California Hospital Association et al v. Toby Douglas et al, No. 2:2011cv09078 - Document 59 (C.D. Cal. 2011)

Court Description: ORDER GRANTING PRELIMINARY INJUNCTION by Judge Christina A. Snyder: The Court hereby GRANTS Plaintiffs' Motion for a Preliminary Injunction 29 . IT IS HEREBY ORDERED as follows: Defendant Toby Douglas, Director of the California Department of H ealth Care Services, his employees, his agents, and others acting in concert with him shall be, and hereby are, enjoined and restrained from violating federal law by implementing or otherwise applying the reduction on Medi-Cal reimbursement for skill ed nursing services rendered by distinct part hospital units on or after 6/1/2011, pursuant to Assembly Bill 97 enacted by the California Legislature in March 2011, as codified at California Welfare and Institutions Code Section 14105.192(j), or to a ny other degree reducing current Medi-Cal rates for skilled nursing services rendered by distinct part hospital units. IT IS HEREBY FURTHER ORDERED that, consistent with the foregoing, the 10/27/2011 decision by Defendant Kathleen Sebelius, Secretary of the Department of the United States Department of Health and Human Services, approving the Medi-Cal reimbursement reduction codified at Welfare and Institutions Code Section 14105.192(j), is hereby stayed. (gk)

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California Hospital Association et al v. Toby Douglas et al Doc. 59 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 WESTERN DIVISION 11 12 13 14 15 16 17 18 CALIFORNIA HOSPITAL ASSOCIATION; ET AL; et al., ) ) ) Plaintiffs, ) ) vs. ) ) ) TOBY DOUGLAS; et al.; ) ) ) Defendants. ) ) _______________________________ ) Case No. CV 11-9078 CAS (MANx) ORDER GRANTING PRELIMINARY INJUNCTION 19 I. 20 On November 1, 2011, plaintiffs filed the instant action against Toby Douglas, INTRODUCTION AND BACKGROUND 21 Director of the California Department of Health Care Services (the “Director”) and 22 Kathleen Sebelius, Secretary of the U.S. Department of Health and Human Services (the 23 “Secretary”). Plaintiffs filed their First Amended Complaint (“FAC”) on November 18, 24 2011. 25 The California Department of Health Care Services (“DHCS”) is a California 26 agency charged with the administration of California’s Medicaid program, Medi-Cal. 27 The Secretary is responsible for administering the Medicaid program at the federal level. 28 Through her designated agent, the Centers for Medicare and Medicaid Services Dockets.Justia.com 1 (“CMS”), the Secretary is responsible for reviewing and approving policy changes that 2 states make to their Medicaid programs. Plaintiff California Hospital Association (“CHA”) is a trade association 3 4 representing the interests of hospitals in the State of California. Many of CHA’s 5 member hospitals operate skilled nursing facilities that are distinct units within the 6 hospital, commonly referred to as “DP/NFs.” Plaintiffs G.G., A.G., I.F., R.E., and A.W. 7 are beneficiaries of the Medi-Cal program who require skilled nursing services. On March 25, 2011, California Governor Edmund G. Brown Jr. signed into law 8 9 Assembly Bill 97 (“AB 97”), the health budget trailer bill for California fiscal year 10 2011–2012. AB 97 enacted significant payment reductions for many classes of services 11 provided under the Medi-Cal program. Most significantly for the purposes of the instant 12 action, AB 97 enacted California Welfare and Institutions Code § 14105.192, which 13 authorizes the Director to reduce the Medi-Cal payment rates for various categories of 14 services, effective June 1, 2011. Most of the rate reductions called for are flat 10 percent 15 reductions. However, pursuant to Welfare and Institutions Code § 14105.192(j), 16 reimbursement for certain services may not exceed the reimbursement rates that were 17 applicable to those claims of providers in the 2008–09 rate year, reduced by 10 percent. 18 Among the services impacted by this provision are DP/NF services. 19 DHCS submitted proposed State Plan Amendment (“SPA”) 11-010 to CMS on 20 June 30, 2011, seeking federal approval of the rate reduction and incorporation of that 21 reduction into California’s Medi-Cal State Plan. On September 27, 2011, CMS issued a 22 letter to DHCS requesting additional information concerning the proposed rate 23 reduction. This Request for Additional Information (“RAI”) focused on the impact of 24 the rate reduction on access to services. DHCS responded with an “Access Analysis” 25 and a plan for monitoring access. On October 27, 2011, in a letter from the Associate 26 Regional Administrator of the Division of Medicaid & Children’s Health Operations, 27 CMS provided notice to the Director and DHCS that it had approved the SPA. 28 /// 2 Plaintiffs seek a declaration that the rate reduction violates the Takings Clause of 1 2 the Fifth Amendment to the United States Constitution, the Takings Clause of the 3 California Constitution,1 numerous provisions of the Medicaid Act,2 and the 4 Administrative Procedure Act (“APA”), 5 U.S.C. § 706 et seq. Prayer for Relief ¶ 1. 5 Plaintiffs further seek a declaration that it was arbitrary, capricious, and an abuse of 6 discretion for the Secretary to approve the SPA incorporating the rate reduction into 7 California’s State Plan. Id. ¶ 2. Plaintiffs also request that the Court set aside the 8 Secretary’s approval, and enjoin the Director from effectuating the rate reduction. Id. ¶¶ 9 3, 4. On November 21, 2011, plaintiffs filed the present motion seeking a preliminary 10 11 injunction restraining the Director from implementing the rate reduction. On December 12 2, 2011, the Court denied the Director’s ex parte application for a stay of the 13 proceedings. On December 5, 2011, the Director and the Secretary filed separate 14 oppositions to plaintiffs’ motion.3 Plaintiffs replied on December 9, 2011. The Court 15 heard oral argument on December 19, 2011. After carefully considering the parties’ 16 arguments, the Court finds and concludes as follows. 17 /// 18 19 1 20 Cal. Const. art. 1, § 19. 2 21 22 23 24 25 26 27 28 Specifically, plaintiffs allege violations of 42 U.S.C. § 1396a(a)(8) (“Section (a)(8)”), 42 U.S.C. § 1396a(a)(19) (“Section (a)(19)”), and 42 U.S.C. § 1396a(a)(30)(A) (“Section 30(A)”). 3 Contemporaneously with his opposition, the Director submitted evidentiary objections to substantially all of plaintiffs’ declarations in support of their motion for preliminary injunction. Dkt. No. 44. The Director argues that plaintiffs’ declarations are inadmissible because they are irrelevant, not based on personal knowledge, improper opinion testimony by a lay witness, and include inadmissible hearsay evidence. Id. To the extent the Court relies on evidence contained within plaintiffs’ declarations, as noted below, the Director’s objections are overruled. The Director’s other objections are overruled as moot. 3 1 II. LEGAL STANDARD 2 A preliminary injunction is an “extraordinary remedy.” Winter v. Natural Res. 3 Def. Council, Inc., 555 U.S. 7, 9 (2008). The Ninth Circuit summarized the Supreme 4 Court’s recent clarification of the standard for granting preliminary injunctions in Winter 5 as follows: “[a] plaintiff seeking a preliminary injunction must establish that he is likely 6 to succeed on the merits, that he is likely to suffer irreparable harm in the absence of 7 preliminary relief, that the balance of equities tips in his favor, and that an injunction is 8 in the public interest.” Am. Trucking Ass’n, Inc. v. City of Los Angeles, 559 F.3d 1046, 9 1052 (9th Cir. 2009); see also Cal. Pharms. Ass’n v. Maxwell-Jolly, 563 F.3d 847, 849 10 (9th Cir. 2009) (“Cal. Pharms. I”). Alternatively, “‘serious questions going to the 11 merits’ and a hardship balance that tips sharply towards the plaintiff can support 12 issuance of an injunction, so long as the plaintiff also shows a likelihood of irreparable 13 injury and that the injunction is in the public interest.” Alliance for the Wild Rockies v. 14 Cottrell, 632 F.3d 1127, 1132 (9th Cir. 2011); see also Indep. Living Ctr. of So. Cal. v. 15 Maxwell-Jolly, 572 F. 3d 644, 657–58 (9th Cir. 2009) (“ILC II”). A “serious question” 16 is one on which the movant “has a fair chance of success on the merits.” Sierra On-Line, 17 Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1421 (9th Cir. 1984). 