United States Court of Appeals
For the First Circuit
No. 08-2550
FRANKLIN MEMORIAL HOSPITAL,
Plaintiff, Appellant,
v.
BRENDA M. HARVEY, in her official capacity as the Commissioner
of the Maine Department of Health and Human Services,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. George Z. Singal, U.S. District Judge]
Before
Lynch, Chief Judge,
*
Ebel and Lipez, Circuit Judges.
Marc N. Frenette with whom Michael R. Poulin and Skelton,
Taintor & Abbott were on brief for appellant.
Christopher C. Taub, Assistant Attorney General, with whom
Janet T. Mills, Attorney General, and Paul Stern, Deputy Attorney
General, were on brief for appellee.
August 5, 2009
*
Of the Tenth Circuit, sitting by designation.
LYNCH, Chief Judge. Since 1989, Maine has required all
hospitals to provide free medical services to certain low income
patients under a set of statutes and regulations collectively known
as "free care laws." See Me. Rev. Stat. Ann. tit. 22, §§ 1715,
1716; 10-144-150 Me. Code R. § 1.01 et seq. Maine's free care laws
do not reimburse the hospitals for their expenses incurred in
delivering care to low income patients, and the amount of free care
that the hospitals must provide is not limited under the statute.
Separately, Maine pays for the medical treatment provided
to some low income patients through its Medicaid program, called
"MaineCare." Yet the MaineCare reimbursements fall well below the
hospitals' actual cost of providing medical services.
Plaintiff Franklin Memorial Hospital ("FMH") is a non-
profit, general acute care hospital located in Farmington, Maine
with a tradition of voluntarily providing free and reduced price
medical care to low income patients. FMH sued Brenda M. Harvey,
the Maine official charged with enforcing the state's free care
laws and administering MaineCare. In a two-count complaint, FMH
sought a declaratory judgment that both Maine's free care laws and
MaineCare are unconstitutional takings of property. The district
court dismissed the count relating to MaineCare and granted summary
judgment to the state official on FMH's takings challenge to the
free care laws. We affirm.
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I.
Since July 1, 2007, Maine's free care laws have required
hospitals to provide free medically necessary inpatient and
outpatient hospital services to Maine residents who earn incomes at
or below 150% of the federal poverty level.1 See 10-144-150 Me.
Code R. §§ 1.01(A), 1.02(C). Under the regulations, "[n]o hospital
shall deny services to any Maine resident solely because of the
inability of the individual to pay for those services." Id.
§ 1.01(A). Compliance with the free care laws is not a condition
for having a license to operate a hospital in Maine. Instead, the
state obtains compliance with its free care requirement through a
system of fines and enforcement suits brought by the state's
attorney general or any affected patient. See Me. Rev. Stat. Ann.
tit. 22, § 1715(2). Maine's free care laws do provide relief to
1
This is a change from Maine's prior free care scheme,
which set the income qualification at 100% of the federal poverty
level.
Historically, Maine law required local towns, not the
medical care providers, to bear the cost of medical treatment for
their indigent residents. See Me. Rev. Stat. ch. 24, § 23 (1871)
("A person residing in a place not incorporated, may provide relief
and medical aid for any person sick, wounded, or dangerously
injured, residing in such place . . . and recover the amount
necessarily expended of the town where such person had a settlement
. . . ."); see also Hutchinson v. Inhabitants of Carthage, 73 A.
825 (1909) (ordering payment by the town for the cost of medical
care rendered to an indigent family with measles). In 1973,
Maine's pauper laws were revised and replaced with a system of
municipal general assistance programs, which required
municipalities to pay the cost of certain medical expenses for
their indigent residents. See Me. Rev. Stat. Ann. tit. 22,
§§ 4301, 4313. These laws remain in effect today.
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hospitals for which compliance with the regulations would have
ruinous financial consequences. Specifically, in any legal action
brought to enforce Maine's free care laws, the hospital may avoid
liability by showing that its "economic viability . . . would be
jeopardized by compliance." Id. § 1715(2)(D).
