San Lazaro Ass'n, Inc. v. Connell

Decision Date24 January 2002
Docket Number00-55963,00-55377,No. 00-55065,00-55610.,00-55065
Citation278 F.3d 932
PartiesSAN LAZARO ASSOCIATION, INC., dba Biomedical Laboratory, Plaintiff-Appellee, v. Kathleen CONNELL, Controller of the State of California, Defendant-Appellant. Oganes Nagapetyan; Khachik Simonyan, Plaintiffs-Appellees, v. Kathleen Connell, Controller of the State of California; Joseph Munso, Chief Deputy Director of the California Department of Health Services, Defendants-Appellants. Clinical Care Laboratory, Inc., Plaintiff-Appellee, v. Kathleen Connell, Controller of the State of California; S. Kimberly Belshe, Director of the Department of Health Services, Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

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Sandra L. Goldsmith, Deputy Attorney General of the State of California, Los Angeles, California, for the defendants-appellants.

Patric Hooper, Hooper, Lundy & Bookman, Inc., Los Angeles, California, for the plaintiffs-appellees.

Robert D. Kamenshine, United States Department of Justice, Civil Division, Washington, D.C., for amicus United States Department of Health and Human Services, in support of defendants-appellants.

Before: NOONAN, SILVERMAN, and PAEZ, Circuit Judges.

PAEZ, Circuit Judge.

This case arises from a joint effort by the State of California and the Federal Bureau of Investigation ("FBI") to investigate fraud in the State's Medicaid/Medi-Cal Program. Plaintiffs are providers of medical services to Medi-Cal recipients. The California Department of Health Services ("DHS") instructed the Controller of the State of California ("Controller") to withhold payments to Plaintiffs after receiving an audit report from the Controller and other information from the FBI that Plaintiffs may have submitted fraudulent payment requests. Plaintiffs, in three separate actions under 42 U.S.C. § 1983, sought to enjoin DHS from utilizing the Controller's audit and the FBI information to withhold payments. The district court, ruling on cross-motions for summary judgment, granted Plaintiffs the relief they requested. It enjoined DHS from utilizing the Controller's audits to withhold payments to Plaintiffs. The district court concluded that: (1) by authorizing the Controller to conduct Medi-Cal provider audits, DHS improperly delegated its discretionary authority to the Controller in violation of a requirement under the Medicaid Act1 that a single state agency administer or supervise the State's Medicaid program; (2) Plaintiffs, as Medi-Cal providers, had a right under 42 U.S.C. § 1983 to enforce the single state agency requirement; and (3) the Controller's audit could not constitute "reliable evidence" sufficient to justify withholding payments under 42 C.F.R. § 455.23. The district court also awarded Plaintiffs attorney's fees under 42 U.S.C. § 1988.

Because there have been significant developments regarding the status of several of the Plaintiffs as Medi-Cal providers during the course of the district court proceedings as well as after entry of the district court's judgments, we initially address whether any of Plaintiffs' claims are moot. We conclude that, because Plaintiff San Lazaro Association, Inc. ("San Lazaro") canceled its laboratory license, its claims are moot. Accordingly, we dismiss the appeal in case no. 00-55065. Nonetheless, we have jurisdiction over Defendants' appeal in case no. 00-55610 from the district court's order granting San Lazaro attorney's fees. Aside from San Lazaro's claims, the other Plaintiffs' claims present live controversies over which we have jurisdiction. We also have jurisdiction over Defendants' appeals from the district court's orders granting attorney's fees to these Plaintiffs.

On the merits, because we hold that the single state agency requirement does not establish a right that the remaining Plaintiffs can enforce under 42 U.S.C. § 1983, we reverse the district court's summary judgments. We also reverse the attorney's fee awards under 42 U.S.C. § 1988. Finally, we hold that Plaintiffs Nagapetyan and Simonyan cannot assert a viable claim for relief under 42 C.F.R. § 455.23.

I. Background

We briefly review the structure of the Medicaid Act and its implementation in California. We also summarize the events that precipitated the instant actions, and the district court's resolution of Plaintiffs' claims.

A. Medicaid and Medi-Cal

Under the Medicaid Act, the federal government underwrites part of the costs of state programs providing medical care to eligible needy individuals. In order to receive federal support, the States must comply with requirements of the Medicaid Act and with regulations promulgated by the Department of Health and Human Services ("HHS"). Wilder v. Va. Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990).