18 III. DISCUSSION 19 A. 20 Before turning to the merits of plaintiffs’ motion, the Court first addresses the 21 22 23 Standing Director’s arguments that plaintiffs lack standing to bring this case. 1. Concrete Injury The Director argues that plaintiffs have not alleged an “actual and imminent 24 injury” because plaintiffs’ alleged injury relies on a “tenuous thread of assumptions 25 contingent upon possibilities.” Director’s Opp’n at 2. 26 The Court rejects this argument because plaintiffs’ alleged injuries are concrete 27 rather than speculative or conjectural. In order to establish standing to assert a claim, a 28 plaintiff must: (1) demonstrate an injury in fact, which is concrete, distinct and palpable, 4 1 and actual or imminent; (2) establish a causal connection between the injury and the 2 conduct complained of; and (3) show a substantial likelihood that the requested relief 3 will remedy the alleged injury in fact. See McConnell v. Fed’l Election Comm’n, 540 4 U.S. 93, 225-26 (2003). In this case, plaintiffs allege that if implemented, the challenged 5 rate reduction would inflict concrete financial injury on Medi-Cal participating hospitals. 6 See Indep. Living Ctr. of So. Cal. v. Shewry, 543 F. 3d 1050, 1065 (9th Cir. 2008) (“ILC 7 I”). ILC I also establishes that Medi-Cal beneficiaries have standing to challenge a 8 Medi-Cal rate reduction when they allege they will by “‘put at risk of injury by 9 implementation of the . . . payment cuts’ because those cuts will reduce . . . access to 10 quality services.” Id. Accordingly, there can be little doubt that plaintiffs have Article 11 III standing. 12 2. Prudential Standing 13 The Director argues that plaintiffs’ lack prudential standing to enforce Sections 14 (a)(19)4 and 30(A)5 because plaintiffs seek to enforce rights belonging to a third party, 15 CMS. According to the Director, these Sections do not confer individual entitlements on 16 any private parties, but instead serve as “yardsticks” by which the federal government 17 18 4 19 Section (a)(19) states that a State plan for medical assistance must: 22 provide such safeguards as may be necessary to assure that eligibility for care and services under the plan will be determined, and such care and services will be provided, in a manner consistent with simplicity of administration and the best interests of recipients. 23 5 20 21 Section 30(A) states in pertinent part that a State plan for medical assistance must: 24 25 26 27 28 provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan . . . to assure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area. 5 1 may assess a state’s performance under the Medicaid Act. Director’s Opp’n at 3. 2 Moreover, to the extent that plaintiffs’ claims rely on the Supremacy Clause, the 3 Director argues that they run afoul of the bar against considering generalized grievances 4 in that plaintiffs are not attempting to vindicate any right personal to them, but instead 5 invoke the Supremacy Clause as an “all-purpose cause of action to compel a state’s 6 compliance with federal law.” Id. at 4 (citing Valley Forge Christian Coll. v. Amer. 7 United for Sep. of Church and State, 454 U.S. 464, 483 (1982)). 8 9 The Court finds the Director’s prudential standing arguments unavailing. In assessing prudential standing, a court need not “inquire whether there has been a 10 congressional intent to benefit the would-be plaintiff,” but instead must determine only 11 whether the plaintiff’s interests are among those “arguably . . . to be protected” by the 12 statutory provision. Nat’l Credit Union v. First Nat’l Bank & Trust Co., 552 U.S. 478, 13 489 (1998). This “zone of interest” test “is not meant to be demanding.” Clarke v. Secs. 14 Indus. Ass’n, 479 U.S. 388, 399–400 (1987). To this end, Section (a)(19) mandates that 15 state Medicaid agencies set policies consistent with the “best interests” of Medicaid 16 beneficiaries, while Section 30(A) establishes standards by which payments to providers 17 are set. Accordingly, Medi-Cal beneficiaries and providers are undoubtedly within the 18 zone of interests protected by Sections (a)(19) and 30(A). Further, the Court finds that 19 contrary to the Director’s assertion, plaintiffs are not alleging a “generalized grievance.” 20 This is so because plaintiffs have alleged that CHA’s member hospitals and the 21 individual-beneficiary plaintiffs will be directly harmed by the implementation of the 22 rate reduction. 23 3. 24 Associational Standing The Director maintains that CHA cannot establish associational standing. 25 Specifically, the Director argues that CHA does not have associational standing on 26 behalf of hospitals because any injury suffered by a hospital will be particular to that 27 hospital. Director’s Opp’n at 4–5. The Director further contends that CHA does not 28 have standing on behalf of Medi-Cal beneficiaries because CHA represents the interests 6 1 of its member hospitals, rather than the patients of those hospitals, because CHA fails to 2 allege how representing Medi-Cal recipients’ interests is germane to CHA’s purpose, 3 and because whether an individual beneficiary has a claim under §§ (a)(8) and (a)(19) 4 will require individualized determinations. Id. at 5–6. 5 The Director’s associational standing arguments also fail. An association has 6 standing to sue on behalf of its members if (1) they would have standing to sue in their 7 own right; (2) the interests it seeks to protect are germane to the organization’s purpose; 8 and (3) participation by the individual members is not necessary to resolve the claim. 9 Hunt v. Wash. State Apple Advertising Comm’n, 432 U.S. 333, 343 (1997). The Ninth 10 Circuit has recognized that when an association is pursuing an action for only 11 declaratory and injunctive relief on behalf of its members, participation in the action by 12 individual members is not required. See Associated Gen’l Contractors of Am. v. 13 Metropolitan Water Dist. of So. Cal., 159 F. 3d 1178, 1181 (9th Cir. 1998). Here, 14 plaintiffs are not seeking monetary relief, so participation of individual CHA member 15 hospitals is not required. Next, other courts have held that because individual medical 16 providers would have third-party standing to represent the interests of their patients, 17 associations representing those providers can also represent the interests of patients. 18 See, e.g., Penn. Psychiatric Soc’y v. Green Spring Health Srvs., Inc., 280 F. 3d 278, 19 288–94 (3d Cir. 2002); New Jersey Protection & Advocacy v. New Jersey Dep’t of 20 Educ., 563 F. Supp. 2d 474, 481–84 (D.N.J 2008). Accordingly, in this case, CHA’s 21 member hospitals would have standing to represent the interests of their Medi-Cal 22 patients and therefore that CHA has standing to do the same. More fundamentally, even 23 if CHA did not have standing to represent Medi-Cal beneficiaries, it would not alter the 24 Court’s ability to reach the merits of the controversy because there are individual Medi- 25 Cal beneficiaries who are plaintiffs to this case whose standing is not challenged. 26 27 Having rejected each of the Director’s standing arguments, the Court now turns to the merits of plaintiffs’ motion. 