2013 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-9-2013

New Jersey Primary Care Associ v. New Jersey

Department of Human

Precedential or Non-Precedential: Precedential

Docket No. 12-3220

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Recommended Citation

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

No. 12-3220

_____________

NEW JERSEY PRIMARY CARE ASSOCIATION INC.

v.

STATE OF NEW JERSEY DEPARTMENT OF HUMAN 

SERVICES; JENNIFER VELEZ, ESQ., in her Official 

Capacity as Commissioner of the State of 

New Jersey Department of Human Services; 

STATE OF NEW JERSEY DEPARTMENT OF HUMAN 

SERVICES, DIVISION OF MEDICAL ASSISTANCE AND 

HEALTH SERVICES; VALERIE HARR, in her Official 

Capacity as Director of the Division of Medical Assistance 

and Health Services,

 Appellants

_____________

APPEAL FROM THE UNITED STATES DISTRICT 

COURT FOR THE DISTRICT OF NEW JERSEY

(D.C. Civil No. 12-cv-00413)

District Judge: Honorable Joel A. Pisano 

____________

Argued: March 20, 2013

____________

Before: FUENTES, CHAGARES and BARRY, 

Circuit Judges

(Opinion Filed: July 9, 2013)

____________
2

Caroline M. Brown, Esq. (Argued)

Ze-wen J. Chen, Esq.

Covington & Burling, LLP

1201 Pennsylvania Avenue, N.W.

Washington, DC 20004

Counsel for Appellants

Khatereh S. Ghiladi, Esq. (Argued)

Rupinderjit S. Grewal, Esq.

Feldesman Tucker Leifer Fidell, LLP

1129 20th Street, N.W.

4th Floor

Washington, DC 20036

Counsel for Appellee

____________

OPINION OF THE COURT

____________

BARRY, Circuit Judge

Under the federal Medicaid statute, 42 U.S.C. § 1396 

et seq., states participating in Medicaid and implementing a 

managed care environment are obligated to make, at least 

every fourth month, supplemental payments (known as 

―wraparound payments‖) to federally-qualified health centers 

(―FQHCs‖) in an amount equal to the difference between a 

predetermined rate set by the Medicaid statute multiplied by 

the number of Medicaid patient encounters, and the amount 

paid to FQHCs by managed care organizations (―MCOs‖)1for 

all Medicaid-covered patient encounters. In 2011, concerned 

that gaps in the FQHCs‘ claim verification process led to 

significant overpayments, the New Jersey Department of 

Human Services (the ―State‖) changed its methodology for

calculating wraparound payments. Under the new 

methodology, instead of basing the payments solely on the 

 

1 MCOs are commonly referred to as health maintenance 

organizations or ―HMOs‖.
3

number of Medicaid encounters and their total MCO receipts 

as self-reported by FQHCs, the State would instead rely on 

data reported by MCOs absent receipt of certain additional 

data from the FQHCs. Because MCOs only report encounters 

that they have approved and paid, prior MCO payment would 

become a prerequisite to State wraparound reimbursement 

under the new system. 

 

Plaintiff, the New Jersey Primary Care Association 

(―NJPCA‖), a nonprofit organization under § 501(c)(3) of the 

Internal Revenue Code and comprised of New Jersey FQHCs, 

brought the instant action claiming that this change violated 

the FQHCs‘ right to due process and federal and state law 

governing Medicaid wraparound payments, resulting in 

considerable budget shortfalls. The State moved for summary 

judgment; NJPCA cross-moved for summary judgment and 

moved for a preliminary injunction demanding the immediate 

payment of the amount the State would have paid under the 

preexisting system and enjoining the State from implementing

the change. The District Court granted NJPCA‘s motions for 

summary judgment and a preliminary injunction, and denied 

the State‘s motion. The State now appeals. We will affirm in 

part, and reverse in part. 

I. BACKGROUND

A. Statutory Framework

Title XIX of the Social Security Act authorizes federal 

grants to states for medical assistance to qualified low-income 

persons. Harris v. McRae, 448 U.S. 297, 301 (1980). The

Medicaid program is jointly financed by federal and state 

governments but is administered entirely by the states. States 

that elect to participate in the program must comply with the 

federal Medicaid statute and implementing regulations 

promulgated by the Secretary of Health and Human Services 

(―HHS‖). Pa. Pharmacists Ass’n v. Houstoun, 283 F.3d 531, 

533 (3d Cir. 2002) (en banc). Among the federal requirements 

is the requirement that the state adopt an implementation 

―plan‖ approved by the federal government, consisting of a 

―comprehensive written statement submitted by the [state] 
4

agency describing the nature and scope of its Medicaid 

program.‖ 42 C.F.R. § 430.10; see also 42 U.S.C. § 1396. 

The federal government will review the proposal and 

―determine whether the plan can be approved to serve as a 

basis for Federal financial participation . . . in the State 

program.‖ 42 C.F.R. § 430.10. State plans must be amended 

whenever necessary to reflect changes in the federal law or 

―[m]aterial changes in State law, organization, or policy, or in 

the State‘s operation of the Medicaid program.‖ Id. § 

430.12(c)(ii). 

 

States participating in Medicaid must also offer nonprofit federally-qualified health centers—the FQHCs—known 

as community health centers, which receive federal grants 

under Section 330 of the Public Health Service Act (―PHSA‖)

and provide primary and preventive care to medically 

underserved communities. 42 U.S.C. § 254b. Where 

available, such as for Medicaid-eligible encounters, FQHCs 

must seek reimbursement for their expenses. Id. §

254b(k)(3)(F). The federal Medicaid statute specifically 

regulates FQHC reimbursement for services provided to 

Medicaid beneficiaries. Id. § 1396a(bb)(1). Under the 

Medicaid program, reimbursement payments owed by each

participating state to FQHCs are assessed through what is 

known as the Prospective Payment System (―PPS‖). Id. § 

1396a(bb)(1)-(3). Stated simply, the FQHCs‘ reimbursement

from the state is calculated by multiplying the number of 

Medicaid encounters by the average reasonable costs of 

serving Medicaid patients in 1999 and 2000 (the ―PPS rate‖), 

adjusted yearly for inflation by a factor known as the 

Medicare Economic Index. Id. The system creates risks of 

both under- and over-payment relative to actual costs. If 

FQHCs control their costs below the PPS reimbursement, they 

stand to earn a profit. If costs exceed the PPS reimbursement, 

FQHCs suffer a loss. 2

 

2 Until 2000, in order to ensure that federal grant awards 

under the PHSA did not subsidize benefits that should be paid 

by Medicaid, the federal Medicaid statute required that state 

Medicaid programs reimburse FQHCs for all reasonable 

costs incurred when providing services to Medicaid 
5

Like many other states, New Jersey has adopted a 

managed care program, pursuant to which it contracts with 

managed care organizations—the MCOs—that arrange for the 

delivery of health care services to individuals who enroll with 

them. Because MCOs do not typically operate their own 

facilities, MCOs subcontract with providers, including

FQHCs, to provide medical services. In New Jersey, MCOs 

receive prospective payments from the State based on a fixed 

monthly fee per patient and the anticipated use of services

(the ―capitation payment‖). The MCOs, in turn, contract with 

FQHCs to provide medical services, and reimburse FQHCs 

for Medicaid-covered encounters out of their capitation funds. 

