Opinion ID: 1449914
Heading Depth: 2
Heading Rank: 1

Heading: Independent Living's Likelihood of Success on the Merits

Text: This is not the first time that we have interpreted the substantive and procedural requirements of § 30(A). In Orthopaedic Hospital v. Belshe, 103 F.3d 1491 (9th Cir.1997), several hospitals and health care associations alleged that the Department violated § 30(A) by setting provider reimbursement rates without proper consideration of the effect of hospital costs on the relevant statutory factors [of] efficiency, economy, quality of care, and access. Id. at 1492. We interpreted § 30(A) to require the Director to set 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. Id. at 1496. To meet this statutory requirement, we held that the Director must rely on responsible cost studies, its own or others', that provide reliable data as a basis for its rate setting. Id. Under the standards established in Orthopaedic Hospital, it is clear that the Director violated § 30(A) when he implemented the rate reductions mandated by AB 5. The 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 prior to enacting AB 5, nor did he demonstrate that the Department considered reliable cost studies when adjusting its reimbursement rates. Several of the declarations submitted by the Director candidly admit that the Department does not maintain information on provider costs for covered services. [9] See, e.g., Declaration of Linda Machado at 5 ([T]here is no established mechanism for obtaining cost data from physicians on the costs they incur for providing each of these [covered] services. Therefore, [the Department] has no data from which it can determine how well Medi-Cal rates compensate physician costs.); id. at 3 (admitting same lack of cost data for hospital outpatient services); Declaration of Jon Chin at 2 (DHCS has no available cost data[on covered] dental procedures). In the absence of such cost data, the Director could not have complied with § 30(A) as interpreted in Orthopaedic Hospital. Perhaps as a result, the Director's primary argument on appeal is that the standards established in Orthopaedic Hospital are inapplicable, for several reasons. We address each of them.
First, the Director argues that Orthopaedic Hospital is inapplicable because the plaintiffs in that case were not asserting a claim of federal preemption directly under the Supremacy Clause. As the Director notes, Orthopaedic Hospital addressed claims brought to enforce the provisions of § 30(A) under 42 U.S.C. § 1983, which provides a remedy for deprivation of any rights ... secured by the Constitution and laws of the United States. [10] See Orthopaedic Hosp., 103 F.3d at 1495. In this case, by contrast, Independent Living does not seek direct enforcement of any rights created by § 30(A), but rather argues that the ten percent rate reduction conflicts with the federal requirements established in § 30(A). The question is whether this difference in the theory of recovery renders Orthopaedic Hospital's interpretation of § 30(A) any less persuasive. To answer this question, we turn to basic principles of conflict preemption. Conflict preemption arises when compliance with both federal and state regulations is a physical impossibility, or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. PG & E Co. v. State Energy Res. Conservation & Dev. Comm'n, 461 U.S. 190, 204, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983) (internal quotation marks and citations omitted); see also Ting v. AT & T, 319 F.3d 1126, 1136 (9th Cir.2003). Under this latter strand of so-called obstruction preemption, an aberrant or hostile state rule is preempted to the extent it actually interferes with the `methods by which the federal statute was designed to reach[its] goal.' Id. at 1137 (alteration in original) (quoting Int'l Paper Co. v. Ouellette, 479 U.S. 481, 494, 107 S.Ct. 805, 93 L.Ed.2d 883 (1987)). Thus, obstruction preemption focuses on both the objective of the federal law and the method chosen by Congress to effectuate that objective, taking into account the law's text, application, history, and interpretation. Id. As the description above makes clear, the first step in any conflict preemption analysis is to determine the purpose of the federal law at issue. See id. at 1138. Orthopaedic Hospital discussed the purpose underlying § 30(A) at length, reading its text and legislative history as demonstrating that 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. We held that the Department could not accomplish this purpose in the absence of some determination of what it costs an efficient hospital economically to provide quality care. Id. at 1498. Thus, while the Department need not follow a rigid formula of payments equal to an efficiently and economically operated hospital's costs regardless of other factors, § 30(A) required the Department to at least ascertain provider costs when it adjusted reimbursement rates. Id. The Director has not provided any coherent reason why the purpose underlying § 30(A) would be different for purposes of federal preemption than it was for direct enforcement under § 1983, and we see none. That Independent Living in this case has proceeded under a different cause of action than the plaintiffs in Orthopaedic Hospital is therefore an inconsequential distinction. In both cases, the central question is the purpose underlying § 30(A), and as to that question, Orthopaedic Hospital clearly controls.
