Health Law Case Brief: “But What Does it Mean?” – An Analysis of Douglas v. Independent Living Centers of Southern California, Inc.

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By: Thomas Barker & Joel Goloskie

Does a Medicaid provider or beneficiary have a right to sue a state Medicaid agency if that state enacts a law or regulation that is contrary to the “quality and access” provision of the federal Medicaid Act?  That question was put before the U.S. Supreme Court recently in Douglas v. Independent Living Centers of Southern California, Inc., No. 09-958, the lead case in a group of combined appeals arising out of the U.S. Circuit Court of Appeals for the Ninth Circuit.  Considering the large number of Medicaid providers and beneficiaries nationwide, and considering that skyrocketing Medicaid costs represent one of the largest threats to the future solvency of many states, it is a question whose answer has been eagerly awaited by providers, beneficiaries, and the states alike.

While the Court’s decision in Douglas failed to answer this question, an analysis of the case and the circumstances in which it is playing out indicates that an answer may be safely inferred.  It is likely not, however, the answer that providers and beneficiaries would care to hear.


Facing a well-publicized budget shortfall, the California legislature imposed Medicaid rate cuts across the spectrum of provider types, from hospitals to pharmacies.  CMS did not timely approve these rate cuts, and several lawsuits were filed in federal court by providers, provider associations, and beneficiaries.  These plaintiffs claimed that California’s new rates were so low that they violated the Medicaid Act’s requirement that Medicaid payments are sufficient to: (a) ensure that beneficiaries receive quality healthcare, and (b) enlist enough providers so that beneficiaries have adequate access to that care.  These “quality and access” provisions are found in § 1396a(a)(30)(A) of the Medicaid Act, commonly referred to as section (30)(A). 

Finding that the plaintiffs had established a high likelihood of success on the merits, and because any harm is irreparable under the Eleventh Amendment ‘s prohibition against retrospective relief against states, the district courts in which these cases were pending all granted injunctive relief.  That relief was subsequently upheld by the Ninth Circuit.  California appealed, and the Supreme Court agreed to hear the case. 

What made this a thorny issue is the fact that the Supreme Court had previously held that section (30)(A) does not confer a private right of enforcement under 42 U.S.C. § 1983.[1]  In Gonzaga University v. Doe, 536, U.S. 273, 283 (2002), the Court clarified that a section 1983action required the challenged state law to be in violation of a private right, and not merely a federal law.[2]  Unlike other sections of the Medicaid Act whose wording is deemed specific enough to grant a private right of action, the broad wording of section (30)(A) contains no such “rights creating language.”  Thus, absent some other basis of standing, a provider or beneficiary aggrieved by Medicaid rates that fail the quality and access provision of the Medicaid Act would have no right to contest the state’s rates in federal court.

In Douglas, what turned this from a thorny issue to a justiciable one was the plaintiffs’ reliance upon the Supremacy Clauseto establish standing.  The Supremacy Clause of the U.S. Constitution, found at Article VI, Clause 2, requires state law to yield to federal law with which it conflicts, either directly or through “field preemption.”  However, the Supremacy Clauseis limited by the sovereign immunity granted to states by the Eleventh Amendment.

The tension between the Supremacy Clause and the Eleventh Amendment was at least partly relieved a century ago in Ex parte Young, 209 U.S. 123, (1908).  Under the ex parte Young doctrine, a federal court, consistent with the Eleventh Amendment, may enjoin state officials to conform their future conduct to the requirements of federal law.  Across the subsequent hundred years of jurisprudence, official-capacity cases seeking purely prospective relief have not been treated as actions against the state for Eleventh Amendment purposes, and plaintiffs aggrieved by state action in contravention of federal law have routinely been granted injunctive relief in federal court.

In Douglas, what turned this justiciable issue back into a thorny one was the fact that the ex parte Young doctrine has never been applied to Spending Clause legislation.  Congress’ Spending powerarises under its Article I, section 8 power to provide for the general welfare of the United States.  It is this power from which the Medicaid Act draws its legitimacy.  In Douglas, the state focused upon the fact that there was simply no Spending Clause jurisprudence for the plaintiffs to rely upon to establish Supremacy Clause standing under ex parte Young.