28 7 1 2 3 B. Likelihood of Success on the Merits 1. Plaintiffs’ Section 30(A) Claim Against the Secretary Plaintiffs argue that they are likely to succeed on the merits of their Section 30(A) 4 claim against the Secretary because CMS failed to apply controlling law in evaluating 5 SPA 11-010 and therefore acted arbitrarily and capriciously. 6 Under the APA, a reviewing court must affirm an agency’s determination unless it 7 is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with 8 law.” 5 U.S.C. § 706(2)(A). “A decision is arbitrary and capricious if the agency ‘has 9 relied on factors which Congress has not intended it to consider, entirely failed to 10 consider an important aspect of the problem, offered an explanation for its decision that 11 runs counter to the evidence before the agency, or is so implausible that it could not be 12 ascribed to a difference in view or the product of agency expertise.’” O’Keefe’s, Inc. v. 13 U.S. Consumer Prod. Safety Comm’n, 92 F. 3d 940, 942 (9th Cir. 1996) (quoting Motor 14 Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). 15 If a statute is silent or ambiguous with respect to a specific question, the issue for 16 the court is whether the agency’s answer is based on a permissible construction of the 17 statute. Chevron U.S.A. v. NRDC, 467 U.S. 837, 842–43 (1984). Chevron deference is 18 required “when it appears that Congress delegated authority to the agency generally to 19 make rules carrying the force of law, and . . . the agency interpretation claiming 20 deference was promulgated in the exercise of that authority.” United States v. Mead 21 Corp., 533 U.S. 218, 226–27 (2001). 22 a. Cost Studies 23 Plaintiffs first contend that CMS’s approval of SPA 11-010 was arbitrary and 24 capricious because CMS failed to consider whether DHCS relied on credible cost studies 25 and developed rates reasonably related to provider costs as the Ninth Circuit has held is 26 required under Section 30(A). Mot. at 9–10 (citing Orthopaedic Hosp. v. Belshe, 103 F. 27 3d 1491, 1492, 1496, 1500 (9th Cir. 1997) cert. denied, Belshe v. Orthopaedic Hosp., 28 522 U.S. 1044 (1998)). 8 In opposition, the Secretary contends that CMS’s contrary interpretation of 1 2 Section 30(A), upon which it based its approval of SPA 11-010, is entitled to Chevron 3 deference notwithstanding the Ninth Circuit’s decision in Orthopaedic Hospital that a 4 state must consider “responsible cost studies.” According to the Secretary, she has 5 “consistently taken the position” that Section 30(A) does not require states to base 6 payment rates on the costs incurred by providers even though this interpretation has not 7 yet been incorporated into a final rule. Secretary’s Opp’n at 8. The Secretary cites Nat’l 8 Cable & Telecom. Ass’n v. Brand X Internet Servs. (“Brand X”), for the principle that 9 “[a] court’s prior judicial construction of a statute trumps an agency construction 10 otherwise entitled to Chevron deference only if the prior court decision holds that its 11 construction follows from the unambiguous terms of the statute and thus leaves no room 12 for agency discretion.” Id. (quoting Brand X, 545 U.S. 967, 982 (2005)). Because the 13 Ninth Circuit has not held that its interpretation follows from the unambiguous terms of 14 the statute, the Secretary contends that her interpretation of the statute controls because it 15 was made within the context of an adjudication that would normally be afforded 16 Chevron deference. Id. at 9–10. The Secretary further argues that the Ninth Circuit has 17 held that the Secretary’s interpretation of Section 30(A), which formed the basis of the 18 disapproval of a State Plan Amendment, is entitled to Chevron deference. Id. at 10 19 (citing Alaska Dept. of Health and Social Servs. v. CMS, 424 F. 3d 931 (9th Cir. 2005) 20 (“Alaska”)). The Secretary contends that any distinction between the approval and the 21 disapproval of a SPA is irrelevant to whether Congress delegated interpretative authority 22 to the agency, thus mandating Chevron deference. Id. at 11 n. 5. The Secretary notes 23 also that the Court of Appeals for the District of Columbia Circuit has determined that 24 the Secretary’s interpretation of the Medicaid statute made in connection with the 25 approval of an SPA is entitled to Chevron deference. Id. at 11 (citing PhRMA v. 26 Thompson, 362 F.3d 817, 822 (D.C. Cir. 2004)). 27 /// 28 /// 9 1 Although the Court agrees with the Secretary that Section 30(A) leaves room for 2 interpretation,6 the Court does not believe the agency’s interpretation is owed Chevron 3 deference with respect to the approval at issue in this case. In this respect, the Court 4 finds significant that the Secretary’s approval of SPA 11-010 did not involve a formal 5 adjudication accompanied by the procedural safeguards justifying Chevron deference. 6 Instead, the Secretary’s issued her interpretation of Section 30(A) in a letter to DHCS. 7 This kind of interpretation is of the very type for which the Supreme Court has declined 8 to extend Chevron deference. See e.g., Christensen v. Harris County, 529 U.S. 576, 9 586–88 (2000) (holding that informal agency interpretations of a statute such as those 10 contained in an opinion letter, policy statement, agency manuals, or enforcement 11 guidelines, are not entitled to Chevron-style deference). The Secretary’s reliance on 12 Alaska misplaced. In Alaska, the Ninth Circuit deferred to the Secretary’s interpretation 13 of Section 30(A) and upheld the denial of a State Plan Amendment. In finding that the 14 CMS Administrator’s final determination “carr[ied] the force of law” necessary for 15 Chevron deference, the court highlighted “the formal administrative process afforded the 16 State,” with “opportunities to petition for reconsideration, brief its legal arguments, be 17 heard at a formal hearing, receive reasoned decisions at multiple levels of review and 18 submit exceptions to those decision.” Alaska, 424 F. 3d at 939. None of these 19 procedural safeguards was incorporated in the SPA approval process at issue in this case, 20 in which there was no hearing, no record, no opportunity for interested parties to 21 /// 22 /// 23 24 25 26 27 28 6 The Court notes that Section 30(A) does not explicitly mention provider costs or cost studies and that three other circuit courts have determined that CMS need not consider provider costs in deciding whether or not to approve a State Plan Amendment. See Rite Aid of Pa. Inc. v. Houstoun, 171 F. 3d 842, 853 (3d Cir. 1999); Methodist Hosps., Inc. v. Sullivan, 91 F. 3d 1026, 1030 (7th Cir. 1996); Minn. Homecare Ass’n v. Gomez, 108 F. 3d 917, 918 (8th Cir. 1997) (per curiam). 10 1 present evidence, and no formal decision in which the Secretary set forth her reasoning.7 2 Accordingly, the Secretary’s approval of SPA 11-010 did not include the “hallmarks of 3 ‘fairness and deliberation,’” to which Chevron deference is owed. See Alaska, 424 F. 3d 4 at 939 (quoting Mead, 533 U.S. at 226–27).8 5 The Court does not believe that the Court of Appeals for the District of Columbia 6 Circuit’s determination in PhRMA, 362 F.3d at 822, compels a contrary result in this 7 case. Here, the decision of the Associate Regional Administrator of the Division of 8 Medicaid & Children's Health Operations approving the SPA, as set forth in the October 9 7 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 42 U.S.C. § 1316(a), which governs CMS’s consideration of State Plan Amendments, does not require any type of hearing when the Secretary approves a State Plan Amendment. 42 U.S.C. § 1316(a)(1). In contrast, where the Secretary rejects a State’s proposed Amendment, the State is entitled to petition the Secretary for reconsideration of the issue, and the Secretary is required to hold a hearing. 42 U.S.C. § 1316(a)(2). For this reason, Chevron deference is more appropriate for the disapproval of a State Plan Amendment. 