Second, the Director argues that our more recent decision in Sanchez, 416 F.3d 1051, effectively overruled Orthopaedic Hospital, and that the district court's analysis of the merits was thus based on legal error. This argument is unavailing. Sanchez did not overrule Orthopaedic Hospital 's interpretation of § 30(A). Sanchez addressed the narrow question of whether developmentally disabled recipients of Medicaid funds and their service providers have a private right of action against state officials to compel the enforcement of a federal law governing state disbursement of such funds. 416 F.3d at 1053. Applying the Supreme Court's decision in Gonzaga University v. Doe, 536 U.S. 273, 122 S.Ct. 2268, 153 L.Ed.2d 309 (2002), we held that § 30(A) does not create any federal rights enforceable under § 1983. Sanchez, 416 F.3d at 1068. In so holding, we did not reach the substantive requirements of § 30(A), as we were concerned solely with whether the plaintiffs in that case could bring suit in federal court. In fact, Sanchez does not explore the congressional purpose underlying § 30(A), the touchstone of federal preemption analysis. If the Sanchez court had any qualms about Orthopaedic Hospital 's substantive interpretation of § 30(A), it did not say so. More fundamentally, Sanchez cannot be read to have overruled Orthopaedic Hospital, for three reasons. First, Sanchez does not even cite Orthopaedic Hospital, much less overrule its holdings. Second, Sanchez was decided by a three-judge panel that, under our circuit rules, was powerless to overturn one of our prior decisions in the absence of intervening authority, Hart v. Massanari, 266 F.3d 1155, 1171 (9th Cir.2001). Third, we affirmed the continuing vitality of Orthopaedic Hospital in a published opinion filed one month after Sanchez. See Alaska Dep't of Health & Soc. Servs. v. Ctrs. for Medicare & Medicaid Servs., 424 F.3d 931, 940 (9th Cir.2005). In that case, the State arguedmuch as the Director has here that subsequent developments rendered Orthopaedic Hospital anachronistic. See id. We were not persuaded, and we noted that the relevant language of § 30(A) remains unchanged since Orthopaedic Hospital, and thus our interpretation of its purpose, and the State's obligations thereunder, still holds. Id. at 940-41. Aside from his misreading of Sanchez, the Director also argues that Orthopaedic Hospital is no longer good law because its interpretation of § 30(A) conflicts with the interpretation of the federal agency that Congress vested with authority to enforce and implement the statute. By this, the Director apparently means that Orthopaedic Hospital conflicts with the interpretation of § 30(A) presented in an amicus brief filed by the Solicitor General when the Supreme Court asked him to opine on whether our decision in Orthopaedic Hospital was worthy of a grant of certiorari. In the process of recommending denial of certiorari, the Solicitor General opined that requiring states to reimburse medical providers at rates roughly equal to their costs ran counter to the text and legislative history of § 30(A). From this, the Director concludes that a federal agency repudiated our interpretation of § 30(A). Whatever the merits of the Solicitor General's views, we owe them no deference in this case. Although at one time the Supreme Court suggested that a legal opinion expressed by an agency in the course of litigation may be entitled to deference, Auer v. Robbins, 519 U.S. 452, 461-63, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997), it subsequently limited such deference to an agency's interpretation of ambiguities in its own regulations, Christensen v. Harris County, 529 U.S. 576, 586-88, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000). The Director also contends that our holding in Orthopaedic Hospital has been undermined by Congress's subsequent repeal of the so-called Boren Amendment, which required states to set hospital inpatient reimbursement rates that were reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities. This argument is not persuasive either, as Orthopaedic Hospital itself expressly distinguished the requirements of the Boren Amendment, previously codified at § 1396a(a)(13)(A), from the more flexible requirements of § 30(A). See 103 F.3d at 1499. The fact that Congress repealed the more rigid requirements of the Boren Amendment does not speak to the propriety of our past interpretation of § 30(A). Moreover, we have previously rejected the same argument made by the Director in this case, noting that the repeal of the Boren Amendment, like its enactment, modified § 13(A) alone; it effected no change to § 30(A). [11] Alaska DHSS, 424 F.3d at 941. Finally, the Director urges us to reconsider our interpretation of § 30(A) in Orthopaedic Hospital, noting that several courts have disagreed with its reasoning. See, e.g., Rite Aid v. Houstoun, 171 F.3d 842, 851 (3d Cir.1999) (holding that section 30(A) requires the state to achieve a certain result but does not impose any particular method or process for getting to that result, expressly disagreeing with Orthopaedic Hospital); Methodist Hosps., Inc. v. Sullivan, 91 F.3d 1026, 1029-30 (7th Cir.1996) (holding that [n]othing in the language of § 1396a(a)(30) ... requires a state to conduct studies in advance of every modification, as the statute merely requires each state to produce a result ). But see Ark. Med. Soc'y, 6 F.3d at 530 (holding that § 30(A) requires the state to consider the relevant factors of equal access, efficiency, economy, and quality of care as designated in the statute when setting reimbursement rates); Minn. HomeCare Ass'n v. Gomez, 108 F.3d 917, 918 (8th Cir.1997) (holding that Medicaid Act mandates consideration of the equal access factors of efficiency, economy, quality of care and access to services in the process of setting or changing payment rates, although it does not require the State to utilize any prescribed method of analyzing and considering said factors and