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California Hospital Association v. David Maxwell-Jolly

March 4, 2011


The opinion of the court was delivered by: Frank C. Damrell, Jr. United States District Judge


This matter is before the court on plaintiff California Hospital Association's ("plaintiff" or "CHA") motion for preliminary injunction. CHA seeks an order enjoining defendants, California Department of Health Care Services ("DHCS") and the Director thereof (sometimes collectively, "defendants"), from continuing to implement California Welfare & Institutions Code § 14105.281 ("Section 14105.281"). Section 14105.281, adopted by the California Legislature in October 2010, freezes the rates at which California reimburses hospitals providing inpatient MediCal services to the lesser of the rates paid on January 1, 2010 or July 1, 2010 (sometimes referred to generally herein as the "Rate Freeze").

Plaintiff contends that it is likely to succeed on the merits of this case for several alternative reasons: (1) the implementation of the Rate Freeze violates the Contract Clauses of the United States and California Constitutions; CHA contends that the "Rate Freeze will prevent impacted hospitals from receiving any increased reimbursement . . . they otherwise would have been entitled to . . . under their contracts with the [DHCS] or, in the case of non-contract hospitals, under the reimbursement methodology set forth in the Medi-Cal Regulations." (Dauner Decl., filed Jan. 27, 2011 [Docket # 14], Attachment 7 ¶ 6); (2) plaintiff contends defendants have violated federal law because DHCS, which administers the Medi-Cal program, enacted amendments to the state Medi-Cal plan without receiving prior federal approval; and (3) plaintiff alleges that the federal Medicaid Act preempts the Rate Freeze because, prior to enactment, DHCS failed to comply with 42 U.S.C. §§ 1396a(a)(13)(A) ("Section 13(A)") and (30)(A) ("Section 30(A)") which require that any change in reimbursement be preceded by specific comment and notice procedures and that the change be based upon responsible cost studies.

Moreover, plaintiff contends that an injunction is proper because if DHCS is not enjoined from implementing the freeze, it will be irreparably harmed. Specifically, plaintiff contends it will be irreparably harmed because the Eleventh Amendment bars any action against DHCS to recoup the Medi-Cal reimbursements its member hospitals would have received but for the Rate Freeze.

Finally, plaintiff asserts that the balance of hardships and the public interest weigh in its favor because defendants' stated purpose for enacting the freeze is not a sufficient justification for impairing Medi-Cal hospitals' contracts with the State.

Defendants oppose the motion on numerous procedural and substantive grounds. First, defendants claim that since the freeze was enacted to facilitate the development of a more efficient Medi-Cal reimbursement system, the State's police power to protect the public health permits it to impair the contracts in question. More specifically, defendants argue that the Rate Freeze is necessary because, in order to implement a new proposed methodology for establishing reimbursement rates, DHCS requires static reimbursement rate figures. Defendants also assert that, because hospitals will receive supplemental payments during the temporary freeze, the statute does not "substantially impair" any contracts, and thus, the Contract Clauses are inapplicable.

Defendants also contend that plaintiff's claim for failure to obtain federal approval of the Rate Freeze is not cognizable because Congress did not create a private right of action to enforce the federal approval provisions. Moreover, defendants assert that, even if the claim is cognizable, federal law does not actually require prior federal approval before the Rate Freeze may be implemented and asks this court to reconsider its recent holding to the contrary in Cal. Ass'n of Rural Health Clinics v. Maxwell-Jolly, Civ. No. S-10-759 FCD/EFB, 2010 WL 4069467 (E.D. Cal. Oct. 18, 2010) ("CARHC").