The parties agree that Maine's free care laws are unique
in that
(1) the laws mandate that a hospital provide
free/uncompensated care to persons deemed
eligible by the state through a penalty
enforcement scheme, (2) the hospital is not
reimbursed any amount for the provision of
care, [and (3)] the provision of free care is
not a license condition or is not linked to
the state's certificate of need process.
To the parties knowledge, no other state has a system of free care
with each of those three features.2
FMH operates in one of the poorest counties in Maine, and
the amount of free medical services it provides in compliance with
2
Other states, however, have laws that, although not
identical to Maine's scheme, require hospitals to give free medical
care to low income patients. Rhode Island, for example, requires
"[a]ll licensed hospitals . . . as a condition of initial and/or
continued licensure . . . [to] meet the statewide community needs
for the provision of charitable care." R.I. Gen. Laws
§ 23-17.14-15(a). The Rhode Island regulations, in turn, state
that "[h]ospitals shall provide full charity care (i.e., a 100%
discount) to patients/guarantors whose annual income is up to and
including 200% of the Federal Poverty Levels, taking into
consideration family unit size." 14-90-28 R.I. Code R. § 11.3(c).
Rhode Island's free care requirements are enforceable by the
state's attorney general, and noncompliance may result in
revocation of the hospital's license, up to a $1 million fine, and
5 years in prison. See R.I. Gen. Laws § 23-17.14-30.
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Maine's free care laws has grown over the past several years. In
2004, FMH provided $131,280 in mandatory free care. During the
eleven months preceding May 31, 2008, FMH spent $890,212 to meet
its free care obligations.3
Still, these expenditures represent only a small fraction
of FMH's overall budget. Indeed, the roughly $661,000 in mandatory
free care that FMH provided during fiscal year 2007 amounted to
only 0.51% of the hospital's gross revenues for that year, and FMH
has not alleged that the level of free care that it currently
provides threatens its continued economic viability.
Although Maine provides no payment for the medical
services rendered in compliance with its free care laws, FMH
recovers some of the costs it incurs in treating certain low income
patients through reimbursements from the MaineCare program. Yet
reimbursements through MaineCare fall well short of FMH's actual
costs in treating patients. For example, in fiscal year 2007, FMH
received reimbursement under MaineCare at a rate of $2646.95 per
discharge for inpatient services, but FMH's actual cost per
discharge had historically been approximately $4796. MaineCare's
reimbursement rate for outpatient services is more favorable to FMH
but still only covers 89.7% of the hospital's outpatient costs.
3
FMH has not received funds under the Hill-Burton Act, 42
U.S.C. § 291 et seq., and so is not subject to that statute's free
care requirements.
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On August 21, 2007, FMH sued Harvey in her capacity as
the Commissioner of the Maine Department of Health and Human
Services, seeking a declaratory judgment that both Maine's free
care laws and the MaineCare program constitute uncompensated
takings of property. On October 22, 2007, Harvey filed a motion to
dismiss the count in FMH's complaint relating to the MaineCare
program. The district court granted Harvey's motion to dismiss the
MaineCare count on January 28, 2008, holding that FMH could not
state a takings claim because it voluntarily participates in the
MaineCare program. The parties filed cross-motions for summary
judgment on the remaining count relating to Maine's free care laws.
On September 24, 2008, a magistrate judge recommended granting
Harvey's motion for summary judgment. The magistrate judge,
applying an ad hoc analysis, held that Maine's free care laws did
not constitute a regulatory taking. On November 14, 2008, the
district court adopted the magistrate judge's recommended decision
and granted Harvey's motion for summary judgment. FMH timely
appealed.
II.
We first address FMH's takings challenge to Maine's free
care laws, which the district court rejected on summary judgment.
We review the grant of a motion for summary judgment de novo,
drawing all reasonable inferences in favor of the non-moving party.
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See Sullivan v. City of Springfield, 561 F.3d 7, 14 (1st Cir.
2009).
