San Lazaro Ass'n. Inc. v. Connell

• Decision Date: 24 January 2002
• Docket Number: No. 00-55963.,No. 00-55065.,No. 00-55377.,No. 00-55610.,00-55065.,00-55610.,00-55377.,00-55963.
• Parties: SAN 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.
• Court: U.S. Court of Appeals — Ninth Circuit

286 F.3d 1088

SAN 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.

No. 00-55065.

No. 00-55610.

No. 00-55377.

No. 00-55963.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 10, 2001.

Filed January 24, 2002.

Amended April 17, 2002.

COPYRIGHT MATERIAL OMITTED

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

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

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

Appeal from the United States District Court for the Central District of California; Robert J. Kelleher, District Court Judge, Presiding. D.C. Nos. CV-98-06216-RJK, CV-99-02420-RJK, CV-98-08425-RJK.

Before NOONAN, SILVERMAN, and PAEZ, Circuit Judges.

ORDER

The panel has unanimously voted to deny the petition for rehearing. The full court has been advised of the petition for rehearing en banc, and no active judge of the court has requested a vote on the petition for rehearing en banc. Fed. R.App. P. 35(b). The petition for rehearing is denied and the petition for rehearing en banc is denied.

The opinion filed January 24, 2002, is hereby AMENDED as follows:

1. On page 1081 of the slip opinion, the text beginning "The plaintiffs relied on statutory provisions" and ending "federal guidelines. Id." is deleted. The following new paragraph is inserted: "The Court noted that the plaintiffs in Blessing had not "identif[ied] with particularity the rights they claimed," and went on to note that some of the provisions of Title IV-D were systemic or structural. Id. at 342-44, 117 S.Ct. 1353." For example, Title IV-D provides that States, if they are to receive federal funds, must include, inter alia, a "comprehensive system to establish paternity, locate absent parents, and help families obtain support orders." Id. at 333-34, 117 S.Ct. 1353. The statute at issue in Blessing also provides specific guidelines for the "structure" of the state agency designated to administer this system, such as a requirement for sufficient staffing levels. Id. at 333-35, 117 S.Ct. 1353. Additionally, Title IV-D contains the more general requirement that state AFDC plans must be in "substantial compliance" with these and other federal guidelines. Id."

2. On page 1082, delete the phrase "but, with respect to the particular "systemwide" requirements that the plaintiffs invoked" and insert "but, with respect to the "systemwide" requirements in Title IV-D". After "Id. at 344, 117 S.Ct. 1353" and before "The structural requirements" the following footnote 9 is inserted:

"While spelling out that the systemic and structural provisions of Title IV-D do not give rise to rights enforceable under § 1983, Blessing did "not foreclose the possibility that some provisions of Title IV-D give rise to individual rights," and remanded for the District Court to construe the complaint to determine whether "any specific claim asserts an individual federal right." Id. at 345-346, 117 S.Ct. 1353."

OPINION

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, "[t]he 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-7b(a)(1) & (6). Medicaid fraud also may result in criminal prosecution. 42 U.S.C. §...