on their facilities, and lease costs for those providers who were leasing their facilities. Interest and lease costs were generally considered allowable unless they were between related parties or, for interest costs, were at rates far in excess of going interest rates. If a loan or a lease was between related parties, only the underlying cost to the related party was considered for reimbursement. There also were specified minimum depreciable lives for assets. Prior to 1985, DSHS lidded property costs at 1.75 standard deviations above the predicted level of property costs for all facilities of similar age, construction type and location. If a nursing home was sold, DSHS recognized a new depreciation base, interest or lease expense (unless the sale was between related parties). (Testimony of Denise Gaither.) 39. Beginning on January 1, 1985, the property cost center was changed to reimburse only depreciation, using the same minimum depreciable lives as before 1985. Depreciation is reimbursed according to a straight-line method, unrelated to any actual cash expenditures by a provider for improvements to the facility or its equipment, and is controlled by RCW 74.46.360. The property rate is an unrestricted amount of reimbursement that the provider can use for any purpose. (Testimony of Denise Gaither.) 40. The payment that the State makes for depreciation expense is a potential source of profit to the providers. For the nursing home business, depreciation is not an out-of-pocket expenditure, it is rather an allocation over time of the book value of the business’s physical assets. In real terms, the nursing home assets for most providers in Washington State are appreciating over time, not depreciating. The nursing home industry in the State has realized a substantial aggregate gain on sale of assets during the period covered by this lawsuit. (See Ex. A-600.) The State makes no attempt to recapture the depreciation reimbursement paid to providers when they sell their nursing homes for a gain. (Testimony of William Scanlon.) Owners of a nursing home may claim income tax deductions for depreciation expense on the nursing home’s assets and thus realize a double benefit from depreciation — Medicaid reimbursement plus a tax deduction. (Testimony of Wallace Walsh.) (See Ex. A-589.) 5. The ROE/ROI Rate 41. The ROE rate, which was in effect from before July 1, 1981, through December 31, 1984, was calculated as a percentage of the provider’s equity at the end of the cost year. This percentage was equal to the percentage paid for ROE under the Medicare program. ROE was a profit opportunity for providers and was an incentive to invest in the nursing home. Only for-profit providers received ROE. (Testimony of Denise Gaither.) 42. The ROI rate, which became effective January 1, 1985 (at the same time the State changed the property cost center), has three components: a financing allowance, a working capital allowance, and a variable return allowance. The financing allowance is 11% of the facility’s net book value of assets used in patient care and is paid over a 30-year period in lieu of direct reimbursement of capital interest or lease expenses. All providers receive a financing allowance whether or not they incur any actual interest or lease expenses. The working capital allowance is 11% of 5% of operating eosts. The financing allowance and working capital allowance are not restricted to the payment of any particular expenses. Providers may have excess in the financing allowance if they obtain interest rates less than 11%, finance less than the entire purchase price of the facility, or negotiate lease agreements that keep their costs below 11% of the net book value of the assets. They can use that excess for any purpose, whether to cover other costs or as profit. (Testimony of Denise Gaither.) 43. The variable return allowance is a percentage increase that is added on to the rates paid for nursing services, A & 0, food and property. The percentage increase ranges from one to four percent, depending on how low the provider’s A & 0 and property costs are in relation to all the other providers in the State. This allowance is an incentive for providers to be efficient and economically operated because it rewards lower cost providers. The larger increases paid to lower cost nursing homes provide more assurance that these homes will have sufficient revenue to incur additional necessary costs. The lower increases given to higher cost homes put some pressure on them to control their rate of cost increase or to lower their costs. The variable return allowance also provides another opportunity for a profit. (Testimony of William Scanlon.) 6. The Wage Enhancement Cost Center 44. In 1987, the Legislature enacted a special temporary cost center, called the wage enhancement cost center, to provide funds to enable providers to comply with legislation applying minimum wage requirements to nursing home employees. In the fall of 1987, the Department instructed the industry on how to report wage costs so this increase could be implemented. However, the information submitted by the providers was unsatisfactory to the Department, and the Department set the enhancement rate on the basis of information submitted in the 1986 cost reports. At the time the Department issued these enhancement rates, it also advised the providers that if they submitted the required information, the Department would adjust the enhancement rate accordingly. Approximately 200 providers appealed, provided the proper information, and received the supplemental wage allowances. Approximately 78 did not pursue this opportunity and therefore got the allowance on the basis of their 1986 costs. (Testimony of Paul Montgomery.) 