The Takings Clause of the Fifth Amendment, which applies
to the states through the Fourteenth Amendment, prohibits the
taking of private property for public use without just
compensation. Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 536
(2005). Although physical occupation of a person's property is the
paradigmatic taking, the Constitution also guards against certain
uncompensated regulatory interferences with a property owner's
interest in his property. Id. at 537. Here, the challenged
government action, which does not directly appropriate FMH's
property but rather regulates how FMH may use it, is properly
analyzed under the law of regulatory takings, not the law of
physical takings. See Philip Morris, Inc. v. Reilly, 312 F.3d 24,
33 (1st Cir. 2002) (en banc) ("A physical taking occurs either when
there is a condemnation or a physical appropriation of property.");
id. ("A regulatory taking transpires when some significant
restriction is placed upon an owner's use of his property for which
'justice and fairness' require that compensation be given."
(quoting Goldblatt v. Hempstead, 369 U.S. 590, 594 (1962))).
The Supreme Court's regulatory takings jurisprudence has
eschewed bright-line rules. Indeed, in contrast to the law of
physical takings, which typically "involves the straightforward
application of per se rules," Tahoe-Sierra Pres. Council, Inc. v.
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Tahoe Reg'l Planning Agency, 535 U.S. 302, 322 (2002), "regulatory
takings jurisprudence . . . is characterized by 'essentially ad
hoc, factual inquiries,'" id. (quoting Penn Cent. Transp. Co. v.
City of New York, 438 U.S. 104, 124 (1978)), "designed to allow
'careful examination and weighing of all the relevant
circumstances,'" id. (quoting Palazzolo v. Rhode Island, 533 U.S.
606, 636 (2001) (O'Connor, J., concurring)).
Still, the Supreme Court has identified "two categories
of regulatory action that generally will be deemed per se takings."
Lingle, 544 U.S. at 538. "First, where [the] government requires
an owner to suffer a permanent physical invasion of her property --
however minor -- it must provide just compensation." Id. The
Court cited, as an example, Loretto v. Teleprompter Manhattan CATV
Corp., 458 U.S. 419 (1982), where a "state law requiring landlords
to permit cable companies to install cable facilities in apartment
buildings effected a taking." Lingle, 544 U.S. at 538. Second,
the Court has held that per se regulatory takings occur where the
"regulations completely deprive an owner of 'all economically
beneficial us[e]' of her property." Id. (emphasis and alteration
in original) (quoting Lucas v. S.C. Coastal Council, 505 U.S. 1003,
1019 (1992)). Neither of these situations is presented here.
A. Per Se Analysis
FMH argues that Maine's free care laws fall under the
first category of per se takings because "FMH is required to admit
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and house (and board) patients who need admission to a hospital for
free." In its view, "[t]here is no difference in the government
occupying a room or the government ordering that a room be made
available to someone it designates." And FMH contends that "this
case involves laws that force FMH to give its real property
(hospital rooms) away for free."4 Additionally, FMH stresses that
Maine's free care laws require it to give away its personal
property to the extent that it must purchase and freely provide
expensive medicines and medical supplies to low income patients.
Thus, in FMH's view, Maine's free care laws are not a form of price
control but instead direct the transfer of property from the
hospitals to low income patients.
The Supreme Court, however, has recognized that
regulations of this sort do not effect a per se taking. See Yee v.
City of Escondido, 503 U.S. 519, 527-28 (1992). Yee rejected a
takings challenge to a rent control ordinance for mobile home
parks. It held that the ordinance did not require the property
owner to continue to use his land as a mobile home park and so did
not infringe his right to exclude others from the property. Id. at
528. That is, because the property owner remained free to exclude
4
Admittedly, this is not a permanent physical invasion of
FMH's real property, but rather periodic and intermittent. But the
temporary nature of the intrusion does not resolve the question of
whether the free care laws violate the Constitution, for even
temporary takings require just compensation. See First English
Evangelical Lutheran Church of Glendale v. County of Los Angeles,
482 U.S. 304, 318-19 (1987).
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others from his property if he ceased using his property as a
mobile home park, the Supreme Court found that ordinance did not
require the occupation of the property by unwanted tenants. Here
too, FMH is not required to serve low income patients; it may
choose to stop using its property as a hospital, which is what
makes it subject to Maine's free care laws.
