Medicaid Rate Litigation The Supreme Court's Decision in Independent Living Centers History, Description, and Implications

Transcription

1 Medicaid Rate Litigation The Supreme Court's Decision in Independent Living Centers History, Description, and Implications Lloyd A. Bookman, Esq. Hooper, Lundy & Bookman, P.C. Los Angeles, California PREFACE This outline addresses the Supreme Court's February 22, 2012 decision in Douglas v. Independent Living Center of Southern California et al. The outline focuses on the background of these consolidated cases including significant lower court rulings not disturbed by the Supreme Court's opinion, the decision itself, and the implications of the decision for current and future Medicaid rate litigation. This outline is intended to be read concurrently with the comprehensive paper authored by Mark Gallant with Cozen O'Connor being submitted for the same program session. This outline is not designed to cover precisely the same ground that is covered in Mr. Gallant's paper, although there will of necessity be some overlap between the two papers. I. BACKGROUND AND LOWER COURT DECISIONS The consolidated cases that are addressed in Independent Living Center ("ILC") arise principally from two sets of Medi-Cal (California's version of Medicaid) rate cut enacted by the California legislature. The first was enacted pursuant to Assembly Bill ("AB") 5, which made certain rate cuts effective July 1, The second was AB 1183, which moderated most of the AB 5 rate cuts and enacted a new limit for inpatient hospital reimbursement. These rate cuts led to a number of separate court challenges, and several significant lower court decisions. The lower court decisions establish important principles that can be used in challenging Medicaid rate modifications, at least within the Ninth Circuit. A. The AB 5 Rate Cuts and Related Lower Court Litigation 1. The Rate Cuts AB 5 was enacted in February, 2008 during an extraordinary session of the California legislature called to address California's budget deficit. AB 5 reduced most Medi-Cal rates by a flat 10% effective July 1, The California Medicaid agency, the California Department of Health Care Services ("DHCS"), implemented the rate cut effective July 1, 2008 prior to seeking 1

2 or obtaining approval of related state plan amendments ("SPAs") from the Centers for Medicare and Medicaid Services ("CMS"). 2. Lower Court Litigation Three principal cases challenging the AB 5 10% cut were filed: (a) Independent Living Center v. Shewry This case was initially filed in state court. It was removed by the State to federal court. The Plaintiffs included beneficiaries and beneficiary organizations and pharmacy representatives. The Plaintiffs pursued their claim under the Supremacy Clause. The Central District of California dismissed the case, ruling that the plaintiffs did not have a private right of action under the Supremacy Clause. The court relied heavily on Sanchez which held that beneficiaries and providers do not have a private right of action under 42 U.S.C to challenge Medicaid rates based on 42 U.S.C. 1396a(a)(30)(A) ("Section 30(A)"). The Ninth Circuit reversed and remanded the matter to the district court. The Ninth Circuit held that the plaintiffs had a private right of action under the Supremacy Clause to sue a state official to challenge Medicaid rates as being pre-empted by Section 30(A). The Court concluded that the absence of a section 1983 claim was irrelevant to the existence of a Supremacy Clause claim, and that the federal courts "for more than a century have entertained suits seeking to enjoin state officials from implementing state legislation allegedly preempted by federal law, and we see no reason to depart for the general rule in this case, or in this category of cases." 543 F.3d 1047 (emergency order); 543 F.3d 1050 (full opinion). The district court issued a preliminary injunction on August 18, 2008 prohibiting the State from implementing the rate cut to all services but hospital services. The district court found that the plaintiffs had shown a reasonable likelihood of success on the merits, in large part because the cuts had been based solely on budgetary factors and there were no cost studies or other analyses by the legislature or DHCS showing the reduced rates were reasonably related to provider costs as required by Ninth Circuit's decision in Orthopaedic Hospital v. Belshe, 103 F.3d 1491 (9 th Cir. 1997). The district court found that beneficiaries and providers would suffer irreparable harm if the cuts were implemented because there was evidence that the cuts would lead to inadequate access to services. However, the court found that there was no evidence that hospitals would stop providing services due to the rate cuts, so declined to enjoin the reduction to hospital rates. 2