Similarly, defendants maintain that plaintiff's claim under Section 30(A) is procedurally improper because Congress did not create a private right to enforce that provision. Defendants also argue that, even if Section 30(A) is privately enforceable, plaintiff lacks standing to bring this action on behalf of its member hospitals. Defendants also claim that, since the language of the statute vests DHCS with the authority to determine whether the Rate Freeze complies with federal Medicaid mandates, and DHCS determined that it does, plaintiff's claim under Section 30(A) is not viable. Lastly, with regard to both plaintiff's federal approval and Section 30(A) claims, defendants ask the court to invoke the doctrine of primary jurisdiction, deferring the determination of whether implementation of the Rate Freeze complies with the federal Medicaid Act to the agency administering the Medicaid program--DHCS in this instance. Defendants further assert that, by providing public notice of the proposed Rate Freeze via the California Regulatory Notice Register, they complied with the notice and comment procedures required by Section 13(A).

Defendants contend that not only is plaintiff unlikely to succeed on the merits of any of its claims, but a preliminary injunction is also improper in this instance because plaintiff cannot show that it is likely to suffer irreparable harm. Defendants allege that, regardless of the Rate Freeze, both contract and non-contract hospitals will eventually recoup more than 100 percent of their allowable costs. Moreover, defendants contend that plaintiff will not suffer irreparable harm because the Rate Freeze will not affect any supplemental payments certain hospitals may receive pursuant to various statutes. Finally, defendants argue that the balance of hardships and public interest weigh in defendants favor because any injunction of the Rate Freeze will impair defendants ability to develop a more efficient Medi-Cal reimbursement methodology.

The court heard oral argument on the motion on February 25, 2011.*fn1 By this order it now renders its decision granting plaintiff's motion for a preliminary injunction, thereby enjoining the State's further implementation of Section 14105.281.


1. The Parties

CHA represents approximately 450 California hospitals that provide both inpatient and outpatient services. (Duaner Decl. ¶ 3.) Almost all of CHA member hospitals provide those services to California Medi-Cal beneficiaries. (Id.) CHA brings this action on behalf of its members to prevent DHCS from implementing the Rate Freeze, which CHA contends will "directly and adversely" affect its member hospitals. (Id. ¶¶ 3--4.) DHCS is the state agency charged with administering California's Medicaid Program, known as the California Medical Assistance Program ("Medi-Cal"). As the sole state agency responsible for the Medi-Cal program, DHCS must establish and administer a state Medi-Cal plan.

42 C.F.R. § 430.12; Cal. Welf. & Inst. Code § 14081 et seq (West 2010). Additionally, DHCS is responsible for reimbursing hospitals that render services to Medi-Cal beneficiaries in compliance with the State Plan and with federal and state laws and regulations. 42 C.F.R. §§ 431.1, 431.10.

In its capacity as administrator of the state Medi-Cal plan, DHCS determined that the freeze complied with federal Medicaid law and began implementing the Rate Freeze in January, 2011. (Defs.' Mot. for Clarification, filed Feb. 2, 2011 [Docket # 21], at 3:7--23.). As part of the implementation, DHCS began updating its Provider Master File to reflect the Rate Freeze, which entails updating 30-40 codes for each hospital. (Id. at 3:17--23.)

On January 28, 2011, the Honorable Lawrence K. Karlton*fn2 issued a temporary restraining order, enjoining DHCS from implementing the Rate Freeze. (Id. at 2:1--9.) Because DHCS began updating its Provider Master File prior to the issuance of the restraining order, it filed a motion for clarification to determine whether the injunction was prohibitory, requiring only that DHCS maintain the status quo at the time of the order, or mandatory, requiring DHCS to reverse the changes it made to its Master Provider List. (Id. at 7:1--6.) On February 4, 2011, Judge Karlton granted defendants' request for clarification, holding that the temporary restraining order is prohibitory, and thus, DHCS was not required by the order to make any changes to its Provider Master File. (See Order Granting Defs.' Req. for Clarification, filed Feb. 4, 2011 [Docket #23].) Judge Karlton clarified that defendants were obligated to reimburse plaintiff's members at the unfrozen reimbursement rate for dates of service on or after January 28, 2011 (the date of the court's TRO order).


Plaintiff now moves for a preliminary injunction, asking this court to enjoin further implementation of Section 14105.281 and direct that defendants reverse the previously made changes to the Master Provider List so that plaintiff's member hospitals are reimbursed at the non-frozen rates for dates of service following the statute's enactment in October 2010.