Moreover, the second category of per se taking is not
presented on these facts. There is no allegation that the
regulations remove all economically beneficial uses of the
property; FMH merely says that it faces higher operating costs as
a result of the free care laws.
B. Ad Hoc Analysis
Because the challenged government action does not fall
under either category of regulatory taking invoking a per se rule,
we apply an ad hoc analysis. Our analysis is guided by the three
Penn Central factors: (1) "[t]he economic impact of the regulation
on the claimant"; (2) "the extent to which the regulation has
interfered with distinct investment-backed expectations"; and (3)
"the character of the government action."5 438 U.S. at 124.
"[T]he Penn Central inquiry turns in large part, albeit not
exclusively, upon the magnitude of a regulation's economic impact
5
We are bound by the Penn Central factors but note that
the Penn Central analysis has been the subject of some academic
criticism. See, e.g., R.A. Epstein, From Penn Central to Lingle:
The Long Backwards Road, 40 J. Marshall L. Rev. 602 (2007).
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and the degree to which it interferes with legitimate property
interests." Lingle, 544 U.S. at 540. Ultimately, this inquiry
"aims to identify regulatory actions that are functionally
equivalent to the classic taking in which the government directly
appropriates private property or ousts the owner from his domain."
Id. at 539.
1. Economic Impact of the Regulations
In response to those three factors, FMH argues that the
economic impact of the regulations is severe because "[t]he amount
of goods and services being confiscated by the State under the Free
Care Laws [is] significant and potentially unlimited." And the
cost of providing medical care is undisputably high. According to
FMH, each inpatient on average requires "approximately $1,200 in
medical goods, such as medical and surgical supplies, pharmacy
drugs, anesthesia gases, and intravenous therapy supplies, about
$1,700 in room and board services, and . . . about $1,800 for
doctors, nurses, and other staff to provide care to the client."
Moreover, the financial burden on FMH under Maine's free care laws
has increased nearly five fold since 2006 under the new
regulations.
Yet the potentially harsh economic consequences to
hospitals of Maine's free care laws are ameliorated somewhat by the
statutory defense to enforcement of the free care requirements
against hospitals whose "economic viability . . . would be
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jeopardized by compliance." Me. Rev. Stat. Ann. tit. 22,
§ 1715(2)(D). And there is no allegation that FMH is presently
facing any threat to its economic viability on account of the free
care laws.6 We do not suggest that there can never be a taking
based upon an adverse economic effect short of jeopardizing the
economic viability of a plaintiff; we only note that this case is
not at that end of the spectrum.
We do agree with one of FMH's arguments regarding how to
assess the economic impact of the regulation. The magistrate
judge's recommended decision speculated that "[i]t is not difficult
to imagine, for example, that Franklin Memorial's revenue from
other public programs, or better yet, the profits from such
programs, exceeds the financial burden imposed by Maine's Free Care
Laws." This factor is not relevant to the question of whether
Maine's free care laws constitute a taking and plays no part in our
analysis.
2. Effect on FMH's Investment-Backed Expectations
As for FMH's investment-backed expectations, we first
reject an argument made by the defendant. Harvey argues the
hospital's non-profit status eliminates any influence this factor
6
Our case does not involve a hospital whose claim that its
economic viability would be jeopardized by compliance with the free
care laws has been rejected by state authorities.
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has in FMH's favor.7 We disagree very much with Harvey's proposed
categorical approach. While there may be differences in degree
between expectations for for-profit institutions and non-profit
institutions, there is no categorical exclusion of non-profit
institutions from this prong of the analysis. Like a for-profit
institution, FMH acquires property with the expectation that it may
use it for a particular purpose. Indeed, Maine law expressly
recognizes the right of non-profit corporations to acquire, own,
use, improve, and convey property like any other property owner.8
See Me. Rev. Stat. Ann. tit. 13-B, § 202(1)(I). To the extent that
Maine's free care laws may force FMH to use its property in ways
that it would not otherwise, they may interfere with FMH's
investment-backed expectations.
7
Harvey also argues that we should adopt a new test for
charitable organizations, which finds a taking only where the
regulation interferes with the organization's charitable purpose.