Though the costs are agreed upon, under the Medicaid statute, 

MCOs must make to FQHCs at least ―the level and amount of 

payment which the [MCO] would make for the services if the 

services were furnished by a provider which is not a 

[FQHC].‖ Id. § 1396b(m)(2)(A)(ix). 

 

A frequent problem, and the subject of the dispute 

before us, occurs in a managed care system: the contracted-for

payment from the MCO to the FQHC for a Medicaid-covered 

patient encounter is often less than the amount the FQHC is 

entitled to receive under the PPS. In this situation, the 

Medicaid statute requires the state to make a supplemental

payment—the wraparound payment—at least once every four 

months, to make up the difference between the PPS rate and 

the MCO payment. § 1396a(bb)(5)(B). This payment must 

be ―equal to the amount (if any) by which the [per-visit rate] 

exceeds the amount of the payments provided under the 

[managed care] contract.‖ 42 U.S.C. §1396a(bb)(5)(A). In 

essence, then: FQHCs are entitled to two discrete payments 

for Medicaid-covered encounters, the direct payment from the 

 

beneficiaries. The Benefits Improvement and Protection Act 

of 2000 (―BIPA‖), Pub. L. No. 106-554, 114 Stat. 2763, 

repealed cost-based reimbursement and adopted the PPS, 

which created these cost-controlling incentives. BIPA also 

alleviated the providers‘ burden of providing individual cost 

data. After the enactment of BIPA, providers need report 

only the number of Medicaid-eligible visits and MCO 

receipts. 
6

MCO, and the wraparound payment from the state to 

supplement the former. The MCO payment plus the 

wraparound payment equals the PPS reimbursement. 

Critically here, the Medicaid statute does not mandate any 

particular methodology for calculating the wraparound 

payment, and different states have implemented different 

procedures. Compare Three Lower Cntys. Cmty. Health 

Servs., Inc. v. Maryland, 498 F.3d 294, 299 (4th Cir. 2007) 

(describing Maryland‘s practice whereby the FQHCs file 

claims to MCOs, and MCOs validate and process the claims 

and report them to the state), with Ohio Admin. Code § 

5101:3-28-07 (wraparound payments are calculated based on 

claim data submitted to states directly by FQHCs). 

The Medicaid statute also requires that states ―provide 

for procedures of prepayment and postpayment claims review, 

including review of appropriate data with respect to the 

recipient and provider of a service and the nature of the 

service for which payment is claimed, to ensure the proper 

and efficient payment of claims and management of the 

program.‖ 42 U.S.C. § 1396a(a)(37)(B). The Centers for 

Medicare and Medicaid Services (―CMS‖), the federal agency 

responsible for overseeing the Medicare and Medicaid 

programs, issues the State Medicaid Manual, which interprets 

federal law and regulations to require ―supporting 

documentation [that] includes as a minimum the following: 

date of service, name of recipient, Medicaid identification 

number, name of provider agency and person providing the 

service, nature, extent, or units of service, and the place of 

service.‖ State Medicaid Manual § 2500.2, at 2-112, 

available at www.cms.gov/Regulations-andGuidance/Guidance/Manuals/Paper-Based-ManualsItems/CMS021927.html.

 

B. New Jersey Medicaid and Calculation of Wraparound 

Payments 

Following implementation of the PPS in 2000, New 

Jersey amended its state plan to read as follows: 

After the final PPS encounter rates effective 
7

January 1, 2001 and July 1, 2001 are calculated, 

a financial transaction will be processed for the 

difference between the interim and final PPS 

encounter rate for encounters provided to 

Medicaid managed care beneficiaries. Once the 

PPS rates effective January 1, 2001 and July 1, 

2001 have been finalized, all subsequent 

quarterly wraparound payments will be 

reconciled at 100% of the PPS encounter rate. 

N.J. State Plan, attach. 4.19-B, at 9(c)(10-11). Though the 

plan amendment was approved by CMS, it does not specify 

how the State is to verify eligible claims or calculate 

wraparound payments, leaving this instead to the New Jersey 

Medicaid statute, N.J. Stat. Ann. § 30:4D-1, et seq., and 

subsequent regulations. 

 

The New Jersey Medicaid statute requires providers to 

―maintain such individual records as are necessary to fully 

disclose the name of the recipient to whom the service was 

rendered, the date of the service rendered, the nature and 

extent of each such service rendered, and any additional 

information, as the department may require by regulation.‖ 

N.J. Stat. Ann § 30:4D-12(d). State regulations specify that 

health care providers agree to ―furnish information for . . . 

services as the program may request.‖ N.J. Admin. Code §

10:49-9.8(b)(2). The regulations also require FQHCs to 

―maintain an accounting system, which identifies costs in a 

manner that conforms to generally accepted accounting 

principles and maintain documentation to support all data.‖ 

Id. § 10:66-1.5(d)(1)(x). The State is authorized to ―conduct 

either on-site or desk audits of cost reports, including 

financial, statistical, and medical records,‖ id. § 10:66-

1.5(d)(1)(x)(4), and in connection with such, FQHCs are 

required to ―submit other information (statistics, cost and 

financial data) when deemed necessary by the Department.‖ 

Id. § 10:66-1.5(d)(1)(x)(5). 

The New Jersey regulations implementing the quarterly 

wraparound payment system provide more specific details 

regarding Medicaid reimbursement and FQHC reporting 
8

requirements:

[A]ll quarterly wrap-around reports shall be 

reconciled at 100 percent of the difference 

between the final rate and the managed care 

receipts received for services provided to 

Medicaid . . . managed care beneficiaries. In the 

event of an underpayment, the Division shall 

reimburse the provider 100 percent of the 

amount due. In the event of an overpayment, the 

provider shall reimburse the Division 100 

percent of the overpayment within 30 days of 

the due date of the Managed Care Wrap-around 

Report.

Id. § 10:66-1.5(d)(1)(viii)(4). FQHCs are required to submit 

two quarterly reports to the New Jersey Department of Human 

Services—one indicating the number of Medicaid-eligible 

encounters, id. at § 10:66-1.5(d)(1)(viii)(6), and another 

indicating ―[a]ll Medicaid . . . managed care payments 

received by the FQHC for the quarter, including capitation, 

fee-for-service, supplemental or administration fund, and any 

other managed care payments,‖ id. at § 10:66-

1.5(d)(1)(viii)(7). FQHCs report these Medicaid encounters 

and the MCO receipts on reports called the ―Medicaid 

Managed Care Encounter Detail Report‖ and the ―Medicaid 

Managed Care Receipts Report.‖ Id. at § 10:66-4, App‘x. E. 

These reports do not require a claim-by-claim breakdown of 

the data; rather, they require FQHCs only to report the 

aggregate quarterly encounters and aggregate MCO receipts. 