8 The Secretary’s reliance on Dickson v. Hood, 391 F. 3d 581 (5th Cir. 2004), Harris v. Olszewski, 442 F. 3d 456, 460 (6th Cir. 2006), and West Virginia v. Thompson, 475 F. 3d 204, 210–11 (4th Cir. 2007) is similarly misplaced. In Dickson, a Medicaid recipient alleged that the Louisiana Department of Health and Hospitals violated his federal rights by refusing to pay for medically prescribed disposable incontinence underwear. Id. at 584. The court merely afforded deference to the Secretary’s interpretation of “home health care services” as embodied in a regulation previously promulgated pursuant to formal noticeand-comment rulemaking. Id. at 594. Harris involved a challenge to Michigan’s single source provider contract for incontinence supplies as violating the Medicaid Act’s freedom of choice provisions. 442 F. 3d at 460. West Virginia v. Thompson merely held that the Secretary’s interpretation of the Medicaid statute as embodied in the disapproval of a SPA was entitled to deference. None of these cases involved a challenge to the Secretary’s approval of a State Plan Amendment or the appropriate level of deference required to be afforded to such approvals. Similarly, the Supreme Court’s decision in Chase Bank U.S.A, N.A. v. McCoy, 131 S. Ct. 871 (2011), cited by the Director for the proposition that an agency’s amicus brief deserves deference, does not compel a contrary result. This is so because that case involved an agency’s interpretation of its own regulation rather than the statutory scheme itself. See id., 131 S. Ct at 880. 11 1 27 approval letter, is conclusory in nature. It does not provide any reasons on its face as 2 to why provider costs should not be considered in determining whether the SPA's rate 3 reduction will result in lower quality of care or decreased access to services. Given the 4 logical and empirical relationship between reimbursement rates and the willingness of 5 providers to make services available that the Ninth Circuit found was the case in 6 Orthopaedic Hospital, the absence of a reasoned decision to not require cost studies to 7 justify the SPA makes the decision to approve the SPA less appropriate for Chevron 8 deference. Further, the record reflects that CMS states even though it “does not 9 currently interpret [Section 30(A)] of the Act to require cost studies in order to 10 demonstrate compliance,” CMS is “currently reviewing and refining, in a rulemaking 11 proceeding, guidance on how states can adequately document access to services,” 12 suggesting that a formal notice and comment rulemaking process, accompanied by the 13 procedural safeguards of such a proceeding, is contemplated by CMS. See Dkt. No. 47- 14 2, at 1; letter from CMS to DHCS. Besides the fact that no explanation is given for not 15 requiring cost studies other than the statement that CMS “believe[s] the appropriate 16 focus in on access,” this statement by CMS suggests that its position regarding cost 17 studies is not necessarily settled. Thus, as the court noted in PhRMA, Chevron 18 deference may be warranted even when no administrative formality was required and 19 none was afforded, the circumstances of this case call into question whether Chevron 20 deference is appropriate.9 21 /// 22 /// 23 24 25 26 27 28 9 Further, in PhRMA, not only did the record support the reasonableness of the Secretary's decision that the SPA at issue would make it less likely that needy persons would become eligible for Medicaid, thereby impacting Medicaid services, the court noted that an intervening decision of the Supreme Court supported the trial court’s decision to grant summary judgment in favor of the Secretary. 362 F. 3d at 821. 12 1 Having determined that Chevron deference is inappropriate, the Court now turns 2 to whether the Secretary’s interpretation that cost studies are not required under Section 3 30(A) is “entitled to respect” under Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). The Court answers this question in the negative. Skidmore instructs that “[t]he 4 5 weight accorded to an administrative judgment in a particular case will depend upon the 6 thoroughness evident in its consideration, the validity of its reasoning, its consistency 7 with earlier and later pronouncements, and all of those factors which give it power to 8 persuade, if lacking power to control.” 333 U.S. at 140. Skidmore respect is not owed 9 for two reasons. First, in apparent conflict with the Secretary’s position in this case, in 10 Alaska, the Secretary asked the Ninth Circuit to uphold her disapproval of a State Plan 11 Amendment because Alaska failed to analyze provider costs. Specifically, the Secretary 12 argued: 13 The requirements of § 1396(a)(30)(A) are . . . not so flexible as to allow the 14 [State] to ignore the costs of providing services. For payment rates to be 15 consistent with efficiency, economy, quality of care and access, they must bear a 16 reasonable relationship to provider costs.” 17 Alaska, Resp. Br., 2004 WL 3155124, at 32 (citing Orthopaedic Hospital, 103 F. 3d at 18 1499).10 In addition to this inconsistency in agency position, the Secretary’s proffered 19 interpretation directly contradicts the law in the Ninth Circuit. See Orthopaedic 20 Hospital, 103 F. 3d at 1497. Thus, while the Court recognizes that in appropriate 21 circumstances, an agency may change its position on the construction of a statute, the 22 Court finds that in light of the circumstances of this case, the Secretary’s conclusory 23 interpretation that Section 30(A) does not require consideration of cost studies is of 24 limited “power to persuade,” and is therefore not entitled to respect under Skidmore. 25 /// 26 10 27 28 Importantly, under Skidmore, courts consider whether the agency has acted consistently. See Federal Express Corp. v. Holowecki, 552 U.S. 389, 399 (2008); Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 417 (1993). 13 1 Accordingly, because CMS failed to consider whether DHCS relied on 2 responsible cost studies, the Court finds that CMS failed to consider a relevant factor, 3 and therefore that there is a strong probability that its approval of SPA 11-010 will be 4 found to be arbitrary and capricious. 5 In any event, the Court finds that whether the Secretary’s interpretation of Section 6 30(A) as embodied in the approval of SPA 11-010 is owed deference presents a “serious 7 question going to the merits.” See Alliance for the Wild Rockies, 632 F.3d at 1132; ILC 8 II, 572 F. 3d at 657–58; Sierra On-Line, Inc., 739 F.2d at 1421. In light of the balance of 9 the hardships, which the Court believes tips strongly in plaintiffs’ favor as discussed 10 11 12 below, the Court finds that the issuance of a preliminary injunction is warranted. b. Access Plaintiffs next contend that even if the Secretary’s approval of SPA 11-010 is 13 owed deference, the approval still may be found to be arbitrary, capricious, an abuse of 14 discretion, or otherwise not in accordance with the law. Specifically, plaintiffs contend 15 that the approval was arbitrary and capricious because DHCS failed to consider facts that 16 bear on the impact of the rate reduction on access to services. In particular, plaintiffs 17 contend that the record demonstrates that the rate reduction would “devastate” access to 18 skilled nursing care, especially in already underserved areas of the State. Mot. at 11–12. 