Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-09-55532/USCOURTS-ca9-09-55532-0/pdf.json

Nature of Suit Code: 950
Nature of Suit: Contitutionality of State Statutes
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CALIFORNIA PHARMACISTS 

ASSOCIATION; CALIFORNIA MEDICAL

ASSOCIATION; CALIFORNIA DENTAL

ASSOCIATION; CALIFORNIA HOSPITAL

ASSOCIATION; CALIFORNIA

ASSOCIATION FOR ADULT DAY

SERVICES; MARIN APOTHECARY, INC.,

DBA Ross Valley Pharmacy;

SOUTH SACRAMENTO PHARMACY;

FARMACIA REMEDIOS, INC.; ACACIA No. 09-55532

ADULT DAY SERVICES; SHARP D.C. No.

MEMORIAL HOSPITAL; GROSSMONT  2:09-cv-00722-CASHOSPITAL CORPORATION; SHARP MAN

CHULA VISTA MEDICAL CENTER;

SHARP CORONADO HOSPITAL AND OPINION

HEALTHCARE CENTER; FEY GARCIA;

CHARLES GALLAGHER,

Plaintiffs-Appellees,

v.

DAVID MAXWELL-JOLLY, Director of

The California Department of

Health Care Services,

Defendant-Appellant. 

Appeal from the United States District Court

for the Central District of California

Christina A. Snyder, District Judge, Presiding

Argued and Submitted

January 19, 2010—Pasadena, California

Filed March 3, 2010

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Before: Stephen Reinhardt, William A. Fletcher and

Milan D. Smith, Jr., Circuit Judges.

Opinion by Judge Milan D. Smith, Jr.

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COUNSEL

Edmund G. Brown Jr., Attorney General of California, Jennifer M. Kim, Shannon M. Chambers and Randall R. Murphy,

Supervising Deputy Attorneys General, and Gregory M.

Cribbs, Deputy Attorney General, Los Angeles, California,

for defendant-appellant David Maxwell-Jolly.

Lloyd A. Bookman, Byron J. Gross, and Jordan B. Keville,

Hooper, Lundy & Bookman, Inc., Los Angeles, California,

for plaintiffs-appellees California Pharmacists Association, et

al.

OPINION

MILAN D. SMITH, JR., Circuit Judge:

We are once again asked to consider whether the California

Department of Health Care Services (Department) Director,

David Maxwell-Jolly (Director), should be enjoined from

implementing state legislation reducing payments to certain

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medical service providers. In this latest set of appeals,

Plaintiffs-Appellees (California Pharmacists), a group of adult

day health care centers (ADHCs), hospitals, pharmacies, and

beneficiaries of the State’s Medicaid program, Medi-Cal,

challenge a five percent reduction in those payments.1 We

affirm, and hold that the district court did not abuse its discretion in granting California Pharmacists’s motion for a preliminary injunction because the State failed to “stud[y] the impact

of the [five] percent rate reduction on the statutory factors of

efficiency, economy, quality, and access to care” prior to

implementing the rate reductions. Indep. Living Ctr. of S.

Cal., Inc. v. Maxwell-Jolly, 572 F.3d 644, 652 (9th Cir. 2009)

(Independent Living II).

FACTUAL AND PROCEDURAL BACKGROUND

I. Medicaid and Medi-Cal

Under Title XIX of the Social Security Act (the Medicaid

Act), 42 U.S.C. § 1396 et seq., the federal government provides funds to participating states to “enabl[e] each State, as

far as practicable . . . to furnish . . . medical assistance on

behalf of families with dependent children and of aged, blind,

or disabled individuals, whose income and resources are

insufficient to meet the costs of necessary medical services.”

42 U.S.C. § 1396-1. “Medicaid is a cooperative federal-state

program that directs federal funding to states to assist them in

providing medical assistance to low-income individuals.”

Katie A. ex rel. Ludin v. Los Angeles County, 481 F.3d 1150,

1153-54 (9th Cir. 2007). As we have stated many times, it is

the states that choose whether to participate in Medicaid.

Should a state choose to participate in the Medicaid program,

it must comply with federal Medicaid law. Id. California has

chosen to participate in the program.

1Here we deal only with providers and beneficiaries of ADHCs. Mirroring the analysis of today’s holdings, we address the challenges to AB 1183

with respect to pharmacy and hospital providers, as well as their beneficiaries, in two separate, concurrently filed memorandum dispositions. 

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To receive federal funds, states must administer their programs in compliance with individual “State plans for medical

assistance,” which require approval by the federal Secretary

of Health and Human Services. 42 U.S.C. § 1396-1. The State

plan must “[s]pecify a single State agency established or designated to administer or supervise the administration of the

plan.” 42 C.F.R. § 431.10. The Defendant-Appellee’s agency,

the Department, “is the state agency responsible for the

administration of California’s version of Medicaid, the MediCal program.” Orthopaedic Hosp. v. Belshe, 103 F.3d 1491,

1493 (9th Cir. 1997) (Orthopaedic II).

The Medicaid Act provides detailed requirements for state

plans. See 42 U.S.C. § 1396a(a)(1)-(73). One of those provisions is § 1396a(a)(30)(A) (hereafter § 30(A)), the provision

at issue in this appeal. Under § 30(A), a state plan must:

provide such methods and procedures relating to . . .

the payment for . . . care and services . . . as may be

necessary . . . 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.

Id. § 1396a(a)(30)(A). Thus, a state plan must establish health

care provider reimbursement rates that are, among other

things: (1) “consistent with high-quality medical care” (quality of care); and (2) “sufficient to enlist enough providers to

ensure that medical services are generally available to Medicaid recipients” (access to care). Indep. Living Ctr. of S. Cal.,

Inc. v. Shewry, 543 F.3d 1050, 1053 (9th Cir. 2008) (Independent Living I).