45. No evidence was presented that the enhancement for the 200 providers that did appeal was improperly calculated. Nor was any evidence presented that the 78 providers that did not appeal were denied notice of the opportunity to appeal or otherwise were treated unfairly. There was no evidence that any of those that did not appeal had any right to a wage enhancement in addition to what the Department gave them on the basis of the 1986 cost reports. D. The Audit Process 46. In the audit process, DSHS auditors receive copies of the cost reports submitted by providers. The audit staff work with desk review staff to determine which cost reports will be audited each year. Each provider must be subjected to audit at least once every three years. In conducting the audit, DSHS auditors establish a “scope of review” for each nursing home cost report to be audited, choosing only certain cost areas to review. 47. The audit process focuses on whether providers have adequate records to document certain reported costs in those particular cost areas within the scope of review. As a practical matter, DSHS auditors cannot conduct a thorough and meticulous audit of every cost item reported by providers. (Testimony of Sandra Libbey.) Therefore, the audit process cannot pinpoint all unnecessary costs. The auditors are not able to determine whether each care-related expense must be incurred in order to provide care that conforms with licensing and certification standards. (Testimony of William Scanlon.) It was clear from the testimony that the audit process does not, as plaintiffs alleged, eliminate all unallowable costs. 48. In May 1989, DSHS changed the scope of audit regulations to require that the auditors apply the rate-setting lids in the audit process beginning with audits of the 1987 cost year. Prior to May 1989, the auditors applied only the limitations which could be determined by review of an individual provider’s cost report and supporting documentation. It was not DSHS practice to apply the statutory lids in the audit process before May 1989 because final settlement is calculated at the lower of audited cost or interim rate and the interim rate already incorporated application of the lids. (Testimony of Denise Gaither.) E. The Inflation Adjustment Factor and the Budget Process 49. The inflation adjustment factor (IAF) that DSHS adds on to providers’ rate bases to arrive at their interim rates is prescribed by the Legislature in its biennial Budget Act. The source of the IAF is the “implicit price deflator” that is established by the State’s Economic and Revenue Forecast Council, a bipartisan council of state legislators and officials of the executive branch. 50. The implicit price deflator that the Forecast Council sets is a forecast of the expected increase over the following year in the U.S. Commerce Department’s implicit price deflator of goods and services, which is a general index of inflation experienced in the national economy. The State uses the federal index to predict expected future inflation because there is no comparable index that is specific to the Washington economy. 51. The implicit price deflator forecast is calculated by the Council’s staff solely on the basis of inflationary trends identified in the federal index. The Forecast Council does not adjust the implicit price deflator on the basis of available revenues or the State’s budgetary needs. The Legislature does not make adjustments to the implicit price deflator when prescribing the IAF for purposes of nursing home rate-setting. (Testimony of Chang Mook Sohn, Ph.D.) 52. The budget for DSHS’s Medicaid program for nursing homes is supervised by the Office of Financial Management (OFM) within the Governor’s office, and is approved by the Legislature every two years in the biennial Budget Act. In overseeing the biennial budgets, OFM allows for three separate increases in funds appropriated for the nursing home program: an increase for the projected effects of rebas-ing; an increase for “rate creep,” which includes expected higher reimbursement rates attributed to new provider budgets and to DSHS’s approval of requests for current funding; and an increase for a general inflation adjustment. (Testimony of David A. Black.) 53. OFM generally relies on the expertise of DSHS staff in determining prospective increases attributable to rebasing and rate creep. The inflation adjustment factor that OFM adds into each biennial budget is equal to the most recent implicit price def-lator forecasted by the Economic and Revenue Forecast Council. This is the same IAF used by DSHS in rate-setting as prescribed separately by the Legislature. 