Palomar Pomerado Health System v. Belshe

• Decision Date: 29 June 1999
• Docket Number: No. 98-15794.,98-15794.
• Citation: 180 F.3d 1104
• Parties: PALOMAR POMERADO HEALTH SYSTEM, a Health Care District, Plaintiff-Appellant, v. Kimberly BELSHE; Dieter Merkle; Curtis Cotton, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

180 F.3d 1104

PALOMAR POMERADO HEALTH SYSTEM, a Health Care District, Plaintiff-Appellant, v. Kimberly BELSHE; Dieter Merkle; Curtis Cotton,¹ Defendants-Appellees.

No. 98-15794.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 12, 1999.

Decided June 29, 1999.

Patric Hooper, Hooper, Lundy & Bookman, Los Angeles, California, for plaintiff-appellant.

Marsha Ann Bedwell, Deputy Attorney General, Sacramento, California, for defendants-appellees.

Before: LAY,² PREGERSON, and HAWKINS, Circuit Judges.

Opinion by Judge PREGERSON; Concurrence by Judge HAWKINS.

PREGERSON, Circuit Judge:

This action arises out of a California Department of Health Services ("DHS") audit of Plaintiff Palomar Pomerado Health System's billing practices.

DHS asks us to decide whether a health care district created by the State of California has standing to sue the state in a federal court to challenge the validity of state regulations on federal constitutional grounds. We answer in the negative.

I.

Palomar Pomerado is a health care district formed under California law. It provides long-term health care services at two "distinct part nursing facilities"³ in San Diego County, California. Palomar Pomerado provides services to privately insured patients, Medi-Cal patients, and uninsured patients who pay on their own.

In April 1994, Palomar Pomerado switched from a billing system based on the level of care the patient required to a "flat rate" system based on the type of room the patient occupied. At the same time, Palomar Pomerado introduced a "prompt pay discount" for patients who paid privately or who were privately insured. Palomar Pomerado does not offer the discount to Medi-Cal. Under the prompt pay discount policy, patients who paid their bills within thirty days receive a fifty percent discount.

The Boren Amendment, 42 U.S.C. § 1396a(a)(13)(A) (repealed by Pub.L. No. 105-33, § 4711(a), 111 Stat. 251, 507-08 (1997)), requires states to reimburse providers such as Palomar Pomerado at a rate that is "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities." In California, reimbursement is governed by Title 22, California Code of Regulations, section 51511(a)(2). Section 51511(a)(2) provides that the per diem reimbursement rate for distinct part nursing facilities such as Palomar Pomerado "shall be the lesser of the facility's costs as projected by DHS or $214.90."

A separate California regulation prohibits providers such as Palomar Pomerado from submitting "claims for reimbursement for the rendering of health care services to a Medi-Cal beneficiary in any amount greater or higher than the usual fee charged by the provider to the general public for the same service." 22 C.C.R. § 51480(a). DHS enforces section 51480(a) through annual audits. Following an audit for Fiscal Year Ending ("FYE") June 30, 1994, DHS found that the discounted rate under the "prompt pay" program was Palomar Pomerado's "usual fee" and concluded that Palomar Pomerado had overcharged the state by $558,000 for the period between April 1, 1994 and June 30, 1994. Accordingly, DHS brought an administrative recoupment action. Palomar Pomerado filed an administrative appeal on grounds separate from those Palomar Pomerado raises here.⁴ Since the FYE June 30, 1994 audit, DHS has continued to enforce 22 C.C.R. § 51480(a) against Palomar Pomerado.

On February 24, 1997, Palomar Pomerado brought this action against DHS to permanently enjoin defendants and their agents "from reducing the Medi-Cal payment rates owing to Palomar Pomerado for distinct part skilled nursing facilities services furnished to Medi-Cal patients below the rates required to be paid under . . . federal Medicaid law, including enjoining them from reducing reimbursement to the discounted rates" charged under the prompt pay program to patients who pay privately or who are insured privately. Palomar Pomerado also sought "an order declaring the practice and policy of DHS . . . to be in violation of the federal Medicaid law and regulations and the United States Constitution," and "an order declaring that plaintiff is entitled to provide a prompt-pay discount to its private-pay patients without jeopardizing its right to receive Medi-Cal payments from the state at the rates . . . contained in 22 CCR Section 51511." Palomar Pomerado also sought reimbursement for the costs of its action and for its attorneys' fees.

On September 5, 1997, DHS moved for summary judgment. On March 30, 1998, the district court determined that DHS's practices were consistent with the Boren Amendment, and that DHS had not violated Palomar Pomerado's due process rights. Accordingly, the district court granted DHS's motion for summary judgment. Palomar Pomerado appeals. We dismiss for lack of standing.

