Independent Living Ctr. of Southern Cal. v. Shewry

• Citation: 543 F.3d 1050
• Decision Date: 17 September 2008
• Docket Number: No. 08-56061.,08-56061.
• Parties: INDEPENDENT LIVING CENTER OF SOUTHERN CALIFORNIA, INC., a nonprofit corporation; Gray Panthers of Sacramento, a nonprofit corporation; Gray Panthers of San Francisco, a nonprofit corporation; Gerald Shapiro, Pharm. D. doing business as Uptown Pharmacy and Gift Shoppe; Sharon Steen doing business as Central Pharmacy; Mark Beckwith; Margaret Dowling; Tran Pharmacy, Inc., doing business as Tran Pharmacy; Jason Young, Petitioners-Appellants, v. Sandra SHEWRY, Director of the Department of Health Care Services, State of California, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

543 F.3d 1050

INDEPENDENT LIVING CENTER OF SOUTHERN CALIFORNIA, INC., a nonprofit corporation; Gray Panthers of Sacramento, a nonprofit corporation; Gray Panthers of San Francisco, a nonprofit corporation; Gerald Shapiro, Pharm. D. doing business as Uptown Pharmacy and Gift Shoppe; Sharon Steen doing business as Central Pharmacy; Mark Beckwith; Margaret Dowling; Tran Pharmacy, Inc., doing business as Tran Pharmacy; Jason Young, Petitioners-Appellants, v. Sandra SHEWRY, Director of the Department of Health Care Services, State of California, Respondent-Appellee.

No. 08-56061.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 11, 2008.

Filed September 17, 2008.

Lynn S. Carman and Stanley L. Friedman (argued) for Independent Living Center of Southern California, et al., petitioners-appellants.

Edmund G. Brown, Jr., Attorney General of the State of California; Richard T. Waldow, Supervising Deputy Attorney General; Jennifer M. Kim (argued), Supervising Deputy Attorney General; Phillip J. Matsumoto, Tara L. Newman, Gregory M. Cribs, and Sara Ugaz, Deputy Attorneys General; for Sandra Shewry, Director of the Department of Health Care Services of the State of California, respondent-appellee.

Appeal from the United States District Court for the Central District of California; Christina A. Snyder, District Judge, Presiding. D.C. No. 2:08-cv-03315-CAS-MAN.

Before: STEPHEN REINHARDT, MARSHA S. BERZON, and MILAN D. SMITH, JR., Circuit Judges.

BERZON, Circuit Judge:

Petitioner-appellants, a group of pharmacies, health care providers, senior citizens' groups, and Medi-Cal beneficiaries (collectively "ILC"),¹ seek to enjoin a state official from implementing legislation reducing payments to medical service providers under the state's Medicaid program, known as "Medi-Cal," by ten percent. ILC alleged in its complaint that the state legislation violates certain provisions of the federal Medicaid Act, and is therefore preempted under the Supremacy Clause.² Although ILC sought preliminary relief, the district court denied any such relief, holding that ILC could not allege any viable claim for injunctive relief because none of the petitioners or their members have any federal right to Medi-Cal payments or benefits. We do not agree that this suit fails for this threshold reason, and therefore reverse.

I.

A.

Under Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. (the "Medicaid Act"), the federal government provides funds to participating states to "enabl[e] each State, as far as practicable . . . to furnish [ ] medical assistance on behalf of families with dependent children and of aged, blind, or disabled individuals, whose income and resources are insufficient to meet the costs of necessary medical services[.]" 42 U.S.C. § 1396. Medicaid is a cooperative federal-state program, enacted by Congress pursuant to its powers under the Spending Clause, see U.S. CONST. art. I, § 8, cl. 1, that "`directs federal funding to states to assist them in providing medical assistance to low-income individuals.'" Ball v. Rodgers, 492 F.3d 1094, 1098 (9th Cir.2007) (quoting Katie A. v. Los Angeles County, 481 F.3d 1150, 1153-54 (9th Cir. 2007)). To receive federal funds, states are required to administer their programs in compliance with individual "State plans for medical assistance" approved by the federal Secretary of Health and Human Services. 42 U.S.C. § 1396. The Act sets forth detailed requirements for state plans, see id. § 1396a(a)(1)-(71), including the specific provision at issue in this appeal.

Under that provision, § 1396a(a)(30)(A) ("Section 30(A)"), a state plan must:

provide such methods and procedures relating to . . . the payment for[ ] care and services . . . as may be necessary . . . to assure that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area[.]

That is, a state plan must establish reimbursement rates for health care providers that are both consistent with high-quality medical care (the "quality of care provision") and sufficient to enlist enough providers to ensure that medical services are generally available to Medicaid recipients (the "access to care provision"). See generally Orthopaedic Hosp. v. Belshe, 103 F.3d 1491 (9th Cir.1997).