We reject Harvey's invitation to adopt such a standard and adhere
to the usual regulatory takings analysis under Penn Central.
8
Maine law does not forbid a non-profit entity from
earning a return on its investment. It merely restricts how non-
profits may dispose of any profits they earn. For example, a non-
profit may not pay dividends or distribute its profits to its
members, directors, or officers. See Me. Rev. Stat. Ann.
tit. 13-B, § 407. And upon dissolution or liquidation of a non-
profit, the entity's assets must go to an organization involved in
"substantially similar" activities. Id.
Moreover, as a non-profit hospital, FMH is considered a
"public charity," subject to additional regulations. See Me. Rev.
Stat. Ann. tit. 5, § 194-A(2) ("Any nonprofit hospital and medical
service organization is a charitable and benevolent institution and
a public charity and its assets are held for the purpose of
fulfilling the charitable purposes of the organization.").
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It is true that FMH's investment-backed expectations are
tempered by the fact that it operates in the highly regulated
hospital industry.9 See United Wire, Metal & Mach. Health &
Welfare Fund v. Morristown Mem'l Hosp., 995 F.2d 1179, 1191 (3d
Cir. 1993) (rejecting a takings challenge to New Jersey's system of
setting hospital billing rates, in part, because the plaintiffs'
investment-backed expectations were reduced by "the historically
heavy and constant regulation of health care" in the state). And
the Supreme Court has recognized that heavy government regulation
may diminish a property owner's expectations. See Lucas, 505 U.S.
at 1027-28 ("It seems to us that the property owner necessarily
expects the uses of his property to be restricted, from time to
time, by various measures newly enacted by the State in legitimate
exercise of its police powers . . . . And in the case of personal
property, by reason of the State's traditionally high degree of
control over commercial dealings, he ought to be aware of the
9
Despite the second and third prongs of the ad hoc test,
it is also true that the extent to which Maine's free care laws
"substantially advance legitimate state interests," Agins v. City
of Tiburon, 447 U.S. 255, 260 (1980), abrogated by Lingle, 544 U.S.
at 541-42, plays no part in our analysis. As Lingle recognized,
this factor sounds in due process, 544 U.S. at 542, and although
there is some overlap between the protections of substantive due
process and the law of takings, see Goldblatt, 369 U.S. at 594
(recognizing, in the context of a due process challenge, that a
regulation may be "so onerous to as to constitute a taking which
constitutionally requires compensation"), consideration of whether
a regulation substantially advances a legitimate state interest "is
not a valid method of discerning whether private property has been
'taken' for purposes of the Fifth Amendment," Lingle, 544 U.S. at
542. FMH has not raised a due process challenge.
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possibility that new regulations might even render his property
economically worthless . . . .").
3. The Character of the Government Action
The third Penn Central factor -- the character of the
government action -- strongly favors finding no taking here. Under
Penn Central, "[a] 'taking' may more readily be found when the
interference with property can be characterized as a physical
invasion by government than when interference arises from some
public program adjusting the benefits and burdens of economic life
to promote the common good." 438 U.S. at 124 (citation omitted).
Thus, in Hodel v. Irving, 481 U.S. 704, 716 (1987), the Supreme
Court found a taking where the character of the government
regulation was "extraordinary" in that it completely extinguished
the property owner's right to pass on the property to his heirs.
By contrast, the free care laws adjust the benefits and burdens of
economic life but leave the core rights of property ownership
intact. Maine's free care laws merely require that hospitals not
refuse to treat patients based on their ability to pay and that
they provide those services freely to those with incomes at or
below 150% of the federal poverty level. FMH may otherwise set the
terms on which it provides access to its facilities and services.
Thus, on these facts, we hold that Maine's free care laws do not
effect a taking.
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III.
FMH separately challenges the reimbursement rate it
receives under the MaineCare program as an unconstitutional taking.
The district court dismissed this count, and we review de novo the
grant of a motion to dismiss, assuming the truth of all well-
pleaded facts in the complaint and drawing all reasonable
inferences in FMH's favor. Vernet v. Serrano-Torres, 566 F.3d 254,
258 (1st Cir. 2009).
