Cal. Hosp. Ass'n v. Maxwell–jolly

Decision Date04 March 2011
Docket NumberCiv No. 10–3465 FCD/EFB.
Citation776 F.Supp.2d 1129
PartiesCALIFORNIA HOSPITAL ASSOCIATION, Plaintiff,v.David MAXWELL–JOLLY, Director of the California Department of Health Care Services, California Department of Health Care Services, Defendants.
CourtU.S. District Court — Eastern District of California

OPINION TEXT STARTS HEREWest CodenotesHeld UnconstitutionalWest's Ann.Cal.Welf. & Inst.Code § 14105.281

Jordan Brian Keville, Lloyd A. Bookman, Hooper Lundy and Bookman Incorporated, Los Angeles, CA, for Plaintiff.Christine Michelle Murphy, Elizabeth Anne Linton, Julie Weng–Gutierrez, Attorney General's Office for the State of California, Sacramento, CA, for Defendants.


FRANK C. DAMRELL, JR., District Judge.

This matter is before the court on plaintiff California Hospital Association's (plaintiff or “CHA”) motion for preliminary injunction. CHA seeks an order enjoining defendants, California Department of Health Care Services (“DHCS”) and the Director thereof (sometimes collectively, defendants), from continuing to implement California Welfare & Institutions Code § 14105.281 (Section 14105.281). Section 14105.281, adopted by the California Legislature in October 2010, freezes the rates at which California reimburses hospitals providing inpatient Medi–Cal services to the lesser of the rates paid on January 1, 2010 or July 1, 2010 (sometimes referred to generally herein as the “Rate Freeze”).

Plaintiff contends that it is likely to succeed on the merits of this case for several alternative reasons: (1) the implementation of the Rate Freeze violates the Contract Clauses of the United States and California Constitutions; CHA contends that the “Rate Freeze will prevent impacted hospitals from receiving any increased reimbursement ... they otherwise would have been entitled to ... under their contracts with the [DHCS] or, in the case of non-contract hospitals, under the reimbursement methodology set forth in the Medi–Cal Regulations.” (Dauner Decl., filed Jan. 27, 2011 [Docket # 14], Attachment 7 ¶ 6); (2) plaintiff contends defendants have violated federal law because DHCS, which administers the Medi–Cal program, enacted amendments to the state Medi–Cal plan without receiving prior federal approval; and (3) plaintiff alleges that the federal Medicaid Act preempts the Rate Freeze because, prior to enactment, DHCS failed to comply with 42 U.S.C. §§ 1396a(a)(13)(A) (Section 13(A)) and (30)(A) (Section 30(A)) which require that any change in reimbursement be preceded by specific comment and notice procedures and that the change be based upon responsible cost studies.

Moreover, plaintiff contends that an injunction is proper because if DHCS is not enjoined from implementing the freeze, it will be irreparably harmed. Specifically, plaintiff contends it will be irreparably harmed because the Eleventh Amendment bars any action against DHCS to recoup the Medi–Cal reimbursements its member hospitals would have received but for the Rate Freeze. Finally, plaintiff asserts that the balance of hardships and the public interest weigh in its favor because defendants' stated purpose for enacting the freeze is not a sufficient justification for impairing Medi–Cal hospitals' contracts with the State.

Defendants oppose the motion on numerous procedural and substantive grounds. First, defendants claim that since the freeze was enacted to facilitate the development of a more efficient Medi–Cal reimbursement system, the State's police power to protect the public health permits it to impair the contracts in question. More specifically, defendants argue that the Rate Freeze is necessary because, in order to implement a new proposed methodology for establishing reimbursement rates, DHCS requires static reimbursement rate figures. Defendants also assert that, because hospitals will receive supplemental payments during the temporary freeze, the statute does not “substantially impair” any contracts, and thus, the Contract Clauses are inapplicable.

Defendants also contend that plaintiff's claim for failure to obtain federal approval of the Rate Freeze is not cognizable because Congress did not create a private right of action to enforce the federal approval provisions. Moreover, defendants assert that, even if the claim is cognizable, federal law does not actually require prior federal approval before the Rate Freeze may be implemented and asks this court to reconsider its recent holding to the contrary in Cal. Ass'n of Rural Health Clinics v. Maxwell–Jolly, 748 F.Supp.2d 1184 (E.D.Cal.2010) (“ CARHC ”).