3 The Ninth Circuit upheld the injunction in Independent Living Center v. Maxwell-Jolly, 572 F.3d 644 (9 th Cir. 2009). The court held (1) Orthopaedic Hospital remained good law, interpreting Section 30(A) to require states to consider provider costs and the impact of rate changes on efficiency, economy, quality of care, and access before changing rates, (2) the plaintiffs had a reasonable likelihood of success on the merits because neither the legislature nor DHCS had considered these factors before enacting the rate cuts, (3) the district court's finding of irreparable harm was supported by the record because it showed that there would likely be an adverse impact on access if the cuts were implemented, and (4) the district court's findings that the balance of the equities and public interest supported the injunction was supported notwithstanding California's fiscal crisis as the public interest supported access to care for Medicaid beneficiaries. The Ninth Circuit also upheld the Plaintiffs' cross-appeal and ordered that the court's August 18, 2008 order would apply retroactively to July 1, The court held the state waived its 11 th Amendment immunity by removing the case from state court, and that under state law a mandate claim to require a state official to disburse funds wrongfully withheld was not barred by the state's sovereign immunity. (b) California Medical Association v. Shewry, LASC Case No. BC Provider associations brought state court action challenging the AB 5 10% reductions. The case was removed to federal court, but remanded on plaintiffs' motion as plaintiffs were concerned with the Ninth Circuit jurisprudence concerning their ability to bring Section 30(A) claims in federal court. The Superior Court denies Plaintiffs motion for a preliminary injunction, finding that although there was a strong showing of irreparable harm, plaintiffs were not likely to prevail on the merits in their mandate claim because Section 30(A) did not impose ministerial duties on the state due largely to its vagueness, citing Sanchez v. Johnson, 416 F.3d 1091 (9 th Cir. 2005). This ruling is inconsistent with later California Court of Appeals decisions, discussed below. This case has been stayed at the Superior Court. (c) Santa Rosa Memorial Hosp. v. Maxwell-Jolly, CCH Medicare and Medicaid Guide 303,458 (9 th Cir. 2010) A group of hospitals sued in the Northern District of California to challenge the AB 5 10% reduction. The Ninth Circuit upheld the preliminary injunction issued by district court on November 18, 2009, relying on California Pharmacists Association, discussed below. B. The AB 1183 Rate Cuts and Lower Court Decisions 1. The Rate Cuts 3

4 On September 16, 2008, the California Legislature passed AB AB 1183 replaced the AB 5 10% reductions for most services, modifying the reduction to 5% for some services and to 1% for other services effective March 1, AB 5 retained the 10% cut as applied to inpatient hospital services reimbursed under the state's reasonable cost system, and imposed a limit on reimbursement for such services to 95% of the average rates paid to hospitals that contracted with the state to furnish Medi-Cal inpatient hospital services effective October 1, The State implemented the rate changes prior to seeking or obtaining federal approval of the related SPAs. 2. California Pharmacists Association v. Maxwell-Jolly A group of provider associations, individual providers, and individual beneficiaries challenged the AB 1183 rate cuts in federal district court in Los Angeles. The district court issued a preliminary injunction on March 9, 2009 barring implementation of the rate cuts as to all plaintiffs except hospitals. The court ruled that although the hospitals showed a likelihood of success on the merits, there was not irreparable harm with respect to hospital services as there was no showing that beneficiaries would not have access to hospital services due to the rate reductions. 630 F. Supp.2d 1144 (C.D. Cal. 2009). The hospital plaintiffs sought an emergency stay of the district court's order to the extent it denied their motion for a preliminary injunction. The Ninth Circuit granted the hospitals motion and stayed the AB 1183 rate cuts pending the hospitals appeal of the order denying their motion for a preliminary injunction. 563 F.3d 847 (9 th Cir. 2009). The Ninth Circuit upheld the district court's finding with respect to likelihood of success on the merits, noting that the legislature had not considered efficiency, economy quality of care, and access before enacting AB 1183, and any analysis by DHCS post-enactment did not meet the Section 30(A) requirement because DHCS had no discretion not to implement the rate cuts. The Ninth Circuit overturned the district court's ruling concerning irreparable harm. The court accepted the hospitals argument that they would be irreparably harmed if their stay request was denied because they would lose reimbursement and could not be made whole in federal court due to the state's Eleventh Amendment immunity. The Ninth Circuit ultimately upheld the district court to the extent it issued a preliminary injunction barring implementation of the rate cuts, and reversed the district court's denial of the preliminary injunction as to hospitals. The Court emphasizes that the final body responsible for setting rates must study the impact of a rate reduction on efficiency, economy, quality of care and access before setting the rates, whether it is the state legislature or the state Medicaid agency. The Court found that the final body here was the state legislature, and the legislature considered only budgetary factors in enacting the rate cuts. 4