Of course, where a property owner voluntarily
participates in a regulated program, there can be no
unconstitutional taking. See Garelick v. Sullivan, 987 F.2d 913,
916 (2d Cir. 1993) ("[W]here a service provider voluntarily
participates in a price-regulated program or activity, there is no
legal compulsion to provide service and thus there can be no
taking."); cf. Yee, 503 U.S. at 527-28 (finding no taking because
the property owner voluntarily engaged in the regulated conduct).
FMH's essential argument is that it has no choice but to
participate in MaineCare because otherwise it would be forced to
treat low income patients without any compensation at all under the
state's free care laws.
Under the Maine free care laws, an individual who has
insurance or is eligible for coverage by a state or federal medical
assistance program, like MaineCare, is generally not eligible to
receive free care. See 10-144-150 Me. Code R. § 1.05(B)(1)(b).
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But there is an exception to this rule: if a patient meets the
income requirements to receive free care but has insurance or is
eligible for state or federal medical assistance, the hospital must
treat the patient and "any amount remaining due after payment by
the insurer or medical assistance program will be considered free
care." Id. § 1.05(B)(2). That is, the treating hospital bears the
medical costs for treating low income patients beyond what is
covered by insurance or a government-funded medical assistance
plan.
FMH reads the regulation, 10-144-150 Me. Code R.
§ 1.05(B), to require that if a hospital opts out of MaineCare, it
must pay the entire cost of treating patients who are eligible for
MaineCare. Thus, in FMH's view, hospitals must choose between
receiving inadequate reimbursement by participating in MaineCare or
receiving no reimbursement at all.
Harvey, however, offers a different reading. She argues
that the regulation's use of the phrase "any amount remaining due
after payment by the insurer or medical assistance program" really
means "any amount not covered by insurance or medical assistance
program." Under this reading, if a hospital did not accept
coverage from a particular insurer or government program, it could
still obtain compensation by billing the patient directly for up to
the amount that would be covered by the insurer or medical
assistance program. Harvey defends this reading because the
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regulation's drafters worked from "the assumption that the hospital
participates in, and would receive some payment from, the insurer
or medical assistance program." Harvey says this assumption is
reasonable because, to the state's knowledge, every hospital in
Maine participates in MaineCare.
We owe some deference to an agency's reasonable
interpretations of its own regulations. See Massachusetts v.
United States, 522 F.3d 115, 127 (1st Cir. 2008) ("This court must
also be mindful of the substantial deference required when an
agency adopts reasonable interpretations of regulations of its own
creation."). Yet our level of deference is reduced to the extent
that the agency's interpretation is merely a litigation position.
See Alliance to Protect Nantucket Sound, Inc. v. U.S. Dep't of the
Army, 398 F.3d 105, 112 n.5 (1st Cir. 2005).
Regardless of the level of deference we give Harvery's
interpretation, we accept it as reasonable. Indeed, we view it as
a judicial admission, which will have some binding effect on the
state.10 See Massachusetts, 522 F.3d at 118 (binding the Nuclear
Regulatory Commission to its litigation position). Allowing
hospitals that opt out of MaineCare to seek compensation for the
medical services they provide advances the state's broader goal of
making health care widely accessible. And reading "payment" as
10
Nothing in this opinion precludes defendant from moving
to revise the literal language of the regulation to make it conform
with the position taken in court.
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synonymous with "coverage" is sensible given the background
understanding that all Maine hospitals participate in MaineCare.
Accepting Harvey's reading of the regulation, there is no
coercive financial incentive to participate in MaineCare.
Hospitals are not left with accepting MaineCare's reimbursement
rates to avoid receiving nothing at all. Therefore, we hold that
FMH's participation in MaineCare is voluntary and reject its
takings challenge on that basis.
IV.
In the end, FMH's objection to Maine's free care laws and
MaineCare program is a dispute with the policy choices made by the
state's political branches. As such, FMH's better course of action
is to seek redress through the state's political process.
The district court's judgment is affirmed.
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