Ariz. Hosp. & Healthcare Ass'n, an Ariz. Corp. v. Betlach

• Decision Date: 23 March 2012
• Docket Number: No. CV11–2348–PHX–DGC.,CV11–2348–PHX–DGC.
• Citation: 865 F.Supp.2d 984
• Parties: ARIZONA HOSPITAL AND HEALTHCARE ASSOCIATION, an Arizona corporation, Plaintiff, v. Thomas J. BETLACH, Director of the Arizona Healthcare Cost Containment System; Kathleen Sebelius, Secretary of the United States Department of Health and Human Services, Defendants.
• Court: U.S. District Court — District of Arizona

865 F.Supp.2d 984

ARIZONA HOSPITAL AND HEALTHCARE ASSOCIATION, an Arizona corporation, Plaintiff,

v.Thomas J. BETLACH, Director of the Arizona Healthcare Cost Containment System; Kathleen Sebelius, Secretary of the United States Department of Health and Human Services, Defendants.

No. CV11–2348–PHX–DGC.

United States District Court, D. Arizona.

March 23, 2012.

Jordan B. Keville, Lloyd A. Bookman, Hooper Lundy & Bookman PC, Los Angeles, CA, Keith Beauchamp, Scott Michael Bennett, Coppersmith Schermer & Brockelman PLC, Phoenix, AZ, for Plaintiff.

Logan T. Johnston, Johnston Law Offices PLC, Phoenix, AZ, William August Richards, Bade & Baskin PLC, Tempe, AZ, Michael Andrew Zee, US Dept. of Justice, Washington, DC, for Defendants.

ORDER

DAVID G. CAMPBELL, District Judge.

Plaintiff Arizona Hospital and Healthcare Association (“Plaintiff”) has filed a motion for a preliminary injunction. Doc. 7. Defendant Thomas J. Betlach (“the Director”) and Defendant Kathleen Sebelius (“the Secretary”) have filed separate responses. Docs. 44, 54. The motion is fully briefed. Docs. 7, 44, 54, 55. The Court heard oral argument on March 1, 2012. For the reasons that follow, the Court will deny the motion.

I. Background.

The State of Arizona has elected to participate in the federal Medicaid program. Doc. 1, at 6, ¶ 17. Arizona has named its program the Arizona Health Care Cost Containment System (“AHCCCS”). Id. The Arizona Health Care Cost Containment System Administration (“AHCCCSA”) is the single state agency charged with administering AHCCCS. Id. In order to receive matching federal financial participation, state Medicaid plans must comply with applicable federal Medicaid law and regulations. 42 U.S.C. § 1396a(a)(5); 42 C.F.R. §§ 430.10, 431.10. State plans must be submitted to the Secretary for approval. 42 C.F.R. §§ 430.10, 447.201(b). The Ninth Circuit has held, under federal Medicaid law, that changes to state plans may not be implemented by the State prior to approval by the Secretary. Doc. 1, at 5, ¶ 13. The Secretary's review and approval of any state Medicaid plan amendment is reviewable under the Administrative Procedure Act (“APA”), 5 U.S.C. § 706 et seq.

AHCCCS payments are disbursed in two ways. The first is a fee-for-service (“FFS”) process whereby AHCCCSA determines whether the health care services were covered and furnished by a provider to an eligible beneficiary, and, if so, pays the service providers directly. Doc. 1, at 6–7, ¶ 18. The second is through managed care plans operated by public and private entities under contract. Id. Under the managed care model, the State pays a capitation rate to managed care organizations (“MCOs”) who then negotiate contractual managed care rates with hospital providers. Most of the AHCCCS program is conducted under a managed care model. Doc. 1, at 8, ¶ 24. Plaintiff alleges, however, that changes to hospital FFS rates have a direct impact on how much hospitals are paid through managed care programsbecause contracts, federal law, and Arizona law all tie payments under managed care plans to FFS rates. Doc. 1, at 8–9, ¶¶ 24–28.

On April 6, 2011, Senate Bill 1619 (“SB 1619”) was signed into law by Governor Brewer. SB 1619 was intended to balance the State's health care budget. Doc. 1, at 10, ¶ 34. The bill made several changes to AHCCCS's reimbursement policy. Section 11 of SB 1619 amends A.R.S. § 36–2903.01, which concerns the powers and duties of AHCCCSA, eliminating language concerning reimbursement to hospitals for “claims with extraordinary operating costs per day” or “outliers.” Id. Section 31 ¹ of SB 1619 vests AHCCCSA with authority to “reduce payments for institutional and non-institutional services by up to five per cent” for rates effective October 1, 2011 through September 30, 2012. Id. The rates were previously reduced by five percent on April 1, 2011, and have not been increased since approximately 2007. Doc. 1, at 9–10, ¶ 29.

Under the authority of SB 1619, AHCCCS prepared three state plan amendments (“SPAs”) to Arizona's Medicaid plan concerning payment reductions for inpatient and outpatient hospital reimbursement. Doc. 1, at 11, ¶ 37. SPA 11–009–A proposed to reduce payment rates for inpatient hospital services provided between October 1, 2011 and September 30, 2012 by five percent. Id. SPA 11–009–B proposed the same rate reduction for outpatient hospital services. Id. at ¶ 38. SPA 11–011 proposed a change in the methodology for calculating additional reimbursement paid to hospitals for high cost “outlier” cases. Doc. 1, at 12, ¶ 39. In conjunction with the proposed changes to outlier payment methodology in SPA 11–011, AHCCCSA announced on May 27, 2011 that it was amending two Arizona administrative regulations concerning outlier payments. Doc. 7, at 7; Doc. 7–7 (Ex. F).