5 3. Dominguez v. Schwarzenegger Recipients of California's In-Home Supportive Services ("IHSS") program, which is part of Medi-Cal, and unions representing the IHSS workers sued in federal court to enjoin enforcement of a California statute reducing the state's contribution to wages paid to IHSS providers. The Ninth Circuit upheld the district court's grant of a preliminary injunction. 596 F.3d 1087 (9 th Cir. 2010). The Ninth Circuit ruled that the reduction to the state's contribution is subject to Section 30(A), and that the state was required to consider the impact of the reduction on efficiency, economy, quality of care, and access before enacting it, as well as the cost of providing IHSS services. The Ninth Circuit concludes that the State did not consider the Section 30(A) factors before enacting the contribution reduction. C. Ninth Circuit Holdings The Ninth Circuit opinions in Independent Living Center, California Pharmacists Association, and Dominguez have very significant holdings and analyses beyond the question of whether the plaintiffs have a private right of action under the Supremacy Clause. 1. Private Right of Action The Ninth Circuit held that Medicaid providers and recipients have a right of action under the Supremacy Clause to challenge rate reductions on the ground that such reductions are incompatible with federal law, specifically with Section 30(A). The impact of the Supreme Court's decision in ILC on this holding is discussed below. 2. Interpretation and Application of Section 30(A) The Ninth Circuit repeatedly held that the interpretation of Section 30(A) in Orthopaedic Hospital remains good law. This interpretation requires that the state body responsible for enacting a rate consider the impact of a rate change on efficiency, economy, quality of care, and access to services before enacting a rate change, that rates must be reasonably related to provider costs, and that rates must be based on responsible cost studies. The procedural components of Section 30(A) apply regardless of whether the state legislature or the state Medicaid agency adopts the rate. As discussed in Mark Gallant's paper, other circuits may not endorse this view. California asked in its Petition for Certiorari that the Supreme Court review this issue, but the Court declined. 3. Irreparable Harm The Ninth Circuit has held that harm to providers is adequate to support injunctive relief whether or not there is harm to beneficiaries, and whether or not 5

6 providers have third-party standing to assert harm to beneficiaries. Further, the court has held that irreparable harm exists when a provider loses money due to a rate cut and cannot be made whole in federal court due to the 11 th Amendment. This ruling makes it much easier for certain providers, particularly hospitals, to establish the irreparable harm needed for a preliminary injunction. 4. Eleventh Amendment Waiver The court held that the a state waives its 11 th Amendment immunity where it removes a case to federal court. II. THE SUPREME COURT'S ILC DECISION A. The Issue The only issue accepted for review by the Supreme Court is: "Whether Medicaid providers may maintain a cause of action under the Supremacy Clause to enforce 1396a(a)(30)(A) by asserting that the provision preempts a state law that reduces reimbursement rates." The Court did not accept the question of whether the Ninth Circuit correctly interpreted Section 30(A). B. Summary of the Arguments 1. The State's Arguments (a) (b) (c) (d) Congress must create any private cause of action to enforce a federal statute. Congress did not create a private cause of action to enforce Section 30(A). The Supremacy Clause does not by itself confer any rights. Implying a cause of action to enforce Section 30(A) would be frustrate Congress' intent, which is to leave enforcement to the federal agency. Supremacy clause and preemption have no role in disputes over states' compliance with a Spending Clause provision, like Section 30(A). There can be no conflict since Congress anticipated state noncompliance and provided the remedy, namely the loss of federal funding. 2. The Providers' and Recipients' Arguments 6