2. Statutory Background

a. Federal Medicaid Law

Title XIX of the Social Security Act (the "Medicaid Act") establishes a cooperative federal-state program that provides federal funding to states that choose to provide medical assistance to low-income persons. Medicaid is jointly financed by federal and state governments and administered by the states through the State Plan, which must receive approval from the Secretary for Health and Human Services ("Secretary").

42 U.S.C. § 1396a. As a condition of receiving federal funding, Medi-Cal must cover certain enumerated services, including inpatient and outpatient services. Id. § 1396a(a)(10)(A)(i)(I)-- --(VII). Moreover, in exchange for federal funds, participating states must comply with federal Medicaid laws and regulations. Id. § 1396c; see also 42 C.F.R. § 430.35. One of the chief requirements is that the State must establish and comply with the State Medicaid plan. 42 U.S.C. § 1396a(a)(5); 42 C.F.R. § 430.10

"The State [P]lan is a comprehensive written statement . . . describing the nature and scope of [the State's] Medicaid program and [assuring the Plan] will be administered in conformity with the . . . requirements of [federal Medicaid law]." 42 C.F.R. 430.10; see also 447.252(b). In establishing the State Plan, the Medicaid Act requires the State to establish reimbursement rates for inpatient services through a public process that includes:

(a) publication of proposed rates, the methodologies underlying the establishment of such rates and justification for the rates;

(b) an opportunity for the public to comment on the proposed rates and their justifications; and (c) publication of the final rates, the methodology underlying their establishment and the justification for the final rates. 42 U.S.C. § 1396a(a)(13)(A). Moreover, prior to establishing reimbursement rates, federal Medicaid law requires states to consider responsible cost studies to ensure rates will be reasonably related to provider costs. 42 U.S.C. § 1396a(a)(30)(A);*fn3 Orthopaedic Hosp. v. Belshe, 103 F.3d 1491, 1497 (9th Cir. 1997)*fn4 (requiring states to consider responsible cost studies, its own or others, prior to setting provider compensation rates and directing that in considering providers' costs, hospital rates should bear a reasonable relationship to an efficient and economical hospital's costs in providing quality care).

When a state seeks to make changes to its approved State Plan, it must submit a State Plan Amendment ("SPA") to the Centers for Medicare and Medicaid Services ("CMS") so CMS may determine whether the amended State Plan continues to comply with federal regulations. 42 C.F.R. § 430.12(c). CMS may approve or disapprove of the amendment, or it may request more information before making a determination. Id. § 430.16(a). Any amendment to the State Plan, including changes in the methodology for determining reimbursement rates, cannot be implemented until the amendment has been approved by CMS. Id. §§ 430.20(b)(2), 447.256(c); see also Exeter Memorial Hosp. Ass'n v. Belshe, 145 F.3d 1106 (9th Cir. 1998); CARHC, 2010 WL 4069467. If CMS fails to act upon a submitted amendment within 90 days, the amendment is deemed approved. 42 C.F.R. § 430.16. A request for more information, however, stops the 90-day clock. Id. §§ 430.16(a)(2), 447.256(b).

Here, DHCS submitted the proposed amendment of the State Plan to CMS on September 30, 2010. (Keville Decl., filed Jan. 27, 2011 [Docket #14], Attachment 2, ¶ 4 Ex. C) At oral argument, defendants indicated that CMS has requested more information concerning the SPA. CMS has yet to approve the amendment. (Defs.' Opp'n to Mot. for P.I. [Opp'n], filed Feb. 10, 2011 [Docket # 25], at 3:11--12.)

b. California's Medi-Cal Program

In California, DHCS is required to administer Medi-Cal in accordance with the State Plan, state law and Medicaid Regulations. Cal. Code Regs. tit. 22, § 50004(b) (2010).