Up until the third quarter of 2011, to calculate the 

quarterly wraparound payment, the State relied solely on the 

self-reported Medicaid Managed Care Encounter Detail and 

the Medicaid Managed Care Receipts reports. Using the 

FQHCs‘ reports, the State would multiply the number of 

Medicaid encounters by the PPS rate, and then subtract from 

this figure aggregate MCO receipts. In practice, this meant 

that each FQHC would report all Medicaid-covered 

encounters on the worksheet, regardless of whether an MCO 

actually paid its contracted portion of the particular encounter. 
9

Therefore, for reported encounters left unpaid by an MCO, 

the wraparound payment for that encounter would constitute 

the full PPS rate (i.e., full PPS rate minus the zero payment by 

MCO is equal to the wraparound payment). 

 

C. New Jersey’s New Wraparound Payment System

In a letter dated April 6, 2004, the State invited FQHCs 

to participate in a dialogue in an effort to remedy its concern

that wraparound calculations were resulting in overpayments

to the FQHCs. Over the next few years, the State conducted 

site visits and held quarterly meetings to discuss possible 

remedies. At a meeting on February 9, 2005, the State 

indicated for the first time that it would prefer to use data 

submitted to it by MCOs to calculate wraparound payments. 

It was not disputed that there were important discrepancies 

between the MCO and FQHC data systems. The State 

believed that the self-reported data resulted in substantial 

overpayment by the State for invalid Medicaid claims that had 

been correctly rejected by the MCOs. The NJPCA maintained 

that using MCO data would result in substantial 

underpayment because claims are rejected by MCOs for 

reasons unrelated to their Medicaid eligibility, and insisted 

that FQHCs continue to play a role in the verification process. 

In 2008, the State proposed that FQHCs include in their 

quarterly wraparound reports claim-level data fields (such as 

the name of the patient, the provider, Medicaid ID number, 

the encounter date, etc.) to verify each claim. NJPCA resisted 

this proposal and the State held off implementation. 

In 2011, however, the State informed FQHCs that it 

had performed a review of the MCO Medicaid data and 

discovered that approximately 10% of claims submitted by 

FQHCs to MCOs had been denied but were never corrected 

and resubmitted for MCO reimbursement. Because these 

claims were nevertheless submitted as Medicaid-covered 

encounters in the FQHCs‘ quarterly wraparound reports, the 

State‘s wraparound payment for these claims amounted to the 

full PPS rate. According to the State, this indicated one of 

two problems: either (1) the rejected claims, if valid, should 

have been, but never were, paid by the MCOs at the 
10

contracted rate (indicating that the State overpaid by the 

amount of the contracted rate), or (2) the claims were invalid, 

for a variety of reasons—such as lack of Medicaid eligibility, 

accidental duplicate claims, or fraud—and were not eligible 

for any State reimbursement (indicating that the State 

overpaid by the entire PPS rate). 

In a May 5, 2011 letter addressed to each FQHC, the 

State informed the clinics that it had developed, through a 

third party, a detailed reporting system that captured FQHC 

claim data from MCOs called the ―Molina Medicaid 

Encounter System.‖ The State provided a disk to each FQHC 

with the Molina data and invited the FQHCs to point out and 

reconcile valid Medicaid encounters they believe were not 

reported by the Molina system. 

 

In a letter dated June 9, 2011, the State ordered new 

data to be included in the FQHCs‘ quarterly reports beginning 

with the third quarter of 2011. The letter required the 

following detailed data fields to support reimbursement 

claims for each Medicaid encounter: (1) recipient full name; 

(2) recipient Medicaid ID number; (3) name of the MCO; (4) 

MCO assigned ID number; (5) FQHC billing number; (6) date 

of service rendered; and (7) procedure code and modifiers. 

The State indicated that it would not process the wraparound 

payments until it received this claim-level verification data. 

Despite raising concerns about the feasibility of providing this

data on such short notice and requesting at least a one-quarter 

delay before implementation, the FQHCs expressed their 

intent to comply. The NJPCA, however, reiterated its 

position that the State was nevertheless responsible for 

making full and timely wraparound payments for all valid 

Medicaid encounters. 

 

The State sent a letter to the FQHCs on September 12, 

2011 that launched the parties into the instant dispute. The 

letter requested that FQHCs provide two additional data fields 

for each claimed Medicaid encounter: (1) the MCO payment 

amount, and (2) the MCO payment date (together, the ―MCO 

payment data‖). The letter also stated that if the FQHCs were 

unable to produce this information by the close of the third 
11

quarter, the State would calculate the quarterly wraparound 

payment using the MCO data generated by the Molina system. 

To the NJPCA, this request evinced an unprecedented change 

to the New Jersey State Medicaid reimbursement system. 

Rather than ensuring reimbursement for all Medicaid-covered 

encounters, regardless of whether the FQHC obtained MCO 

payment, the State would reimburse FQHCs only for 

encounters for which the MCO had paid its contracted 

portion. The State has not retreated from this position, 

maintaining that an MCO‘s determination that a claim is valid 

and Medicaid-eligible is an essential prerequisite to the 

State‘s reimbursement. 

 

The NJPCA objected to the change, principally on the 

ground that MCOs deny claims for myriad reasons unrelated 

to whether the encounter was covered under Medicaid. For 

example, MCOs might reject valid Medicaid services when a 

patient sees a covering physician rather than the patient‘s 

primary care physician when the primary care physician is on 

vacation or ill, when a single physician provides services in 

two different locations on the same day, or when an MCO‘s 

own processing delays wrongfully result in a claim‘s ―late 

submission.‖ When an MCO denies a valid Medicaid-eligible 

claim for one of these reasons and the State refuses to pay any 

wraparound payment, the FQHC is denied the entire PPS rate 

reimbursement for a Medicaid-eligible encounter, which, 

NJPCA argues, constitutes a violation of the federal Medicaid 

statute‘s mandate that FQHCs receive full and timely 

compensation. 

While objecting to the change in policy, the FQHCs 

nevertheless attempted to comply with the State‘s additional 

documentation demands by the end of the third quarter of 

2011. After reviewing the claims data submitted, however, 

the State determined that each of the FQHCs had failed to 

submit sufficiently complete or accurate data. According to 

the State, in some instances, FQHCs failed to provide the 

amount or date of the MCO payment; in others, FQHCs 

provided duplicate Medicaid numbers for multiple 

encounters. Therefore, the State based its third-quarter 

wraparound payments on the Molina system. The State made 
12

these payments in late November 2011, which FQHCs claim 

resulted in severe budget shortfalls, including as much as 

$400,000 for one FQHC. 3 

The NJPCA brought the instant action on behalf of the 

New Jersey FQHCs, claiming that the State‘s new 

wraparound payment policy violated the federal Medicaid 

statute and the New Jersey‘s own Medicaid regulations. The 

NJPCA also alleged that the State‘s implementation of the 

new policy without changing existing regulations through 

notice and comment rulemaking procedure violated its right to 

due process. The parties cross-moved for summary judgment, 

and the NJPCA moved for a preliminary injunction requiring 

the emergency payment of wraparound funds based on the 

predecessor payment system. 