no formal analysis is required). Even if we were at liberty to overrule Orthopaedic Hospital, we would nonetheless affirm the district court's injunction, for several reasons. First, even those courts that have rejected Orthopaedic Hospital's procedural requirements have generally recognized that state Medicaid rate reductions may not be based solely on state budgetary concerns. See Rite Aid, 171 F.3d at 856 ([B]udgetary considerations may not be the sole basis for a rate revision. ...); see also Beno v. Shalala, 30 F.3d 1057, 1069 n. 30 (9th Cir.1994); Amisub (PSL), Inc. v. Colo. Dep't of Soc. Servs., 879 F.2d 789, 800-01 (10th Cir.1989); Ark. Med. Soc'y, 6 F.3d at 531 (Abundant persuasive precedent supports the proposition that budgetary considerations cannot be the conclusive factor in decisions regarding Medicaid.). But see Am. Soc'y of Consultant Pharmacists v. Garner, 180 F.Supp.2d 953, 974-75 (N.D.Ill.2001). In this case, the record supports the district court's conclusion that the only reason for imposing the cuts was California's current fiscal emergency. The legislation was passed in an emergency session called to address[] the fiscal emergency declared by the Governor. See Declaration of Stan Rosenstein at 1 (describing the ten percent rate reduction as one option at the State's disposal for dealing with the fiscal crisis). Thus, quite apart from any procedural requirements established by Orthopaedic Hospital, the State's decision to reduce Medi-Cal reimbursement rates based solely on state budgetary concerns violated federal law. Second, even if we were in a position to relax the procedural requirements established in Orthopaedic Hospital, the Director's failure to study the effect of the rate reduction in any meaningful way would still lead us to enjoin implementation of AB 5. Those courts that have criticized Orthopaedic Hospital's reasoning have not simply rubber-stamped rate reductions imposed by state agencies; rather, reviewing courts typically subject state rate-making to something akin to arbitrary and capricious review. See Rite Aid, 171 F.3d at 853 (requiring the agency's process of decision-making to be reasonable and sound); id. at 857 (holding that the agency's 11-month period of data gathering, consultation, and review before promulgating the [rate reduction] was not so deficient as to be arbitrary and capricious); see also Ark. Med. Soc'y, 6 F.3d at 529-30 (noting that [r]eview under the arbitrary and capricious standard is appropriate). In this case, the State's own Legislative Analyst warned that the ten percent rate reduction 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, and on that basis recommended that the legislature reject the Governor's proposal to reduce payments for all providers except hospitals. Nothing in the record indicates that any other State official consideredlet alone studiedthese possibilities prior to enacting the cuts. Thus, it is far from clear that the Director would prevail under a different standard, as there is no evidence that the agency's decision-making process was reasonable and sound. [12] Third, those courts that have resisted interpreting § 30(A) to include certain procedural requirements have nonetheless held that § 30(A) imposes substantive obligations on states that elect to participate in Medicaid. See Rite Aid, 171 F.3d at 851 (Section 30(A) requires the state to achieve a certain result.); Methodist Hosps., 91 F.3d at 1030 (holding that if rates are inadequate to attract sufficient providers, then under § 1396a(a)(30), [the state] must raise the price until the market clears). In this case, Independent Living alleges that at least some medical providers have refused to treat Medi-Cal recipients since the ten percent rate reduction was implemented. See, e.g., Supplemental Declaration of Thu-Hang Tran at 3-5. Even if we were to interpret § 30(A) to mandate a substantive rather than procedural result, the ten percent rate reduction might still conflict with the quality of care and access provisions of § 30(A), as the cuts have apparently forced at least some providers to stop treating Medi-Cal beneficiaries. The potential difficulties inherent in assessing substantive compliance with the factors laid out in § 30(A) demonstrate why the more process-oriented view of the statute espoused in Orthopaedic Hospital has much to recommend it. As Judge Levi stated in Clayworth v. Bonta, [ Orthopaedic Hospital 's] approach has substantial practical benefits. The Medicaid Act is clearly intended to give states discretion and flexibility in setting reimbursement rates, within the limits of federal law. The arbitrary and capricious standard[ [13] ] limits the court's review of the State's rate setting and permits the court to defer to the judgment of specialists in a complex regulatory field. Furthermore, 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. 295 F.Supp.2d 1110, 1127 (E.D.Cal.2003), rev'd, 140 Fed.Appx. 677 (9th Cir.2005) (internal citations omitted ). As Judge Levi recognized, the framework established in Orthopaedic Hospital allows reviewing courts to defer to a state agency's balancing of competing interests, so long as the record created by the agency demonstrates that the State considered the factors mandated by statute. In this sense, the procedural approach is far less intrusive than the substantive compliance standard espoused by the Third and Seventh Circuits. In sum, the Director has not demonstrated that Orthopaedic Hospital has been overruled or undermined in the past twelve years, and a recent decision of this court expressly reaffirmed its central holding. Moreover, even if we were not bound by Orthopaedic Hospital, there are compelling reasons to retain Orthopaedic Hospital's process-oriented focus. The district court thus correctly applied binding precedent to Independent Living's claims in this case. Its conclusion that Independent Living had demonstrated a likelihood of success on the merits was not an abuse of discretion.