Reimbursement rates for services rendered by hospitals to MediCal beneficiaries are determined by one of two methods, depending on whether the specific hospital has an express contract with DHCS. Where an express written contract exists between DHCS and the hospital ("contract hospital"), the reimbursement rates are governed by the express terms of the contract. When a hospital renders inpatient services to a Medi-Cal beneficiary, but does not negotiate a written contract with DHCS ("non-contract hospital"), the reimbursement rate is established in accordance with a formula set forth in Medi-Cal regulations and California's State Plan. In California, there are approximately 173 contract hospitals and over 250 non-contract hospitals. (Sands Decl., filed Feb. 10, 2011 [Docket # 27], ¶¶ 5-6.)

Contracts between hospitals and DHCS are confidentially negotiated by the California Medical Assistance Commission ("CMAC"). Cal. Welf. & Inst. Code §§ 14082, 14082.5 (West 2010). While a hospital's status as a Medi-Cal contractor is public knowledge, the contract terms controlling reimbursement rates are not subject to public disclosure.*fn5 Cal. Gov't Code § 6254(q) (West 2010). Contract hospitals are reimbursed at the negotiated rate per patient per day ("per diem"). (Zaretsky Decl., filed Jan. 27, 2011 [Docket #14], Attachment 6, ¶ 11.) Contract hospitals often negotiate contract amendments with CMAC to increase reimbursement rates at a future date. (Id. ¶ 13.) "For example, some providers agree to a one-time increase in their per diem rate to take effect on a date certain, as specified in a contractual amendment." (Id.) Prior to the enactment of the Rate Freeze, hospitals "had the option to discontinue the contract after a specific notice period." (Id. ¶ 14.) Non-contract hospitals "are paid for inpatient services based on the lesser of the hospital's reasonable costs," which is "based on a complex formula that serves as a limit on allowable reimbursement." (Id. ¶¶ 7, 9.)

California's selective provider contracting program ("SPCP"), which governs contract negotiations between DHCS and hospitals offering services to Medi-Cal beneficiaries, has been carried out pursuant to a waiver of certain Medicaid Act requirements, as approved by CMS pursuant to 42 U.S.C § 1315(a)(1). This waiver is accompanied with certain special terms and conditions, such as: the State must continue to comply with all applicable Medicaid requirements that were not waived; and, changes to the SPCP must be approved by CMS and go through the requisite public process prior to implementation. (Keville Decl. Ex. A at 9.) To this end, any change in "[r]eimbursement methodologies affecting . . . the Medicaid State Plan" must go through the public process and be approved by CMS. (Id.)

c. Implementation of the Rate Freeze

Plaintiff had actual notice of the proposed Rate Freeze on May 26, 2010, when it opposed the proposed freeze at a state Senate Budget Committee hearing. (Hutonhill Decl., filed Feb. 10, 2011 [Docket # 25], Attachment 3, ¶ 5, Ex. B.) Subsequently, defendants provided public notice of the proposed freeze on at least four occasions. First, on June 25, 2010, DHCS, via its website and the California Regulatory Notice Register ("Register"), gave a preliminary notice regarding the proposed Rate Freeze. (Sands Decl. ¶ 19, Ex. B.) According to the notice, the freeze was intended to go into effect on July 1, 2010. (Id.) The notice informed the public that it had until June 29, 2010 to submit comments concerning the proposed Rate Freeze. (Id.)

On October 8, 2010, the Legislature passed ("SB 853"), which added Section 14105.281 to the California Welfare and Institutions Code. On October 19, 2010, the Governor signed SB 853, enacting the Rate Freeze. It should be noted that, since SB 853 was a budget trailer bill,*fn6 there is no documented legislative history or intent available. Therefore, the only documentation this court has to rely on is the language of the bill itself and the notices posted by DHCS concerning the Rate Freeze.*fn7

Importantly, the first notice posted by DHCS stated that the Rate Freeze was necessary solely for budgetary reasons; specifically, to "generate savings to the State General Fund and operations efficiencies" and to "contribute to reducing and stabilizing the payments to hospitals for impatient services." (Pl.'s Req. for Judicial Notice ["RJN"], filed Jan. 27, 2011 [Docket #14], Attachment 10, Ex. B.) There was no mention, whatsoever, of the proposed implementation of a DRG-based methodology until the Legislature amended SB 853 on October 7, a day before the Legislature passed the measure. (See Raymond Decl., Ex. B at 2, 8--37.)