D. The District Court’s Decision

The District Court found, first, that the State‘s 

unilateral change in its wraparound payment policy 

constituted an amendment of the State plan without obtaining 

federal approval in violation of the federal Medicaid statute. 

The Court also found that the State‘s departure from its own 

regulations without notice-and-comment rulemaking was 

arbitrary and capricious. The Court further found that the 

policy of requiring prior MCO payment for eligibility itself 

was arbitrary and capricious because prior MCO payment is 

not equivalent to eligibility for Medicaid, as MCOs deny 

claims for reasons unrelated to whether they are covered by 

Medicaid. In other words, because some Medicaid-covered 

encounters would remain unpaid, the new policy would 

guarantee that the State would violate the Medicaid statute‘s 

mandate to reimburse FQHCs at the PPS rate. Moreover, the 

Court found that the new policy constituted a denial of the 

FQHCs‘ right to procedural due process, because it deprived 

 

3 According to the State, several FQHCs submitted additional 

data validating Medicaid-covered encounters that had not 

been accounted for in the Molina data. The State, after 

reviewing the new data, made additional supplemental 

payments to these FQHCs.
13

them of their property interest in full and complete 

wraparound payments without adequate notice-and-comment 

rulemaking. Finally, the Court found that the FQHCs would 

be denied due process under the new policy, because they 

would be unable to meaningfully challenge wraparound 

payment denials other than through the private—and 

inadequate—MCO appeals process. 

Accordingly, the District Court entered an order

granting NJPCA‘s motion for summary judgment and denying 

the State‘s motion, and issued a preliminary injunction, 

enjoining the State from calculating wraparound payments in 

the manner proposed and ordering immediate emergency 

payment in the amount the FQHCs would have received under 

the preceding wraparound payment system. While the Court 

acknowledged that NJPCA had established its entitlement to 

summary judgment on the issue of whether the State‘s past

actions violated the law, it noted ―complex issues of fact 

relevant to the establishment of a new system, which are 

unsuited to resolution by the Court.‖ A22 (emphasis added). 

Accordingly, the Court exercised its equitable powers to grant 

―limited injunctive relief‖ relating to remediating the State‘s 

past illegal actions, and retained jurisdiction over the case 

while the parties ―engaged in a good-faith effort to resolve 

their differences and create a new system that complies with 

federal and state law.‖ Id. The Court required that the State 

submit an implementation plan within 180 days of the order 

and that the parties submit regular written status reports. The 

State now appeals. 

 

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had jurisdiction under 28 U.S.C. § 

1331 and we have jurisdiction under 28 U.S.C. § 1291. Our 

review of a district court‘s grant of summary judgment is 

plenary, and we view the facts in the light most favorable to 

the non-moving party. A.W. v. Jersey City Pub. Schs., 486 

F.3d 791, 794 (3d Cir. 2007). We review a district court‘s 

decision to grant a preliminary injunction under a three-part 

standard: findings of fact are reviewed for clear error, 

conclusions of law are evaluated under a plenary standard, 
14

and the ultimate decision to grant the preliminary injunction is 

reviewed for abuse of discretion. Rogers v. Corbett, 468 F.3d 

188, 192 (3d Cir. 2006). 

 

III. ANALYSIS

As an initial matter, the parties agree on appeal, 

notwithstanding the order of the District Court to the contrary, 

that the State may require that FQHCs provide claim-level 

data of the seven categories initially requested in the June 9, 

2011 letter: (1) recipient full name; (2) recipient Medicaid ID 

number; (3) name of the MCO; (4) MCO assigned ID 

number; (5) FQHC billing number; (6) date of service 

rendered; and (7) the procedure code and modifiers. 

Appellee‘s Br. at 24. Indeed, the State was well within its 

statutory and regulatory authority to require this information, 

see 42 U.S.C. § 1396a(a)(37)(B) (requiring that states collect 

such information); N.J. Stat. Ann §§ 30:4D-12(d), (f)

(authorizing agency to collect this data), and we will reverse 

the order of the District Court to the extent it enjoined the 

State from taking such action. 

NJPCA does take aim, however, at the State‘s 

requirement that FQHCs submit the two MCO payment data 

fields—the MCO Payment Amount and the MCO Payment 

Date—before receiving quarterly wraparounds payments. On 

appeal—and conceded during oral argument—the NJPCA 

objects not to the collection of the MCO payment data, as 

such, but only insofar as the collection of that data is ―really 

just indicia of a new policy limiting supplemental payment to 

only those encounters that received prior MCO payment.‖ 

Appellee‘s Br. at 24; see also id. at 43 n. 12 (―The primary 

issue of contention in this case is the State unlawfully 

requiring prior MCO payment for an FQHC to obtain a 

corresponding supplemental payment.‖). Therefore, because 

the NJPCA appears to have waived its objection to the data 

collection requirements, and for the additional reasons we 

discuss below, we will also reverse the order of the District 

Court to the extent it enjoined the State from requiring 

FQHCs to report the two MCO payment data fields. 

 
15

At the heart of the instant dispute is the NJPCA‘s 

attempt to invalidate the State‘s policy shift requiring prior 

MCO payment before processing wraparound 

reimbursements. The NJPCA contends that the State‘s action: 

(1) violated the federal Medicaid statute by (a) effectuating a 

de facto amendment to its State Medicaid Plan without 

obtaining prior federal agency approval in violation of 42 

U.S.C. § 1396a and 42 C.F.R. § 430.12(c), and (b) failing to 

provide FQHCs with full and timely wraparound payments; 

(2) violated New Jersey regulations implementing Medicaid; 

and (3) violated the FQHCs‘ right to procedural due process 

by depriving them of wraparound payments without sufficient 

notice and opportunity to be heard. 

 

The State, of course, has taken issue with each of these 

contentions. We depart from the District Court on several of 

its grounds for invalidating the State‘s action, and will 

address these first. At the end of the day, however, we 

conclude that the State‘s requirement of prior MCO payment 

before processing a wraparound reimbursement, absent an 

effective process by which FQHCs may challenge improperly 

denied claims within the statutorily mandated time period, 

violates the federal Medicaid statute‘s requirement that 

FQHCs receive full and timely wraparound payments. 

A. New Jersey Regulations

The District Court found that the MCO payment 

documentation requirement and the prior payment 

requirement violated New Jersey‘s regulations implementing 

Medicaid, and ordered compliance with those regulations. 

We conclude that the Eleventh Amendment barred the Court

from taking any such action. 

The NJPCA characterizes its claim that the State 

violated its own implementing regulations as a violation of 

federal law. A federal court, however, is ―barred by the 

Eleventh Amendment from ordering . . . state officials to 

conform their conduct to state law.‖ Jones v. Connell, 833 

F.2d 503, 505 (3d Cir. 1987); see also Concourse 

Rehabilitation & Nursing Ctr., Inc. v. DeBuono, 179 F.3d 38, 
16

43 (2d Cir. 1999) (―As we repeatedly have explained, the 

failure of a State authority to comply with State regulations 

cannot alone give rise to a [42 U.S.C.] § 1983 cause of 

action.‖). In Pennhurst State School & Hospital v. 