54. In making its inflation adjustments to the nursing home budget, OFM does not alter or reduce the implicit price deflator increase or the increases allowed for rebas-ing and rate creep on the basis of revenues available to the State or the State’s budgetary needs. OFM treats the nursing home budget as an entitlement program whose payment requirements must be fully funded. 55. If the amount of appropriation provided in a biennial budget falls short of DSHS’s Medicaid payment needs for nursing homes, DSHS requests a supplemental budget appropriation. OFM and the Legislature regularly approve supplemental budget requests because of the entitlement nature of the nursing home program. The Legislature invariably appropriates the money necessary to pay the rates prescribed by the statutory rate-setting mechanism. (Testimony of David Black, Paul R. Lamm and Donald A. Gary.) 56. OFM does not affect DSHS’s rate-setting process through the biennial budget. The budget and rate-setting processes are separate. (Testimony of David Black, Paul Lamm and Don Gary.) 57. The testimony from state officials regarding the biennial budget process and the role of OFM and OFM’s application of the IAF was consistent and credible and was uncontested. III. ADEQUACY OF THE RATES A. Introduction 58. This case is about money and not about quality of care. From the evidence, it is clear that, generally, nursing home patients in the State of Washington are receiving good care. The State monitors the quality of care and has ample weapons to enforce compliance with care quality standards. Providers who do not provide adequate care may lose their license to operate a nursing home. 59. The plaintiffs assert that they provide high quality of care, but that doing so under the rates paid by the State is causing them financial hardship. No evidence substantiated the claim that nursing homes in this State, generally, are suffering financial hardship. The rates paid under RCW 74.46 are adequate to enable efficient and economic facilities to provide the standard of care required by state and federal law. B. The “Lag” 60. As a practical necessity, the method used by DSHS for annually rebasing a provider’s interim rates creates a “lag” period between the cost year and the rate year at each rate-setting. The provider experiences inflation during this lag period which is not fully reflected in the costs incurred by the provider during the prior cost year, and thus will not be fully reflected in the provider’s prospective rate base without some additional adjustment. This inflation lag may be measured from the middle of the cost year to the middle of the rate year, a period of 18 months. (Testimony of Daniel Humphrey, Steven D. Hu-ebner, CPA, Lowell W. Bassett, Ph.D., and William Scanlon.) During this 18-month time frame between the midpoint of the cost year and the midpoint of the rate year, providers experience cost increases due to general inflation in the economy and cost increases due to a rise in the costs of inputs that are specific to the nursing home industry, such as nurses’ wages. (Testimony of Daniel Humphrey, Lowell Bassett and William Scanlon.) 61. The Washington reimbursement system attempts to compensate for this inflation lag in a number of ways. First, DSHS adds the IAF percentage adjustment to the provider’s rate base in setting the interim rate. As noted above, the IAF is based on a forecast of inflation expected in the general economy over the following year. Further, DSHS pays the provider an ROI rate that contains the variable return allowance, which is an unrestricted percentage increase given as a bonus for cost containment. For providers who earn the higher variable return allowances of three or four percent, these two upward adjustments in the rate — IAF and variable return — substantially cover the cost increases experienced in the nursing home industry during the 18-month lag, as measured by the HCFA Market Basket Index. This fact is illustrated by Exhibit A-581 prepared by the defendants’ expert witness, Dr. William J. Scanlon. {See Ex. A-581.) (Testimony of William Scanlon.) 62. When the IAF and variable return allowance adjustments are analyzed in combination with the rebasing process, the effect of the lag is virtually, eliminated over time. {See Ex. A-582.) Dr. Scanlon’s Exhibit A-582 sets out a running comparison of rates to costs using the HCFA Market Basket Index as a hypothetical index of cost increases. Exhibit A-582 shows that since 1985 the IAF and a variable return allowance of three percent, combined with annual rebasing, have resulted in rates at the midpoint of each rate year that closely track costs incurred at the same point in time. Providers who earn a four percent variable return would receive higher rates in relation to costs, and the percentage of rate increase would be even greater if current funding increases were included in the analysis. (Testimony of William Scanlon.) 63. Over the period covered by this lawsuit, the actual rates paid by DSHS — including all components of the rate — have fairly compensated for the average cost increases experienced by the nursing home industry as reflected in the best available index of inflation for nursing homes, the HCFA Market Basket Index. From 1981 through 1988, the State’s total average reimbursement rate has increased almost 70%, or nearly eight percent annually. In comparison, the Market Basket Index over the same period has increased a total of 39%, or under five percent annually. (Ex. A-580.) (Testimony of William Scanlon.) 