II.

On appeal, DHS argues for the first time that Palomar Pomerado, as a political subdivision of the state, has no standing to sue the state in federal court to challenge the validity of state regulations as violative of the Due Process Clause, U.S. Const. amend. XIV, or the Supremacy Clause, U.S. Const. art. VI, cl. 2.

It is well-settled that "standing is a necessary element of federal-court jurisdiction." City of South Lake Tahoe v. California Tahoe Reg'l Planning Agency, 625 F.2d 231, 233 (9th Cir.1980) (citing Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)). This jurisdictional issue is not waived because it was not raised in the district court. See South Lake Tahoe, 625 F.2d at 233 ("Although the district court passed over the standing issue we must consider it because it governs our jurisdiction as well.").

A.

Under established Ninth Circuit law, "political subdivisions of a state may not challenge the validity of a state statute" in a federal court on federal constitutional grounds. Id. (quoting City of New York v. Richardson, 473 F.2d 923, 929 (2d Cir.1973)); see also Burbank-Glendale-Pasadena Airport Auth. v. City of Burbank, 136 F.3d 1360, 1363-64 (9th Cir. 1998) (holding that the rule of South Lake Tahoe applies to both Fourteenth Amendment and Supremacy Clause claims.) "This is true whether the defendant is the state itself or another of the state's political subdivisions." South Lake Tahoe, 625 F.2d at 233 (citations omitted).

Palomar Pomerado's claims are based on Fourteenth Amendment and Supremacy Clause grounds. We must determine (1) whether Palomar Pomerado is a "political subdivision" of the State of California, and if so, (2) whether, by suing the defendants named in this action, Palomar Pomerado brings this action against the state.

B.

Palomar Pomerado is a health care district. It is a public corporation formed under California law. See Cal. Health & Safety Code § 32000 et seq. (Local Health Care District Law). Its powers are limited to those granted it by the state. See Cal. Health & Safety Code § 32001.

Among its powers, Palomar Pomerado may "establish, maintain, and operate" health facilities. See Cal. Health & Safety Code § 32121(j). To meet this end, Palomar Pomerado possesses and exercises limited governmental functions within a particular area of the state. For example, Palomar Pomerado possesses the power to levy taxes and issue bonds. See Cal. Health & Safety Code §§ 32200-32243, 32316-32321. It also has the power of eminent domain. See Cal. Health & Safety Code § 32121(d). As such, it is a "political subdivision" and an agency of the state. See 58 Cal. Jur.3d § 12 ("all public corporations exercising governmental functions within a limited portion of the state— counties, cities, reclamation districts, irrigation districts—are agencies of the state").

Such political subdivisions, like "municipal corporations, have generally been denied standing in the federal courts to attack state legislation as violative of the federal Constitution, on the ground that they have no rights against the state of which they are a creature." Hart and Wechsler's The Federal Courts and The Federal System 180 (Richard H. Fallon et al., eds.1996).

In sum, Palomar Pomerado is a creature of the state. Counsel for Palomar Pomerado conceded at oral argument that the district continues to exist at the pleasure of the state, its legislature, and its citizens. Moreover, Palomar Pomerado's powers are limited to those granted by the state. See Cal. Health & Safety Code § 32001. Finally, as stated above, Palomar Pomerado possesses and exercises governmental functions. Accordingly, Palomar Pomerado is a "political subdivision" for purposes of the standing doctrine discussed in South Lake Tahoe.

C.

Palomar Pomerado argues that we should not apply South Lake Tahoe because Palomar Pomerado brings this action against named state employees and not against the state. But as the following discussion indicates, Palomar Pomerado's action is in fact an action against the State of California.

"`The general rule is that relief sought nominally against a state officer is in fact against the sovereign if the decree would operate against the latter.'" Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89, 101, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984) (quoting Hawaii v. Gordon, 373 U.S. 57, 58, 83 S.Ct. 1052, 10 L.Ed.2d 191 (1963) (per curiam)); Dugan v. Rank, 372 U.S. 609, 620, 83 S.Ct. 999, 10 L.Ed.2d 15 (1963) (an action is against the state "if the judgment sought would expend itself on the public treasury or domain, or interfere with the public administration, or if the effect of the judgment would be to restrain the Government from acting, or to compel it to act") (internal quotations omitted). Here, the purpose of the injunction and other orders Palomar Pomerado seeks is to "restrain the Government" from reducing the Medi-Cal payment rates charged by Palomar Pomerado to the discounted rates offered patients who pay privately or who are privately insured. The result Palomar Pomerado seeks would "interfere with the public...