In June 2011, AHCCCSA released a study by Milliman, Inc. Doc. 7, at 8. The study updated a prior study completed in November 2010, and considered the potential impact of the proposed AHCCCS changes.

On June 23, 2011, AHCCCS submitted SPA 11–009–A and SPA 11–009–B to the Secretary's designated agent, Centers for Medicare and Medicaid Services (“CMS”), for approval. Doc. 1, at 11, ¶ 37. On June 24, 2011, AHCCCS submitted SPA 11–011 to CMS for approval. Doc. 1, at 12, ¶ 39.

On July 15, 2011, while the SPAs were pending with CMS, AHCCCSA published a notice in the Arizona Administrative Register that, effective October 1, 2011, AHCCCS would reduce rates by five percent. Doc. 7–8 (Ex. G).

On August 24, 2011, Plaintiff provided materials to AHCCCSA and CMS showing that the proposed reimbursement reductions would adversely impact Medicaid beneficiary access to hospital services and the quality of care and efficiency. Doc. 1, at 15–16, ¶ 47; Doc. 7, at 8. The information purported to show, among other things, that: (1) the reduced payment rates would not come close to the costs that hospitals incur in treating AHCCCS members; (2) the reduced rates would adversely impact AHCCCS member access to hospital care, particularly in rural areas; and (3) the Milliman study contained methodologicaland analytical flaws. Doc. 7, at 8. On October 3, 2011, Plaintiff provided CMS with two additional reports by a health care reimbursement and statistics expert. Doc. 16–3 (Ex. B, CMSLTRS 166–189).

On September 21, 2011, CMS sent AHCCCSA a request for additional information (“RAI”) that expressed concerns that SPA 11–009–A would negatively impact access to care. Doc. 16–10, at 40–44 (AZ PR 288–292); Doc. 7, at 9. AHCCCSA responded on September 29, 2011. Doc. 16–10, at 50–57 (AZ PR 298–305); Doc. 7, at 9. On October 11, 2011, Plaintiff submitted information to CMS addressing inadequacies in AHCCCSA's response to the RAI. Doc. 16–4 (AZ PR 191–272). CMS sent AHCCCSA an additional request for information on October 14, 2011.

By separate letters dated November 18, 2011, CMS approved SPA 11–009–A and SPA 11–011, retrospective to October 1, 2011. Doc. 7, at 9. On November 21, 2011, CMS approved SPA 11–009–B, retrospective to October 1, 2011.²

Plaintiff alleges five claims in its complaint. Doc. 1. The first three claims are against the Director: (1) that the rate reductions were not adopted through a public process, in violation of 42 U.S.C. § 1396a(a)(13)(A) ( “Section 13(A)”) and the Supremacy Clause, and that AHCCCSA acted under color of state law to deprive hospitals of their privately enforceable rights in violation of 42 U.S.C. § 1983; (2) that the rate reductions were enacted solely for budgetary reasons, in violation of 42 U.S.C. § 1396a(a)(30)(A) ( “Section 30(A)”) and the Supremacy Clause; and (3) that public notice of the rate reductions was not properly given, in violation of 42 C.F.R. § 447.205 and the Supremacy Clause. The fourth claim is against the Secretary, and alleges that her approval of the SPAs was arbitrary, capricious, an abuse of discretion, and otherwise inconsistent with governing law, in violation of the APA. The fifth claim seeks declaratory relief pursuant to 28 U.S.C. § 2201 and A.R.S. §§ 12–1831 et seq., against both Defendants.

On December 20, 2011, the Director filed a motion to dismiss Plaintiff's first three claims. Doc. 28. The Court has today, by separate order, dismissed the claim under 42 U.S.C. § 1983 for violation of Section 13(A) as well as the claim for violation of 42 C.F.R. § 447.205(c). For purposes of the preliminary injunction motion, the Court need only address Plaintiff's remaining claims.

At oral argument on the motion for a preliminary injunction, Plaintiff stated that it is no longer asserting a Supremacy Clause argument with respect to Section 30(A) and that it seeks a preliminary injunction based only on (1) an APA challenge to the Secretary's decision with respect to Section 30(A), (2) a Supremacy Clause claim with respect to Section 13(A), and (3) a Section 1983 claim with respect to Section 13(A).

II. Legal Standard for Preliminary Injunction.

“It frequently is observed that a preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.” Mazurek v. Armstrong, 520 U.S. 968, 972, 117 S.Ct. 1865, 138 L.Ed.2d 162 (1997) (emphasis in original) (citation omitted); see also Munaf v. Geren, 553 U.S. 674, 689, 128 S.Ct. 2207, 171 L.Ed.2d 1 (2008). To obtain a preliminary injunction, Plaintiff must show that it is likely to succeed on the merits, that it is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in its favor, and that an injunction is in the public interest. Winter v. Natural Res. Def. Council, 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008). Alternatively, in this circuit, “serious questions going to the merits' and a balance of hardships that tips sharply towards the plaintiff can support issuance of a preliminary injunction, so long as the plaintiff also shows that there is a...