19 Because many DP/NFs are located in remote areas, plaintiffs maintain that they are often 20 the only reasonably available source of skilled nursing, such that if they close or reduce 21 services, access will be unavailable or patients will be forced to travel significant 22 distances. Further, plaintiffs argue that DP/NFs frequently provide a higher level of 23 skilled nursing care than the freestanding Skilled Nursing Facilities (“SNFs”) that the 24 State and CMS assert will absorb patients. Id. at 12. Plaintiffs maintain that DHCS’s 25 Access Analysis, on which CMS relied in approving SPA 11-010, is fatally flawed 26 because inter alia: (1) it assumes complete interchangeability between freestanding 27 SNFs and DP/NFs; (2) it evaluates access not by geographic location but instead by 28 “geographic peer groups”; (3) it relies on non-predictive historical data; (4) it fails to 14 1 consider that the number of Medi-Cal beneficiaries who would be likely to require 2 skilled nursing care is increasing substantially; (5) it assumes all licensed beds are 3 available when facilities frequently have beds that are not staffed and therefore not 4 available for care; and (6) it assumes a facility can operate at 100% capacity when this is 5 untrue due to factors such as the gender or age of patients. Id. at 14–16. 6 In opposition, the Secretary argues that CMS reached a “considered conclusion” 7 that SPA 11-010 does not violate Section 30(A) after a three-year process in which the 8 State submitted a “thorough analysis” of the rate reduction’s impact on access and a 9 “comprehensive plan to measure and monitor access to services.” Secretary’s Opp’n at 10 14–15.11 With respect to plaintiffs’ criticism that DHCS failed to consider the 11 differences between DP/NFs and freestanding SNFs, the Secretary argues that because 12 federal law, state law, and state licensing and certification requirements do not 13 distinguish between DP/NFs and freestanding SNFs, a difference in the type of care 14 DP/NFs choose to provide cannot form the basis of a Section 30(A) violation. Id. at 15 16–17. Accordingly, the Secretary argues that so long as the payment levels suffice to 16 allow SNFs to operate at the level required by federal and state law, there can be no 17 access violation. Id. at 17. With regard to plaintiffs’ charge that DHCS failed to 18 evaluate access by geographic location, the Secretary contends that DHCS reasonably 19 developed geographic peer groups for the purpose of clustering freestanding SNFs into 20 county groupings with similar operating costs. Id. at 20–21. According to the Secretary, 21 this approach allowed DHCS to determine whether access would be reduced in any 22 23 24 25 26 27 28 11 Under the State’s plan, DHCS will monitor a set of “early warning” measures, including change in Medi-Cal enrollment, provider participation rates, and calls to the Medi-Cal help line. Dkt. No 18-3, at 63–64. Any indication of a reduction in beneficiaries’ access to SNF services would trigger a prompt response from DHCS, and if DHCS concludes that an access problem results from a reduction in payment, DHCS will “immediately take action to change the payment levels.” Id. at 64. DHCS is required to abide by monitoring plan as a condition of CMS’s approval of SPA 11-010, and CMS may initiate a compliance action if the State does not act. Dkt. No. 18-2, at 19–20. 15 1 particular type of geographic location. Id. at 21. Moreover, the Secretary contends that 2 DHCS also evaluated access at “the statewide level,” which would have been sufficient 3 for CMS’s approval. Id. (citing Methodist Hosps. v. Sullivan, 91 F. 3d 1026, 1029 (7th 4 Cir. 1996) (“‘Geographic area’ could mean many things.”). As to plaintiffs’ contention 5 that DHCS improperly relied on data regarding historic utilization and available 6 capacity, the Secretary responds that historical data can reasonably be used to identify 7 trends, and that by definition there is no data about actual future access. Id. at 22. In 8 response to plaintiffs’ assertion that DHCS failed to consider the aging Medi-Cal 9 population, the Secretary notes that DHCS’s monitoring plan specifically uses the 10 percentage change in Medi-Cal enrollment to evaluate access. Id. n. 11. As to plaintiffs’ 11 contention that DHCS improperly assumed facilities could operate at full capacity, the 12 Secretary responds that DHCS did not assume that a facility can have every available 13 bed filled, but rather identified vacancy rates and determined only that sufficient 14 capacity existed based on those rates. Id. at 23. 15 The Court finds that plaintiffs have shown a likelihood of success on the merits of 16 their claim that CMS’s approval based on its acceptance of DHCS’s access analysis was 17 arbitrary and capricious.12 In this regard, the Court rejects the Secretary’s argument that 18 DP/NFs are interchangeable with SNFs. While the law may treat DP/NFs and SNFs as 19 fungible, the record demonstrates that as a matter of fact, they are far from 20 interchangeable. Accordingly, any conclusion by the Secretary and DHCS that 21 freestanding SNFs could absorb patients from DP/NFs is belied by the record, making it 22 likely that the Secretary’s decision to approve SPA 11-010 was arbitrary and capricious. 23 Similarly, the Court finds it likely that the Secretary’s acceptance of DHCS’s geographic 24 peer group analysis will also be found to be arbitrary and capricious. This is so because 25 DHCS’s peer groups apparently have nothing to do with geographic proximity and 26 12 27 28 The Court notes that counsel for the Secretary conceded at oral argument that if the State’s access analysis were inherently flawed, the Secretary’s decision to approve the SPA may be found arbitrary and capricious. Transcript of Oral Argument at 36: 13–15. 16 1 include hospitals from disparate regions of the state. For example, Peer Group 3 2 includes both Plumas and Siskiyou Counties in northern and northeastern part of the 3 State and Ventura County in the south. It is unreasonable to expect that any capacity in 4 Ventura County could offset DP/NF closures in Plumas and Siskiyou Counties. As a 5 result, the peer groups provide minimal useful information about the availability of 6 skilled nursing services in any particular region of California. Finally, the Court finds it 7 likely that the Secretary’s acceptance of the monitoring plan as adequately ensuring 8 access to quality care will also be found arbitrary and capricious. This is so because the 9 monitoring plan merely creates a potential response after an access problem has been 10 identified. To the extent reduced rates cause DP/NFs to close their doors, increased rates 11 will not necessarily result in the reopening of those facilities. More fundamentally, 12 during the period between the detection of an access problem and its potential remedy 13 through increased reimbursements, Medi-Cal beneficiaries will necessarily suffer from 14 reduced access to skilled nursing services.13 c. 15 16 Quality of Care Plaintiffs next argue that the record demonstrates “no consideration” at all by 17 DHCS or CMS of the impact of the rate reduction on quality of care. Mot. at 16. In this 18 regard, plaintiffs maintain that closure of DP/NFs, reductions in their bed capacity or 19 willingness to accept Medi-Cal patients, and reduction or elimination of specialized 20 services, means that patients requiring more complex services will not be able to obtain 21 appropriate care or will have to wait longer to obtain such services. Further, plaintiffs 22 contend that the record shows that DP/NF patients have shorter lengths of stay, are 23 24 25 26 27 28 13 Furthermore, whether the Secretary’s acceptance of the access analysis and monitoring plan as sufficiently ensuring access to skilled nursing services will be found to be arbitrary and capricious at least presents a “serious question going to the merits.” Because the Court finds that the balance of hardships tips strongly in plaintiffs’ favor, a preliminary injunction is appropriate on this basis as well. See Alliance for the Wild Rockies, 632 F.3d at 1132; ILC II, 572 F. 3d at 657–58; Sierra On-Line, Inc., 739 F.2d at 1421. 