Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-00767/USCOURTS-caed-2_05-cv-00767-3/pdf.json

Nature of Suit Code: 440
Nature of Suit: Other Civil Rights
Cause of Action: 28:1331 Federal Question: Other Civil Rights

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

THUONG VAN TRAN, et al.,

NO. CIV. S-05-767 LKK/PAN

Plaintiffs,

v. O R D E R

ORANGE COUNTY HEALTH

AUTHORITY, et al.,

Defendants.

 /

Plaintiffs, beneficiaries of the Medi-Cal Program and a 

group of pharmacists and pharmacies, seek to enjoin a pharmacy

program established and administered by CalOptima, Orange County's

Medi-Cal managed care plan. Plaintiffs bring suit against the

Orange County Health Authority and members of its board of

directors ("Orange County"), Sandra Shewry, the Director of the

California Department of Health Services ("Shewry"), and Michael

Leavitt, Secretary of the United States Department of Health and

Human Services ("Leavitt"). 

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1 Defendants Orange County, Shewry, and Leavitt each move to

dismiss plaintiffs’ complaint. 

2

Plaintiffs contend that Orange County sets pharmacy rates

which violate the federal statewideness, comparability of services,

and freedom of choice requirements under the Medi-Cal statute

(first, second, and fifth claim); that defendants' extension of

various waivers under the Medicaid statute was void ab initio

(third claim); that defendants have violated § 14087.5 of the

California Welfare and Institutions Code (fourth claim); that

pharmaceutical rates and drug utilization restrictions violate 

§ 1915 of the Social Security Act (fifth claim); that the CalOptima

pharmacy rates are void because they were set in violation of the

Social Security Act (sixth claim); and that defendants violated

plaintiffs' equal protection rights under the Fourteenth Amendment

(seventh claim). Pending before the court is plaintiffs’ motion

for three preliminary injunctions and defendants' motions to

dismiss.1

I.

 BACKGROUND

Plaintiffs bring a number of claims related to a waiver of

various Medicaid requirements issued by the Secretary ("Secretary")

of the United States Department of Health and Human Services

("DHHS") to the California Department of Health Services ("Cal DHS"

or "the Department").

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3

A. MEDICAID STATUTORY AND REGULATORY FRAMEWORK 

The Medicaid program was established in 1965 by Title XIX of

the Social Security Act, codified at 42 U.S.C. § 1396-1396v

("Medicaid statute" or "the Act"). Medicaid is a cooperative

federal-state program through which the federal government provides

financial assistance to states so that they may furnish medical

care to needy individuals.

The basic requirements governing state Medicaid plans are set

out in § 1902(a) of the Act, 42 U.S.C. § 1396a, and in regulations

promulgated by the Secretary. See 42 C.F.R. Part 430 et seq.

State Medicaid plans must be approved by DHHS, Centers for Medicare

and Medicaid Services ("CMS"). 42 U.S.C. § 1396(a). State

Medicaid plans must meet the requirements set forth in § 1902 of

the Act and implementing regulations, including benefits, cost

sharing, utilization and reimbursement requirements. Id. 

Section 1915(b) of the Act, 42 U.S.C. § 1396n(b), authorizes

the Secretary to waive certain requirements of § 1902 "to the

extent he finds it to be cost-effective and efficient and not

inconsistent with purposes of [Title XIX]." Under 42 U.S.C. 

§ 1396n(b), the Secretary is permitted to waive the statewideness

(§ 1396a(a)(1)), comparability of services (§ 1396a(23)), and

freedom of choice requirements (§ 1396a(23)(A)). 

Once CMS receives an application for a § 1396n(b) waiver from

a state's Medicaid agency, the state's program will be deemed

approved unless it is acted upon within 90 days. 42 U.S.C. 

§ 1396n(f)(2); 42 C.F.R. Part 430.25(f)(3). Within this time

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4

frame, CMS can approve, disapprove, or stop the 90-day clock if

additional information about the program is needed. Id. The

waiver programs are approved for two-year periods and can be

renewed on an ongoing basis if the state seeks renewal. 42 U.S.C.