B.

California Assembly Bill X35 ("AB 5"), enacted on February 16, 2008, during a special session convened by the Governor to address the state's budget deficit, reduces payments to medical providers participating in the state's Medi-Cal program by ten percent. Section 14 of AB 5 instructs the Director of the Department of Health Care Services, the state agency responsible for administering the Medi-Cal program, to reduce payments to physicians, dentists, pharmacies, adult day health care centers, clinics, health systems and other providers participating in Medi-Cal's fee-for-service program by ten percent. See CAL. WELF. & INST. CODE § 14105.19 (2008). Section 14 also reduces payments to managed health care plans under contract with the Department by the "actuarial equivalent" of ten percent. Id. Section 15 of AB 5 instructs the Director to reduce payments for inpatient services provided by acute care hospitals not under contract with the Department by ten percent. See id. § 14166.245. All of these cuts were scheduled to take effect July 1, 2008.

ILC filed this suit in California state court seeking to enjoin implementation of AB 5 on April 22, 2008, maintaining that the ten-percent rate reduction violates both the "quality of care" and "access to care" provisions of § 30(A) and is therefore invalid under the federal Constitution's Supremacy Clause, as it conflicts with governing federal law. The complaint alleged that even prior to passage of AB 5, a substantial percentage of medical care providers — 45% of primary care providers and 50% of specialists — were unwilling to participate in the Medi-Cal program due to low reimbursement rates; that 90% of dentists refused to accept Medi-Cal patients; and that Medi-Cal's reimbursement rates for prescription drugs allowed pharmacies to "uniformly earn less than a 10% net profit." By further reducing already-low reimbursement rates, ILC argued, AB 5 would drive even more primary care physicians, specialists, dentists, and pharmacies out of the Medi-Cal program and force existing providers to reduce services. As a result, ILC contended, Medi-Cal recipients would be "denied quality medical services and access to quality medical services," in violation of § 30(A). ILC also maintained that nothing in the legislative history of AB 5 demonstrated that the legislature had considered whether reduced payments would be consistent with efficiency, economy, and quality of care, or whether such payments would be sufficient to enlist an adequate network of health care providers. Rather, the sole purpose cited in the legislation was to "address[ ] the fiscal emergency declared by the Governor" and "implement cost containment measures affecting health services, at the earliest possible time." ILC therefore requested a peremptory writ of mandate or injunction to prevent the Department of Health Care Services³ and its Director, Sandra Shewry ("the Director"), from implementing AB 5.⁴

C.

The state defendants removed the suit to federal court, where ILC filed a motion for preliminary injunction. The district court denied relief, holding that although it was "acutely cognizant of the potential adverse consequences of the ten percent rate reduction," ILC had "no likelihood of succeeding on the merits" because they "do not have any federal rights under § 30(A)."

In reaching this conclusion, the district court relied heavily on this court's decision in Sanchez v. Johnson, which held that § 30(A) does not "create an individual right that either Medicaid recipients or providers would be able to enforce under [42 U.S.C.] § 1983." 416 F.3d 1051, 1062 (9th Cir.2005). Although the district court acknowledged that ILC in this case filed suit under 28 U.S.C. § 1331 and the Supremacy Clause rather than under § 1983, the court viewed this as a distinction without a difference, reasoning that the Supremacy Clause — like § 30(A) — "`is not a source of any federal rights.'" Golden State Transit Corp. v. City of Los Angeles, 493 U.S. 103, 107, 110 S.Ct. 444, 107 L.Ed.2d 420 (1989) (quoting Chapman v. Houston Welfare Rights Org., 441 U.S. 600, 613, 99 S.Ct. 1905, 60 L.Ed.2d 508 (1979)). In the absence of any "right," the district court concluded, ILC almost surely had failed to state a claim for injunctive relief.

In so ruling, the district court rebuffed ILC's argument that it was entitled to seek purely injunctive relief — which is all it is seeking — on the basis of federal preemption under the doctrine recognized in Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983). Shaw held that "[a] plaintiff who seeks injunctive relief from state regulation, on the ground that such regulation is pre-empted by a federal statute which, by virtue of the Supremacy Clause . . ., must prevail, thus presents a federal question which the federal courts have jurisdiction under 28 U.S.C. § 1331 to resolve." Id. at 96 n. 14, 103 S.Ct. 2890. The district court held Shaw and its progeny — which, as we shall see, are legion — inapplicable to ILC's claims, holding that Shaw preemption claims have been permitted in only three "circumstances": (1) "where the plaintiff claims that a state law requires him to act in violation of federal law;" (2) "where the plaintiff contends that his conduct will be restricted by a state law that is preempted by federal law;" and (3) "where state law interferes with federally created rights." The court concluded that ILC's claims did not fall under any of...