II. Assembly Bill 5

On February 16, 2008, the California legislature enacted

Assembly Bill X3 5 (AB 5) in special session. See 2008 Cal.

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Legis. Serv. 3rd Ex. Sess. Ch. 3. AB 5 reduced by ten percent

payments under the Medi-Cal fee-for-service program for

physicians, dentists, pharmacies, ADHCs, clinics, health systems, and other providers for services provided on or after

July 1, 2008. Cal. Welf. & Inst. Code § 14105.19(b)(1). Section 14105.19 of the California Welfare & Institutions Code

also reduced payments to managed health care plans by the

actuarial equivalent of the ten percent payment reduction. Id.

§ 14105.19(b)(3). Finally, AB 5 reduced payments to acute

care hospitals not under contract with the Department for

inpatient services. Id. § 14166.245(c). Under AB 5, these cuts

were scheduled to take effect on July 1, 2008.

In Independent Living II, a group of pharmacies, health

care providers, senior citizens’ groups, and Medi-Cal beneficiaries brought an action under the Supremacy Clause, alleging that AB 5 conflicted with the requirements of § 30(A). We

agreed, and held that under Orthopaedic II § 30(A) requires

the Director to set provider reimbursement rates that “ ‘bear

a reasonable relationship to efficient and economical hospitals’ costs of providing quality services, unless the Department shows some justification for rates that substantially

deviate from such costs.’ ” Indep. Living II, 572 F.3d at 651

(quoting Orthopaedic II, 103 F.3d at 1496). We explained that

Orthopaedic II interpreted § 30(A) to require the Director to

“ ‘rely on responsible cost studies, its own or others’, that provide reliable data as a basis for its rate setting.’ ” Id. at 652

(quoting Orthopaedic II, 103 F.3d at 1496). However, prior to

enacting AB 5,

[t]he Director failed to provide any evidence that the

Department or the legislature studied the impact of

the ten percent rate reduction on the statutory factors

of efficiency, economy, quality, and access to care

. . . , nor did [the Director] demonstrate that the

Department considered reliable cost studies when

adjusting its reimbursement rates.

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Id.

III. Assembly Bill 1183

On September 16, 2008, the California legislature passed

Assembly Bill 1183 (AB 1183), which became effective on

September 30, 2008. See Cal. Legis. Serv. Ch. 758. AB 1183

amended § 14105.19(b)(1) to provide that the ten percent rate

reductions previously called for in AB 5 would end on February 28, 2009. Id. AB 1183 also added § 14105.191 and

amended § 14166.245 of the California Welfare & Institutions

Code, for either one percent, five percent, or ten percent rate

reductions, depending on provider type. See Cal. Welf. & Inst.

Code §§ 14105.191, 14166.245. 

On January 29, 2009, California Pharmacists challenged

the AB 1183 Medi-Cal reimbursement rate reductions. California Pharmacists sought to enjoin the Director from implementing AB 1183’s five percent reduction in payments to

ADHCs. ADHCs provide an alternative to institutional care,

responding to the State’s need “to establish and to continue a

community-based system of quality adult day health care

which will enable elderly persons or adults with disabilities to

maintain maximum independence.” Cal. Health & Safety

Code § 1570.2. Though recognizing the need for custodial

care, the California legislature has concluded that “overreliance on [custodial] care has proven to be a costly panacea in

both financial and human terms, often traumatic, and destructive of continuing family relationships and the capacity for

independent living.” Id.

The district court granted the preliminary injunction. It held

that California Pharmacists had demonstrated a likelihood of

success on the merits for three reasons. First, the legislative

history showed no indication that the legislature considered

§ 30(A) prior to passage of AB 1183. Second, since the

Department was given no discretion to alter the rate reductions imposed by the legislature, any analysis that the DepartCALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3339

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ment completed in February 2009, and thus after the

reductions were enacted, did not satisfy the requirements of

Orthopaedic II. And third, any analysis conducted by the

Department was inadequate because the Department relied on

costs incurred at intermediate care facilities (NF-As), which

the district court considered to be an inadequate proxy for

ADHC costs. The district court also held that California Pharmacists had demonstrated a risk of irreparable harm and that

the balance of equities and public interest weighed in favor of

injunctive relief. The Director timely appealed.

The Director raises three issues on appeal. First, the Director argues that the district court erred in holding that the legislature itself was required to conduct cost studies or analyses

prior to enactment of AB 1183 to determine whether the proposed rate reductions complied with the efficiency, economy,

and quality of care provisions of § 30(A). Second, the Director contends that even if the legislature was required to conduct the relevant analysis, the district court committed clear

error in concluding that the legislature did not adequately consider the § 30(A) factors prior to enacting AB 1183. Third, the

Director argues that the district court erred in concluding that

California Pharmacists had met their burden of demonstrating

irreparable harm with respect to reduced reimbursement rates

under AB 1183.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction over this appeal pursuant to 28 U.S.C.

§ 1292(a)(1). A district court’s decision to grant or deny a

preliminary injunction is reviewed for abuse of discretion.

Indep. Living II, 572 F.3d at 651. We recently restated our

two-part test used to determine whether a district court has

abused its discretion. First, we “determine de novo whether

the trial court identified the correct legal rule to apply to the

relief requested.” United States v. Hinkson, 585 F.3d 1247,

1262 (9th Cir. 2009) (en banc). If the trial court did not identify the correct legal rule, it abused its discretion. Id. at 1262.

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Second, we must determine if the district court’s “application

of the correct legal standard was (1) ‘illogical,’ (2) ‘implausible,’ or (3) without ‘support in inferences that may be drawn

from the facts in the record.’ ” Id. (quoting Anderson v. City

of Bessemer City, 470 U.S. 564, 577 (1985)).

In granting a request for a preliminary injunction, a district

court abuses its discretion if it “base[s] its decision on an erroneous legal standard or clearly erroneous findings of fact.”