64. The HCFA Market Basket Index is the best available inflation index because it measures actual increases in the cost of inputs used in the nursing home industry. It is a national composite index made up of indices that are drawn from sample data in different geographical areas, including most large metropolitan statistical areas like the Seattle area, as well as smaller statistical areas. There is no regional equivalent of the Market Basket Index. There are some factors related to cost increases — such as changes in case mix— that are not reflected in the Market Basket Index, but there is no available index that can capture these cost increases, short of the providers’ actual cost experience. Actual cost experience is not an accurate and useful index of necessary inflation. (Testimony of William Scanlon.) C. Reimbursement Ratios 65. The parties prepared several statistical exhibits regarding the adequacy of DSHS’s overall reimbursement of providers’ costs. Defendants’ Exhibits A-595 and A-596 indicate that the State’s Medicaid rates ’ reimbursed between 98.5% and 101.7% of the plaintiffs’ aggregate costs during the years covered by this lawsuit. On the rate side, these exhibits include all components of the reimbursement rate except the financing allowance and working capital allowance portions of the ROI rate, which are excluded because of the lack of complete reporting by providers of interest and lease expenses incurred after 1985. On the cost side, Exhibits A-595 and A-596 exclude interest and lease costs after 1985 and the depreciation expenses reported by the providers (since depreciation is not a true out-of-pocket cost, as discussed above). These exhibits also deduct from the providers’ costs those amounts that exceed the lids used in the various cost centers. 66. These exhibits indicate substantial levels of reimbursement of the providers’ aggregate costs. A comparison of total rates to total costs would have been a more accurate indicator of the adequacy of the State’s reimbursement than the partial rates and costs provided to the Court. However, the Court recognizes that a complete comparison is difficult, if not impossible, due to the lack of data on providers’ interest and lease costs. 67. Exhibits A-595 and A-596 are also significant in detailing the amount of reimbursement provided in particular components of the rate payment. 68. Exhibit A-583, prepared under the direction of the defendants’ expert Dr. Scanlon, provides a comparison of costs per day and reimbursement rates paid by DSHS for all nursing homes in the State, arrayed into quartiles according to the level of their costs. • These tables show the percentage of nursing homes in each quartile that have received various ratios of reimbursement, ranging from 93% to 99% of their audited costs. Again, the reimbursement rate included in this exhibit is the total rate paid by DSHS except for the financing allowance and the working capital allowance after 1984. The costs include all audited costs except interest and lease expenses after 1984. No amounts were removed for costs in excess of lids. A second version of these tables was also introduced which removed depreciation expense from the cost side of the comparison. 69. Exhibit A-583 shows that substantial percentages of providers received near full reimbursement in all years, especially in the quartiles of lower cost providers. For example, between 81.9% and 91.7% of providers in the lowest cost quartile have had 95% or more of their costs reimbursed from 1982 to 1988. (Ex. A-583.) It is also significant that a substantial (though steadily diminishing) percentage of homes in the higher cost quartiles have also received near full reimbursement. Between 12.5% and 63.4% of homes in the highest cost quartile have had 95% or more of their costs reimbursed. (Ex. A-583.) 70. Exhibit A-584 is a series of histogram charts for the years 1982 to 1988 that depict the percentages of reimbursement paid to all providers in the State. The data in Exhibit A-584 corresponds to the information contained in the tables in Exhibit A-583. The histogram charts graphically portray the ratios of reimbursement experienced by all providers throughout the industry. They show that a number of providers every year receive reimbursement for greater than 100% of their costs, and a number receive less than 100% of their costs. (Ex. A-584.) (Testimony of William Scanlon.) 71. The plaintiffs’ expert Mr. Humphrey introduced an exhibit indicating that from 63% to 91% of providers in the years 1981 through 1988 had less than 100% of their costs reimbursed by DSHS, counting only the rates paid in the four cost centers and not counting the ROE/ROI rate. (Ex. 7.) Because the Court found that a comparison of costs to less than the full rate payment was not helpful in determining the adequacy of the State’s rates, Mr. Humphrey reworked one of his exhibits to allow an offset from a portion of the providers’ ROE payments and “cost savings” against the reimbursement shortfall in the four cost centers. The reworked exhibit indicated that between 47% and 74% of providers with final settlements did not receive 100% reimbursement in the years 1981 to 1984. (Ex. 120.) Mr. Humphrey made no attempt to indicate what percentage of providers received near full reimbursement — such as reimbursement ratios of 97%, 95% or 93%. Mr. Humphrey’s exhibits assumed that all allowable costs reported by the providers and accepted by DSHS on audit were the necessary costs of efficient and economical facilities. Under his analysis, even providers who were reimbursed all but one dollar of their costs would appear to be “underfunded.” (Testimony of Daniel Humphrey.) 