Ak. Health & Social v. Medicare & Medicaid, 04-74204.

• Decision Date: 12 September 2005
• Docket Number: No. 04-74204.,04-74204.
• Citation: 424 F.3d 931
• Parties: ALASKA DEPARTMENT OF HEALTH AND SOCIAL SERVICES, Petitioner, v. CENTERS FOR MEDICARE AND MEDICAID SERVICES, Mark B. McClellan in his Official Capacity as Administrator of the Opinion Centers for Medicare and Medicaid Services; Michael O. Leavitt,<SMALL><SUP>*</SUP></SMALL> Secretary, Respondents.
• Court: U.S. Court of Appeals — Ninth Circuit

424 F.3d 931

ALASKA DEPARTMENT OF HEALTH AND SOCIAL SERVICES, Petitioner, v. CENTERS FOR MEDICARE AND MEDICAID SERVICES, Mark B. McClellan in his Official Capacity as Administrator of the Opinion Centers for Medicare and Medicaid Services; Michael O. Leavitt,^* Secretary, Respondents.

No. 04-74204.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 12, 2005.

Filed September 12, 2005.

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Charles A. Miller, Covington & Burling, Washington, DC, for the petitioner.

Gerard Keating, Office of the General Counsel, United States Department of Health and Human Services, Washington, DC, for the respondents.

On Petition for Review of an Order of the Department of Health and Human Services.

Before GOODWIN, BRUNETTI, and W. FLETCHER, Circuit Judges.

BRUNETTI, Circuit Judge.

The Alaska Department of Health and Social Services (hereinafter the "State") petitions for review of a final determination by the Administrator of the Centers for Medicare and Medicaid Services ("CMS" or "Agency") disapproving a proposed Medicaid state plan amendment that would alter the rate at which the federal government reimburses State expenditures on behalf of patients at Indian tribal health facilities. The Administrator rejected the proposed amendment on two alternative grounds: (1) that it was inconsistent with the statutory requirement of efficiency, economy, and quality of care; and (2) that it failed to comply with a regulation governing payment ceilings. The State challenges the Administrator's decision as arbitrary and capricious under the Administrative Procedure Act. We conclude that the Administrator's interpretations of the statute and regulation were permissible and deny the petition for review.

I. BACKGROUND

A. Statutory Framework

Medicaid is a cooperative federal-state program through which the federal government reimburses states for certain medical expenses incurred on behalf of needy persons. Wilder v. Va. Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990). Participation by states is voluntary, but those that choose to participate must comply both with statutory requirements imposed by the Medicaid Act and with regulations promulgated by the Secretary of Health and Human Services. Id.; see also Orthopaedic Hosp. v. Belshe, 103 F.3d 1491, 1493 (9th Cir.1997).

To qualify for federal assistance, participating states must submit to the Secretary, and have approved, a "plan for medical assistance" that describes the nature and scope of the state program. Wilder, 496 U.S. at 502, 110 S.Ct. 2510. The Medicaid Act prescribes a laundry list of requirements that this state plan "must" satisfy, 42 U.S.C. § 1396a(a), and an extensive body of regulations implements these requirements. The Secretary "shall approve" any state plan (or amendment) that fulfills these statutory and regulatory conditions, 42 U.S.C. § 1396a(b), and has delegated this authority to the CMS Administrator. 42 C.F.R. § 430.15(b).

Under normal circumstances, if the Administrator approves the state plan, the federal government reimburses the state for a fixed percentage of certain expenses that the state incurs on behalf of Medicaid-eligible individuals. This percentage, known as the Federal Medical Assistance Percentage ("FMAP"), varies from state to state. Health care providers bill the state, the state pays the providers, and the federal government reimburses the state at the FMAP rate — which, for Alaska in 2004, was 57.58%. The state is responsible for the balance. In theory, this arrangement incentivizes states to keep rates at efficient levels, because they share financial responsibility for Medicaid costs with the federal government. 66 Fed.Reg. 3148, 3175 (2001). The tribal facilities at issue in this case are unique, however, and by statute receive 100% FMAP. See 42 U.S.C. § 1396d(b).¹ There are seven such facilities — one in Anchorage and six in rural areas.

Assuming that its plan meets federal requirements, a state has considerable discretion in administering its Medicaid program, including setting reimbursement rates. See Lewis v. Hegstrom, 767 F.2d 1371, 1373 (9th Cir.1985). The statutory requirement at issue here provides that a state plan must

provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan . . . as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency, economy, and quality of care[.]