§ 1396n(h); 42 C.F.R. Part 430.25(h)(2)(ii), 431.55(b)(3).

In the case at bar, the Secretary granted a waiver of these

three specific Medicaid provisions for approximately two years.

Upon Cal DHS' request, the Secretary granted several renewals of

the waivers, thus extending their effective period. Id.

B. THE CALOPTIMA MEDI-CAL PROGRAM

The Cal DHS administers Medi-Cal, through which California

participates in the federal Medicaid program. 42 U.S.C. 

§§ 1396a-1396v. Defendant Sandra Shewry ("Shewry") is DHS'

Director. Under Medi-Cal, Cal DHS pays providers directly on a

fee-for-service basis, for specific services provided to

beneficiaries.

Orange County Health Authority, dba CalOptima ("CalOptima"),

is a local public agency and one of five County Organized Health

Systems in California. In 1993, CalOptima was organized under

§ 14087.54 of the California Welfare and Institutions Code and

Orange County Ordinance No. 3896, as amended by Ordinance No. 00-8.

The ordinance mandates that CalOptima shall create and implement

a Medi-Cal program that incorporates managed care concepts. 

Ordinance § 4-11-2.

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5

II.

 THE SECOND AMENDED COMPLAINT

Before the court is plaintiffs’ second amended complaint. The

allegations of that complaint are summarized below.

In October 1995, DHHS and CalOptima entered into a written

contract to ensure the provision of and payment for primary care

and other related managed care services under the Medi-Cal program.

Compl. at 10, 13, 14. On October 1, 1999, the same parties

entered into a successor contract wherein CalOptima agreed to

continue to ensure the delivery of Medi-Cal services in Orange

County. Through these contracts, DHHS arranged with CalOptima,

as a payer, to exclusively arrange for and pay providers to furnish

Medi-Cal services to Medi-Cal beneficiaries residing in Orange

County from federal-state funding, for the period of each contract.

Compl. at 13. The contract has been amended from time to time and

on July 5, 2005, the contract was further amended to extend through

June 30, 2007. 

The contract between DHHS and CalOptima contains provisions

by which Cal DHS supervises and retains control of CalOptima with

respect to (1) eligibility of beneficiaries and providers, (2)

CalOptima provider rates, operational policies, and the amount,

duration, and scope of pharmacy benefits to be furnished (none of

which are authorized by the contract to be set or changed without

Department written approval), and (3) to the processes by which

CalOptima identifies and investigate fraud or by which to assess

the potential of a pharmacy for fraud. 

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6

Under California law, the DHHS-CalOptima contract is

contingent upon a valid federal waiver being issued by the

Secretary of DHHS, without which the contract is prohibited from

being implemented. Cal. Welf. & Inst. Code § 14807.5. On or

before October 1, 1995, the Secretary of DHHS granted waivers of

the following requirements of the Medicaid Act: (1) statewideness

(§ 1396a(a)(1)); (2) comparability (§ 1396a(a)(10)(B)); freedom of

choice requirement (§ 1396a9a)(23)(A)). 

The waivers have been extended several times by the Secretary,

with the most recent extension having been granted by letters sent

by the Centers for Medicare and Medicaid Services, which were datestamped April 8, 2003, November 10, 2004, and July 5, 2005. Compl.

at 15. The extension of the waiver by the most recent extension

is for the period July 1, 2005 through July 30, 2007.

Plaintiffs contend that CalOptima has arranged for licensed

pharmacies to furnish Medi-Cal services in the CalOptima program,

claiming authority to do so under the DHHS-CalOptima contract.

Compl. at 16. Plaintiffs maintain that at all times, pharmacy

services have been and are arranged and paid for on a fee-forservices payment basis in the CalOptima pharmacy program, just as

pharmacy services were performed on a fee-for-service basis by

Orange County pharmacies in the statewide Medi-Cal pharmacy

program. Id.