17 1 readmitted to acute care settings less frequently, and have better outcomes than patients 2 in freestanding facilities. Mot. at 16–17. The Secretary responds that in the RAI, CMS specifically asked the State to 3 4 address concerns about the impact on quality of care. Secretary’s Opp’n at 18. 5 Furthermore, the Secretary contends that the State’s monitoring plan repeatedly makes 6 clear that it does not simply address access to any care, but rather that it addresses access 7 to high quality care. Id. The Secretary notes also that the monitoring plan acknowledges 8 that “[p]rovisions in both Federal and State [law] mandate that administrators ensure 9 access to high quality healthcare for its Medi-Cal beneficiaries.” Id. (quoting Dkt. No 10 18-3 at 8). The Court finds that plaintiffs have shown a high probability of success on the 11 12 claim that CMS’s acceptance of the State’s monitoring plan as sufficiently ensuring 13 quality of care was arbitrary and capricious. First, as described above with respect to 14 access, the Court finds it likely that at best the monitoring plan creates a potential 15 response after a quality deficiency has been identified. That is, while the monitoring 16 plan may alert the State that reimbursement rates must be increased to improve the 17 quality of skilled nursing services, at that point beneficiaries will necessarily have 18 already suffered injury. Next, the Court finds it likely that the monitoring plan’s reliance 19 on external assurances of quality will also be found to be flawed. In Orthopaedic 20 Hospital, 103 F. 3d at 1497, the Ninth Circuit rejected the view that under Section 30(A), 21 it was reasonable to rely on independent provisions in federal and state law that ensure 22 quality of care. Specifically, the court explained that “[t]he Department, itself, must 23 satisfy the requirement that the payments themselves be consistent with quality care.” 24 Id. For the reasons state above, the Secretary’s contrary interpretation in this case is not 25 owed Chevron deference because the approval of a State Plan 26 /// 27 28 18 1 Amendment does not include the “hallmarks of ‘fairness and deliberation” to which 2 deference is owed. See Alaska, 424 F. 3d at 939 (quoting Mead, 533 U.S. at 226–27).14 2. 3 Plaintiffs’ Section 30(A) Claim Against the Director 4 The Director argues that plaintiffs are unlikely to succeed on the merits of their 5 Section 30(A) claim because they have no basis for asserting a private right of action 6 under Section 30(A). Director’s Opp’n at 18. The Director further contends that even if 7 plaintiffs have a private right of action, they cannot demonstrate that AB 97 violates, and 8 is thus preempted by, Section 30(A). In support of this argument, the Director points to 9 CMS’s approval of SPA 11-010, which the Director contends is owed deference, and the 10 concession of CHA’s counsel at oral argument before the Supreme Court that if CMS 11 were to approve an SPA, medicaid providers and recipients would not prevail in 12 litigation. Id. at 19 (citing Tr. Oral Arg. at 53, Douglas v. Indep. Living Ctr., No. 09- 13 958). 14 At this juncture, the Director’s argument that plaintiffs lack a private right of 15 action to enforce Section 30(A) fails. While plaintiffs lack a private right of action 16 under 42 U.S.C. § 1983, see Develop. Servs. Network v. Douglas, No. 11-55851 slip op. 17 at 20533 (9th Cir. Nov. 30, 2011), Ninth Circuit case law establishes that Section 30(A) 18 is enforceable by private parties under the Supremacy Clause. See ILC I, 543 F. 3d at 19 1050-52; ILC II, 572 F. 3d at 644; Cal. Pharms. I, 563 F. 3d at 850–51. Although this 20 issue is presently before the Supreme Court, unless and until this precedent is overruled, 21 it controls here. See Hart v. Massanari, 266 F. 3d 1155, 1171 (9th Cir. 2001). For the 22 reasons articulated in Section B(1) supra, the Court finds that plaintiffs are likely to 23 24 25 26 27 28 14 Furthermore, whether the Secretary’s acceptance of the monitoring plan as sufficiently ensuring quality will be found to be arbitrary and capricious at least presents a “serious question going to the merits.” Because the Court finds that the balance of hardships tips strongly in plaintiffs’ favor, a preliminary injunction is warranted on this basis as well. See Alliance for the Wild Rockies, 632 F.3d at 1132; ILC II, 572 F. 3d at 657–58; Sierra On-Line, Inc., 739 F.2d at 1421. 19 1 succeed on their claim that DHCS’s failure to consider responsible cost studies, failure 2 to adequately consider the effect of the rate reduction on access, and failure to 3 appropriately consider the effect of the rate reduction on quality of care may be found to 4 have violated Section 30(A).15 As discussed above, the Court finds that these issues at 5 least present “serious questions as to the merits” of plaintiffs’ claim, and that the balance 6 of hardships tips strongly in plaintiffs’ favor. See Alliance for the Wild Rockies, 632 7 F.3d at 1132; ILC II, 572 F. 3d at 657–58; Sierra On-Line, Inc., 739 F.2d at 1421. 3. 8 9 Plaintiffs’ Section (a)(8) Claim Plaintiffs contend that the rate reduction violates Section (a)(8) because it will 10 result in significant delays in the time that Medi-Cal beneficiaries will be able to access 11 skilled nursing care.16 In support of this argument, plaintiffs cite Sobky v. Smoley, 855 12 F. Supp. 1123, 1149 (E.D. Cal. 1994) (“. . . the insufficient funding by the State . . . has 13 caused providers . . . to place eligible individuals on waiting lists for treatment. This is 14 precisely the sort of state procedure the reasonable promptness provision is designed to 15 prevent.”). 16 The Court finds that plaintiffs’ Section (a)(8) claim is unlikely to succeed on the 17 merits because Section (a)(8)’s “reasonable promptness” provision requires the 18 expeditious processing of applications and payment rather than the provision of medical 19 services. In reaching this conclusion, the Court notes that although the Ninth Circuit has 20 15 21 22 23 24 25 26 27 28 The Court reaches this conclusion in spite of the statement before the Supreme Court in Douglas v. Indep. Living Ctr. by CHA’s counsel that litigation was unlikely to succeed if CMS approved a SPA. That statement was made in another case, on an issue that had not been briefed prior to argument. In addition, because the individual-beneficiary plaintiffs in this case were not involved in any way with Douglas v. Indep. Living Ctr. a statement by counsel for another party in those proceedings should not be deemed to be a concession by the individual-beneficiary plaintiffs here. 16 Section (a)(8) states that a State plan for medical assistance must “provide that all individuals wishing to make application for medical assistance under the plan shall have opportunity to do so, and that such assistance shall be furnished with reasonable promptness to all eligible individuals.” 20 1 not ruled on the issue, the Fifth, Sixth, Seventh, and Tenth Circuits have all rejected the 2 argument that Section (a)(8) guarantees prompt medical care and services to Medicaid 3 recipients. Equal Access for El Paso, Inc. v. Hawkins, 562 F. 3d 724, 727 (5th Cir. 4 2009); Westside Mothers v. Olszewski, 454 F. 3d 532, 540 (6th Cir. 2006); Bruggeman 5 v. Blagojevich, 324 F. 3d 906, 910 (7th Cir. 2003); Oklahoma Chap. of the Amer. Acad. 6 of Pediatrics v. Fogarty, 472 F. 3d 1208, 1214 (10th Cir. 2007). Accordingly, the Court 7 declines to follow the Sobky court’s reasoning because it appears to be based on a 8 flawed interpretation of the term “medical assistance.” See Brown v. Tenn Dep’t of Fin. 9 & Admin., 561 F. 3d 542, 544 (6th Cir. 2009) (rejecting finding in Sobky that term 10 “medical assistance” meant medical services); Susan J. v. Riley, 616 F. Supp. 2d 1219, 11 1241 n. 24 (M.D. Ala. 2009) (declining to follow Sobky and finding it “not 12 persuasive”).17 13 4. Plaintiffs’ Section (a)(19) Claim Plaintiffs argue that the rate reduction violates Section (a)(19), which mandates 14 15 that Medicaid policies promote the “best interests” of beneficiaries. According to 16 plaintiffs, by justifying the reduction in part on the grounds that, even if some DP/NFs 17 are forced to close, access will not decrease because patients can simply transfer to 18 freestanding nursing facilities, DHCS does not act in the best interest of beneficiaries 19 because this ignores the trauma beneficiaries will suffer as a result of such transfer. Mot 20 at 19, n. 3. 