7 (a) (b) (c) (d) (e) A long, unbroken line of Supreme Court cases recognizes an equitable right under the Constitution to enjoin ongoing constitutional violations. There are many cases under the Supremacy Clause whereby the Court has entertained claims by private parties that state laws should be enjoined because they were preempted by a federal law, although the Court had not previously directly addressed the question of whether private parties have a cause of action directly under the Supremacy Clause to challenge state laws as being inconsistent with federal law. Because the claim arises directly under the Constitution, it is unnecessary for Congress to have provided a private cause of action to enforce the federal statute. Spending Clause legislation is privately enforceable under the Supremacy Clause to the same extent as other legislation. So long as a state participates in the federal spending program, the state is bound to follow the applicable federal law. Allowing a private cause of action would not frustrate Congress' intent. Nothing in the Medicaid Act indicates that the remedy afforded the Secretary of withholding funding is exclusive. Also, evidence shows the Secretary's remedy is ineffectual. 3. The Post-Hearing Developments CMS had disapproved the SPAs implementing the challenged rate reductions in November The State filed an administrative appeal to challenge the disapprovals. The State also resubmitted the SPAs that had been disapproved. The resubmitted SPAs, however, would by their terms only be effective for periods for which preliminary injunctions had not been issued, and to the extent the rate reductions had not sunset previously, to certain months in early CMS approved the resubmitted SPAs on October 27, 2011, portions of which were retroactively effective as far back as July 1, By way of example, the resubmitted SPAs would apply a 10% reduction (AB 5) to services finished by hospital-based skilled nursing facilities for the period July 1, 2008 through February 28, 2009 when it sunset, a 5% reduction. (AB 1183) to such services for the period March 1, 2009 through April 5, 2009 when it was enjoined, and January 1, 2011 through April 13, 2011 when it was repealed, but not to the period April 6, 2009 through December 31, Maintaining the reductions that had not sunset for portions of 2011 appears to have been designed to avoid rendering the cases before the Supreme Court moot. The Court asked the parties for letter briefs stating their views of the impact of the SPA approvals. The State and the Solicitor General took the view that the SPA approvals should have little impact on the Court's decision. The providers and 7

8 recipients argued that the grants of certiorari should be dismissed as having been improvidently granted, because the circumstances had dramatically changed. They pointed out that the question of the impact of SPA approvals on the availability of a private Supremacy Clause claim had not been briefed or otherwise developed either in the lower courts or before the Supreme Court. C. The Decision 1. The Majority Justice Breyer delivered the opinion of the Court for the five justice majority. Significantly, Justice Breyer appeared during oral argument potentially accepting of a private claim to enjoin a state Medicaid rate reduction prior to federal approval, but seemed more reticent to accept the existence of a private right of action after agency approval, indicating that any claim after federal approval might be a claim against the federal agency under the Administrative Procedure Act ("APA"), and that an appropriate level of deference would likely be afforded the federal agency's decision. First, the majority states that the cases were not moot despite federal approval of the SPAs. The providers and beneficiaries continue to argue that the rate reductions violate Section 30(A) notwithstanding federal approval, the injunctions remain in place prohibiting enforcement of the rate cuts, and California might ask the lower courts to set the injunctions set aside in view of the federal approval. The majority, however, found that the posture of the cases had changed such that it declined to decide whether the providers and beneficiaries could maintain a cause of action under the Supremacy Clause to enforce Section 30(A) in a challenge to rate cuts implemented prior to federal approval. The majority noted that while the federal approval did not change the underlying substantive question, whether the rate reductions complied with federal law, the answer to this question might be affected by the federal approval. The majority stated that the plaintiffs might now have to pursue their claims under the APA as a challenge to the federal approval. The majority commented that the plaintiffs would likely have an APA claim. The Court noted that APA review would be under the arbitrary and capricious standard, requiring the court to set aside the federal approval if it was found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. The majority also indicated that the federal agency's decision might be entitled to some deference. First, the court states that the federal agency is "comparatively expert" in the statute's subject matter, and that the broad and general language of Section 30(A) suggests than the agency's expertise is relevant to determining its application. Second, the majority expresses concern that allowing a Supremacy Clause claim once the agency has reached a decision would threaten inconsistency or confusion, pointing to the Ninth Circuit's refusal to give weight to the federal government's interpretation of Section 30(A). The majority states that ordinarily such a final decision would be entitled to Chevron deference. 8