72. During his rebuttal testimony, Mr. Humphrey introduced an exhibit that reformulated most of the assumptions contained in defendants’ Exhibit A-596. (See Ex. 130.) Exhibit 130 simply showed the number of providers receiving less than 100% reimbursement of costs. Like Mr. Humphrey’s earlier exhibits, Exhibit 130 did not include all relevant information. D. Financial Ratios 73. The plaintiffs also presented evidence through Mr. Humphrey and Steven D. Huebner, CPA, regarding an alleged decline in the general financial health of the State’s nursing home industry during the relevant period. This evidence consisted of aggregated financial ratios for all providers drawn from Mr. Humphrey’s database of cost report information. (Ex. 92 & Ex. 126.) The information contained in these ratios was incomplete and inaccurate. Mr. Humphrey and Mr. Huebner compared only ratios for 1981 and 1987, whereas similar calculations for the other years involved in this lawsuit may have produced ratios substantially different. (See Ex. A-599.) 74. Furthermore, the ratios calculated by the plaintiffs’ experts were susceptible of distortion by the financial manipulations that some providers engage in — such as related-party lease arrangements and other excess unallowable expenses — that directly benefit the owners of a facility while burdening the facility’s bottom line and weakening its financial health. If those providers had chosen not to incur these unallowa-ble expenses, their net income would be increased or net losses decreased. If they had spent the money on allowable activities, their Medicaid revenues would have been increased, which would have improved their bottom lines and hence their financial ratios. (Testimony of Denise Gaither.) The total effect of such manipulations is unknown, IV. CREDIBILITY OF THE EXPERTS 75. This case necessarily involves an analysis of statistics and the adequacy of rates to costs. Since the Court is not an expert in health care economics or statistics, the Court must rely to an extent on the credible testimony of the parties’ experts in these areas. 76. The testimony of the defendants’ expert witness, William J. Scanlon, Ph.D., of the Center for Health Policy Studies in Washington, D.C., was credible and reasonable. Dr. Scanlon is impartial and professional. He has previously worked as a consultant for both state governments and private Medicaid providers. He has never testified as an expert witness at trial before the present case. Dr. Scanlon demonstrated substantial experience with and understanding of Medicaid reimbursement systems and policies, and he is well acquainted with the Washington Medicaid program and the conditions in the State’s nursing home industry. His testimony was important in explaining the reasonableness of the State’s reimbursement system and rates and was helpful in assisting the Court in understanding the economics of public health care as it relates to the Boren Amendment. The plaintiffs did not offer credible testimony to controvert Dr. Scan-lon’s opinions regarding health policy and the economics of the Medicaid program. 77. The Court accepts the testimony of Dr. Scanlon, with only two minor exceptions: 1) In disagreement with Dr. Scanlon, the Court does see in the quartile exhibits a trend toward lesser reimbursement of providers’ costs during the years at issue. 2) The Court finds that the most accurate comparison of costs to rates should include an exact amount for the complete rates paid and an exact amount for all true costs. 78. The plaintiffs’ principal expert, Mr. Humphrey, was not a credible witness. Consequently, Mr. Humphrey’s opinions regarding the reasonableness of the State’s reimbursement system and the adequacy of the State’s Medicaid rates under the Boren Amendment did not carry significant weight. 79. Eleven points undermined Mr. Humphrey’s credibility: One, he is a partisan on the side of the nursing homes; he is not an independent expert. Two, he is a stakeholder in this lawsuit because as a part owner of two nursing homes in the plaintiff class he has a substantial personal financial interest in the outcome. Three, he is a contingent fee expert; he was guaranteed five percent of any damage award the plaintiffs obtained. Four, he stands to get more income from accounting work if the plaintiffs prevail because he expects to divide the proceeds as judgment fund accountant, just as he did in a prior state court case, United Nursing Homes, Inc. v. McNutt, 35 Wash.App. 632, 669 P.2d 476, review denied, 100 Wash.2d 1030 (1983). Five, his testimony indicated that he was the principal architect of this lawsuit, believing that this action would simply be a “mirror image” of the McNutt case, which it clearly is not. Six, he testified that the Washington reimbursement system started to go “sour” in 1985, yet his own actions belied this testimony since he invested around $450,000 in the system in 1986 with his expert’s knowledge of the nursing home business. Seven, he kept changing the questions that he was asked on cross-examination instead of answering them straightforwardly. He tried to answer the questions he wanted to answer, rather than the questions asked. 