Furthermore, unlike other purely-federal Spending Clauseprograms such as the Medicare Act, Medicaid is a joint federal-state program.  California argued that, because the Medicaid program is a voluntary compact between the federal government and the states, and because the states only agree to participate under the explicit terms of the Medicaid Act, the only private rights of action that providers or beneficiaries can claim are those rights explicitly granted in the Act.  Congress’ decision not to imbue section (30)(A) with rights-creating language, California argued, shielded section (30)(A) from the ex parte Young doctrine.  In essence, California’s argument was that, because Congress had (ostensibly) decided not to grant a private right under section 1983 in this Spending Clause legislation, Congress did not intend for standing to exist under the Supremacy Clause, either.

The Supreme Court Decision 

Then, the unexpected happened.  About a month after oral argument was heard by the Supreme Court, the Centers for Medicare and Medicaid Services (“CMS”) approved most of California’s requested changes, including some that were approved retroactively, and the state withdrew the remaining unapproved change requests.  Thus, before the Court rendered a decision, the federal agency charged with administering the Medicaid program determined that the challenged rate cuts did, in fact, comply with federal law.

Writing for a five-justice majority, Justice Breyer held that CMS approval had sufficiently changed the posture of the case such that the Court would not decide the question of whether the Ninth Circuit properly recognized a Supremacy Clause action to enforce the federal statute against the State before the federal agency took final action.  Instead, the majority remanded the case to the Ninth Circuit for further argument on whether CMS approval of the rate cuts meant that the plaintiffs would now have to abandon their Supremacy Clause action against the state and instead challenge the federal agency determination under the Administrative Procedure Act (“APA”).

The APA provides for judicial review of final agency action, specifically allowing anyone “adversely affected or aggrieved” by agency action to obtain judicial review of the lawfulness of that action.  Under the APA, a reviewing court will set aside agency action it finds to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.”  In an APA action challenging CMS’ approval of the rate reductions, the state agency, of course, is not the proper defendant.  In Douglas, therefore, to challenge CMS’ approval of California’s rate cuts under the APA, the plaintiffs would have to bring suit against the Secretary of Health and Human Services (“HHS”), who had theretofore not been a party to the case.

Justice Breyer gave several reasons why an APA action might be the proper posture for the plaintiffs once CMS had granted approval.  First, the broad and general language of section (30)(A) suggests that the agency’s expertise is relevant in determining that provision’s application.  Second, allowing a Supremacy Clause action to proceed after the agency has reached a decision threatens potential inconsistency or confusion, with the conflicting interpretations of law by several courts (and the agency) threatening to defeat the uniformity that Congress intended by centralizing administration of the program in the agency.  Third, to allow the Supremacy Clause action to continue would appear redundant and inefficient, since the agency was not a participant in the litigation below.

Ordinary review of agency action requires courts to apply the highly-deferential standard of review found in cases like National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005), and Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 476 U.S. 837 (1984).  Justice Breyer found that the parties had not suggested reasons why, in the changed posture of the case following agency approval, those ordinary standards of deference should not apply.  However, noting that the parties had not fully argued that question, the majority chose not to decide it themselves, but to vacate the decision below and remand the question back to the Ninth Circuit.

It should also be noted that the majority did not hold that the plaintiffs had Supremacy Clause standing prior to CMS approval of the rate cuts.  The majority’s failure to so hold was likely the price of Justice Kennedy’s decision to join the majority; Justice Kennedy had ruled that states could not be sued under § 1983 in the earlier Wilder decision. Instead, Douglas was remanded on a far narrower question.  As to the broader question of Supremacy Clause standing, the dissenting opinion, delivered by Chief Justice Roberts on behalf of the four conservative justices, may well signal the ultimate answer.  “When Congress did not intend to provide a private right of action to enforce a statue enacted under the Spending Clause,” the Chief Justice opined, “the Supremacy Clause does not supply one of its own force.  The Ninth Circuit’s decisions to the contrary should be reversed.”

What Does it Mean?

