Health Law Daily Wrap Up, MEDICAID PAYMENT—N.D. Ill.: State Medicaid administrator not responsible for failure of MCOs to provide adequate rate calculation notice, (Feb 24, 2026)

By Jeffrey H. Brochin, J.D.

Although MCOs performed on behalf of the state, a function required by statute, there was insufficient entanglement with the state agency to make the state responsible for failings in the notice provided by the MCOs.

A federal District Court in Illinois has granted the partial motion to dismiss filed by the Illinois Department of Healthcare and Family Services (HFS) in a lawsuit brought by Saint Anthony Hospital (Hospital) alleging that HFS violates due process by providing inadequate information about how it calculates payment for the Hospital's Medicaid claims. The due process claim was dismissed to the extent that the Hospital sought to impose liability upon HFS in connection with the inadequacy of notice provided by the managed care organizations (MCOs). However, HFS’s partial motion for summary judgement was denied because there existed a genuine dispute as to whether the ‘patchwork of data’ given to the Hospital adequately informed it of the basis for the incomplete Medicaid payments that deprived the Hospital of property (Saint Anthony Hospital v. Whitehorn, No. 1:25-cv-06335 (N.D. Ill. Feb. 19, 2026)).

A complex system of calculation. Saint Anthony Hospital is a not-for-profit hospital that serves patients on the south and west sides of Chicago. Most of its patients receive Medicaid, and the Hospital qualifies as a "safety-net" hospital because it serves a high proportion of Medicaid patients. Saint Anthony receives Medicaid payments in two ways: some payments come directly from HFS, but Illinois also contracts with MCOs, most of which are affiliates of large insurance companies, which perform Medicaid payment calculations and pay providers.

HFS adopts payment rates for many claims using industry standard codes of Diagnosis Related Group (DRG) codes for categories of inpatient services, and Enhanced Ambulatory Patient Group (EAPG) codes for categories of outpatient services. The Hospital is also entitled to per diem add-on payments of fixed dollar amounts for inpatient care under the Medicaid Percentage (MPA), Medicaid High Volume (MHVA), and Safety-Net adjustment programs. Additionally, the Hospital is entitled to funds under the Hospital Assessment Program (HAP), a program which increases rates for individual inpatient claims for eligible hospitals; and the Hospital may also be entitled to additional outlier payments when the cost of treatment exceeds its typical cost.

Partial documentation. The foregoing complex calculation is partially documented in several ways: remittance forms, paid-claims reports, and online calculators, with HFS providing the Hospital with an electronic remittance form. However, the parties agreed that the remittance forms do not disclose all payment components (including the DRG or EAPG base rate, add-ons, or adjusters) or whether the Hospital has been fully compensated. Nor do the remittance forms specify any HAP claims payment increase. The Hospital claimed it had not received those forms after requesting them or, it received incomplete forms lacking data on inpatient per diem or outpatient claims. They filed suit against HFS (specifically Whitehorn, its Director) alleging due process violations based on HFS providing inadequate information about how it calculates payment for the Hospital's Medicaid claims. The Hospital also alleged that the MCOs (which process most of its claims under contracts with HFS), similarly failed to provide adequate notice of the components of its payment calculations. Presently before the court was HFS’s partial motion to dismiss for failure to state a claim and failure to join necessary parties, and its partial motion for summary judgement.

Failure to join. HFS moved to dismiss the Hospital's claim for failure to join necessary parties and failure to state a claim. They argued that the MCOs—who were not parties to the instant case—must be joined because the Hospital's Complaint alleged inadequate notice by both HFS, in its fee-for-service claim reimbursement, and the MCOs. Therefore, the relief sought required a change in the conduct of the MCOs.

The court noted that under Federal Rule of Civil Procedure 12(b)(7), a claim may be dismissed for “failure to join a party under Rule 19,” which requires joinder of all necessary parties as defined by Rule 19(a). However, here, the MCOs had not claimed an “interest relating to the subject of the action,” despite having done so in the prior litigation between the Hospital and HFS.

Not state actors. Even if the MCOs had claimed an interest, it was not apparent that a victory for the Hospital would necessarily impair or impede the ability of the MCOs to protect their interests. The only claim in the case was a due process claim against Whitehorn, HFS’s Director, who was a state official under section 1983. The MCOs however, were not proper parties as they were not state actors subject to the requirements of the Constitution's Due Process Clause. The MCOs performed, on behalf of the state, a function required by statute, however, the court found ‘insufficient entanglement’ with HFS to make the state responsible for failings in the notice provided to the Hospital by the MCOs. Although the MCOs calculated claim payments according to state law and regulation, HFS did not dictate the remittance information provided by MCOs nor prohibit the MCOs from providing more information as the Hospital contended was required. Accordingly, HFS could not be held liable for a due process violation consisting of its failure to require more process by the private actor. The court therefore dismissed the Hospital's due process claim to the extent it sought relief against Whitehorn in connection with the allegedly inadequate notice provided by the MCOs.

Partial summary judgement denied. The court next turned to the issue of whether there was a genuine factual dispute as to the allegedly inadequate information provided by HFS in connection with its fee-for-service payments. HFS contended that the agency provided the Hospital with sufficient information—including the DRG and EAPG codes for treatments, the amount HFS paid, and the components of each payment. By contract, the Hospital asserted that HFS did not specify the components of each payment, but rather the components (such as add-ons and adjusters) that it should pay under the governing laws and regulations.

As a preliminary matter, the court found that the Hospital had a property interest in receiving the payments required by statute from HFS for treatment provided to Medicaid patients, and HFS did not contest that point. However, there existed a genuine dispute regarding whether the Hospital was deprived of property. HFS argued that the Hospital's due process claim could not survive because the Hospital “did not seek better notice for any underpayments, and did not even allege any underpayments.” The court disagreed, noting that the Hospital alleged "unwarranted delays in payment, underpayments, and unjustified denials." The Hospital did not merely contend that it faced a risk of deprivation, but rather that it did not even know the full extent of systemic underpayment.

Because there was a genuine dispute regarding whether the “patchwork of data” given to the Hospital adequately informed it of the basis for the incomplete Medicaid payments that deprived the Hospital of property, the court denied HFS’s partial motion for summary judgement.

The case is No. 1:25-cv-06335.

Judge: Kennelly, M.

Attorneys: Michael L. Shakman (Miller Shakman Levine & Feldman LLP) for Saint Anthony Hospital. Richard Scott Huszagh, Office of the Comptroller of the Currency, for Elizabeth Whitehorn.

Companies: Saint Anthony Hospital

Cases: CaseDecisions CMSNews MedicaidNews MedicaidPaymentNews GCNNews IllinoisNews