Similarly, defendants maintain that plaintiff's claim under Section 30(A) is procedurally improper because Congress did not create a private right to enforce that provision. Defendants also argue that, even if Section 30(A) is privately enforceable, plaintiff lacks standing to bring this action on behalf of its member hospitals. Defendants also claim that, since the language of the statute vests DHCS with the authority to determine whether the Rate Freeze complies with federal Medicaid mandates, and DHCS determined that it does, plaintiff's claim under Section 30(A) is not viable. Lastly, with regard to both plaintiff's federal approval and Section 30(A) claims, defendants ask the court to invoke the doctrine of primary jurisdiction, deferring the determination of whether implementation of the Rate Freeze complies with the federal Medicaid Act to the agency administering the Medicaid program—DHCS in this instance. Defendants further assert that, by providing public notice of the proposed Rate Freeze via the California Regulatory Notice Register, they complied with the notice and comment procedures required by Section 13(A).

Defendants contend that not only is plaintiff unlikely to succeed on the merits of any of its claims, but a preliminary injunction is also improper in this instance because plaintiff cannot show that it is likely to suffer irreparable harm. Defendants allege that, regardless of the Rate Freeze, both contract and non-contract hospitals will eventually recoup more than 100 percent of their allowable costs. Moreover, defendants contend that plaintiff will not suffer irreparable harm because the Rate Freeze will not affect any supplemental payments certain hospitals may receive pursuant to various statutes. Finally, defendants argue that the balance of hardships and public interest weigh in defendants favor because any injunction of the Rate Freeze will impair defendants ability to develop a more efficient Medi–Cal reimbursement methodology.

The court heard oral argument on the motion on February 25, 2011.1 By this order it now renders its decision granting plaintiff's motion for a preliminary injunction, thereby enjoining the State's further implementation of Section 14105.281.


1. The Parties

CHA represents approximately 450 California hospitals that provide both inpatient and outpatient services. (Duaner Decl. ¶ 3.) Almost all of CHA member hospitals provide those services to California Medi–Cal beneficiaries. ( Id.) CHA brings this action on behalf of its members to prevent DHCS from implementing the Rate Freeze, which CHA contends will “directly and adversely” affect its member hospitals. ( Id. ¶¶ 3–4.) DHCS is the state agency charged with administering California's Medicaid Program, known as the California Medical Assistance Program (“Medi–Cal”). As the sole state agency responsible for the Medi–Cal program, DHCS must establish and administer a state Medi–Cal plan. 42 C.F.R. § 430.12; Cal. Welf. & Inst.Code § 14081 et seq (West 2010). Additionally, DHCS is responsible for reimbursing hospitals that render services to Medi–Cal beneficiaries in compliance with the State Plan and with federal and state laws and regulations. 42 C.F.R. §§ 431.1, 431.10.

In its capacity as administrator of the state Medi–Cal plan, DHCS determined that the freeze complied with federal Medicaid law and began implementing the Rate Freeze in January, 2011. (Defs.' Mot. for Clarification, filed Feb. 2, 2011 [Docket # 21], at 3:7–23.). As part of the implementation, DHCS began updating its Provider Master File to reflect the Rate Freeze, which entails updating 30–40 codes for each hospital. ( Id. at 3:17–23.)

On January 28, 2011, 2011 WL 285866, the Honorable Lawrence K. Karlton 2 issued a temporary restraining order, enjoining DHCS from implementing the Rate Freeze. ( Id. at 2:1–9.) Because DHCS began updating its Provider Master File prior to the issuance of the restraining order, it filed a motion for clarification to determine whether the injunction was prohibitory, requiring only that DHCS maintain the status quo at the time of the order, or mandatory, requiring DHCS to reverse the changes it made to its Master Provider List. ( Id. at 7:1–6.) On February 4, 2011, Judge Karlton granted defendants' request for clarification, holding that the temporary restraining order is prohibitory, and thus, DHCS was not required by the order to make any changes to its Provider Master File. ( See Order Granting Defs.' Req. for Clarification, filed Feb. 4, 2011, 2011 WL 464008 [Docket # 23].) Judge Karlton clarified that defendants were obligated to reimburse plaintiff's members at the unfrozen reimbursement rate for dates of service on or after January 28, 2011 (the date of the court's TRO order). ( Id.)

Plaintiff now moves for a preliminary injunction, asking this court to enjoin further implementation of Section 14105.281 and direct that defendants reverse the previously made changes to the Master Provider List so that plaintiff's member hospitals are reimbursed at the non-frozen rates for dates of service following the statute's enactment in October 2010.

2. Statutory Backgrounda. Federal Medicaid Law

Title XIX of the Social Security Act (the “Medicaid Act”) establishes a cooperative federal-state program that provides federal funding to states that choose to provide medical assistance to low-income persons. Medicaid is jointly...

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