9 Finally, the majority states that the ultimate result should be the same after federal approval whether the claim proceeds under the Supremacy Clause or the APA and that it would be redundant to allow both kinds of action if they would reach the same result. The Court stated it would seem inefficient to permit the continuation of the Supremacy Clause claim since the agency is not a party to that action which would decide whether the agency approved rates violate the federal statute. The Court ultimately vacated the Ninth Circuit's judgments and remanded the cases to the Ninth Circuit to allow the parties to argue the impact of federal approval in the first instance before the lower courts. The majority emphasized that the parties had not fully argued the impact of federal approval, to decide whether the cases may proceed under the Supremacy Clause it will be necessary to take into account proceedings that have occurred after the case was briefed and argued to the Court, and that it may be that not all considerations that bear upon the proper resolution of the issue have been presented to the Court or to the Ninth Circuit. D. The Dissent Chief Justice Roberts authored the dissent, which Justices Scalia, Thomas, and Alito joined. The dissent argues that the case should have been decided in favor of the State, as "it is enough to conclude that the Supremacy Clause does not provide a cause of action to enforce the requirements of 30(A) when Congress, in establishing those requirements, elected not to provide such a cause of action in the statute itself." The dissent states that while Congress could not deprive a party of a claim under various Constitutional provisions, like the Takings Clause, the Supremacy Clause is different in that it is not a source of rights. Rather the Supremacy Clause just says that "in a conflict with state law, whatever Congress says goes." Thus, the dissent states that it makes no sense to supply a cause of action to enforce a statute if Congress did not intend for the statute to supply a cause of action. The dissent also demonstrates concern that to allow a Supremacy Clause claim would result in an end-run around the Court's decisions concerning implied statutory rights of action and rights of action under 42 U.S.C. 1983, which precludes private causes of action "where the text and structure of a statute provide no indication that Congress intends to create new individual rights." The dissent rejects the argument that traditional exercise of equity jurisdiction supports finding a direct cause of action. According to the dissent, creating an equitable remedy for private parties to enforce a statute where Congress did not intend to create a private right of action would raise "the most serious concerns regarding both the separation of powers (Congress, not the Judiciary, decides whether there is a private right of action to enforce a federal statute) and federalism (the States under the Spending Clause agree only to conditions clearly specified by Congress, not any implied on an ad hoc basis by the courts)." 9

10 The dissent contrasts the private right of action sought by the plaintiffs here with the pre-emptive assertion in equity of defense which would otherwise have been available at law in a State enforcement proceeding, which the Court has recognized is permissible in cases like Ex Parte Young, 209 U.S. 123 (1908). The dissent criticizes the majority's disposition of the cases. The dissent states that the Court should either end the matter by ruling that there is no Supremacy Clause claim to enforce Section 30(A) or rule that there is, and remand the matter to consider the impact of the federal approvals. The dissent observes that in supplemental briefing to the court no party had argued that the federal approvals would affect the ultimate question of whether the providers and beneficiaries had a private right of action to enforce Section 30(A) through the Supremacy Clause. The dissent questions what the Ninth Circuit is supposed to do on remand in view of the Court's decision. The dissent emphasizes all of the reasons given by the majority for not allowing a Supremacy Clause claim to proceed now that there has been federal approval. The dissent finds no precedent for a claim that would fade away once the federal agency has acted. Finally the dissent addresses the majority's implication that these cases should morph into APA actions. The dissent notes this would require adding the federal agency as a party, and that there are different standards of review, different records, and potentially different remedies in an APA claim. E. Implications, Comments, and Questions 1. Supremacy Clause Claim (a) (b) (c) The Court did not decide whether providers and beneficiaries have a claim under the Supremacy Clause to challenge Medicaid rate reductions as being inconsistent with Section 30(A). The ultimate resolution of this issue may be different between rate cuts implemented prior to federal approval and rate cuts implemented after federal approval. At oral argument, a number of the Justices in the majority appeared bothered by California's implementation of the rate reductions before federal approval. These Justices seemed to believe that providers or beneficiaries should have a vehicle for challenging these types of rate reductions, whether through a Supremacy Clause 30(A) challenge or through some other unspecified resort to the equitable powers of the federal courts. (i) Most states do not implement rate changes prior to federal approval. California historically has been an outlier in this regard. But even California did not implement its most recent series of rate cuts prior to federal approval. 10