Plaintiffs allege that, since October 1, 1995, CalOptima and

its governing board have engaged "in a series of acts under color

of state law (namely, §§ 14087.5, 14087.54 WI Code),” which

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"unlawfully circumvent and violate the statewideness requirement

of § 1396a(a)(1), the comparability requirement of 

§ 1396a(a)(23)(A).” The CEO of CalOptima, Richard Chambers, and

his predecessors, "with knowledge of the facts, have also acted

under the same color of state law to aid and abet the

implementation of these violations of the Medicaid Act." Compl. at

16. 

At all times since October 1995, DHHS allegedly allowed

CalOptima to set, and CalOptima has set, pharmacy rates, including

the current CalOptima pharmacy rates, each of which has violated

and currently violates the statewideness requirement. Plaintiffs

contend that the rates set were different and substantially less

than the rates which are paid to pharmacies in the statewide

program. Since October 1995, DHHS has allowed CalOptima to set

drug utilization restrictions, many of which violate the statewide

and comparability requirements. Compl. at 17. The drug

utilization rules allegedly reduce the services in the CalOptima

pharmacy program to substantially less than the amount, duration,

and scope of pharmacy services which are provided to beneficiaries

in the statewide Medi-Cal fee-for-service pharmacy program. Id.

At all times DHHS allowed CalOptima to adopt a regulation,

CalOptima Policy GG. 1406 ("CalOptima pharmacy eligibility

policy"), which restricts beneficiaries in the CalOptima program

from:

a. using any pharmacy which has not been accepted by a

specified entity into its private pharmacy network

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8

b. using any pharmacy which has not been certified by a

specified unlicensed unregulated private "fraud assessment

organization" ("FAO")

c. using any new pharmacy in Orange County which is not

owned by a pharmacy already accepted by the private entity

network.

DHHS has never requested and has never received approval of

any request for any waiver of these requirements with respect to

the CalOptima pharmacy program. Compl. at 18-19

Plaintiffs also allege that the application for the § 1915

waiver and its extensions failed to specify or show what 

restrictions of choice of pharmacy providers were to be made or

allowed under the (b)(4) waiver. Compl. at 23. Plaintiffs contend

that the actions of the Secretary to grant the § 1915 waiver, and

to extend the waiver through June 30, 2007, were void because the

Secretary had no valid basis on which to grant the requested

waiver. Id. 

It is further alleged that the Secretary knew that there had

been virtually 100% participation by Orange County pharmacies in

the statewide Medi-Cal fee-for-services program. It is alleged

that it has never been necessary to restrict the pharmacies in

Orange County from whom a beneficiary may receive pharmacy

services, in order to enable beneficiaries to obtain pharmacy

services effectively and efficiently. Compl. at 24. The

Secretary's decision to grant and extend the Section 1915 waiver

with respect to the CalOptima pharmacy program was arbitrary,

capricious, and contrary to law. Compl. at 24. 

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9

By virtue of the waiver, CalOptima adopted pharmacy rates

which are different from the statewide Medi-Cal fee-for-services

pharmacy program, and adopted drug utilization restrictions which

reduced the amount, duration and scope of pharmacy services

violating the statewideness and comparability requirements of

(a)(1) and (b)(4) of Social Security Act § 1915. 

The pharmacy rates set by CalOptima since October 1, 1995 have

been set without regard for and in violation of the procedural

requirements imposed upon CalOptima both by § 30A and by Subd.

(b)(4) in that the governing board of CalOptima failed to consider

the relevant factors, the costs to pharmacies, failed to consider

the costs to pharmacies to acquire and furnish prescribed drugs,

failed to obtain or use any factual study to justify its

restrictions, failed to consider the factor of reasonable profit

for those furnishing quality services, and in setting each of the

rates, budgetary considerations were the conclusive factor in the

determination of the rate by the board. Compl. 29-30.

As a result of all the above, the beneficiary plaintiffs, and

the pharmacy plaintiffs in their individual capacity, and as

representatives of their beneficiary patients, each suffered and

will continue to suffer irreparable injury. Compl. at 30-31. 

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10

III.