21 /// 22 23 24 25 26 27 28 17 42 C.F.R. § 435.911, the regulation implementing Section (a)(8), imposes specific deadlines for processing eligibility applications, providing further support for this interpretation. See Bruggerman, 324 F. 3d at 910 (noting that the regulation indicates that Section (a)(8) requires “prompt determination of eligibility and prompt provision of funds to eligible individuals” and not prompt treatment). 21 1 The Court finds that plaintiffs’ Section (a)(19) claim is unlikely to succeed on the 2 merits. This is so because Section (a)(19)’s “best interest” provision is too vague to 3 create any objective benchmark for measuring whether the State has met its obligations. 4 See Maynard v. Bonta, 2003 U.S. Dist. LEXIS 16201, at *97–*100 (C.D. Cal. 2003). 5 Instead, the Section merely imposes a generalized duty on the states and expresses in 6 general terms the overall goals of the program. Id.; Harris v. James, 127 F. 3d 993, 1010 7 (11th Cir. 1997). 5. 8 9 Plaintiffs’ Takings Clause Claim The “Takings Clause” of the Fifth Amendment provides that private property 10 shall not “be taken for public use, without just compensation.” U.S. Const. amend. V. 11 “In order to state a claim under the Takings Clause, a plaintiff must first demonstrate 12 that he possesses a ‘property interest’ that is constitutionally protected.” Turnacliff v. 13 Westly, 546 F. 3d 1113, 1118–19 (9th Cir. 2008) (internal citations omitted). 14 Plaintiffs contend that due to California’s statutes that restrict the ability of 15 nursing facilities to withdraw from Medi-Cal and cease operations,18 the Director’s 16 failure to pay hospitals adequate rates for DP/NF services constitutes an unlawful taking 17 of their property without just compensation. Mot. at 17. Specifically, plaintiffs contend 18 that any skilled nursing facility that wants to close or withdraw from Medi-Cal must 19 continue to treat Medi-Cal patients until they are: (1) transferred to another facility; (2) 20 appropriately discharged; or (3) lose entitlements to Medi-Cal benefits. Id. 21 In opposition, the Director argues that it is well-settled in the Ninth Circuit that 22 health care providers “do not possess a property interest in continued participation in 23 24 25 26 27 28 18 Cal. Welf. & Inst. Code § 14022.4(3)(d) requires that no NP/NF facility may withdraw from the Medi-Cal program until “all patients residing in the facility at the time the facility filed [a] notice of intent to withdraw from the Medi-Cal program no longer reside in the facility.” Under Cal. Health and Safety Code § 1336.2, facilities that intend to close must transfer their residents to other facilities before they can cease operations. 22 1 Medicare, Medicaid, or the federally-funded state health care programs.” Director’s 2 Opp’n at 7 (quoting Erickson v. U.S. ex rel. Dept. of Health and Human Services, 67 F. 3 3d 858, 862 (9th Cir. 1995)). In this respect, the Director argues that CHA has failed to 4 establish a protected property interest because its member hospitals voluntarily 5 participate in the Medi-Cal program. Id. at 7–8 (citing Burditt v. U.S. Dept. of Health 6 and Human Services, 934 F. 2d 1362, 1376 (5th Cir. 1991) (quoting Whitney v. Heckler, 7 780 F. 2d 963, 972 (11th Cir. 1986)). According to the Director, CHA’s member 8 hospitals “accepted the various restrictions to their services, including the statutory 9 requirements to continue treating Medi-Cal beneficiaries until they are placed in suitable 10 alternative facilities,” such that there is no valid property interest subject to a Takings 11 Clause claim. Id. at 10. 12 The Court finds that plaintiffs have established a likelihood of success on their 13 Takings Clause claim. In reaching this conclusion, the Court finds that the cases the 14 Director cites for the principle that a Takings Clause claim is not viable when an entity 15 voluntarily participates in a regulated field are inapposite. See, e.g., Garelick v. 16 Sullivan, 987 F. 2d 913, 917 (2d Cir. 1993); Minn. Ass’n of Health Facilities, Inc. v. 17 Minn. Dep’t of Public Welfare, 742 F. 2d 442, 446 (8th Cir. 1984); Franklin Mem’l 18 Hosp. v. Harvey, 575 F. 3d 121, 129 (1st Cir. 2009); Burditt v. U.S. Dep’t of Health and 19 Human Services, 934 F. 2d 1362 (5th Cir. 1991). For example, while the court in 20 Franklin Mem’l Hosp., 575 F. 3d at 129, held that a state statute requiring hospitals to 21 provide free medical services to low-income patients was not an unconstitutional taking 22 because the hospital’s participation in the state Medicaid program was voluntary, here 23 the hospitals’ continued participation in Medi-Cal is compulsory at least until such time 24 as alternate arrangements are made for patients receiving skilled nursing services. And 25 while it is true that the hospitals in this case accepted the restrictions to their services 26 when they voluntarily elected to participate in Medi-Cal, they did so before the State 27 enacted AB 97. See Georgia Nursing Home Ass’n v. State of Georgia, 1997 WL 28 820966, *3 (N.D. Ga. Oct. 29, 1997) (noting that plaintiffs “may have a valid claim” if a 23 1 Georgia statute required them to continue treating Medicaid patients once they opt out of 2 the Medicaid program).19 3 C. Risk of Irreparable Injury 4 Plaintiffs contend that the rate reduction will cause irreparable harm in a number 5 of ways. Plaintiffs first argue that beneficiaries will be injured because access to skilled 6 nursing will be impaired. According to plaintiffs, due to the rate reduction, many 7 hospitals are planning to eliminate services, reduce hours and lay off employees, with 8 some facilities having already taken such steps. See, e.g., Declaration of C. Duane 9 Duaner ¶¶ 6–8; Declaration of Andrew Jahn, ¶¶ 5–8; Declaration of David. A 10 Neopolitan ¶¶ 6, 10; Declaration of James J. Raggio, ¶¶ 9, 14; Declaration of Thomas 11 Hayes, ¶¶ 9, 12; Declaration of Marieellen Faria, ¶¶ 4, 6. Plaintiffs argue that these 12 measures will adversely impact the availability of skilled nursing, as well as other 13 categories of medical services, in a number of communities, many of which are already 14 medically underserved. See Dauner Decl., ¶¶ 6–8; Jahn Decl., ¶¶ 5–8; Neopolitan Decl., 15 ¶¶ 6, 10; Raggio Decl., ¶¶ 9, 14; Hayes Decl., ¶¶ 9, 12; Faria Decl., ¶¶ 4, 6. Plaintiffs 16 further contend that the fact that multiple DP/NFs will close in response to the rate 17 reduction requiring the transfer of patients causing “significant trauma and disruption” to 18 many Medi-Cal beneficiaries, most of whom are physically or mentally frail. See e.g., 19 Declaration of E.H.D., ¶¶ 6–8; Declaration of D.F., ¶¶ 6–8; Declaration of D.X.P., ¶¶ 20 6–8; Declaration of E.M., ¶¶ 5–8. Lastly, plaintiffs argue that CHA’s member hospitals 21 will be irreparably harmed by the rate reduction because they are barred from recovering 22 any unlawfully withheld Medicaid payments from the State in federal court by virtue of 23 24 25 26 27 28 19 At oral argument, counsel for the Director cited L.A. Haven Hospice, Inc. v. Leavitt, 2009 U.S. Dist. LEXIS 125308, *3 n.2 (C.D. Cal. July 13, 2009), aff’d in part and vacated on other grounds, 638 F. 3d 644 (9th Cir. 2011), for the proposition that providers have no takings claim where their participation in Medi-Cal is voluntary. However, that case, like those cases cited in the Director’s opposition, is inapposite because here, the hospitals’ continued participation in Medi-Cal after the implementation of the rate reduction is at least temporarily compelled by state law. 24 1 the Eleventh Amendment. Mot. at 24 (citing Cal. Pharms. I, 563 F. 3d at 851–52). See 2 also Declaration of Mary M. Forrest, ¶ 6 (projecting annual losses of $6.2 million due to 3 rate reduction); Declaration of Daniel Ruth, ¶ 6 (projecting annual losses of $11 4 million). 