Since the Ninth Circuit decisions in the Douglas cases, a handful of trial courts in other states have found Supremacy Clause standing where the agency had not yet approved a challenged rate cut.  Further, there is not a single court case where Supremacy Clause standing was not granted because the federal law in question was enacted under the Spending Clause.

In the U.S. Circuit Court of Appeals for the First Circuit, states will continue to point to Long Term Care Pharmacy Alliance, Inc. v. Ferguson, 362 F.3d 50 (1st Cir. 2004), which relied upon Gonzaga to hold that section (30)(A) did not confer a private right of action.  However, Long Term Care Pharmacy Alliance was decided solely under § 1983, and did not address Supremacy Clause standing.  While Rosie D. v. Swift, 310 F.3d 230 (1st Cir. 2002), contains language that appears to favor plaintiffs’ standing, it involves early and periodic screening, diagnosis and treatment (“EPSDT”) under § 1396(a)(10) of the Medicaid Act.  At least five circuit courts of appeal have held that Section 1396(a)(10) creates a private right of action, and none have held to the contrary.  See Watson v. Weeks, 436 F.3d 1152 (9th Cir. 2006).  This renders Rosie D. less than ideal footing for a Supremacy Clause action.

Far more supportive of Supremacy Clause standing are the First Circuit’s holdings in Puerto Rico Telephone Co. v. Municipality of Guayanilla, 450 F.3d 9 (1st. Cir 2006), and O’Brien v. Massachusetts Bay Transportation Authority, 162 F.3d 40 (1st Cir. 1998).  Puerto Rico Telephone Co., decided two years after Long Term Care Pharmacy Alliance, announced a broadly-worded rule that did not carve out an exception for Spending Clause legislation.  To quote: “A party may bring a claim under the Supremacy Clause that a local enactment is preempted even if the federal law at issue does not create a private right of action.”   The 1998 O’Brien decision actually did address the Spending Clause, holding “[P]reemptive legislation under the spending power presents states with a choice… *** When congress delineates conditions governing the receipt of federal dollars and a state agency accepts the money on that basis, the Supremacy Clause requires conflicting local laws to yield.  The rule then, is crystal clear: as long as a state receives federal funds for a particular purpose, its law, if contrary to conditions attached to the funds, must give way to federal law.”

However, it might now be expected that district courts will draw stronger direction from the four dissenting Supreme Court justices in Douglas, who did not hesitate to answer the underlying Supremacy Clause question.  Moreover, the dissent needs only one other justice to join them if the underlying question makes its way back before the Court.

Furthermore, Douglas and the Supremacy Clause cases in its wake are not being decided in a vacuum.  The federal government is facing a multi-trillion dollar shortfall due to unfunded liabilities, and the explosive growth of Medicaid spending has been identified by many states as their number one threat to fiscal solvency.  Against this backdrop, states are already taking lessons from the California cases.  For example, one of the findings that supported a likelihood of success on the merits in the California cases is the fact that the plaintiffs could demonstrate that rates cuts had been made for purely budgetary reasons, without the “section (30)(A) analysis” that prior Medicaid cases have required of the states.  Providers should expect that states will increasingly alchemize their budget processes into “well-researched studies” supporting the fact that quality and access can be effectively maintained under the proposed rate cuts.

Supremacy Clause plaintiffs may also find that hearings on their request for preliminary injunctive relief take just long enough for the state’s proposed changes to be “presumptively approved” under the 90 day rule in 42 C.F.R. § 430.16.  Presumptive approval might then be held to mean that an APA action is the proper remedial vehicle.  Of course, APA actions are decided under the highly-deferential Chevron standard.[3]

This does not mean, however, that CMS will never disapprove a proposed state plan amendment simply because of today’s challenging fiscal environment.  In a pair of change requests recently submitted to CMS by the State of Rhode Island, CMS denied requested premium increases that would have violated “maintenance of effort” requirements, but approved a twenty-three percent rate cut to providers of developmental disability services.  In the latter determination, CMS found that the providers’ attestations and cost documentation simply had not defeated the state’s assurances that that quality and access would be maintained.