On November 19, 2010, DHCS, via the Register, posted further notice regarding implementation of the freeze. (Sands Decl. ¶ 19, Ex. C.) On January 18, 2011, DHCS posted on its website a "detailed description of the precise methodology to be implemented by DHCS for both contract and non-contract hospitals." (Id. at Ex. D.) Finally, on January 28, 2011 DHCS gave a final public notice of the Rate Freeze in the Register. (Id. at Ex. E.). In addition to the various public notices, on January 20, 2011, DHSC mailed a letter to all contract and non-contract hospitals describing the methodology underlying the Rate Freeze. (Id. ¶ 20, Ex. F.)

The terms of Section 14105.281 make a number of fundamental changes to the current Medi-Cal system. First, the "recital" states that the purpose of the freeze is to facilitate implementation of a new system for reimbursement--a diagnosis related groups*fn8 or "DRG"-based system. Cal. Welf. & Ins. Code § 14105.281(a)(1) (West 2010). Second, the Rate Freeze itself limits reimbursement rates to the lesser of the rates paid on January 1, 2010 or July 1, 2010 until the DRG-based system is fully implemented. Id. § 14105.281(c)(1). The statute itself does not provide a specific date for termination of the Rate Freeze; it shall continue "to the extent that the rates, alone or in combination with any available supplemental payments, are consistent with federal law." Id. § 14105.281(a)(3). The freeze nullifies any rate adjustment provision in contracts between DHCS and hospitals providing Medi-Cal services if the provision conflicts with the terms of the Rate Freeze. Id. § 14105.281(c)(3). Third, if a contract hospital exercises its rights to terminate its contract with DHCS, it will still be paid at the frozen rates, not as a non-contract hospital, as was the case prior to implementation of the Rate Freeze. Id. § 14105.281(c)(2). The statute also provides for reconciliation of payments, but only at the rate that would have been paid had the new DRG-based system been in place as of July 1, 2010, not at the rates contracted for. Id. § 14105.281(f). In other words, the statute requires DHCS to reimburse hospitals at the rate established by the DRG-based system for all inpatient services rendered between the enactment of the freeze and the date the DRG-based system goes into effect. The court will refer herein to the various provisions of Section 14105.281 collectively as the "Rate Freeze."

In January 2011, defendants conducted a study*fn9 "to evaluate whether Medi-Cal reimbursement paid for hospital inpatient services during the freeze in rates will comply with title 42 United States Code section 1396a(a)(30)(A)." (Douglas Decl., filed Feb. 10, 2011 [Docket #27], Attachment 1, Ex. A at 1.) After providing background information concerning California's Medi-Cal system and the enactment of the Rate Freeze, the study surveyed the relatively large body of Ninth Circuit and California case law interpreting Section 30(A) for purposes of analyzing whether the Rate Freeze complies with that provision. (Id. at 7-10.) The study then addresses the potential fiscal impact of the Rate Freeze. (Id. at 11-15.) It ultimately concludes that Section 14105.281 complies with Section 30(A) because: (1) even if supplemental payments are not considered, "reimbursement [levels] will comply with the reasonable cost based standard that the Ninth Circuit has adopted for section 1396a(30)(A)" and (2) Medi-Cal beneficiaries "will continue to have sufficient access to hospital inpatient services." (Id. at 14, 17.)

The January 18, 2011 notice posted by DHCS explained the methodology that would be used to apply the Rate Freeze to non-contract hospitals. (Sands Decl. ¶ 19, Ex. D.) The notice also alerted the public that the freeze nullifies any rate increase due under the terms of Medi-Cal contracts. (Id.) The freeze is set to begin impacting actual reimbursement for any claims processed after January 31, 2011. (Id.) DHCS, however, also intends to retroactively reprocess previous claims after the date of the Rate Freeze in order to recoup excess payments made to providers based on the non-frozen rates. (Id.) Thus, DHCS will reprocess all claims previously paid at the non-frozen rates between July 1, 2010 and the date the Provider Master File is completely updated to reflect the frozen rates. (Id.)