STANDARDS

A. DISMISSAL STANDARDS UNDER FED. R. CIV. P. 12(b)(6)

On a motion to dismiss, the allegations of the complaint must

be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972).

The court is bound to give the plaintiff the benefit of every

reasonable inference to be drawn from the "well-pleaded"

allegations of the complaint. See Retail Clerks Intern. Ass'n,

Local 1625, AFL-CIO v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963).

Thus, the plaintiff need not necessarily plead a particular fact

if that fact is a reasonable inference from facts properly alleged.

See id.; see also Wheeldin v. Wheeler, 373 U.S. 647, 648 (1963)

(inferring fact from allegations of complaint).

In general, the complaint is construed favorably to the

pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). So

construed, the court may not dismiss the complaint for failure to

state a claim unless it appears beyond doubt that the plaintiff can

prove no set of facts in support of the claim which would entitle

him or her to relief. See Hishon v. King & Spalding, 467 U.S. 69,

73 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

In spite of the deference the court is bound to pay to the

plaintiff's allegations, however, it is not proper for the court

to assume that "the [plaintiff] can prove facts which [he or she]

has not alleged, or that the defendants have violated the . . .

laws in ways that have not been alleged." Associated General

Contractors of California, Inc. v. California State Council of

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11

Carpenters, 459 U.S. 519, 526 (1983).

B. STANDARD FOR A PRELIMINARY INJUNCTION

 The Ninth Circuit’s longstanding standard for a preliminary

injunction is well known: The moving party must show either (1)

a combination of probable success on the merits and the possibility

of irreparable injury, or (2) that serious questions are raised and

the balance of hardships tips sharply in favor of the moving party.

Dr. Seuss Enters. v. Penguin Books USA, Inc., 109 F.3d 1394, 1397

n. 1 (9th Cir. 1997). These standards “are not separate tests but

the outer reaches of a single continuum.” International Jensen,

Inc. v. Metrosound U.S.A., 4 F.3d 819, 822 (9th Cir. 1993)

(citation omitted). 

 The court in any situation must find that there is at least

a fair chance of success on the merits, see Johnnson v. California

State Bd. of Accountancy, 72 F.3d 1427, 1430 (9th Cir. 1995), and

that there is some threat of an immediate irreparable injury. See

Big County Foods, Inc. v. Board of Ed. of the Anchorage School

Dist., 868 F.2d 1085, 1088 (9th Cir. 1989). Furthermore, “[t]he

issuance of an ex parte temporary restraining order is an emergency

procedure, and is appropriate only when the applicant is in need

of immediate relief.” Wright, Miller & Kane, Federal Practice and

Procedure: Civil 2d § 2951 at 256-57 (footnote omitted).

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12

IV.

ANALYSIS

This matter is before the court on plaintiffs’ motion for

three preliminary injunctions and on defendants’ motions to

dismiss. 

 As the court understands plaintiffs’ complaint, their central

contention is that the federal defendant has, by virtue of the 

§ 1915 waiver, wrongfully permitted the state and local agency

defendants to set pharmacy rates and drug utilization rates which

violate requirements of statewideness, comparability of services,

and freedom of choice provisions which would otherwise apply under

the Medicaid statute, and that by virtue of the waiver the state

and local defendants are violating Cal. Welf. & Inst. Code 

§ 14097.5, and that the plaintiffs have been deprived of the equal

protection guaranteed by the federal Constitution. 

The statutory and regulatory regime at issue is fairly

complex, and unfortunately, plaintiffs’ briefs are convoluted and

sometimes self-contradictory. Nonetheless, it appears that many

of the substantive issues raised should not be addressed by the

court because plaintiffs’ present pleadings seek redress under a

statute which is not applicable to their claims. For that reason,

the court concludes that plaintiffs’ motion for preliminary

injunctions must be denied, and defendants’ motions to dismiss must

be granted. 

