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North East Medical Services v. California Department of

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION


June 24, 2011

NORTH EAST MEDICAL SERVICES,
INC., PLAINTIFF,
v.
CALIFORNIA DEPARTMENT OF HEALTH CARE SERVICES, HEALTH AND HUMAN SERVICES AGENCY, STATE OF CALIFORNIA, ET AL., DEFENDANTS. LA CLINICA DE LA RAZA, INC..,
PLAINTIFF,
v.
CALIFORNIA DEPARTMENT OF HEALTH CARE SERVICES, HEALTH
AND HUMAN SERVICES AGENCY, STATE OF CALIFORNIA, ET AL.,
DEFENDANTS.

The opinion of the court was delivered by: Richard Seeborg United States District Judge

United States District Court For the Northern District of California

ORDER GRANTING MOTIONS TO DISMISS

Indigent clientele who lack private health insurance. Plaintiffs receive substantial funding for their operations from the federal government through what are known as "Section 330" grants.

Medicaid program, known in California as Medi-Cal, they are entitled to be reimbursed for their costs by the federal and state governments. In these actions plaintiffs contend that California applied incorrect rules in 2006 and 2007 for calculating the amount of its Medi-Cal reimbursement 9 obligation to plaintiffs with respect to pharmaceutical services that plaintiffs provided to "dual-10 eligibles"-persons entitled to coverage under both Medi-Cal and Medicare. As a result, plaintiffs contend, they were forced to expend a portion of their Section 330 grants to cover costs that should have been paid by the state. Plaintiffs assert that Congress expressly intended Section 330 grants

I. INTRODUCTION

Plaintiffs in these related cases operate medical clinics that primarily serve low income and Additionally, when plaintiffs provide services to persons eligible under the joint federal and state not be used to "subsidize" services provided to Medicaid recipients, and argue that the state's accounting rules had precisely such an effect.

Defendants, who are California state agencies and officers, move to dismiss. They contend,among other things, that the Eleventh Amendment forecloses plaintiffs from seeking in federal court what is, in essence, "recovery of money from the state." In response, plaintiffs attempt to avoid the 18 effect of the Eleventh Amendment by characterizing the monies in dispute as federal dollars, which 19 merely are in the temporary possession of the state. Because that characterization is not tenable, the 20 motions will be granted and these actions dismissed.

Plaintiff North East Medical Services, Inc., based in San Francisco, focuses on serving the Asian population throughout the Bay Area. Plaintiff La Clinica De La Raza, Inc., headquartered in "federally qualified health center" ("FQHC"), pursuant to Section 330 of the Public Health Services Act, 42 U.S.C. § 254b. As such, plaintiffs receive federal funding for providing certain medical 28 services to underserved areas or populations-the Section 330 grants mentioned above.

II. BACKGROUND

Oakland, serves communities in several East Bay counties. Each plaintiff is designated as a intended to approximate the FQHC's costs-of-care. 42 U.S.C. § 1396a(bb). Funds are advanced 3 each fiscal year based on anticipated costs, followed by a "reconciliation" process at year's end to 4 determine whether the state must pay additional sums for Medicaid services performed by the The dispute in these cases arises from plaintiffs' provision of pharmacy services to persons who are eligible both for Medicare's "Part D" prescription drug benefits and for Medi-Cal. The parties appear to be in agreement that Medi-Cal is, as a general principle, not required to pay for anything that is covered by Medicare. California believes, therefore, that unless a FQHC segregates out its pharmacy services from the per-visit cost advances it obtains each year, then during the year- end reconciliation it must deduct the full amount of any Medicare Part D payments when calculating its entitlement to Medi-Cal reimbursements.

Plaintiffs, in contrast, contend that because the basis of the per-visit cost calculation predates the enactment of Medicare Part D, it reflects "embedded" costs of providing pharmacy services to dual-eligible clients that should be "excised," but not simply by offsetting the entire amount of payments they receive from Medicare Part D. Under plaintiffs' calculations, they received a higher level of reimbursement when prescription drugs were covered under Medi-Cal rather than by Medicare Part D. Plaintiffs believe that the higher amounts previously reimbursed 19 more accurately reflect their true "costs" of providing those services than the current payments from FQHCs are fully reimbursed for their costs of providing services to Medicaid eligible persons, 22 plaintiffs conclude that California is effectively underpaying its Medi-Cal obligations by insisting 23 that plaintiffs deduct the full amount of Medicare Part D payments during the reconciliation process.