11 (ii) (iii) The Ninth Circuit has held that the federal Medicaid law and regulations do not permit rate changes to be implemented before federal approval. See, Exeter Mem l Hosp. Ass n v. Belshe, 145 F.3d 1106 (9 th Cir. 1998) (Boren Amendment case decided under 42 U.S.C. 1983); Developmental Svcs. Network v. Douglas, 666 F.3d 540, 2011 WL , *3-*4 (9th Cir. 2011) (post Boren amendment, but holds there is no private right of action under 42 U.S.C. 1983). The court's disposition appears to leave undisturbed the Ninth Circuit's holdings that providers and beneficiaries have a Supremacy Clause claim for implementation of a rate reduction prior to federal approval. (d) The viability of a Supremacy Clause claim to challenge a rate reduction that has been approved by CMS appears to be more questionable. This is consistent with comments made at oral argument by one or two of the Justices in the majority who expressed skepticism that a Supremacy Clause claim was appropriate after the federal government acted. This may all be much ado about nothing given the Court's discussion of an APA claim against the federal agency. 2. APA Claim (a) (b) (c) Appears clear that providers and beneficiaries have a claim under the APA to challenge federal approval of a SPA containing a rate reduction. Likely the post approval challenges of rate reductions will focus on APA claims against the Secretary of HHS. Claims will proceed under the arbitrary and capricious standard of review. Although this is often thought of as a deferential standard, litigation experience indicates it can be quite powerful. (i) Under the arbitrary and capricious standard, agency action will be set aside if the agency did not consider the relevant factors, relied on factors which Congress did not intend it to consider, or "entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." Motor Vehicle Mfrs. Ass'n v. State Farm Ins., 463 U.S. 29, 44 (1983); Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 418 (1971). 11

12 (ii) (iii) Review proceeds based primarily on the administrative record before the agency at the time the agency made its decision. Extra-record material is admissible for only limited purposes. Overton Park, 401 U.S. at 420; Camp v. Pitts, 411 U.S. 138, 142 (1973). The agency's decision may be upheld based only on the explanations given by the agency when making the decision. Post-hoc rationalizations of counsel provided for the first time in litigation are insufficient. Motor Vehicle Mfr. Assn. v. State Farm Ins., 463 U.S. at Participation in CMS Approval Process (a) (b) (c) (d) (e) Given the likely shift to APA claims, it is critical that providers and beneficiaries seeking to challenge Medicaid rate reductions participate in the CMS review "process." CMS has 90 days to approve or disapprove a SPA. The regional office may approve a SPA, disapproval may only be done by the central office. CMS may and often will request additional information from the state, which restarts the 90 day clock. SPAs may be effective commencing the first day of the calendar quarter in which the SPA is submitted. 42 C.F.R. Part 430. There is no formal process. There is no notice that CMS issues announcing it is reviewing a SPA, or establishing deadlines or any procedure for the submission of comments. CMS can take action on a SPA anytime after the SPA is submitted. It is thus important for those objecting to a SPA to insert themselves into the process very early, so as to at least inform CMS that they oppose the SPA and will be submitting detailed comments. Where a SPA approval may end up in litigation, comments submitted by those opposing a SPA should be crafted in part with an eye toward the material being part of an administrative record that may be reviewed by a court and may form the evidentiary base for the court's decision. F. Interpretation of Section 30(A) 1. The proper interpretation of Section 30(A) was not before the Court. 2. However, the majority opinion alludes to the possibility of Chevron deference. 3. The level of deference to be afforded a CMS SPA approval as to the proper interpretation of Section 30(A) is very important, particularly in jurisdictions 12