80. Eight, not all of the necessary numbers were included in Mr. Humphrey’s statistical analyses. He left out data that should and could have been included for a fair and realistic assessment of the reimbursement rates. Nine, as he himself testified, his analyses of the financial ratios of the providers were skewed by various factors, including the presence in the State of large corporate nursing home chains like Beverly Enterprises and Hillhaven Corporation. Ten, his testimony showed that his own nursing homes were engaged in the sort of financial manipulations of unallowa-ble administrative and property costs— which he characterized as “shenanigans” in his direct testimony — that can skew the numbers that indicate a provider’s financial performance, thus making it difficult to determine whether the reimbursement rates received are in fact adequate. 81. Eleven, Mr. Humphrey testified on cross-examination that providers get into the nursing home business for reasons other than just earning an operating profit. He testified that these other reasons include favorable tax deductions for depreciation, the investment potential of realizing a profit on the sale of the nursing home property, and the opportunity to engage in financial manipulations — like related-party leases and excess compensation — that provide ways to draw money out of the business for the owner’s personal benefit. These reasons are very important considerations in determining the adequacy of Medicaid reimbursement rates, as Mr. Humphrey himself admitted, yet none of these factors was included in his figures or analyses. The real meaning of depreciation was not well covered in his analyses, and his exhibits did not make it clear how the various forms of financial manipulations affect a provider’s bottom line. 82. The plaintiffs’ other expert witnesses, Mr. Huebner and Dr. Lowell Bassett, relied extensively on the statistical data and work of Mr. Humphrey, as well as Mr. Humphrey’s approach to the Boren issue and his conclusions about reasonable rates. To the extent these experts’ opinions depended on the work of Mr. Humphrey, they suffered from his same disabilities, and the Court has discounted the weight of their opinions accordingly. V. FINDINGS AND ASSURANCES 83. HCFA’s regulations require HCFA approval of a state plan change in payment methods and standards. 42 C.F.R. § 447.253(a) (1988). Prior to October 26, 1987, this requirement applied only to significant changes. 42 C.F.R. § 447.253(a) (1986). Effective that date, the word “significant” was deleted from the regulation. See 52 Fed.Reg. 28147 (1987). 84. In order to receive HCFA’s approval for changes in a state plan, the state Medicaid agency “must make assurances satisfactory to HCFA” that certain prescribed requirements are being met. Id. The assurance in dispute in this case tracks the Boren Amendment: “The Medicaid agency pays for ... long-term care facility services through the use of rates that are reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated providers to provide services in conformity with applicable State and Federal laws, regulations, and quality and safety standards.” 42 C.F.R. § 447.253(b)(1) (1988). The regulations further require that “[w]henever the Medicaid agency makes a change in its methods and standards, but not less often than annually, the agency must make” certain findings that are identical to the assurances. 42 C.F.R. § 447.253(b) (1988). Although the assurances must be submitted to HCFA, the underlying findings do not have to be submitted. 85. No evidence was presented indicating that DSHS had failed to submit the required assurances to HCFA. Indeed, the evidence showed that the Department submitted the assurances each year between 1981 and 1988, with the exception of 1986, when there was no significant change in the Plan. Plaintiffs contend that the assurances merely parroted the language of the regulations and that the Department had not engaged in any bona fide process to make the findings to support the assurances. The evidence did not support this contention. 