Earth Island Inst. v. U.S. Forest Serv., 442 F.3d 1147, 1156

(9th Cir. 2006), abrogated on other grounds by Winter v. Natural Res. Def. Council, Inc., 129 S. Ct. 365 (2008). We

review conclusions of law de novo and findings of fact for

clear error. Id. Under this standard, “[a]s long as the district

court got the law right, it will not be reversed simply because

the appellate court would have arrived at a different result if

it had applied the law to the facts of the case.” Id. (internal

quotation marks omitted).

DISCUSSION

[1] In seeking a preliminary injunction in a case in which

the public interest is involved, a plaintiff must overcome four

hurdles. Thus, California Pharmacists must show that: (1)

they are likely to succeed on the merits; (2) they are likely to

suffer irreparable harm in the absence of preliminary relief;

(3) the balance of equities tips in their favor; and (4) an

injunction is in the public interest. Cal. Pharms. Ass’n v.

Maxwell-Jolly, 563 F.3d 847, 849 (9th Cir. 2009) (citing Winter, 129 S. Ct. at 376); see also Am. Trucking Ass’ns, Inc. v.

City of Los Angeles, 559 F.3d 1046, 1052 (9th Cir. 2009).

I. Likelihood of Success on the Merits

[2] In Orthopaedic II, we held that § 30(A) requires

the Director [to] set hospital outpatient reimbursement rates that bear a reasonable relationship to effiCALIFORNIA PHARMACISTS v. MAXWELL-JOLLY 3341

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cient and economical hospitals’ costs of providing

quality services, unless the Department shows some

justification for rates that substantially deviate from

such costs. To do this, the Department must rely on

responsible cost studies, its own or others’, that provide reliable data as a basis for its rate setting.

103 F.3d at 1496. 

We address the Director’s arguments in turn.

A. The Body Responsible for Complying with § 30(A)

First, the Director argues that Orthopaedic II did not hold

that rate setting must be based upon pre-enactment legislative

studies undertaken and completed by the legislature itself

prior to legislative action authorizing a state department to

implement rate reductions. According to the Director, at issue

in Orthopaedic II were statutorily mandated rate changes not

unlike those set pursuant to AB 1183. However, despite those

enactments, we focused solely on the Department’s actions,

rather than on the legislature’s, and thus only the Department

is required to consider the § 30(A) factors. We disagree.

In Orthopaedic II, none of the disputed rate-settings was

actually set by the legislature. See Orthopaedic Hosp. v.

Kizer, No. 90-4209, 1992 WL 345652 (C.D. Cal. Oct. 5,

1992) (Orthopaedic I). To the contrary, the legislative enactments granted the Director broad discretion to set the applicable rates in the face of general governing criteria. See, e.g.,

Orthopaedic I, 1992 WL 345652, at *7 (describing that reimbursement rates for rural hospitals were to “be set at a level

which will provide incentives for rural hospitals to focus on

the provision of outpatient services and . . . reduce the financial losses incurred by the facilities”); id. at *8 (describing

that for delivery services rates the Department “shall eliminate the Medi-Cal reimbursement differential for obstetrical

services” by equalizing reimbursement for Caesarean and

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non-Cesarean section deliveries); id. at *9 (statute required

the Department to amend the method for reimbursing disproportionate share hospitals for outpatient services, to which the

“Department responded by developing a new payment methodology”). Since the Director set the challenged rates, Orthopaedic II addressed whether the Medicaid Act “requires the

Department to consider the costs hospitals incur in delivering

services when setting specific payment rates under [§ 30(A)].”

103 F.3d at 1496 (emphases added). Looking to the clear language in the statute, we noted that § 30(A) “provides that payments for services must be consistent with efficiency,

economy, and quality of care, and that those payments must

be sufficient to enlist enough providers to provide access to

Medicaid recipients.” Id. We reasoned that costs were an integral factor to be considered in the payment calculus, since

“[t]he Department cannot know that it is setting rates that are

consistent with [§ 30(A)’s relevant factors] without considering the costs of providing such services.” Id. (emphasis

added). Thus, we held that “payments for hospital outpatient

services must bear a reasonable relationship to the costs of

providing quality of care incurred by efficiently and economically operated hospitals.” Id. 

[3] Unlike the statutes at issue in Orthopaedic II, the State

has taken a different approach to setting rates under AB 1183.

Under AB 1183, the legislature mandated that the Director

reduce provider payments by a fixed percentage. See, e.g.,

Cal. Welf. & Inst. Code § 14105.191(b)(2) (“[P]ayments to

the following classes of providers shall be reduced by 5 percent for Medi-Cal fee-for-service benefits[.]”). Thus, the

Director is misguided in arguing that our focus on the Department in Orthopaedic II absolves the legislature of the same

requirements when it sets rates. In other words, in Orthopaedic II, there was no question that the Department set reimbursement rates. Those rates provided payments for the

medical service at issue under the State’s plan—there, hospital outpatient services. We had no reason to focus on what the

State legislature considered before rates were set since the

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legislature was one step removed from the regulations promulgated by the Department. As noted, the legislature merely

outlined broad goals for the Department, a process separate

and distinct from determining the effect of a specific rate

reduction on the statutory factors of efficiency, economy,

quality, and access to care. Yet if the legislature elects to bypass the Department, and set rates itself, it must engage in the

same principled analysis we required of the Director in Orthopaedic II.

Moreover, in Orthopaedic I, the Director made the inverse

of the argument he asserts here. There, he argued that in

enacting the governing statutes, the legislature considered the

relevant § 30(A) factors, thus excusing the Department’s need

to do the same when it set rates based on the legislature’s

commands. See Orthopaedic I, 1992 WL 345652, at *7-11.