Halderman, the Supreme Court explained: 

A federal court‘s grant of relief against state 

officials on the basis of state law, whether 

prospective or retroactive, does not vindicate 

the supreme authority of federal law. On the 

contrary, it is difficult to think of a greater 

intrusion on state sovereignty than when a 

federal court instructs state officials on how to 

conform their conduct to state law. Such a result 

conflicts directly with the principles of 

federalism that underlie the Eleventh 

Amendment.

465 U.S. 89, 106 (1984). 

The Second Circuit applied this doctrine in the 

Medicaid context, when a health care provider claimed that 

New York‘s manner of conducting audits violated the New 

York plan and regulations, and, as such, violated the federal 

Medicaid statute. Concourse Rehabilitation, 179 F.3d at 43-

44. The Court concluded that ―absent the assertion of a 

specific conflict between the State plan or practices and 

federal law, such allegations fail to give rise to a federal cause 

of action. Because Concourse's allegations fail to assert such 

a specific conflict, and because the Eleventh Amendment bars 

our consideration of purely State law claims, we lack 

jurisdiction to decide appellant‘s claim.‖ Id. at 44 (internal 

citation omitted). Similarly here, the District Court lacked 

jurisdiction to invalidate the State‘s action on the basis of the 

State‘s purported failure to abide by its implementing 

regulations. 

 

B. Due Process

We also disagree with the District Court that the 

State‘s change of policy violated the FQHCs‘ right to 
17

procedural due process. The NJPCA makes two distinct due 

process claims: (1) that the State‘s action itself deprived the 

FQHCs of due process because it denied them the full 

wraparound payments to which they were entitled without 

affording sufficient notice and opportunity to be heard; and 

(2) that the MCO appeals process is inadequate to protect 

against the deprivation of their entitlement to full 

supplemental payments. The Court found that the FQHCs 

had succeeded on both of these claims, because (1) the policy 

change was not accompanied by a notice-and-comment rulemaking procedure and (2) the FQHCs‘ ―only recourse is the 

MCO appeals process—a private contractual remedy which 

may bear little relation to whether a disputed claim is eligible 

for Medicaid coverage.‖ A. 16. 

 

1. Notice and Opportunity to Heard

The State‘s failure to engage in notice-and-comment 

rulemaking does not constitute a procedural due process 

violation. The Due Process Clause does not require a state 

agency to engage in notice-and-comment rulemaking. See 

Tenny v. Blagojevich, 659 F.3d 578, 582 (7th Cir. 2011) 

(―The plaintiffs suggest that some sort of notice-and-comment 

rulemaking might satisfy constitutional due process. The 

prospect of a federal court ordering a state to create such a 

procedure risks turning procedural due process into a 

constitutionally mandated state administrative procedure 

act.‖). Indeed, the NJPCA does not try to defend this position 

before us. Rather, it essentially argues that FQHCs were not 

given enough notice to comb through and reconcile the data 

demanded by the State in time for the end of the third quarter 

of 2011. While sympathetic, we cannot see how this amounts 

to a deprivation of constitutional proportions. The NJPCA 

also argues that the State failed to give notice ―justifying‖ the 

denial of full wraparound payments. However, the State had 

given the FQHCs notice of its intent to seek and base its 

wraparound reimbursement on MCO payment data as early as 

2004 and solicited FQHCs‘ opinions on the issue on multiple 

occasions. The State‘s action did not amount to a due process 

violation. 

 
18

2. MCO Appeals Process

The second due process claim is more perplexing as it 

seems to involve the adequacy of the process provided by 

non-state actors, the MCOs. This cannot rise to a 

constitutional violation. See Gonzalez-Maldonado v. MMM 

Healthcare, Inc., 693 F.3d 244, 248 (1st Cir. 2012) (―Because 

we hold that [MCOs] are not governmental actors, the 

appellants‘ constitutional claims necessarily fail . . . .‖). The 

NJPCA attempts to shoehorn the State into this claim by 

arguing that the new State policy leaves the FQHCs with no 

choice when confronted with a wrongful denial of a 

Medicaid-eligible claim but to go through the internal MCO 

appeals process, which the NJPCA contends is timeconsuming and biased. But this simply restates the NJPCA‘s 

substantive Medicaid claim. If an FQHC is entitled to a 

wraparound payment for a Medicaid-eligible claim 

notwithstanding the lack of the prior MCO payment, the 

State‘s refusal to provide the payment is unlawful—no matter 

what subsequent process is offered. In any event, the 

adequacy or inadequacy of the internal MCO appellate 

process cannot be the basis for a procedural due process 

claim. 

C. Federal Medicaid Statute

The District Court found that the State‘s shift in policy 

violates the Medicaid statute in two ways: (1) it constitutes an 

amendment to the State Medicaid plan which requires federal 

approval, not the informal procedure used here; and (2) it 

deprives FQHCs of the full and timely wraparound payments 

to which they are entitled. We find that FQHCs do not have a 

private right of action to enforce the federal Medicaid 

statute‘s state plan approval requirement, but agree that the 

State‘s action violates the statute‘s requirement that a state

timely make fully compensatory wraparound payments. 

1. Federal Approval Requirement

As noted, the State must amend its plan and submit it 

for federal approval by the CMS to reflect ―[m]aterial changes 
19

in State law, organization, or policy, or in the State‘s 

operation of the Medicaid program.‖ 42 C.F.R. § 

430.12(c)(ii). If the CMS determines that a state plan or plan 

amendment does not comply with statutory requirements, it 

may deny the state federal funds. Id. §§ 430.15(c), 430.18. 

The District Court concluded that New Jersey‘s change in

requiring the MCO data and prior MCO payment before 

processing wraparound payments constituted a de facto

amendment to the plan without first securing federal approval 

in violation of the Medicaid statute. 42 U.S.C. § 1396a; 42 

C.F.R. § 430.12(c). Because the FQHCs lack a private right 

of action to enforce the federal approval requirement—and 

NJPCA is comprised of New Jersey FQHCs—however, we do

not address whether federal approval was required. 

 

―In order to seek redress through § 1983, . . . a 

plaintiff must assert the violation of a federal right not merely 

a violation of federal law.‖ Blessing v. Freestone, 520 U.S. 

329, 340 (1997). To determine whether a particular statutory 

provision gives rise to federal right, we look to whether 

―Congress [1] must have intended that the provision in 

question benefit the plaintiff . . . [,] [2] the right assertedly 

protected by the statute is not so  ̳vague and amorphous‘ that 

its enforcement would strain judicial competence . . . [,] [and]

[3] the statute must unambiguously impose a binding 

obligation on the States.‖ Id. at 340-41. The Court, in 

Gonzaga University v. Doe, 536 U.S. 273 (2002), emphasized 

that Congressional authorization of a private right of action 

must be clear: ―We now reject the notion that our cases permit 

anything short of an unambiguously conferred right to support 

a cause of action brought under § 1983.‖ Id. at 283. 