13 which have an interpretation that differs from the interpretation now being asserted by CMS in recent litigation, like the Ninth Circuit. 4. As discussed below, a California district court that recently has fully considered the issue has determined that an interpretation of Section 30(A) proffered by CMS that conflicted with the Ninth Circuit's interpretation was not entitled to either Chevron deference or Skidmore deference in view of the lack of formality of the SPA approval process and the paucity of the explanation for the agency's interpretation. Compare, Pharm. Research & Mfrs. Am. v. Thompson, 362 F.3d 817, 822 (D.C. Cir. 2004). III. THE FUTURE IS NOW POST ILC LITIGATION A. Recent California Rulings 1. The AB 97 Cuts The California legislature in March, 2011 authorized DHCS effective June 1, 2011 to implement 10% reductions to many Medi-Cal provider rates, and to reduce certain provider rates to 90% of the August 1, 2008 levels, such as rates for distinctpart nursing facilities ( DP/NFs ). The legislation permitted the reductions to be implemented only after CMS approval. CMS approved the reductions on October 27, The Legal Challenges Four lawsuits were filed in the Central District of California challenging the AB 97 rate reductions on behalf of different providers and beneficiaries. The suits were filed against both the Director of DHCS and the Secretary of HHS. The suits alleged, among other claims, that the CMS approvals were invalid under the APA and that the rate reductions were pre-empted because they were incompatible with Section 30(A). The district court issued a preliminary injunction in each case prohibiting the state from implementing the rate reductions and staying the Secretary's approval of the related SPAs. These cases include California Hosp. Ass n v. Douglas, No , 2011 WL (C.D. Cal. Dec. 28, 2001) ( CHA ); Managed Pharmacy Care v. Sebelius No , 2011 WL (C.D. Cal. Dec. 28, 2011); California Medical Transportation Ass n v. Sebelius, C.D. Cal. Case No (C.D. Cal. Jan. 10, 2012) ( CMTA ); California Medical Ass n v. Douglas, C.D. Cal. Case No (C.D. Cal. Jan. 31, 2012). 3. The District Court's Rulings (a) Deference to CMS's Interpretation of Section 30(A) The Secretary argued that the court should afford Chevron deference to CMS's interpretation of Section 30(A) made as part of the SPA approval process regardless of whether this interpretation conflicted with Ninth Circuit precedent, 13

14 citing National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005). The Secretary asserted that her interpretation did not require rates to be based on cost studies or be reasonably related to provider costs in contrast to the Ninth Circuit's interpretation of Section 30(A). The court declined to afford deference to CMS's interpretation. The court emphasized that the CMS approval process did not involve a formal adjudication accompanied by the procedural safeguards justifying Chevron deference. There "was no hearing, no record, no opportunity for interested parties to present evidence, and no formal decision in which the Secretary set forth her reasoning." The court emphasized that the Secretary provided no basis in the SPA approval process "as to why provider costs should not be considered in determining whether the SPA's rate reduction will result in lower quality of care or decreased access to services." The court also declined to afford Skidmore deference to the Secretary's proffered interpretation of Section 30(A). (Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). The court found that the agency's current interpretation was contrary to an interpretation she took in litigation in 2004, directly contradicts Ninth Circuit law, and was not supported by any explanation. Thus, the court concluded that the Secretary's interpretation was of limited power to persuade and not entitled to respect under Skidmore. (b) APA Claim (i) (ii) The court found that CMS failed to consider whether DHCS relied on responsible cost studies as required by the Ninth Circuit, and that its decisions were therefore arbitrary and capricious. The court found that CMS's decisions were arbitrary and capricious with respect to the equal access requirement. Among the court's findings were: (A) (B) (C) As to DP/NFs, the state and the Secretary relied on access to freestanding SNF services as a substitute for DP/NF services. The court found that the record showed DP/NF services were not interchangeable with freestanding SNF services. The Secretary's acceptance of a geographic peer group analysis relied on by the state was arbitrary and capricious because the peer groups had nothing to do with geographic proximity, but grouped together counties that were remote from one another. Reliance on a monitoring plan developed by DHCS was arbitrary and capricious because the monitoring plan would only identify access problems after they 14