The district court rejected this argument, holding first that the

statutes did not “purport to establish any specific payment

rates,” id. at 7, and second that even if the legislature had considered the relevant factors, that did not “relieve the Department of the obligation to further consider [the relevant

factors] in exercising what discretion it had in implementing

the legislature’s general mandate,” id. at 9. In addition, the

court noted, “nor is there adequate evidence in the record

demonstrating that the state legislature at any time considered

[the relevant factors] in connection with the equalization of

rates.” Id. The district court explained:

In sum, if there was evidence both that (1) in setting

the challenging rates, the Department had merely in

rote fashion been implementing a precisely-crafted

statutory enactment that did not permit the Department to exercise any significant discretion whatsoever, and further, that (2) the legislature in enacting

the statute had expressly considered “efficiency,

economy, and quality of care,” the Court might agree

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ciency, economy, and quality of care,” at all. But

there is convincing evidence of neither.

Id. Thus, we are not telling the State something new. 

Indeed, we find no distinction between the method by

which rates were set under either AB 1183 or AB 5. Under

AB 5, the California legislature enacted a statutorily mandated across-the-board rate reduction. In holding that the

Director violated § 30(A) when he implemented AB 5’s rate

reductions, we held “[t]he Director failed to provide any evidence that the Department or the legislature studied the

impact of the ten percent rate reduction on the statutory factors . . . prior to enacting AB 5.” Indep. Living II, 572 F.3d

at 652 (emphases added). We noted several times our concern

with the context in which the legislation was passed, and

focused on what State officials failed to consider prior to

enactment. See id. at 655-56 (holding that the State’s decision

to pass legislation reducing Medi-Cal reimbursement rates for

purely budgetary concerns violated federal law); id. at 656

(concluding that the State’s Legislative Analyst was the only

“State official” to have “considered—let alone studied” the

impact of the rate reduction on services provided to Medi-Cal

beneficiaries); id. at n.12 (“Nothing in the record connects the

decision to cut Medi-Cal reimbursement rates by ten percent

across-the-board to a factfinding process initiated by state

officials.”). Such an approach is consistent with that of our

sister circuits, where in the context of legislative, as opposed

to agency, rate-setting, they too have focused on ensuring that

the legislative body had information before it so that it could

properly consider efficiency, economy, quality of care, and

access to services before enacting rates. See Minn. Homecare

Ass’n, Inc. v. Gomez, 108 F.3d 917, 918 (8th Cir. 1997) (holding that although the agency did not provide any formal

§ 30(A) analysis to the legislature, lobbyists “actively participated in the . . . legislative session” such that the legislature

adequately considered § 30(A) when it raised reimbursement

rates); cf. Ark. Med. Soc’y, Inc. v. Reynolds, 6 F.3d 519, 530

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(8th Cir. 1993) (refusing to consider evidence offered during

agency hearings regarding the effect of rate cuts on accessibility because it “could only be confirmed by historical data

accumulated after the cuts were made”).2

[4] In sum, we find nothing remarkable in holding that the

final body responsible for setting Medicaid reimbursement

rates must study the impact of the contemplated rate reduction

on the statutory factors of efficiency, economy, quality of

care, and access to care prior to setting or adjusting payment

rates. We emphasize that the State need not follow “any prescribed method of analyzing and considering [the § 30(A)]

factors.” Minn. Homecare Ass’n, 108 F.3d at 918; Orthopaedic II, 103 F.3d at 1498 (refusing to impose a “rigid formula”

for the Department to follow). But as we stated in Orthopaedic II, “Congress intended payments to be flexible within a

range; payments should be no higher than what is required to

provide efficient and economical care, but still high enough

to provide for quality care and to ensure access to services.”

103 F.3d at 1497. The only way to ensure that Congress’s

intent is realized is for the State to study the impact of the

contemplated rate change on the statutory factors prior to setting rates. Thus, in no way do we mean to suggest that the

State is proscribed from setting or adjusting reimbursement

rates. We simply reaffirm that if it does so, it must comply

with federal law. 

2The Director’s reliance on Folden v. Wash. State Dep’t of Soc. &

Health Servs., 981 F.2d 1054 (9th Cir. 1992), is also misplaced. In Folden,

the owners of fourteen nursing home care facilities challenged Washington state Medicaid payments under a now repealed section of the Medicaid

Act known as the Boren Amendment. 981 F.2d at 1056. We have numerous times rejected the Director’s attempt to “graft past judicial interpretation of the Boren Amendment onto this court’s interpretation of § 30(A).”

Indep. Living II, 572 F.3d at 654-56 & nn.11-12; Alaska Dep’t of Health

and Soc. Servs. v. Ctrs. for Medicare and Medicaid Servs., 424 F.3d 931,

940-41 (9th Cir. 2005). 

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B. Legislative Consideration Prior to Setting Rates

Having determined that the State legislature was required

to study the impact of the five percent rate reduction on the

statutory factors of efficiency, economy, quality, and access

to care prior to enacting AB 1183, we next consider whether

it did so. The Director argues that even though the legislature

was not required to do so, the district court committed clear

error in concluding that the legislature did not adequately consider the § 30(A) factors prior to implementing AB 1183. 

In support of his argument, the Director submits the declaration of the Department’s Deputy Director for Legislative

and Governmental Affairs. The Deputy Director states that in

May 2008, the Senate and Assembly proposals were released

in public hearings held by the Senate and Assembly Budget

Committees. According to the Deputy Director, Department

employees “provid[ed] information, technical assistance, and

responses to numerous inquiries to legislative staff members

concerning the various 5% and 1% rate reductions that were

included in AB 1183.” The Director also references the May

30, 2008, agenda released by the Assembly Budget Subcommitee No. 1 on Health and Human Services. That agenda lists

certain “items to be heard” including proposed actions to

“Maintain Essential Health Care Services and Eligibility,”

such as “Restore 10% provider rate cut for physicians and

other healthcare providers” and “Partially restore long-term

care rate reductions enacted in AB 5 X 3 (reduce cut from

10% to 5%).” The only proposed action that includes a discussion relevant to ADHCs explains that individuals with

developmental disabilities living in Intermediate Care Facilities are eligible for ADHC services, and that such clarification

in a trailer bill is necessary so that the State’s Department of

Developmental Services will no longer have to “fund these

ADHC services at 100 percent General Fund cost.” 