42 U.S.C. § 1396a(a)(30)(A) [hereinafter " § 30(A)"]. Neither the Medicaid Act, nor its implementing regulations, define the terms "efficiency," "economy," or "quality of care." However, since 1997, § 30(A) has been the principal statutory authority for a series of upper payment limit ("UPL") regulations that cap state reimbursement rates to "promote economy and efficiency." 66 Fed.Reg. at 3148. These regulations have been modified several times in recent years to respond to concerns about states' inappropriate use of intergovernmental transfers to fund their Medicaid programs.

B. Regulatory Framework

An intergovernmental transfer ("IGT") is a mechanism by which states use local, rather than state, dollars to fund the state share of Medicare expenditures. Such transfers — which typically require that public entities at the city or county level transfer funds to the state — are specifically sanctioned by the Medicare Act, which grants states the flexibility to fund up to 60% of their share of Medicare expenditures with local dollars. 66 Fed.Reg. at 3148. Although the Agency recognizes that the use of IGTs is protected by statute, in its view "that flexibility has been used in recent years to establish funding arrangements that are excessive and abusive and do not assure that federal Medicaid funding is spent for Medicaid covered services provided to Medicaid eligible individuals." Id. at 3164.

In 2001, audits by the Office of the Inspector General and the General Accounting Office revealed a relationship between IGT misuse and excessive federal Medicaid spending. The Agency, concluding that its UPL regulations created a financial incentive for IGT abuse, modified them by rule. Id. at 3148. In short, the then-existing UPLs placed a single upper limit on aggregate payments made to several categories of providers, including (i) state government-owned facilities, (ii) non-state (i.e., city and county) government-owned facilities, and (iii) private facilities. 65 Fed.Reg. 60151, 60151-52 (2000). This allowed states to set reimbursement rates for city and county facilities at relatively high levels, and other facilities at relatively low levels, while still complying with the overall aggregate UPL. 66 Fed.Reg. at 3149-50. Because the federal government reimburses states for a fixed percentage of their Medicaid expenses, the higher rates at local facilities led to higher federal matching payments. Id. at 3150. And, as these local facilities are public entities, the majority of excess federal matching payments could be returned, via IGTs, from local providers to the states. The states ultimately used the excess federal dollars to fund their own share of Medicaid expenses — and sometimes for wholly unrelated purposes. Id.

The Agency determined that this practice, which effectively replaced state Medicaid dollars with federal Medicaid dollars, was "not consistent with the statutory requirements that Medicaid payments be economical and efficient." Id. To remedy this problem, and to reduce the incentive for abuse, the Agency revised the UPL regulations. Specifically, it retained the upper limit on overall aggregate payments to all facilities, and implemented separate aggregate limits for both state government-owned facilities and non-state government-owned facilities. Id.; 42 C.F.R. § 447.272; 42 C.F.R. § 447.321.

However, "Indian Health Services facilities and tribal facilities" were specifically excepted from the scope of these new regulations. Instead, these facilities were made subject to a separate UPL for "other" facilities, which provides:

The [state] agency may pay the customary charges of the provider but must not pay more than the prevailing charges in the locality for comparable services under comparable circumstances.

42 C.F.R. § 447.325; see 66 Fed.Reg. at 3159. In proposing this exception, the Agency explained that "we excluded IHS facilities because we believe there is little incentive for States to pay enhanced rates to these facilities. Rates to these facilities are generally set by the State in accordance with rates published by the Federal government." 65 Fed.Reg. at 60153. Its concern, rather, was that categorizing them as "public facilities within the UPLs may enable States to set lower payments for the IHS and tribal facilities, and set payments for government operated providers at higher levels and still comply with the aggregate UPLs." 66 Fed.Reg. at 3159. Therefore, "to avoid these types of incentives, [the Agency] excluded IHS facilities from the UPLs." Id.

C. The State Plan Amendment

Shortly after the 2001 amendments to the UPLs, Alaska submitted state plan amendment 01-009 to the Agency. It provided:

Under agreement with a Tribal Health Facility provider the [Alaska] Department [of Health and Social Services] may pay the customary charges of the provider but must not pay more than the prevailing charges in the locality for comparable services under comparable circumstances. Such a payment . . . is subject to the payment limits at 42 CFR 447.325.

The text of the proposed amendment thus tracks verbatim the UPL that the 2001 amendments made applicable to the tribal facilities at issue. In response to the Agency's request for clarification, the State explained that, to receive the additional federal revenue generated by the amendment, the tribal facilities "will be...