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2 The statute provides that:

To the extent necessary to decision and when presented,

the reviewing court shall decide all relevant questions

of law, interpret constitutional and statutory

provisions, and determine the meaning or applicability

of the terms of an agency action. The reviewing court

shall--

(1) compel agency action unlawfully withheld or

unreasonably delayed; and

(2) hold unlawful and set aside agency action, findings,

and conclusions found to be--

(A) arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law;

(B) contrary to constitutional right, power, privilege,

or immunity;

(C) in excess of statutory jurisdiction, authority, or

limitations, or short of 

13

B. SUIT UNDER 42 U.S.C. § 1983

Plaintiffs assert that they sue under 42 U.S.C. § 1983, and

disavow any claim under the Administrative Procedure Act.

Plaintiffs’ claims, however, demonstrate that suit under § 1983

does not lie for most of the causes of action. Plaintiffs’ central

claim is that the Secretary was not authorized to approve federal

waivers, where “there is no claim or showing . . . that the

restriction in choice of approval . . . will result in reducing the

state’s costs or the rate of increase in the state’s cost.” Compl.

at 18. Elsewhere, plaintiffs maintain that the waiver application

“must show facts to sustain or authorize the waiver, extension, or

license to be approved.” Compl. at 11. In sum, the allegation is

that the waivers were unlawful and thus CalOptima’s conduct

violates the MediCare statute. Such allegations, by their very

nature, challenge agency action and thus fall within the purview

of the Administrative Procedure Act (“APA”), 5 U.S.C. § 706.2

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statutory right;

(D) without observance of procedure required by law;

(E) unsupported. 

5 U.S.C.A. § 706.

3 At oral argument, plaintiffs confirmed that they are not

bringing suit under the APA, although counsel, perhaps anticipating

the court’s ruling, suggested that he might amend the complaint to

include such a claim.

4 Plaintiffs also assert standing, and one assumes a cause

of action, under the Supremacy Clause. The contention is without

merit. It is firmly established that the Supremacy Clause does not

create any independent federal rights. Golden State Transit Corp.

v. City of Los Angeles, 493 U.S. 103, 107 (1989). Rather, the

Supremacy Clause provides the basis for suit to a plaintiff with

standing to strike down state law which conflicts with preempting

federal law. Pharm. Research & Mfrs. of Am. v. Concannon, 249 F.3d

66, 74 (1st Cir. 2001).

14

Nonetheless, as noted, plaintiffs insist that “this [action] is not

. . . an APA proceeding.” Pl.’s Repl. at 20.3 Plaintiffs’

insistence is without effect. It is well-established that a suit

under § 1983 does not lie where Congress has provided a specific

remedy for the challenged conduct. Middlesex County Sewerage

Authority v. National Sea Clammers Ass'n, 453 U.S. 1, 20 (1981)

(“When the remedial devices provided in a particular Act are

sufficiently comprehensive, they may suffice to demonstrate

congressional intent to preclude the remedy of suits under 

§ 1983"); see also Almond Hill Sch. v. U.S. Dep't of Agric., 768

F.2d 1030, 1035-36 (9th Cir.1985); cf. Jett v. Dallas Indep. Sch.

Dist., 491 U.S. 701 (1989).4 To put it somewhat differently,

plaintiffs cannot forego the remedy Congress provided for

challenges to administrative determinations under the Medicaid

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5 There are innumerable other problems with plaintiffs’ claim

under § 1983. See, e.g., Gonzaga University v. Doe, 536 U.S. 273,

283 (2002); see also Sanchez v. Johnson, 416 F.3d 1051 (9th Cir.

2005). Moreover, as defendant Leavitt notes, § 1983 is limited to

violations of federal rights under color of state law. When

issuing the waivers challenged here, the Secretary acted under

color of federal law. 

6 The statute provides that the “department shall seek all

federal waivers necessary to allow for federal financial

participation in expenditures under this article . . . and that

“[t]his article shall not be implemented until all necessary

waivers have been approved by the federal government.”

7 Obviously, since the statute addresses the duty of state

and local agencies, the federal defendants are not proper targets

of this cause of action.