Next, the Director points to the California Senate Committee on Budget and Fiscal Review for May 30, 2008, which

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includes recommendations for modification of several rate

reductions or elimination of services. With respect to ADHC

services, one entry contains the same description of the proposed trailer bill needed to clarify that individuals with developmental disabilities in Intermediate Care Facilities are

eligible for participation in the ADHC Program. The other

entry relevant to ADHCs is a brief explanation of the Department’s request for an increase in funds for ADHC services

due to an increase in enrollees. 

The Director also points to the June 11, 2008, Subcommittee 3 Health, Human Services, Labor, and Veterans Affairs

Major Action Report. That Report notes certain of the Department’s “Highlights for the Medi-Cal Program.” The Deputy

Director calls particular attention to the entry that indicates

that the 2008-09 budget bill “Provided a partial restoration to

the rates reimbursed under Medi-Cal by providing a 5 percent

across-the-board restoration to the 10 percent reduction as

proposed by the Governor and taken in Special Session

through [AB 5]. In the Medi-Cal Program, this resulted in an

increase of about $597 million ($302 million General Fund).”

The Report also noted adoption of the ADHC proposals set

forth above.

The Director further points to the Budget Conference Committee 2008 Action List dated July 9, 2008, which shows

seven items that the Assembly and Senate voted on, ultimately contained in AB 1183, such as “Partial Restoration of

Medi-Cal Fee-For-Service Provider Payments” and “Partial

Restoration of Medi-Cal Pharmacy Rate.” The Director

argues that this Action List illustrates “that the Assembly and

Senate voted on the very Medi-Cal rate reduction language

that was ultimately contained in AB 1183.” The July 2008

Summary Overview Budget Conference Committee Report

summarizes many of the rate reductions enacted as part of AB

1183. Finally, the Director refers to the State’s Legislative

Analyst Office’s analysis of the 2008-09 Budget, which

includes recommendations from the State’s Legislative Ana3348 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY

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lyst concerning the Governor’s proposed reductions to provider reimbursement. 

[5] The district court explicitly mentioned the legislative

history described above (with the exception of the Legislative

Analyst Office’s analysis), and determined that it does not

show that there was consideration of the § 30(A) factors. We

agree, since the legislative history nowhere mentions any of

the § 30(A) factors, see Orthopaedic I, 1992 WL 345652, at

*8 (“Tellingly—although not dispositively the terms ‘efficiency,’ ‘economy,’ and ‘equality [sic] of care’ appear

nowhere in these documents.”), and is concerned solely with

budgetary matters, see Indep. Living II, 572 F.3d at 659

(“State budgetary concerns cannot . . . be the conclusive factor in decisions regarding Medicaid.” (internal quotation

marks omitted)). Indeed, the legislative history contains no

indication that, in adjusting rates under AB 1183, the State

“ ‘rel[ied] on responsible cost studies, its own or others’, that

provide reliable data as a basis for its rate setting.’ ” Id. at 652

(quoting Orthopaedic II, 103 F.3d at 1496). The Legislative

Analyst Office’s analysis of the 2008-09 Budget appears to be

the very same report we referenced in Independent Living II.

See id. at 656. It discusses the Governor’s proposal of a ten

percent provider rate reduction, which the State’s own Legislative Analyst recommended rejecting for all providers except

hospitals because those rate reductions had “the potential to

negatively impact the operation of the Medi-Cal Program and

the services provided to beneficiaries by limiting access to

providers and services.” It is hardly clear error for the district

court to have failed to mention a report conducted without

regard to the specific rate reductions before it. Accordingly,

we will not disrupt the district court’s factual findings, as they

are not clearly erroneous.

C. The Department’s Analysis

The Director also argues that the district court erred in failing to consider the analysis conducted by the Department,

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completed after the law’s enactment. In rejecting the Department’s analysis, the district court held that AB 1183 did not

provide the Department with any discretion, citing Cal. Welf.

& Inst. Code § 14105.191(a), which provides that

“[n]otwithstanding any other provision of law, in order to

implement changes in the level of funding for health care services, the director shall reduce provider payments.” (emphasis

added). The district court reasoned that since the Department

was not given any authority to alter the rate reduction

imposed by the legislature, the Department’s post hoc analysis does not satisfy the requirements of Orthopaedic II. The

district court went on to hold that even if a post hoc analysis

was sufficient, the Department relied on an inadequate proxy

for ADHC costs when it considered data for NF-As.

[6] To satisfy § 30(A), any analysis of reimbursement rates

on the statutory factors of efficiency, economy, quality, and

access to care, must have the potential to influence the ratesetting process. See Indep. Living II, 572 F.3d at 652 n.9

(holding that the district court did not abuse its discretion in

concluding that post hoc rationalizations of the disputed reimbursement rates do not satisfy the procedural requirements of

Orthopaedic II); see also Orthopaedic II, 103 F.3d at 1499

(“[T]he Department must consider hospitals’ costs based on

reliable information when setting reimbursement rates . . . .”

(emphases added)); Ark. Med. Soc’y, 6 F.3d at 530. Yet the

Department’s analysis of AB 1183 with respect to ADHCs

was issued on February 24, 2009, more than five months after

the legislature enacted AB 1183, but prior to the cuts’ implementation. Therefore, for the Department’s analysis to have

the requisite potential effect, the Director would have to have

discretion regarding implementation of the rates.