So, what is the lesson here?  Given the clear signals from the dissent, it is not clear that a Supremacy Clause action against the state is an advisable strategy.  Rather, the more effective strategy might seem to center on communications with CMS.  The agency has shown that it is not a rubber stamp for the states: if it is presented with persuasive evidence that quality or access will suffer, or that some other Medicaid-related statute will be violated, CMS will deny a state’s change request.  However, potential grievants must be able to demonstrate not merely that the state action will cause reductions in service delivery, but that the reductions will be so great as to constitute a violation of federal law.  When all is said and done, this is the standard, and parties who cannot meet it will fail in their efforts regardless of how they go about seeking redress.

Thomas Barker is a partner in the law firm of Foley Hoag LLP, where he is a member of the firm’s life sciences, health care, and government strategies practices. He represents health care providers, pharmaceutical, biological and medical device manufacturers on complex CMS and FDA regulatory issues. Mr. Barker splits his time between the firm’s Washington, DC and Boston offices. 

Prior to joining Foley Hoag LLP, Mr. Barker served as a political appointee in the Administration of President George W. Bush. Most recently, Mr. Barker was the acting General Counsel of HHS from May of 2008 through the end of the Bush Administration. In that role, he supervised a staff of 450 attorneys nationwide and was responsible for attesting to the legal sufficiency of each regulation issued by HHS and its component agencies, as well as overseeing the conduct of all litigation to which the Department was a party. Mr. Barker also served as counselor to the Secretary of HHS, the Honorable Michael Leavitt, and before that, worked as a policy advisor to the Centers for Medicare & Medicaid Services (CMS). During his tenure at HHS, Mr. Barker was integrally involved in every major health care initiative implemented or proposed by the Bush Administration, including the part D drug benefit.

Prior to his service at HHS, Mr. Barker was regulatory counsel to the Massachusetts Hospital Association. He has also worked on Capitol Hill. Mr. Barker is an adjunct professor of health law at Suffolk University School of Law in Boston, and the George Washington University Schools of Law and Public Health and Health Services in Washington, D.C.

Joel Goloskie is Deputy General Counsel and Director of Compliance, Privacy & Ethics at CharterCARE Health Partners, a multi-facility healthcare delivery system centered in Providence, Rhode Island.  Focusing upon the development of competitive centers of excellence in high-demand services such as cancer care, digestive diseases, elder care, and behavioral health, CharterCARE specializes in breathing vitality and viability into formerly-struggling hospitals and healthcare institutions.

Prior to moving in-house, Mr. Goloskie maintained an active practice in healthcare-related litigation, regulatory, and transactional matters, representing a wide range of clients across all points of the provider spectrum.  Mr. Goloskie spent ten years as the founder and president of Goloskie Consulting Group, Inc., providing reimbursement, compliance, and strategic guidance that generated tens of millions of dollars in additional reimbursement for over fifty hospitals in fifteen states.  Mr. Goloskie also served as the founding Executive Director of a Robert Wood Johnson Foundation-sponsored collaborative consisting of four rural hospitals, two rural referral centers, and nine federally-qualified health center sites.  A graduate of Boston College Law School and a Hingham resident, Mr. Goloskie co-chairs the Boston Bar Association’s Health Law Education Committee.

[1] Twelve years earlier, the Supreme Court had held that another provision of the Medicaid Act, 42 U.S.C. § 1396a(a)(13)(A), could be enforced under § 1983.  Wilder v. Virginia Hosp. Assoc., 496 U.S. 498 (1990).

[2] The inconsistency between Wilder and Gonzaga can likely be explained by two factors.  Number one, in the years between the decisions in Wilder and Gonzaga, the underlying statute had been amended.  Number two, the composition of the Court had changed; Justice Marshall, who had been in the majority in Wilder, was replaced by Justice Thomas, who was in the majority in Gonzaga.

[3] In PhRMA v. Walsh, 538 U.S. 644 (2003), another Medicaid case that arose, in part, under the Supremacy Clause, the Supreme Court implied just how high a challenger’s bar would be once CMS approved a state plan amendment.  See id. at 659 (describing such CMS action as “presumptively valid”).