 

Even though the FQHCs would benefit from 

enforcement of the federal approval provision in this case, 

there is no indication that Congress intended the approval

provision to confer a private right of action to health care 

providers. Pa. Pharmacists Assoc. v. Houstoun, 283 F.3d 

531, 536 (3d Cir. 2002) (en banc) (―It is important to keep in 

mind that the question whether a statute is intended to benefit

particular plaintiffs is quite different from the question 

whether the statute in fact benefits those plaintiffs.‖). 
20

Importantly, the provision contains no ―rights-creating 

language,‖ does not identify any discrete class of 

beneficiaries, and focuses primarily on the state as a regulated 

entity rather than any individuals. See Gonzaga, 536 U.S. at 

287-90; Long Term Care Pharmacy Alliance v. Ferguson, 362

F.3d 50, 56-57 (1st Cir. 2004). 

 

We join several courts in reaching this conclusion.

See, e.g., Developmental Servs. Network v. Douglas, 666 F.3d 

540, 546-48 (9th Cir. 2011) (holding that even though state 

plan amendment was required under the Medicaid statute, this 

provision did not create a private right of action to health care 

providers because it was not intended to benefit them); 

Clifton v. Schafer, 969 F.2d 278, 284-85 (7th Cir. 1992) 

(holding that Medicaid recipients could not challenge a state‘s 

deviation from a plan which comports with federal law—the 

only enforceable right is a state plan that comports with 

federal requirements). Cmty. Health Care Assocs. of New 

York v. New York State Dep’t of Health, __ F. Supp. 2d __, 

No. 10–cv–08258 (ALC), 2013 WL 395449, at *10 (S.D.N.Y. 

Feb 1, 2013) (finding that ―statutes and regulations requiring 

prior approval . . . do not indicate Congress‘s unambiguous 

intention to benefit FQHCs specifically. Thus, there is no 

basis for relief in a private suit. . . .‖); cf. Pa. Pharmacists 

Assoc., 283 F.3d at 541-42 (holding that health care providers 

suing for higher reimbursement rates lacked private right of 

action to enforce separate Medicaid provision requiring state 

plans to provide methods and procedures guaranteeing quality 

of care and adequate access). Because FQHCs lack a private 

right of action to enforce the requirement of federal approval 

of state plan amendments, we lack jurisdiction to consider this 

claim.4 

 

4

In any event, we seriously doubt that the changes 

implemented by the State materially altered the terms of the 

federally-approved State plan. New Jersey‘s plan is silent on 

the methodology for calculating wraparound payments or 

quarterly reporting requirements, leaving specific 

implementation to subsequent State regulation and 

interpretation. See Tinoco v. Belshe, 916 F. Supp. 974, 982 

(N.D. Cal. 1995) (―In such a complex area of the law, the 
21

2. Full and Timely Wraparound Payment

under 42 U.S.C. § 1396a(bb)(5) 

While the NJPCA‘s claim under § 1983 cannot be 

based on the State‘s failure to procure prior federal approval

to a state plan amendment, it can be based on the fact that the 

State infringed the providers‘ right to full payment under the 

federal Medicaid statute. See, e.g., Concilio de Salud Integral 

de Loiza, Inc. v. Perez-Perdomo, 551 F.3d 10, 18 (1st Cir. 

2008) (finding that whether the supplemental payment 

methodology is unlawful as applied is enforceable under § 

1983); Pee Dee Health Care, P.A. v. Sanford, 509 F.3d 204, 

209–12 (4th Cir. 2007) (same); Cmty. Health Ctr. v. Wilson–

Coker, 311 F.3d 132, 136, 140 (2d Cir. 2002) (same); see also 

West Va. Univ. Hosps. v. Casey, 885 F.2d 11, 21 (3d Cir. 

1989) (finding that rights-creating language of § 

1396a(a)(13)(A) creates private right of action for providers). 

 

The NJPCA challenges the State‘s refusal to make 

wraparound payments on claims for which the MCO has not 

paid a FQHC, contending that the Medicaid statute requires 

the full wraparound payment for any Medicaid-eligible claim

 

federal government expected states to formulate 

implementing regulations not described in the state plan.‖). In 

Concourse Rehabilitation & Nursing Center, Inc. v. DeBuono,

the Second Circuit faced the issue of whether the New York 

State Department of Health‘s interpretation of its state plan 

departed so far from the terms of the plan that it ―constitute[d] 

a de facto amendment to the plan, requiring federal approval 

prior to implementation.‖ 179 F.3d at 44. Reasoning that the 

federal approval requirements could be triggered ―not simply 

by a change in the State‘s administration of the plan, but only 

by an alteration of the plan itself,‖ the Court held that a 

―State‘s interpretation of its own Medicaid plan cannot 

constitute a  ̳change‘ as that term is used in [§] 430.12(c) . . . 

unless, at a minimum, the clear and unequivocal effect of the 

interpretation is actually to alter the written terms of the 

plan.‖ Id. at 46 (emphasis added). Here, as in Concourse 

Rehabilitation, there has been no change to the New Jersey 

plan as written, only to its administration. 
22

it submits to the State regardless of whether it has first 

received MCO payment. The State, however, contends that it 

is not responsible for reimbursement at the PPS rate if the 

MCO has failed to make prior payment. For the reasons that 

follow, we believe the answer is somewhere in between: 

Under the Medicaid statute, the State is, indeed, responsible 

for reimbursement of the entire PPS rate for all Medicaideligible encounters. The State may, of course, in determining 

whether a claim is Medicaid-eligible (i.e., whether it counts as 

an encounter), rely in its discretion on many sources, 

including data supplied by FQHCs, MCOs, or its own 

administrative process, and may refuse to pay non-Medicaid 

eligible claims. Here, however, because the State concedes

that the methodology it has chosen to verify claim validity—

the fact of prior MCO payment—will result in failures to fully 

reimburse FQHCs at the PPS rate for valid Medicaid claims,

we conclude that the State‘s insistence on making wraparound 

payments contingent on prior MCO payment violates the 

federal Medicaid statute. 

 

Starting with the text, the federal Medicaid statute

requires ―payment to the [FQHC] by the State of a 

supplemental payment equal to the amount (if any) by which 

the amount determined [by multiplying the number of 

Medicaid encounters by the PPS rate] exceeds the amount of 

payments provided under the [MCO] contract.‖ 42 U.S.C. § 

1396a(bb)(5)(A). The State focuses on the word 

―supplemental,‖ which, it maintains, requires that the FQHCs 

receive payment from the MCOs first, and the State then

supplement that payment in its periodic wraparound 

payments. This places more weight on the word 

―supplemental‖ than it can possibly bear. Nothing in the 

provision requires the sequence suggested by the State, but 

only that the payment be ―in addition to‖ the MCO contractual 

payment. The provision sets forth a relatively simple 

equation: a state should make up the difference between the 

amount owed under the PPS rate for all eligible Medicaid 

encounters and the amount actually paid to the FQHCs by

MCOs at least every four months. See Cmty. Health Care 

Assocs., 2013 WL 395449, at *13 (holding that ―the phrase 

 ̳payments provided under the contract‘ permits deduction 
23

only of amounts actually paid by the MCO to the FQHC‖). 

