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December 17, 2012

Appeals court removes foundation for provider challenges to rate reductions

By Michelle L. Oxman, JD, LLM

California Medicaid providers had no grounds under Soc. Sec. Act. sec. l902(a)(30)(A) to challenge the state's rate reductions when the HHS Secretary has approved them based on her interpretation of the statute, the Ninth Circuit Court of Appeals has ruled (Managed Care Pharmacy v Sebelius, December 13, 2012, Trott, S). Further, the Supremacy Clause of the United States Constitution did not provide an independent basis for federal jurisdiction over the providers' claims. The court dissolved injunctions in four cases that barred California Medicaid officials from reducing rates for the 2011-2012 fiscal year. Cross-appeals by the providers were dismissed as moot.

The decisions below. The California legislature enacted Cal. Welf. & Inst. Code sec. 14105.192, requiring the Medicaid Director to reduce rates to the extent permissible under federal law. This legislation required the agency specifically to determine that the rates were consistent with the statute. The Medicaid director submitted two state plan amendments (SPAs) reducing rates, and four groups of plaintiffs sued, claiming that the reductions violated sec. 1902(a)(30)(A) and that the CMS approval of the SPAs was invalid under the federal Administrative Procedure Act (APA). They relied upon a 1997 decision of the Ninth Circuit, Orthopaedic Hospital v. Belshe, which held that the statute required the agency to consider the providers' costs. Because the agency had not done so, the court in Orthopaedic Hospital ordered it to perform a cost study before setting rates.

Since that decision, several other federal appeals courts had ruled that providers could not enforce sec. 1902(a)(30)(A) in a civil rights action under 42 USC sec. 1983. However, the trial courts had ruled that the providers were not required to sue under sec. 1983, but could sue directly under the Supremacy Clause of the United States Constitution. Therefore, the Ninth Circuit addressed both that issue as well as the substantive issue of the rate challenge.

The APA requirements. The plaintiff argued that CMS approval of the SPAs was inconsistent with sec. 1902(a)(30)(A) because the cost studies were inadequate. The Secretary argued that the statute did not require any particular process. General principles of administrative law require that in actions under the APA, the court must defer to the HHS Secretary's interpretation of a statute that it administers as long as the interpretation is reasonable. The district courts had ruled that deference was not required because: (1) the Secretary's interpretation was inconsistent with the Ninth Circuit's ruling in Orthopaedic Hospital and (2) the agency's decision did not meet the requirements for deference.

However, the court ruled that deference was required. It noted that HHS' interpretation was not available when it decided Orthopaedic Hospital because the agency was not a party. The statute provided that rates must be consistent with efficiency, economy and quality of care and be sufficient to attract enough providers to give beneficiaries access to services. The Medicaid statute was complex, and its broad language could reasonably be interpreted more than one way. Congress did not require any specific process for the agency to follow. Therefore, Congress intended to afford the agency wide discretion in administering the program. Although HHS' interpretation differed from the court's previous decision, it was reasonable and the court must follow it.

The Supremacy Clause. The court did not rule on the general question whether the Supremacy Clause could be the basis for a challenge to a federal statute. Its earlier rulings on this issue depended on the absence of federal action. When the agency had not acted, the plaintiffs could not sue under the APA. Once the agency made its decision, the APA was available, so there was no need to rely on the Supremacy Clause as a basis for federal jurisdiction.

The case numbers are 12-55067, 12-55068, 12-55103, 12-55315, 12-55331, 12-55332, 12-55334, 12-55335, 12-55535, 12-55550, 12-55554.

MainStory: TopStory CaseDecisions MedicaidPaymentNews PreemptionNews CaliforniaNews

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