A party seeking a preliminary injunction must demonstrate that (1) it is likely to succeed on the merits, (2) it is likely to suffer irreparable harm in the absence of preliminary relief, (3) the balance of equities tips in its favor, and (4) an injunction is in the public interest. Winter v. Natural Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008)

The Ninth Circuit, in Am. Trucking Assn's Inc. v. City of Los Angeles, 559 F.3d 1046 (9th Cir. 2009), clarified the controlling standard for injunctive relief in light of the United States Supreme Court's decision in Winter. Pursuant to American Trucking, a party cannot obtain a preliminary injunction "merely because it is possible that there will be an irreparable injury to the plaintiff; it must be likely that there will be." Id. at 1052 (citing Winter, 129 S. Ct. at 375--376 (recognizing that issuing a preliminary injunction based solely on a "possibility of irreparable harm is inconsistent with [the Court's] characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.")).

Traditionally, mere economic damages were not considered irreparable as an injured party may seek corrective relief through litigation. Sampson v. Murray, 415 U.S. 61, 90 (1974). However, where the party seeking injunctive relief is legally precluded from pursuing damages--for example, if a claim is barred by the Eleventh Amendment--irreparable harm is established. Cal. Pharm. Assn. v. Maxwell-Jolly, 563 F.3d 847, 852 (9th Cir. 2009) ("Cal. Pharm. I"). Ultimately, because a preliminary injunction is an extraordinary remedy, in each case, the court "must balance the competing claims of injury and must consider the effect on each party of the granting or withholding of the requested relief." Winter, 129 S. Ct. at 376 (internal quotations and citations omitted).


Plaintiff's complaint, filed December 27, 2010, alleges the following claims for relief: (1) violation of the Contract Clause of the United States Constitution (first claim); (2) violation of the Due Process Clause of the Fourteenth Amendment to the United States Constitution (second claim); (3) violation of the Medicaid Act, 42 U.S.C. § 1396a(a)(30)(A) (third claim); (4) violation of the Medicaid Act, 42 U.S.C. § 1396a(a)(13)(A) (fourth claim); (5) violation of 42 C.F.R. § 447.205's notice requirements (fifth claim); (6) failure to amend the State Plan (sixth claim); (7) violation of federal waiver terms and conditions (seventh claim); (8) for a writ of mandate pursuant to California Code of Civil Procedure § 1085 based on the above, alleged violations of law (eighth claim); and (9) for declaratory relief. Plaintiff moves for a preliminary injunction only on the basis of its first, third, fourth, sixth, seventh and eighth claims for relief. The court considers these claims below in the order best tailored to the parties' various arguments raised in support of and in opposition to the motion.

1. Contract Clause

In its first and eighth claims for relief, plaintiff alleges the enactment of Section 14105.281 violates the Contract Clauses of the United States and California Constitutions. (See Pl.'s Mot. for TRO/Prelim. Inj. ["MPI"], filed Jan. 27, 2011, [Docket #17], at 10--15.) Specifically, plaintiff asserts that the Rate Freeze substantially impairs Medi-Cal contracts between hospitals and the State because "the Rate Freeze by its own terms nullifies any provisions in CMAC contracts that otherwise call for hospitals to receive an increase in their Medi-Cal inpatient payment rates." (Id. at 13:5--7.) Moreover, plaintiff contends that the Rate Freeze substantially impairs non-contract hospitals' implied contracts with the State "because it retrospectively imposes a limit on the payment hospitals can receive for services rendered before the statute was created." (Id. at 14:15--16.)

Defendants do not contest either the existence of a contractual relationship or that those contracts will be "impaired" by the Rate Freeze. Instead, defendants contend that any impairment to the contracts will not be substantial. (Opp'n at 4:20--5:17.) Defendants maintain that, even though hospitals will not be reimbursed at contracted rates, the impairment is not substantial because ...

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