15 had occurred, and to the extent reduced rates cause facilities to close, subsequently increased rates will not cause them to reopen. (D) (E) (F) (G) (H) (I) DHCS's reliance on historical data was unreasonable, as historical access data is not predictive of access after a future rate cut is made. DHCS's reliance on data for access to physician services based on how many physicians submitted at least one claim to Medi-Cal does not reflect that those physicians regularly see Medi-Cal patients. DHCS's reliance on the availability of Federally Qualified Health Centers and Rural Health Centers for Medi-Cal physician access does not demonstrate equal access. As to dental services, CMS's State Medicaid Director Letter established that low beneficiary utilization rates and reimbursement rates that are less than 50% of provider fees in the market place crate a presumption of noncompliance with Section 30(A), and the record establishes that beneficiary dental utilization in California is among the lowest in the country. Only 53 of 58 counties have a Medi-Cal enrolled dentist, and even in those counties there was no information before CMS to suggest that beneficiaries had equal access. As to pharmacy services, utilization data reflected only whether a pharmacy services Medi-Cal beneficiaries, not whether a pharmacy refuses to dispense a particular drug due to inadequate reimbursement. (iii) The court also found the Secretary's SPA approval decisions were arbitrary and capricious with respect to the quality factor in Section 30(A). Specifically, the court found that CMS's reliance on the state's monitoring plan to ensure quality was arbitrary and capricious because the plan will only result in an increase in rates after a quality deficiency has been identified, and this will necessarily be after beneficiaries have suffered injury. Also, the monitoring plan relies on external assurances of quality, like state licensing schemes, which the Ninth Circuit previously held was insufficient; rather the rates themselves must be consistent with quality care. 15

16 (c) Supremacy Clause Claim The Court ruled for the plaintiffs on their claims that the rate reductions were pre-empted because they were inconsistent with Section 30(A). The court concluded the Ninth Circuit's decisions holding that providers and beneficiaries have a Supremacy Clause claim to challenge rate reductions as being pre-empted by Section 30(A) were still good law and were binding. The court found that the rate reductions were likely inconsistent with and pre-empted by Section 30(A) for the same reasons that it found the plaintiffs' APA challenges were meritorious. Specifically, the court found that the plaintiffs were likely to succeed on their claim that DHCS failed to consider responsible cost studies, failed to adequately consider the effect of the rate reductions on access, and failed to appropriately consider the effect of the rate reductions on quality of care. 4. Status Both DHCS and the Secretary have appealed the district court's rulings to the Ninth Circuit. Those cases will be heard on an expedited basis since they involve appeals from the grant of preliminary injunctions. These appeals may leapfrog the cases involved in the Supreme Court's ILC decision and establish the first post-ilc Circuit precedent. IV. STATE COURT REMEDIES A. Nature of Remedy State law may provide a remedy to challenge state rate actions on the ground they violate federal law regardless of the availability of remedies in federal court. State law may also provide state substantive claims, such as failure to comply with a state administrative procedure act, but these are beyond the scope of this paper. B. California Example 1. California Writ of Mandate California law contains a vehicle for parties aggrieved by the action of state officials to seek a writ of mandate. A party must show (1) a clear, present, and usually ministerial duty on the part of a respondent, and (2) a clear, present and beneficial right on the part of the petitioner to the performance of that duty. The availability of a 42 U.S.C claim is irrelevant to the availability of a California mandate claim. It would appear that the availability of a California mandate claim to enforce mandatory duties under federal law would be available regardless of the availability of a separate claim under the Supremacy Clause. 2. California Hospital Ass'n. v Maxwell-Jolly, 188 Cal. App. 4 th 599 (2010) The California Court of Appeal ruled that a change to the manner in which Medi-Cal DP/NF rates were determined was arbitrary and capricious in view of Section 30(A). The court independently interpreted Section 30(A) to require rates to 16

17 be based on cost studies, adopting the Ninth Circuit's interpretation. The court found that the challenged rate changes were not supported by cost studies but appeared to be based solely on budgetary factors. The United States Supreme Court denied the state s cert. petition on the day of the ILC hearing. 3. Mission Hospital Regional Medical Center v. Shewry, 168 Cal.App.4 th 460 (2008) The California Court of Appeal held that a rate change that affected Medi-Cal rates for inpatient hospital services was invalid because it was enacted without following the notice and comment procedures required by 42 U.S.C. 1396a(a)(13)(A). Rather, the rate change was adopted by the California Legislature at the end of the legislative session without any meaningful opportunity for public participation and without providing any discretion to DHCS not to implement the rate change. This case was also brought as a writ of mandate challenge under California law, and the California court held that the petitioner hospitals could maintain the writ of mandate claim regardless of the availability of a claim under 42 U.S.C