Where there is a valid Medicaid encounter for which an MCO 

has failed to make a payment, the supplemental payment 

equals the entire PPS rate. See id. (―Whether or not the MCO 

makes a payment, the State is responsible for the 

supplemental payment (which may in fact be the entire PPS 

rate, if the MCO fails to make a payment).‖). As the Fourth 

Circuit explained, 

the operative language of the statute for this 

case are the words ―equal to.‖ The 

supplemental payment must be ―equal to‖ the 

difference between the payment made by the 

managed care organization and the per-visit rate 

fixed by the Medicaid Act. Thus the statute 

plainly provides that a State must make fully 

compensatory supplemental payments no less 

frequently than every four months.

 

Three Lower Cntys., 498 F.3d at 301 (4th Cir. 2007). 

The conclusion we reach is bolstered by the history of 

the wraparound payment, which originally arose in the 

context of the Balanced Budget Act of 1997 (―BBA‖), Pub. L. 

No. 105-33, 111 Stat. 251. Section 4712 of the BBA removed 

the responsibility of MCOs to reimburse FQHC‘s at their 

cost-based rates as required under the predecessor statute. 

Rather, MCOs could agree on a contractual reimbursement 

rate as long as that rate was no less than the amount offered to 

a non-FQHC. See id. § 4712 (then codified as amended as 42 

U.S.C. § 1396a(a)(13)(C) (1999)). The wraparound payment 

scheme was implemented to ensure, then, that even in 

managed-care states, FQHCs still received the full 

reimbursement amount to which they were entitled. See 

Three Lower Cntys., 498 F.3d at 299 (―[E]ven when a State 

relies upon a managed care system to administer its Medicaid 

program, FQHCs are protected and must receive the full pervisit rate calculated pursuant to the methodology outlined in 

the Medicaid Act.‖). 

 

The primacy of making FQHCs whole every four 
24

months resonates in the CMS‘s subsequent interpretation of 

the supplemental payment system. In an interpretative letter 

to State Medicaid Directors,5the CMS explained that the 

wraparound provision ―specifically requires States to make 

these supplemental payments. It is our conclusion that this 

requirement cannot and should not be delegated to an MCO, 

and that each State must determine any differences in 

payment and make up these amounts.‖ April 20, 1998, Health 

Care Financing Administration State Medicaid Director 

Letter, available at http://www.medicaid.gov/Federal-Policyguidance/federal-policy-guidance.html. The state, therefore, 

cannot simply shift its reimbursement obligations to MCOs. 

In another letter dated September 27, 2000 (as cost-based 

reimbursement was winding down), the CMS further clarified 

that full FQHC reimbursement for Medicaid-eligible 

encounters was paramount notwithstanding the risk of loss to 

the state. In addressing what would occur in the event an 

MCO became insolvent, the letter concluded: 

In order to ensure that [FQHCs] are paid 

reasonable costs under the Act, the State is 

required to include, as part of supplemental 

payments, monies that [FQHCs] subcontracted 

to receive but did not receive from an insolvent 

MCO. . . . Ultimately, the State, on behalf of the 

[FQHC], is eligible to receive any settlement 

funds that the [FQHC] recovers through 

bankruptcy proceedings.

 

5

Though the letter was issued when Medicaid still operated 

on a cost-reimbursement basis, not under the PPS, the analysis 

is the same. The CMS‘s interpretative letters, ―like 

interpretations contained in policy statements, agency 

manuals, and enforcement guidelines, all of which lack the 

force of law—do not warrant Chevron-style deference.‖ 

Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000). 

However, such interpretations are ―entitled to respect‖ under 

Skidmore v. Swift & Co., 323 U.S. 134 (1944), ―to the extent 

that those interpretations have the power to persuade.‖ 

Christensen, 429 U.S. at 587 (internal quotation marks and 

citation omitted). 
25

September 27, 2000, Health Care Financing Administration 

State Medicaid Director Letter, available at 

http://www.medicaid.gov/Federal-Policy-guidance/federalpolicy-guidance.html. In other words, when an MCO is 

unable to make its contracted-for payment due to insolvency, 

the state is required to pay FQHCs the full reimbursable 

amount (at the time, the FQHC‘s reasonable costs), and seek 

restitution itself. Thus, while the statutory language is 

perhaps not as clear as one would wish, the tenor of the 

subsequent interpretations and the limited case law is clear: 

where MCOs do not pay out valid Medicaid claims, the 

FQHC should not be left holding the bag. See Cmty. Health 

Care Assocs., 2013 WL 395449, at *13 (―There is no basis for 

the State‘s conclusion that the FQHC must accept the loss 

because the MCO denied payment for an otherwise legitimate 

visit.‖). And, of course, the Medicaid statute does not support 

the State‘s contention that a wraparound payment must follow 

a prior MCO payment. By opting into a managed care 

system, the State cannot avoid its responsibility to reimburse 

FQHCs at the full PPS amount. Rather, Section 

1396a(bb)(5)(B) requires the State to ―pay FQHCs fully 

compensatory supplemental payments not less frequently than 

four months after [the State] has received the claim for 

supplemental payment.‖ Three Lower Cntys., 498 F.3d at 

303. 

 

The State, however, makes a separate, and more 

compelling, argument justifying its reliance on requiring 

MCO payment prior to processing wraparound payments: the 

MCOs ―play an essential role in determining when a claim is 

for a  ̳valid‘ and  ̳Medicaid-eligible‘ encounter.‖ Reply Br. at 

11. While the State must pay for all Medicaid-eligible claims, 

it must also determine which claims are Medicaid-eligible. 

Though the State has, since 2001, relied on the FQHCs selfreported data to validate eligibility, nothing in the Medicaid 

statute requires the State to rely upon this data, or proscribes 

the State from turning elsewhere.

6

 As a district court recently 

 

6 We express no opinion as to whether New Jersey‘s own 

regulations require that the State rely solely on the quarterly 
26

noted: 

[§ 1396a(bb)(5)] only require[s] that payment of 

the balance be paid by the State. It does not 

require the [S]tate to determine if the payment is 

necessary in the first place. That is, if payment 

is necessary, the [S]tate is responsible for it, but 

the statute is silent on the entity (be it the State 

or the MCO or the FQHC) which makes the 

threshold determination that payment is 

necessary. 

Cmty. Health Care Assocs., 2013 WL 395449, at *13. 

