Clayworth v. Bonta

• Decision Date: 23 December 2003
• Docket Number: No. CIV-S-03-2110 DFL/PA, CIV-S-03-2336 DFL/PA.,CIV-S-03-2110 DFL/PA, CIV-S-03-2336 DFL/PA.
• Citation: 295 F.Supp.2d 1110
• Parties: James CLAYWORTH, R.Ph., doing business under the fictitious name and style of Clayworth Healthcare Pharmacy; Wayne Roberts, and Madeleine Madden, Plaintiffs, v. Diana M. BONTA, Director of the Department of Health Services, State of California, and Department of Health Services, a department of the State of California, Defendants. California Medical Association, et al., Plaintiffs, v. Diana M. Bonta, Director of the Department of Health Services, State of California, Defendant.
• Court: U.S. District Court — Eastern District of California

Page 1110

295 F.Supp.2d 1110

James CLAYWORTH, R.Ph., doing business under the fictitious name and style of Clayworth Healthcare Pharmacy; Wayne Roberts, and Madeleine Madden, Plaintiffs, v. Diana M. BONTA, Director of the Department of Health Services, State of California, and Department of Health Services, a department of the State of California, Defendants.

California Medical Association, et al., Plaintiffs, v. Diana M. Bonta, Director of the Department of Health Services, State of California, Defendant.

No. CIV-S-03-2110 DFL/PA, CIV-S-03-2336 DFL/PA.

United States District Court, E.D. California.

December 23, 2003.

COPYRIGHT MATERIAL OMITTED

Lynn S. Carman, Law Offices of Lynn S. Carman, San Rafael, CA, Craig J. Cannizzo, San Francisco, CA, for Plaintiffs.

Irene K. Tamura, Attorney General's Office for the State of California, Sacramento, CA, Byron J. Gross, Craig J. Cannizzo, San Francisco, CA, for Defendants.

MEMORANDUM OF OPINION AND ORDER

LEVI, District Judge.

Medi-Cal providers and beneficiaries challenge the State of California's impending 5% reduction in the reimbursement rate paid to providers. Plaintiffs contend that the rate reduction violates the Medicaid statute, particularly the quality of care and equal access provisions, and they seek a preliminary injunction preventing defendant Diana Bonta, the Director of the California Department of Health Services, from implementing the rate reduction when it is scheduled to go into effect on January 1, 2004.

The case presents two sorts of issues. First, the court must decide whether plaintiffs have standing and whether Congress has given them a cause of action under 42 U.S.C. § 1983 to enforce certain provisions of the Medicaid statute. The court concludes that Medi-Cal beneficiaries have both standing and a cause of action and that Medi-Cal providers have third party standing to assert claims on behalf of beneficiaries concerning fee-for-service rates. However, the court does not find that either beneficiaries or providers have a claim under § 1983 to enforce the provisions in the Medicaid statute relating to managed care plans. Those statutory provisions are addressed to the Secretary of Health and Human Services, are designed to reduce the State's costs, and do not unequivocally confer rights on either providers or beneficiaries. Furthermore, because managed care providers are contractually bound to provide adequate services to Medi-Cal beneficiaries, beneficiaries in managed care plans should not be adversely affected by the rate cut. As will be explained, there are other avenues available to managed care providers to protest the rate cut.

Second, the court must decide whether the across-the-board 5% rate cut, which was enacted by the California legislature, violates the quality and equal access requirements of the Medicaid Act. Under binding Ninth Circuit law, the Medicaid statute grants a right to beneficiaries to a rate setting decision by the State that is not arbitrary and that takes into account provider costs, quality of service, and equal access to medical services for Medi-Cal recipients. See Orthopaedic Hosp. v. Belshe, 103 F.3d 1491, 1500 (9th Cir.1997). Where the administrative record reveals a considered decision by the Department of Health Services that a certain rate is consistent with the requirements of the Medicaid Act and the approved State plan, the court will review that decision with deference. Given the complexity of the Medi-Cal system, deference to the expertise of the Department of Health Services is not only appropriate, it is virtually a necessity. However, in this case, there is no record of considered decisionmaking. There is no evidence that the Director recommended the rate reduction, that the State legislature ever sought the recommendation of the Director, or that any responsible official in State government made a determination that the pending rate reduction is consistent with quality care and equal access in light of provider costs. Thus, as to this rate reduction, there is no considered decisionmaking process that the court may review. The decision to cut fee-for-service rates across the board without analyzing the effect on services to beneficiaries is arbitrary and violates federal law. Accordingly, the court finds that the preliminary injunction should issue as to the nonmanaged care, fee-for-service reimbursement rates affected by the pending 5% rate reduction.

