Legacy Cmty. Health Servs., Inc. v. Janek

Decision Date03 May 2016
Docket NumberCIVIL ACTION NO. 4:15-CV-25
Citation184 F.Supp.3d 407
Parties Legacy Community Health Services, Inc., Plaintiff, v. Dr. Kyle L. Janek, et al., Defendants.
CourtU.S. District Court — Southern District of Texas

Edward T. Waters, Gregory M. Cumming, Feldesman Tucker Leifer Fidell, Washington, DC, Michael James Collins, Collins Edmonds Schlather & Tower, PLLC, Houston, TX, for Plaintiff.

Eric Alan Hudson, Texas Attorney General, Austin, TX, for Defendants.

MEMORANDUM & ORDER

HON. KEITH P. ELLISON, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

This case concerns a challenge to certain aspects of how Texas administers its responsibilities under the federal Medicaid Act, 42 U.S.C. § 1396a et seq. ("the Medicaid Act" or "the statute"). Plaintiff Legacy Community Health Services ("Plaintiff"), a community health center serving low-income patients in the Houston area, filed this lawsuit to assert its rights under the Medicaid Act. Defendant Dr. Kyle L. Janek1 is sued in his official capacity as Executive Commissioner of Texas's Health and Human Services Commission ("HHSC" or "the State"). Legacy claims that HHSC has violated the Medicaid Act with respect to how it reimburses Legacy for services Legacy provides to Medicaid patients. In the Court's Memorandum & Order of July 2, 2015 (Doc. No. 66), the Court held that Plaintiff had stated a claim for relief on two separate theories: first, that the State's process for providing reimbursement for services rendered to out-of-network patients allegedly violates the Medicaid Act, 42 U.S.C. § 1396b(m)(2)(A)(vii), and, second, that the State's delegation of its reimbursement responsibility to third-party Managed Care Organizations allegedly violates the Act, id. § 1396a(bb)(5)(A). Plaintiff seeks injunctive relief under 42 U.S.C. § 1983 to remedy the alleged shortcomings in Texas's method for providing payments to Legacy for its Medicaid services.2

The parties cross-moved for summary judgment pursuant to Federal Rule of Civil Procedure 56. On April 18, 2016, the Court held a hearing on the cross-motions for summary judgment and took the motions under advisement. The Court now issues its decision as to the claim that the State has unlawfully allocated its payment obligation to Managed Care Organizations. The Court does not here decide Plaintiff's claim with respect to out-of-network services, but finds that there is no just reason to delay the summary judgment decision as to the other, independent claim for relief. After considering the parties' arguments, the applicable law, and the record in this case, the Court finds that Plaintiff's Motion for Summary Judgment (Doc. No. 84) should be granted as to the claim that the State has unlawfully delegated its payment obligation. Likewise, the Court finds that Defendant's cross-Motion for Summary Judgment (Doc. No. 89) should be denied as to this claim.

II. BACKGROUND
A. Federal Statutory Framework

The Medicaid Act is a cooperative federal-state program through which the federal government provides financial assistance to states so that they can furnish medical care to low-income individuals. Wilder v. Va. Hosp. Ass'n , 496 U.S. 498, 502, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990), superseded on other grounds by statute . Medicaid is jointly financed by federal and state governments and is administered by the states. States are not required to participate in Medicaid but, "once a state chooses to join, it must follow the requirements set forth in the Medicaid Act and its implementing regulations." S.D. v. Hood , 391 F.3d 581, 586 (5th Cir.2004) (quoting Evergreen Presbyterian Ministries, Inc. v. Hood , 235 F.3d 908, 915 (5th Cir.2000) ). The Centers for Medicare and Medicaid Services ("CMS"), a subsidiary of the Department of Health and Human Services, is the federal agency responsible for overseeing state compliance with federal Medicaid requirements. Perry Cty. Nursing Ctr. v. U.S. Dep't of Health & Human Servs. , 603 Fed.Appx. 265, 267 (5th Cir.2015). States electing to participate in Medicaid must submit to CMS a "state plan" detailing how the state will expend its funds.3 See 42 U.S.C. §§ 1396, 1396a (2000). Each state plan must be approved by CMS. Id. ; 42 C.F.R. § 430.0. Defendant HHSC is the Texas state agency responsible for establishing and complying with the Texas State Plan and must submit any state plan amendments ("SPAs") to CMS for review and approval. 42 U.S.C. § 1396a(a)(5) ; 42 C.F.R. §§ 430.10, 430.12, 430.14, 431.10.