In his reply brief, and for the first time in this litigation, the

Director argues that the Department’s post-enactment study is

sufficient because the Department retained discretion under

AB 1183 not to implement the reductions before March 1,

2009. Thus, the Director argues, the Department’s February

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24, 2009, analysis would still be meaningful because the

Director had authority to affect rates by deciding not to implement them.3

 Although the Director has clearly waived this

argument by failing to raise it in his opening brief, see Indep.

Towers of Wash. v. Washington, 350 F.3d 925, 929 (9th Cir.

2003), we nevertheless consider and reject the Director’s

argument on the merits. 

The Director argues that if the Department determined that

the reduced payments for any services would not comply with

the relevant § 30(A) factors, the Department retained the discre3The Director’s argument that he has discretion regarding the rates is

drawn from a footnote in the district court’s analysis in Orthopaedic I.

There, the Director argued that legislative consideration of the § 30(A)

factors excused the Department from again having to consider § 30(A). In

rejecting that argument, the district court noted that the relevant statutory

enactments “gave the Department fairly wide discretion in implementing

the basic changes outlined in the statute.” Orthopaedic I, 1992 WL

345652, at *9. To buttress that conclusion, the district court pointed out

that under the Medicaid Act, the “ultimate responsibility” for administration of a state’s Medicaid program is entrusted to a “single state agency.”

Id. at n.14 (quoting 42 C.F.R. § 431.10). As a result, the district court concluded that under federal law, the state agency has the “final say in what

payment rates to set, notwithstanding a legislature’s efforts to provide

broad guidelines for the agency.” Id. (emphasis added). The court found

it particularly relevant that the California legislature directed the Department to “seek federal approval for this section, if necessary.” Id. (citing

California Senate Bill 2563) (internal quotation marks omitted). The court

also noted that subsection (a) under the Medi-Cal enabling statute grants

the Department “extremely broad authority” to “comply with legislative

budgetary enactments” only to the extent that those enactments comply

with federal law. Id.

As we have described, there are a number of notable differences

between the legislative enactments at issue in Orthopaedic I and AB 1183,

thus raising the question of whether, under AB 1183, the Director had the

“final say in what payment rates to set.” Id. However, because we reject

the Director’s argument for the reasons set forth below, we do not decide

whether differences between AB 1183 and the legislative enactments at

issue in Orthopaedic I are dispositive of the Director’s discretion in this

case. 

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tion4

 not to implement those reductions. As a result, the legislature made implementation of the rate reductions dependent

on whether the Department determined that they complied

with federal law.5

The Director relies on § 14105.191(i), which states: 

The department shall promptly seek any necessary

federal approvals for the implementation of this section. To the extent that federal financial participation

is not available with respect to any payment that is

reduced or limited pursuant to this section, the director may elect not to implement that reduction or limitation. 

Cal. Welf. & Inst. Code § 14105.191(i). The Director also

points to the Medi-Cal enabling statute, Cal. Welf. & Inst.

Code § 14105(a):

The director shall prescribe the policies to be followed in the administration of this chapter, may limit

the rates of payment for health care services, and

4At oral argument the Director conceded that he did not have authority

to change the rates set by the legislature, but, he argued, he could exercise

a veto power based on a determination that the rates did not comply with

the statutory factors in § 30(A). We need not decide whether the type of

discretion contemplated by § 14105(a) of the California Welfare & Institutions Code is different from that under § 14105.191(i). That is, that the

Director may “limit the rates,” or “adopt regulations setting rates” under

§ 14105(a) would seem to provide for a different type of discretion than

deciding simply not to implement the rates as set. However, because we

hold that the Director did not retain any discretion to act once rates had

been set, we do not discuss the distinction, if any, between the discretion

contemplated by § 14105(a) as opposed to § 14105.191(i). 

5We need not decide whether a study completed after rates have been

set complies with § 30(A) where the Department has discretion not to

implement the rates. For purposes of our analysis only, we assume such

a study would suffice, but do not so hold because we find that the Director

did not retain any discretion in this case. 

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shall adopt any rules and regulations as are necessary

for carrying out, but are not inconsistent with, the

provisions thereof.

Subsection (a) goes on to provide: 

In order to implement expeditiously the budgeting

decisions of the Legislature, the director shall, to the

extent permitted by federal law, adopt regulations

setting rates that reflect these budgeting decisions

within one month after the enactment of the Budget

Act and of any other appropriation that changes the

level of funding for Medi-Cal services.

Cal. Welf. & Inst. Code § 14105(a).

[7] The Director’s is not the most natural reading of the

statute. Section 14105.191(i) does not clearly invest the

Director with the discretion not to implement the legislature’s

rate reductions. Rather, it first directs the Department to “seek

any necessary federal approvals” to implement the rate reductions. Cal. Welf. & Inst. Code § 14105.191(i). Only then does

it permit the Director not to implement any reduction “[t]o the

extent that federal financial participation is not available.” Id.

(emphasis added). Thus, the most natural reading would seem

to be one of budgetary concern; if federal money is not available for any particular payment reduction, the Director may

choose to save the State money by not implementing the

reduction. Such a reading comports with the budgetary nature

of AB 1183’s legislative history. See Ariz. State Bd. For

Charter Sch. v. U.S. Dep’t of Educ., 464 F.3d 1003, 1008 (9th

Cir. 2006) (“When a natural reading of the statute[ ] leads to

a rational, common-sense result, an alteration of meaning is

not only unnecessary, but also extrajudicial.”).

[8] The Director asks that we read into the statutory text a

process by which the Department could first analyze the

impact of the five percent payment reduction on the § 30(A)

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factors and then elect to implement the reduction based on

that analysis. However, regardless of whether any such process was contemplated in the statute, the record clearly demonstrates that no process of the kind the Director envisions

took place. First, on September 30, 2008, the Department submitted its State Plan Amendment, incorporating AB 1183’s

rate reductions. In its State Plan Amendment, the Department

stated that it had “determined that payments will continue to

comply with any upper spending limits contained in Part 447

that were adopted to implement the ‘efficiency, economy, and

quality of care’ provision of [§ 30(A)]. Beneficiaries will continue to have access to covered services as required by Part

447.” Yet the Department did not issue a § 30(A) analysis

until February 24, 2009 and produced nothing that would

indicate that it studied the impact of AB 1183 on efficiency,

economy, quality, and access to care prior to September 30,

2008. The State Plan Amendment also does not mention the

Department’s discretion not to implement the rate reductions

based on federal participation.