From their conclusion that Medi-Cal is underpaying them, and not reimbursing the full costs of services they provide to Medi-Cal eligible individuals, plaintiffs then reason that they necessarily 26 are paying the balance of those costs by drawing from their Section 330 grants. Plaintiffs assert that Congress has long had the "unmistakable goal" of preventing monies allocated under Section 330 28 from serving as de facto subsidies to the Medicaid program. Rather, Section 330 funds are intended An FQHC also receives a fixed, per-visit fee from its State Medicaid program that is FQHC, or conversely, whether the FQHC must return any overpayments.

Medicare Part D do. Based on their assertion that the Medicaid system is designed to ensure to be used solely to meet the medical needs of persons who have neither private insurance nor Medicare or Medicaid eligibility. Accordingly, plaintiffs' theory is that they are entitled to recover 3 additional Med-Cal reimbursements for services they rendered in 2006 and 2007, for which they 4 claim to have had no choice but to utilize Section 330 funds.

After 2007 plaintiffs avoided this particular issue by opting to "carve-out" all of their pharmacy services from the Medi-Cal program and to receive payment for Medi-Cal covered services on a directly-billed, fee-for-services basis. Although plaintiffs vaguely suggest that electing this option is less desirable to them and could lead to unspecified future problems, they expressly acknowledge that they are not suffering any current financial injury.

III. DISCUSSION

Plaintiffs do not dispute that the Eleventh Amendment generally insulates a state, its agencies, and officers against suits in federal cour that seek to compel the state to pay its own money to the claimant. Nor do plaintiffs suggest that the mere fact they have styled their complaints 15 for declaratory and injunctive relief, rather than for damages, is sufficient to avoid that principle. See Taylor v. Westly, 402 F.3d 924, 929-930 (2005) ("Generally, the Eleventh Amendment shields state governments from money judgments in federal courts, and from declaratory judgments against the 18 state governments that would have the practical effect of requiring the state treasury to pay money to 19 claimants.") Plaintiffs instead rely on authorities that stand for the unremarkable proposition that 20 not all monies that may be in the possession of a state necessarily are state funds, such that the Eleventh Amendment would be implicated. See, e.g. Taylor, 402 F.3d at 932 ("Money that the state 22 holds in custody for the benefit of private individuals is not the state's money . . . . the state's Eleventh Amendment immunity from suit against it for damages payable from its treasury has no 24 application.").

Were it the case that the Federal Government had provided grants to states to distribute to health services providers, and plaintiffs were making a claim that California had not disbursed funds 27 from those grants in conformity with the law, their argument that the Eleventh Amendment is not a 28 barrier might be tenable. Indeed, plaintiffs cite cases that, although not involving Eleventh Amendment issues, support the notion that federal grant money retains its federal character until it 2 reaches the ultimate intended beneficiary, and/or is expended for its intended purposes. See, e.g.

Palmiter v. Action, Inc., 733 F.2d 1244, 1246 (7th Cir. 1984) (judgment creditor of non-profit 4 community service organization not entitled to garnish organization's bank account where all the 5 funds were derived either from direct federal grants, or from federally-funded state grant programs);

In re Joliet-Will County Community Action Agency, 847 F.2d 430 (7th Cir. 1988) (federal and state 7 grant monies held by non-profit not part of its estate in bankruptcy). to California for redistribution to entities like them. Rather, plaintiffs are relying on a fiction-their 10 contention that the effect of California's alleged failure to pay its full Medi-Cal obligation is tantamount to using Section 330 grants as a subsidy. Even if plaintiffs are correct regarding what Medi-Cal should have paid them, that would not somehow transform the character of the monies plaintiffs are seeking from state to federal dollars. Under plaintiffs' construction, the federal government provided Section 330 grants to plaintiffs to subsidize their provision of medical services 15 to Medi-Cal eligible persons. No money in the form of a subsidy or otherwise flowed from the federal government to the state. If plaintiffs are correct, while California retained for its own purposes money that it should have paid to them, it remained the state's money. federal government under Section 330 when they should not have found it necessary to do so.

While that might mean, if correct, that California received a subsidy to its Medi-Cal program in a metaphorical sense, the money that California should have paid-the money plaintiffs seek to recover in this action-is still California's money, that would have to be paid from its coffers.

Because the Eleventh Amendment precludes this Court from exercising jurisdiction over such claims, the motions to dismiss these cases must be granted.*fn1

IV. CONCLUSION

Defendants' motions to dismiss for lack of subject matter jurisdiction are granted. The Clerk 3 shall close the files.

IT IS SO ORDERED.


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