5 In opposition, both the Secretary and the Director rely on the mitigating impact of 6 the monitoring plan that California has adopted. Secretary’s Opp’n at 24; Director’s 7 Opp’n at 25. Both defendants cite Midgett v. Tri-County Metro. Transp. Dist. of Or., 8 254 F. 3d 846, 850 (9th Cir. 2001) (holding that a defendant’s procedures for monitoring 9 compliance in the ADA context “show that Plaintiff does not face a threat of immediate 10 irreparable harm without an injunction”), and argue that given the procedural safeguards 11 of the monitoring plan, plaintiffs cannot prove irreparable harm as a result of the rate 12 reduction. Additionally, the Director argues that the injury to providers is not a proper 13 basis for an injunction because providers are merely “indirect beneficiaries” of the 14 program. Director’s Opp’n at 23. Finally, the Director contends that the claims of 15 irreparable harm to beneficiaries are based entirely on hearsay and conjecture that their 16 current providers will stop treating them and that, in such event, they will not receive 17 equal or better care at another facility. Id. 18 The Court finds that plaintiffs have met their burden of showing irreparable harm 19 in the absence of an injunction. In reaching this conclusion, the Court rejects 20 defendants’ contention that California’s monitoring plan will necessarily prevent 21 beneficiaries from being harmed. As discussed above, the Court believes that the 22 monitoring plan at best presents a potential remedy after an access or quality problem 23 has been detected. Even if the monitoring plan could ensure that beneficiary access to 24 services would not be reduced on the aggregate, the Ninth Circuit has held that as long 25 as there is evidence showing that at least some Medi-Cal beneficiaries might lose 26 services as a result of a rate reduction, irreparable harm is adequately demonstrated. Cal. 27 Pharms. Ass’n v. Maxwell-Jolly, 596 F. 3d 1098, 1114 (9th Cir. 2010) (“Cal. Pharms. 28 II”). Here, plaintiffs have proffered substantial evidence that numerous DP/NF 25 1 providers will reduce their capacity or shutter their doors in response to the 2 implementation of the rate reduction, suggesting that at least some beneficiaries would 3 suffer reduced access to services. Even if this were not the case, it is reasonable to infer 4 that for many people requiring skilled nursing services, transfer to other facilities could 5 itself inflict serious injury. Furthermore, because CHA’s member hospitals would be 6 barred from recovering any reimbursement short fall in an action at law due to 7 California’s Eleventh Amendment immunity, the Court finds plaintiffs have shown 8 adequate irreparable injury to support an injunction on this basis as well. See Cal. 9 Pharms. I, 563 F. 3d at 850–52.20 10 D. Balance of Hardships and Public Interest 11 Plaintiffs argue that the balance of equities and the public interest weigh in favor 12 of entering an injunction. In this regard, plaintiffs contend that the only interest the 13 Secretary and Director can point to is the State’s budget difficulties. Mot. at 25 (citing 14 ILC II, 572 F. 3d at 659; Cal. Pharms. I, 563 F. 3d at 852–853; Cal. Pharms. II, 596 F. 15 3d at 1114–15 for the proposition that a state’s financial problems do not excuse 16 continued violations of federal law with respect to Medicaid policy decisions). 17 Moreover, plaintiffs assert that where “‘there is a conflict between financial concerns 18 and preventable human suffering . . . , the balance of hardships tips decidedly in favor of 19 the latter.’” Id. (quoting Golden Gate Restaurant Ass’n v. City and County of San 20 Francisco, 512 F. 3d 1112, 1126 (9th Cir. 2008)). In opposition, the Secretary and Director each argue that injunctive relief would 21 22 have a serious impact on the continuing financial health of the State of California. 23 Secretary’s Opp’n at 25; Director’s Opp’n at 26. The Director also maintains that the 24 public will suffer harm if an injunction issues because any injunction that prevents the / 25 // 26 27 28 20 In this respect, the Director’s argument that monetary loss to providers cannot be a basis for an injunction is unavailing. The Ninth Circuit has repeatedly rejected this precise argument. See, e.g., Cal. Pharms. I, 563 F. 3d at 850–51; ILC II, 572 F.3d at 658; Cal. Pharms. II, 596 F. 3d at 1113–14. 26 1 implementation of a state statue inflicts injury on the State. Director’s Opp’n at 25 2 (citing Coalition for Economic Equity v. Wilson, 122 F. 3d 718, 719 (9th Cir. 1997)). Although keenly aware of the State’s fiscal difficulties, the Court believes that the 3 4 balance of the equities and the public interest strongly favor the issuance of an 5 injunction. In reaching this conclusion, the Court notes that the Ninth Circuit has held 6 that the injury to a state caused by the injunction of one of its statutes does not outweigh 7 the public’s interest in ensuring that state agencies comply with the law and protect 8 beneficiaries’ access to services. ILC II, 573 F. 3d at 658; Cal. Pharms. II, 596 F. 3d at 9 1114–15. Similarly, the State’s fiscal crisis does not outweigh the serious irreparable 10 injury plaintiffs would suffer absent the issuance of an injunction. See ILC II, 573 F. 3d 11 at 658–59 (“State budgetary considerations do not . . . in social welfare cases, constitute 12 a critical public interest that would be injured by the grant of preliminary relief. In 13 contrast, there is a robust public interest in safeguarding access to health care for those 14 eligible for Medicaid.”); Cal. Pharms. II, 596 F. 3d at 1114–15. 15 IV. In accordance with the foregoing, the Court hereby GRANTS plaintiffs’ motion 16 17 CONCLUSION for a preliminary injunction. 18 IT IS HEREBY ORDERED as follows: 19 Defendant Toby Douglas, Director of the California Department of Health Care 20 Services, his employees, his agents, and others acting in concert with him shall be, and 21 hereby are, enjoined and restrained from violating federal law by implementing or 22 otherwise applying the reduction on Medi-Cal reimbursement for skilled nursing 23 services rendered by distinct part hospital units on or after June 1, 2011, pursuant to 24 Assembly Bill 97 enacted by the California Legislature in March 2011, as codified at 25 California Welfare and Institutions Code § 14105.192(j), or to any other degree reducing 26 current Medi-Cal rates for skilled nursing services rendered by distinct part hospital 27 units. 28 27 1 IT IS HEREBY FURTHER ORDERED that, consistent with the foregoing, the 2 October 27, 2011 decision by Defendant Kathleen Sebelius, Secretary of the Department 3 of the United States Department of Health and Human Services, approving the Medi-Cal 4 reimbursement reduction codified at Welfare and Institutions Code § 14105.192(j), is 5 hereby stayed. 6 7 8 Dated: December 28, 2011 ________________________________ CHRISTINA A. SNYDER UNITED STATES DISTRICT JUDGE 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 28

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