In addition, on February 13, 2009, the State published

notice in the California Regulatory Notice Register that “Section 14105.191 of the [Welfare and Institutions] Code is

reducing the payments that would otherwise be paid for [adult

day health care services] under the current rate methodology

from 10 percent to 5 percent for dates of service on or after

March 1, 2009. The State’s Notice further provided that the

Department

is mandated by state law to implement the above

change in reimbursement. [The Department] has

considered the impact of this reimbursement on providers and Medi-Cal beneficiaries. [The Department’s] assessment is that reimbursement will

continue to compensate a high percentage of costs

incurred for these facility services and that Medi-Cal

beneficiaries will continue to have access to these

services consistent with [§ 30(A)]. 

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As with the State Plan Amendment, the Notice pre-dates any

analysis issued by the Department, yet definitively announces

payment reductions from ten to five percent. Moreover, the

Notice states that the Department “is mandated” to implement

the rates, further undermining the Director’s reading of

§ 14105.191(i).

[9] In sum, the Director’s argument that he retained discretion not to implement AB 1183’s rate reductions is not supported by the record. The Department’s February 24 analysis

issued well after decisions had been made to reduce payments

by five percent, and nothing in the record indicates that the

Department retained the discretion not to implement the rate

reductions based on a § 30(A) analysis. To comply with

§ 30(A), the State must study the impact of the contemplated

rate reduction on the statutory factors of efficiency, economy,

quality, and access to care prior to legislative enactment or in

a manner that allows meaningful consideration of such input

prior to implementation. Here, the State did neither. 

[10] In addition, regardless of whether the Director

retained the discretion to act in the manner he posits, we agree

with the district court that the Department’s analysis was

insufficient. Reviewing for clear error, we hold that the district court did not abuse its discretion in finding that the

Department’s reliance on NF-A rather than ADHC data was

inadequate. The Department looked to the average costs of

only six NF-A facilities, with widely varied costs, as a proxy

for the 313 ADHCs in the Medi-Cal program. In its ADHC

analysis, completed in February 2009, the Department

explained that it had “just begun the process of auditing the

costs of ADHCs for purposes of establishing rates under the

new costs based methodology that is scheduled to go into

effect on August 1, 2010[,]” and therefore, “in order to assess

how ADHC reimbursement compares to the costs that may be

incurred by an ADHC in providing ADHC services to MediCal recipients,” it used as a proxy how Medi-Cal reimbursement compares to NF-A costs. The Director concedes that a

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prospective cost reimbursement methodology for ADHCs is

“still more than one year away.” In the meantime, nothing in

the record indicates that the district court clearly erred in concluding that the Department’s use of NF-A costs was an inadequate proxy for ADHC costs. Cf. Orthopaedic II, 103 F.3d

at 1500 (holding that the Department violated § 30(A) when

readopting reimbursement rates for hospitals’ costs by not

considering hospitals’ costs when reevaluating its rates).

Accordingly, it was not an abuse of discretion for the district

court to have rejected the Department’s analysis.

II. Irreparable Harm

The Director also argues that the district court erred in

holding that California Pharmacists demonstrated a likelihood

of irreparable harm. After reviewing the evidence, the district

court held that “the evidence submitted by plaintiffs indicate[s] that Medi-Cal beneficiaries are at risk of losing access

to ADHC services due to the AB 1183 rate reduction.” The

Director argues that in determining whether California Pharmacists have shown a likelihood of irreparable harm, the district court was required to compare Medi-Cal beneficiaries’

access to ADHC services to that of the general population’s.

Once again, under § 30(A), each state’s Medicaid plan

must be

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.

42 U.S.C. § 1396a(a)(30)(A). This is referred to as the “equal

access to care provision,” Orthopaedic II, 103 F.3d at 1498,

and requires that a state plan establish reimbursement rates

sufficient to enlist enough providers to ensure that medical

services are generally available to Medicaid recipients, id. at

1497. The Director argues that the district court erred in fail3356 CALIFORNIA PHARMACISTS v. MAXWELL-JOLLY

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ing to apply the equal access to care provision in the context

of plaintiffs’ claims of irreparable injury. In other words, the

Director argues that there can be no finding of irreparable

harm where “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.” § 30(A).

According to the Director, applying this standard here, the

evidence before the district court established that ADHC services are not generally available to the general population and

thus California Pharmacists made no showing of irreparable

injury.

In Independent Living II, we discussed the distinction

between § 30(A)’s procedural and substantive requirements.

We considered the “potential difficulties inherent in assessing

substantive compliance with the factors laid out in § 30(A),”

which made more attractive, by comparison, the “processoriented view of the statute espoused in Orthopaedic [II].”

Indep. Living II, 572 F.3d at 657. While explaining that there

is a difference between substantive and procedural compliance with § 30(A), id. at 656, we also explained their interdependence, since “it is fair to assume that a rate that is set

arbitrarily, without reference to the Section 30(A) requirements, is unlikely to meet the equal access and quality

requirements,” id. at 657 (internal quotation marks omitted).

We reaffirmed Orthopaedic II’s requirement that states comply with the procedural components of § 30(A) by setting provider reimbursement rates only after consideration of the

relevant statutory factors of efficiency, economy, quality, and

access to care. Id.