There are undoubtedly many ways in which the Director may reduce overall Medi-Cal costs. For example, some of the medical services provided by Medi-Cal are optional in the sense that they are not required by the Medicaid statute. A decision to cut these services from Medi-Cal would not implicate federal law even though the decision could leave some beneficiaries without coverage for medical care that few would consider "optional" in the normal sense of the term. But when the decision involves a cut to a reimbursement rate for a service that the State either must or has elected to include within Medi-Cal, federal law requires that the decision be based on a considered finding that in light of provider costs the rate reduction will not affect the quality of service afforded to beneficiaries or their equal access to such medical service.

I. Facts and Procedural History

A. The Federal Medicaid Program

Medicaid is a federal program that distributes funds to states in order to provide health care services for poor persons who are aged, blind, disabled, or members of families with dependent children. 42 U.S.C. §§ 1396a-1396v. The program is jointly funded by the federal and state governments and is administered by the states. The states determine eligibility, the types of services covered, payment levels for services, and other aspects of administration, within the confines of federal law. See Orthopaedic Hosp., 103 F.3d at 1493. Federal law requires participating states to provide a basic array of services and allows states to provide certain additional optional services, such as dental care, if they so choose. 42 U.S.C. § 1396a(a)(10); Elizabeth Blackwell Health Ctr. for Women v. Knoll, 61 F.3d 170, 173 (3d Cir.1995).

In order to receive federal funds, a state prepares and submits a state plan, which describes the standards and methods to be used to set reimbursement rates for the services covered. Orthopaedic Hosp., 103 F.3d at 1494. The state plan must be approved by the Secretary of Health and Human Services. The Medicaid Act sets out the requirements of a state plan at 42 U.S.C. § 1396a(a)(1)-(65). The provision central to these two suits is § 1396a(a)(30)(A) ("Section 30(A)"). Section 30(A) requires a state plan to:

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 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.

These Section 30(A) standards are referred to as the "efficiency, economy, and quality" requirement and the "equal access" requirement.

The requirements of § 1396a, including Section 30(A), apply to Medicaid programs that operate on the traditional fee-for-service basis. Under this model, a Medicaid recipient may see any enrolled service provider, who is reimbursed directly by the state. 42 U.S.C. § 1395a. However, by way of a waiver from the Secretary of Health and Human Services, states have the alternative of contracting with managed care plans to provide some or all of the covered services in exchange for payment under a prepaid capitation rate or some other risk-based arrangement. 42 U.S.C. § 1396b(m). Under this arrangement, the managed care plans receive predetermined periodic payments in return for providing the required services. Under 42 U.S.C. § 1396b(m)(2)(A)(iii), the rates paid to the managed care plans must be made on an "actuarially sound basis." Under 42 U.S.C. § 1396n(b)(4), the Secretary of Health and Human Services may grant the necessary waivers that permit a state to require Medicaid recipients to receive care through managed care programs, so long as the managed care providers "meet, accept, and comply with the reimbursement, quality, and utilization standards under the State plan, which standards ... are consistent with access, quality, and efficient and economic provision of covered care and services."

B. The California Medi-Cal Program

California's Medicaid program is known as Medi-Cal. See Cal. Welf. & Inst.Code §§ 14000 et seq. It is administered by the California Department of Health Services. Medi-Cal operates on both a fee-for-service and managed care basis. California has elected to provide 35 of the 36 available optional services.¹ (Menda Decl. Ex. A, p. 2.) The yearly cost of the Medi-Cal program to the State is $12 billion. The federal government contributes something just over this amount to the State for the operation of Medi-Cal.

California has an extensive regulatory framework for the setting of reimbursement rates. See, e.g., Cal. Welf. & Inst. Code §§ 14075, 14079, 14105. However, on the basis of the record now before the court, it appears that the Department of Health Services does not have any continuous study of rates and their adequacy to meet the Section 30(A) requirements.² Nor is there any record that the State legislature — authorized by the State plan to make rate adjustments — has any ongoing study of rates independent of the Department of Health Services.

In January 2003 and again in May 2003, the then-Governor proposed an across-the-board 15% rate cut in Medi-Cal reimbursement rates as part of his proposed budget. (S. Thompson Decl. ¶ 7.) When the State legislature failed to enact a budget by July 1, 2003 (as...