86. The testimony of Michael Wills, Kathy Marshall and Denise Gaither regarding the assurances and findings they prepared for HCFA’s approval of the State Plans for 1984 through 1988 was credible. They were successively the managers of the reimbursement program and as such were the officials directly responsible for making the required findings and assurances. Their testimony indicated a consistent practice and a consistent analysis by DSHS over the several years of their involvement. No evidence rebutted the persuasive testimony of Mr. Wills, Ms. Marshall and Ms. Gaither concerning the findings and assurances process undertaken by DSHS. 87. The testimony showed that DSHS made its findings in the following manner: As required by statute, cost reports were submitted on March 31, although extensions were available. Thereafter, the Department aggregated the information from the cost reports to compile an industry-wide total of raw reported costs, before desk review and the application of any lids or limitations. This total raw reported cost figure was generally available by early summer. The responsible Department officials then compared this figure to total reimbursement. For the years 1982 through 1987, the reimbursement was approximately 95% of raw reported costs. (Ex. 3.) In 1988, reimbursement was 92% of raw reported costs. (Ex. A-340.) Of course, if the reported costs were limited to allowable costs, the percentages of reimbursement would be higher, but this data is not available by the time the annual findings have to be made. 88. The responsible officials then evaluated the ratio of reimbursement to costs in light of their knowledge of the nursing home industry. Foremost among their considerations was the fact that the quality of care provided by nursing homes in Washington is high. Mr. Wills, Ms. Marshall and Ms. Gaither all testified that in their role as managers of the reimbursement program they were well informed on the quality of care in the State’s nursing homes through receipt of survey reports and frequent meetings with colleagues in the Department who were responsible for monitoring quality of care. 89. Furthermore, Mr. Wills, Ms. Marshall and Ms. Gaither were aware that there has been no shortage of persons willing and able to buy nursing homes in this State whenever a former provider decided, for whatever reasons, to leave the industry. When nursing homes were put up for sale, they invariably sold for an apparent profit. Whenever the State issued a license (called a Certificate of Need) to add additional nursing home beds, either through construction of new facilities or expansion,of existing ones, there was brisk competition for these licenses. Mr. Wills, Ms. Marshall and Ms. Gaither considered all of this information in making their findings. 90. Armed with the knowledge that (1) the rates provided a high ratio of reimbursement to raw reported costs, (2) providers were able to provide good care at these rates, and (3) the rates were sufficient to attract providers to the industry whenever a nursing home or additional bed authorization became available, Mr. Wills, Ms. Marshall and Ms. Gaither concluded that the rates met the standard of the Boren Amendment which is repeated in HCFA’s regulations. Stated another way, these officials reasoned that if the State’s rates were too low, one of two consequences would follow: either there would be a perceptible drop in the quality of care; or, if providers lost money providing requisite care at the State's rates, there would be an exodus from the industry and a dearth of new entrants. The fact that neither of these consequences was observed confirmed the officials’ findings that the high ratio of reimbursement to raw reported costs was adequate and reasonable to meet the Boren Amendment standard. 91. In 1983 and 1985, HCFA conducted surveys of the Department’s compliance with the Boren Amendment, the regulations, and the State Plan. In both of these surveys, HCFA looked behind the findings made by the Department and approved the methodology used by the Department and the conclusions it reached. In the 1983 survey, HCFA accepted the Department’s finding that the ratio of reimbursement to reported costs was responsive to the federal regulations. (Ex. A-364 at 24.) In the 1985 survey, HCFA found that the required finding with respect to compliance with the Boren Amendment “appears to be reasonably substantiated.” (Ex. A-365, “Executive Summary.”) The survey further found that although the Department “did not have a formalized finding document ... there was information available to conclude that the payment rates were reasonable and adequate.” (Ex. A-365, “Section II — Findings.”) Mr. Wills, Ms. Marshall and Ms. Gaither testified that these expressions of approval from HCFA supported their belief that the methodology they used to make their findings was appropriate and that the findings themselves were proper. 92. The responsible Department officials engaged in a reasoned and comprehensive finding process to support the assurances they made to HCFA. The more sophisticated statistical analyses presented by the Department at trial, discussed in paragraphs 65-70, supra, confirm the Department’s annual findings. CONCLUSIONS OF LAW 1. This Court has jurisdiction over plaintiffs’ federal law claims pursuant to 28 U.S.C. § 1331. The Court has pendent jurisdiction over plaintiffs’ state law claims. 2. On September 13, 1989, the Court ruled that neither federal nor state law requires the defendants to reimburse the plaintiffs in full for their audited allowable costs. (Order Denying Plaintiffs’ Motion for Partial Summary Judgment; and Granting Defendants’ Motion for Partial Summary Judgment.) On the same date, the Court dismissed the plaintiffs’ 42 U.S.C. § 1983 claims for retrospective relief under the Supreme Court’s holding in Will v. Michigan Dep’t of State Police, — U.S. -, 109 S.Ct. 2304, 105 L.Ed.2d 45 (1989), but ruled that the plaintiffs nevertheless had a federal cause of action for damages against the defendants directly und