[11] The Director’s approach to the irreparable harm analysis conflates § 30(A)’s procedural and substantive requirements. We do not require plaintiffs to show the State has

committed a substantive violation of § 30(A)’s access provision when they can show that the State did not comply with

§ 30(A)’s procedural components. In other words, showing a

procedural violation of the statute—that is, the State’s failure

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to consider the impact of the contemplated rate on the statutory factors set forth in § 30(A)—may demonstrate a likelihood of success on the merits that the setting of provider

reimbursement rates conflicts with § 30(A). Determining

whether plaintiffs have made a sufficient showing of irreparable harm is a separate inquiry, which does not turn on the

State’s substantive compliance with § 30(A). Rather, to show

a risk of irreparable harm, plaintiffs may show either, as Medicaid beneficiaries, “that enforcement of a proposed rule ‘may

deny them needed medical care[,]’ ” Indep. Living II, 572

F.3d at 658 (quoting Beltran v. Myers, 677 F.2d 1317, 1322

(9th Cir. 1982)), or, as Medicaid providers, that they will lose

considerable revenue through the reduction in payments that

they will be unable to recover due to the State’s Eleventh

Amendment sovereign immunity, Cal. Pharms. Ass’n, 563

F.3d at 850-52. 

[12] Requiring a substantive violation of the equal access

to care provision in order to meet the irreparable injury prong

would also run afoul of our Supremacy Clause jurisprudence.

In California Pharmacists, we held that in an action brought

under the Supremacy Clause, a finding of irreparable harm

does not turn on “whether the plaintiffs asserting the economic injury were in any sense intended beneficiaries of the

federal statute on which the Supremacy Clause cause of

action was premised.” Id. at 851. Because “[a] cause of action

based on the Supremacy Clause obviates the need for reliance

on third-party rights,” private parties bringing a Supremacy

Clause cause of action can “enforce the structural relationship

between the federal and state governments so long as they

ha[ve] Article III standing as, essentially, private enforcers of

the Supremacy Clause.” Id. Thus, as stated above, plaintiffs

need only show harm to Medi-Cal service providers or their

members in order to obtain injunctive relief. Id. at 850. The

Director’s more narrow approach would allow injunctive

relief only where plaintiffs are able to show that Medi-Cal

beneficiaries have worse access to care and services than that

available to the general population.

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[13] Finally, we have stated that even if § 30(A) imposes

a substantive requirement, a rate reduction might still conflict

with the statute if at least some providers stop treating MediCal beneficiaries. Indep. Living II, 572 F.3d at 656-57. The

Director concedes that here, the evidence indicates that at

least some ADHC Medi-Cal providers would stop treating

beneficiaries due to AB 1183. Thus, even if we were to

require a substantive violation of the statute to support a finding of irreparable harm, we would find that violation here. 

[14] Therefore, we reject the Director’s argument that

there can be no finding of irreparable harm unless the plaintiffs show a substantive violation of § 30(A)’s access to care

provision. The Director makes no serious attempt to dispute

the district court’s factual finding that, in light of the evidence, “Medi-Cal beneficiaries are at risk of losing access to

ADHC services due to the AB 1183 rate reduction.” Upon our

review of the evidence, we do not find the district court’s conclusion to be clearly erroneous. Accordingly, the district court

did not abuse its discretion in finding that California Pharmacists established sufficient irreparable harm to warrant a preliminary injunction.

III. Balance of Equities and the Public Interest

Finally, the Director argues that because of the State’s

deepening fiscal crisis, a preliminary injunction should not

issue. The Director insists that the legislature be allowed to

exercise “its considered judgment” in a manner that serves the

best interests of both Medi-Cal recipients and the State as a

whole, and that injunctions against payment reductions have

forced the State to eliminate many optional Medi-Cal services. The district court recognized the State’s interest in

meeting its financial obligations but held that the State’s

financial woes were outweighed by the public’s interest in

access to health care, particularly because “nothing . . . prevents [the State] from imposing a rate reduction after . . .

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appropriately consider[ing] and appl[ying] the relevant factors.” 

[15] “The public interest analysis for the issuance of a preliminary injunction requires us to consider ‘whether there

exists some critical public interest that would be injured by

the grant of preliminary relief.’ ” Indep. Living II, 572 F.3d at

659 (quoting Hybritech Inc. v. Abbott Labs., 849 F.2d 1446,

1458 (Fed. Cir. 1988)). We have held that “there is a robust

public interest in safeguarding access to health care for those

eligible for Medicaid, whom Congress has recognized as ‘the

most needy in the country.’ ” Id. (quoting Schweiker v.

Hogan, 457 U.S. 569, 590 (1982)). We continue to recognize

this important public interest in the context of social welfare

cases. As the district court stated, the State is free to exercise

its “considered judgment” and reduce Medi-Cal reimbursement rates. Yet it may not do so for purely budgetary reasons,

Ark. Med. Soc’y, 6 F.3d at 531, nor may it do so in a manner

that violates federal law, Indep. Living II, 572 F.3d at 659.

Accordingly, we hold that the district court did not abuse its

discretion in concluding that the balance of hardships and the

public interest weighed in favor of enjoining implementation

of the five percent rate reduction required by AB 1183.

CONCLUSION

We have now handed down multiple decisions instructing

the State on § 30(A)’s procedural requirements. We trust that

the State now understands that in order for it to comply with

§ 30(A)’s “requirement that payments for services must be

consistent with efficiency, economy, and quality of care, and

sufficient to ensure access,” Orthopaedic II, 103 F.3d at 1500,

it must: (1) “rely on responsible cost studies, its own or others’, that provide reliable data as a basis for its rate setting,”

id. at 1496; and (2) study the impact of the contemplated rate

change(s) on the statutory factors prior to setting rates, or in

a manner that allows those studies to have a meaningful

impact on rates before they are finalized. Because the State

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did neither with respect to AB 1183, we affirm the district

court’s order granting California Pharmacists’s motion for a

preliminary injunction.

AFFIRMED.

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