15

Statute in favor of a suit under the Civil Rights Act.5 Thus,

causes of action one through four, and six must be dismissed. 

C. CALIFORNIA WELFARE AND INSTITUTIONS CODE § 14087.5

Plaintiffs bring suit under § 14087.5 of the California

Welfare and Institutions Code.6 This cause of action does not

directly challenge the Secretary’s determination to grant a waiver,

and thus is not subject to the analysis undertaken above.7

According to plaintiffs, this section prohibited the CalOptima

contract from being implemented. Compl. at 26. Although

plaintiffs bring suit under a provision of California law, it is

clear that plaintiffs’ claims are rooted in allegations that the

state has not complied with federally-imposed conditions under the

Medicaid statute. Such a suit does not lie in federal court. See

Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 106

(1984). In Pennhurst, the Supreme Court taught that “the

typical remedy for state noncompliance with federally-imposed

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conditions is not a private cause of action for noncompliance

but rather action by the Federal Government to terminate funds

to the State.” Id. at 28. Consequently, plaintiffs’ claim, a

private right of action for the state’s alleged noncompliance,

must fail, and the cause of action must be dismissed.

D. EQUAL PROTECTION CLAIM 

Plaintiffs allege in their seventh claim that the

difference in purported lower rates paid to pharmacies in the

CalOptima program as compared to those in the statewide Medi-Cal

program violates the Equal Protection Clause of the federal

Constitution. As defendant Shewry notes, courts will “presume

the constitutionality of the statutory discriminations and

require only the classification challenged be rationally related

to a legitimate state interest.” City of New Orleans v. Dukes,

427 U.S. 297, 303 (1976). Defendants explain that MediCal rates

and services may vary across the state “depending on differences

in area demographics and services provided.” Shewry Mot. at 20

(citing Clayworth, 295 F.Supp.2d at 1125 and Blagojevich, 324

F.3d 906 (9th Cir. 2003)). Of course, variances in treatment

premised upon legally-cognizable differences, i.e., the fact

that the classes are not similarly situated, do not offend the

Equal Protection clause. If the classification has some

“reasonable basis,” it does not offend the Constitution simply

because in “practice it results in some inequality.” Dandridge

v. Williams, 397 U.S. 471, 485(1970)(involving statute that

provides Aid to Families With Dependent Children)(quotation

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8 During oral argument, the parties discussed with the court

whether plaintiffs should be granted leave to amend their

complaint. Plaintiffs intimated that they would amend their

complaint to include a claim under the Administrative Procedure

Act. Defendants vehemently objected to the court granting leave

to amend, noting that plaintiffs have already amended their

complaint twice and that defendants have spent significant time and

resources defending their actions in various law suits, including

this one. Although the court recognizes defendants’ frustration,

because the court cannot conclude that amendment would be “futile”

at this point and because of the generous standard under Fed. R.

Civ. P. 15(a) (The Federal Rules provide that leave to amend

pleadings "shall be freely given when justice so requires”), the

court must grant plaintiffs twenty days from the date of this order

to amend their complaint. Plaintiffs are admonished that the court

will not look kindly upon any amendments which would be futile and

will issue sanctions for frivolous amendments. 

17

omitted). See also McGown v. Maryland, 366 U.S. 420, 426 (1961)

(“A statutory discrimination will not be set aside if any state

of facts reasonably may be conceived to justify it”). Thus, in

the matter at bar, CalOptima is a managed care program and

operates entirely differently than a fee-for-service program. 

For the reasons stated in Shewry’s motion, the court finds that

the purported discriminatory effect is legally permissible and

passes muster under rational basis review.

Accordingly, defendants’ motions to dismiss are GRANTED. 

Plaintiffs’ motions for a preliminary injunction are DENIED.8

IT IS SO ORDERED. 

DATED: December 6, 2005.

/s/Lawrence K. Karlton 

LAWRENCE K. KARLTON

SENIOR JUDGE

UNITED STATES DISTRICT COURT

Case 2:05-cv-00767-LKK -DAD Document 105 Filed 12/06/05 Page 17 of 17