Among the Medicaid Act's many requirements is that states must provide payment for Medicaid-covered services rendered by Federally Qualified Health Centers ("FQHCs"), health centers that provide medical care to an under-served population. 42 U.S.C. § 1396d(a)(2)(B)-(C) ; id. § 1396a(bb)(1). Plaintiff is designated as an FQHC. In addition to receiving Medicaid funding from the state, FQHCs are also eligible to receive federal grants under Section 330 of the Public Health Services Act. 42 U.S.C. § 254b. "The constituencies served by Medicaid funding and by Section 330 grants are not identical, however." Cmty. Health Care Ass'n of New York v. Shah , 770 F.3d 129, 136 (2d Cir.2014). The dual sources of FQHC funding—direct federal grants and indirect federal Medicaid dollars filtered through the states—"allows the FQHC to allocate most of its direct grant dollars towards treating those who lack even Medicare or Medicaid coverage." Cmty. Health Ctr. v. Wilson Coker , 311 F.3d 132, 134 n. 2 (2d Cir.2002). To ensure that Section 330 grants are not used to cover the cost of treating Medicaid patients, the Medicaid Act requires that states reimburse FQHCs for services provided to Medicaid beneficiaries. 42 U.S.C. § 254b(k)(3)(F).

The Medicaid Act, specifically § 1396a(bb), also governs precisely how a state must reimburse FQHCs for Medicaid services. Since 2001, reimbursement payments are assessed through what is known as the Prospective Payment System ("PPS"). Id. § 1396a(bb)(1)-(3). Stated simply, an FQHC's reimbursement from the state is calculated by multiplying the number of Medicaid patient encounters by the average reasonable costs of serving Medicaid patients in 1999 and 2000, adjusted yearly for inflation. Id. See generally New Jersey Primary Care Ass'n Inc. v. New Jersey Dep't of Human Servs. , 722 F.3d 527, 529 (3d Cir.2013). The total amount owed by the state to reimburse an FQHC for a Medicaid patient encounter is referred to as the "PPS rate" or the "PPS amount."4

The "system of states reimbursing FQHCs for their Medicaid costs is complicated considerably by the fact that many states...use a managed care approach to running their Medicaid system." Rio Grande Cmty. Health Ctr., Inc. v. Rullan , 397 F.3d 56, 62 (1st Cir.2005). Under a managed care approach, the state administers its Medicaid program by contracting with private-sector managed care organizations ("MCOs"), analogous to private-sector HMOs, that arrange for the delivery of healthcare services to individuals who enroll with them. 42 U.S.C. § 1396u-2(a)(1). In exchange for its services, an MCO receives from the state a prospective per-patient, per-month payment, called a "capitation" payment, based on the number of patients enrolled in the MCO.5 The MCO, in turn, contracts with healthcare providers, including FQHCs, to provide services to its enrollees. Under the MCO model, the state does not directly reimburse FQHCs for their services to Medicaid recipients; rather, the MCOs reimburse FQHCs out of their capitation funds. See Shah , 770 F.3d at 137 ; New Jersey Primary Care Ass'n , 722 F.3d at 530. If an MCO's costs are less than the capitation payments received from the state, the MCO makes a profit; if costs exceed capitation payments, the MCO incurs a loss.

The tripartite relationship between the state, MCOs, and FQHCs—and the provisions of the Medicaid Act that govern this relationship—forms the crux of this case. As this Court has previously recognized, "[b]ecause federal law requires states to pay FQHCs a designated amount per visit, the FQHC system sits uneasily with the MCO model, which requires MCOs to have the flexibility to negotiate with health care providers." Mem. & Order, July 2, 2015, at 3. To resolve this tension, Congress enacted a pair of statutory provisions—42 U.S.C. § 1396a(bb)(5)(A) and § 1396b(m)(2)(A)(ix) (hereinafter, "the payment provisions")—that together achieve a careful balance between two competing objectives. The payment provisions ensure that FQHCs will be paid the PPS rate to cover the costs of providing Medicaid services while also ensuring that MCOs are able to negotiate with FQHCs just as they would with any other healthcare provider. The precise framework established by the payment provisions is as follows: Section 1396b(m)(2)(A)(ix) provides that MCOs are required to pay FQHCs "not less than" they would pay non-FQHC providers for the same services.6 Section 1396a(bb)(5)(A) then requires states to pay FQHCs a supplemental payment to bring the FQHC's total compensation to the PPS rate, referred to as a "wraparound payment." Specifically, § 1396a(bb)(5)(A) places on the states the following reimbursement obligation: "In the case of services furnished by a [n] [FQHC]...pursuant to a contract between the [FQHC]...and a[n] [MCO]...the State plan shall provide for payment to the center or clinic by the State of a supplemental payment equal to the amount (if any) by which the [PPS] amount... exceeds the amount of the payments provided under the contract." 42 U.S.C. § 1396a(bb)(5)(A). Plaintiff's suit contends that Texas's system for reimbursing FQHCs violates this provision of the Medicaid Act.

B. Texas's Medicaid Reimbursement Regime

Texas has chosen to implement Medicaid through a managed care system. Tex. Gov. Code § 533.002. Beginning in October 2010, when State Plan Amendment ("SPA") 10-61 went into effect, the Texas State Plan mandated that the State make wraparound payments to FQHCs, as contemplated under...

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