Indeed, in Three Lower Counties, 498 F.3d at 305, the 

Fourth Circuit approved a system which relies on MCO 

processing to determine claim eligibility. The Court 

described the Maryland wraparound system as follows: 

Once the [MCO] ensures that (1) a covered 

service (2) has been furnished (3) to an enrollee 

(4) by an approved provider, it processes the 

claim and pays the market rate for the patient 

visit. It then passes the claim information on to 

the Department of Health. The Department of 

Health itself then makes the determination 

whether a supplemental payment under § 

1396a(bb)(5) is necessary. . . . [E]ven if the 

Department of Health did delegate to managed 

care organizations the responsibility of 

determining whether a supplemental payment is 

necessary, § 1396a(bb)(5) only requires that the 

state plan provide for the payment of a 

supplemental payment. It does not require that 

 

reports generated by the FQHCs to calculate wraparound 

payments, and as to whether the State must pass new 

regulations to effectuate a change in the calculation 

methodology. As we have discussed earlier, the District 

Court lacked jurisdiction to conclude that State law imposed 

such requirements. 
27

the state Medicaid agency itself make the 

determination whether a supplemental payment 

is necessary.

Nothing prevents the State from shifting claim verification 

from the FQHCs to the MCOs, and, consistent with the 

federal Medicaid statute, states may rely on MCOs to 

determine whether a claim is Medicaid eligible. 

 

This is not, however, what happened here. Rather than 

leaving it to MCOs to determine whether or not a claim is 

Medicaid eligible, the State essentially adopted the fact of 

prior MCO payment as the proxy for Medicaid eligibility. If 

MCOs denied claims from FQHCs only because they were 

not eligible for reimbursement under Medicaid or because 

they were otherwise invalid, this would satisfy the State‘s 

obligation. The State concedes, however, that MCOs often 

deny payments for reasons unrelated to Medicaid, and we 

have already suggested some of these reasons—e.g., MCO 

delays, multiple visits in different locations in the same day, 

and visits with non-primary care physicians. The new policy 

would, therefore, inevitably exclude valid, Medicaid-eligible 

encounters and result in underpayment. Such a result would 

not comport with the Medicaid statute‘s requirement that 

FQHCs receive full and timely reimbursement under the PPS. 

See Three Lower Cntys., 498 F.3d at 303 (―In enacting § 

1396a(bb)(5), Congress addressed its concern that FQHCs be 

fully and promptly compensated for the services they render to

Medicaid enrollees so that the FQHCs could perform their 

vital function in delivering healthcare to underserved 

populations. . . .‖). On the record before us, we must 

conclude that requiring prior MCO payment before processing

wraparound payments will result in the State‘s failure to meet 

this requirement. In the absence of any process by which an

FQHC may promptly and effectively challenge an adverse 

MCO determination within the statutorily mandated time 

period, the District Court did not abuse its discretion in 

enjoining the State from refusing to process wraparound 

payments for all claims lacking prior MCO payment. 
28

The State offers as an avenue of recourse to aggrieved 

FQHCs the administrative review process of N.J. Admin. 

Code § 10:49-10.3(a)(1), which permits a provider to request 

a hearing on any complaint arising out of the Medicaid claims 

process. Of course, if the State‘s policy is to deny 

wraparound payment for any claim lacking prior MCO 

payment regardless of Medicaid eligibility, the administrative 

review process is of no value. FQHCs must be able to 

meaningfully challenge adverse payment determinations and

receive reimbursement from the State for valid, Medicaideligible claims that have been denied reimbursement by 

MCOs. See Cmty. Health Care Assoc., 2013 WL 395449, at 

*13 (―To the extent that there may be other reasons a valid 

claim would be denied by the MCO, [FQHCs] must be able to 

challenge these adverse payment determinations . . . .‖). 

Absent any such process, 7the requirement of MCO payment 

prior to processing wraparound payments violates the 

Medicaid statute. 8 

 

7

The MCO appeals mechanism does not appear to protect the 

interest of those FQHCs that received incorrect MCO 

determinations. Not only does this process take considerable 

time to reach an ultimate determination, but it fails to address

more basic concerns: What if the MCO continues to 

wrongfully reject a Medicaid-eligible claim? Can an MCO‘s 

determination of claim validity end the inquiry?

8 Contrary to the State‘s claim, our conclusion does not create 

a substantial risk of double payment. FQHCs remain under an 

obligation to seek MCO reimbursement for wrongfully denied 

claims, and the State is required to assist in this process. If an 

FQHC later receives MCO reimbursement for a claim for 

which it has already received the full PPS wraparound 

amount, the State will be credited with this amount in a later 

reconciliation process. See N.J. Admin. Code § 10:66-

1.5(d)(1)(viii)(4).

Ultimately, if the system is functioning correctly (i.e., 

in the absence of bad faith or fraud), the conclusion we reach 

should not shift resources one way or the other, only the 

timing. Had we found, for example, that the State need not 

process a wraparound payment until a claim had been 

accepted and paid by an MCO, an FQHC, through the MCO 
29

We emphasize that we are affirming the order of the 

District Court granting summary judgment and a preliminary 

injunction in favor of the NJPCA only on the ground that the 

State‘s new policy of requiring prior MCO payment before 

processing its quarterly wraparound payments, absent a 

meaningful process to challenge adverse payment 

determinations, violates the federal Medicaid statute. In so 

doing, we do not mean to suggest that prior MCO payment is 

wholly unrelated to Medicaid eligibility. Indeed, even if a 

state may not require an FQHC to bear the entire loss solely 

because of the MCO‘s lack of payment, it is far from 

irrational for the State to require MCO data on a quarterly 

basis as part of FQHC reporting, and to use such data when 

evaluating whether or not a claim is reimbursable under 

Medicaid. In any event, as we have noted earlier in this 

Opinion, the NJPCA has not pressed before us its initial 

challenge to the collection of the two MCO payment data 

fields.9 

 

IV. CONCLUSION

We will affirm the order of the District Court granting 

summary judgment in favor of the NJPCA on the ground that 

the State‘s requirement that wraparound payments be 

contingent on prior MCO payment violated the federal 

 

appeals process (or with intervention by the State), would be 

able to eventually receive reimbursement for wrongfully 

denied claims. Fundamentally at issue is which party must 

bear the cost of MCO errors or delays in reimbursement until 

these disputed claims can be reconciled. The text of the

statute and its legislative purpose, subsequent administrative 

interpretations, and the limited case law, all place a thumb on 

the scale in favor of prompt and complete State 

reimbursement. 

9

Even if it had, however, we would have no difficulty 

concluding that the District Court erred when it found that 

requiring such data was ―arbitrary and capricious . . . because 

the new system itself fails to show a rational connection 

between the facts found and the choice made.‖ A. 15 

(internal quotation marks omitted).
30

Medicaid statute‘s requirement that FQHCs timely receive 

full wraparound payment for all Medicaid-eligible claims 

(and, concomitantly, requiring the emergency payment of 

wraparound funds based on the State‘s predecessor 

methodology) and enjoining the State from implementing a 

policy requiring prior MCO payment absent an adequate 

process for claim-eligibility verification. In all other respects, 

we will reverse the order of the District Court granting 

summary judgment and a preliminary injunction in favor of 

the NJPCA and denying the State‘s motion for summary 

judgment.