1. Single state agency requirement

Among the requirements that the Medicaid Act established for state programs, 42 U.S.C. § 1396a(a)(5) mandates that a participating State "provide for the establishment or designation of a single State agency to administer or to supervise the administration of the State's plan." HHS' regulations interpret this requirement as follows:

Authority of the single State agency. In order for an agency to qualify as the Medicaid agency —
(1) The agency must not delegate, to other than its own officials, authority to — (i) Exercise administrative discretion in the administration or supervision of the plan, or
(ii) Issue policies, rules, and regulations on program matters.
(2) The authority of the agency must not be impaired if any of its rules, regulations, or decisions are subject to review, clearance, or similar action by other offices or agencies of the State.
(3) If other State or local agencies or offices perform services for the Medicaid agency, they must not have the authority to change or disapprove any administrative decision of that agency, or otherwise substitute their judgment for that of the Medicaid agency with respect to the application of policies, rules, and regulations issued by the Medicaid agency.

42 C.F.R. § 431.10(e).

2. Payment and verification of provider claims

Under the Medicaid Act, "the state plan is required to establish ... a scheme for reimbursing health care providers for the medical services provided to needy individuals." Wilder, 496 U.S. at 502, 110 S.Ct. 2510. Various statutory provisions and regulations require the States to verify the legitimacy of payment claims. See, e.g., 42 U.S.C. § 1396a(a)(42) (explaining that a state plan must "provide that the records of any entity participating in the plan and providing services reimbursable on a cost-related basis will be audited as ... necessary to insure that proper payments are made under the plan"); 42 C.F.R. § 447.202 ("The Medicaid agency must assure appropriate audit of records if payment is based on costs of services or on a fee plus costs of materials.").

A provider may face various consequences for submitting an improper claim. A state's Medicaid agency can withhold payments to providers "upon receipt of reliable evidence" that a provider has engaged in "fraud" or "willful misrepresentation." 42 C.F.R. § 455.23(a). Overpayments can be recovered through administrative proceedings. See e.g., Cal. Code Regs. tit. 22, § 51047. Providers can be decertified and barred from participation in the Medicaid program. 42 U.S.C. § 1320a-7(a)(1) & (6). Medicaid fraud also may result in criminal prosecution. 42 U.S.C. § 1320a-7b(a)(setting forth criminal penalties for false statements or representations in provider claims for payments); 18 U.S.C. § 1347 (specifying criminal penalties for scheme to defraud health care benefit program); see also United States v. Woodley, 9 F.3d 774, 778(9th Cir.1993) (upholding mail fraud conviction against Medicare provider).

3. California's Medicaid program

Pursuant to 42 U.S.C. § 1396a(a)(5), California has designated DHS as its Medicaid agency, with responsibility for "administering or ... supervising the administration" of Medi-Cal, California's Medicaid program.

DHS retains a private contractor, Electronic Data Services ("EDS"), to process reimbursement claims by Medi-Cal providers. EDS utilizes an electronic claims processing system to review Medi-Cal claims and determine the amount owed. EDS then forwards its calculations to the Controller for payment. However, EDS does not conduct audits of provider claims.

DHS audits some provider claims, and supplements its own efforts by relying on audits performed by the Controller. DHS has defined the scope of the Controller's audit responsibilities through a series of inter-agency agreements with the Controller. A number of other agencies also may become involved in Medi-Cal fraud investigations. At relevant times, for example, the FBI has worked with both DHS and the Controller to investigate Medi-Cal fraud.

B. Investigations and proceedings involving Plaintiffs

When the four Plaintiffs filed these actions, they were Medi-Cal providers. Khachik Simonyan was the owner of Eagle Medical Supply ("Eagle"), and Oganes Nagapetyan owned Nairi Pharmacy ("Nairi"). Both Eagle and Nairi provided medical supplies and equipment to Medi-Cal recipients. San Lazaro provided laboratory tests for Medi-Cal recipients. Clinical Care Laboratory, Inc. ("Clinical Care") provided clinical laboratory services to Medi-Cal recipients.

In 1998, the Controller audited all four Plaintiffs. In addition, the FBI, in coordination with the Controller, initiated an investigation of Eagle and Nairi. The investigations disclosed evidence of possible fraud. The Controller and the FBI reported their findings to DHS and either requested or recommended that DHS temporarily withhold payments to all Plaintiffs.2 DHS ultimately withheld payments to all four Plaintiffs.

C. Legal proceedings

1. Nature of the claims

Plaintiffs filed three separate lawsuits in federal district...

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