N.D. Cal: enjoins hospital Medicaid rate freeze

In a challenge to a state law freezing Medicaid hospital rates, the District Court for the Northern District of California issued a preliminary injunction prohibiting the agency from enforcing the state law.

The court held that the plaintiff was likely to succeed on the claim that the rate freeze violates the Contract Clauses of the US and California Constitutions. The court also held that there was a likelihood of success on the merits of the claim that a State Plan Amendment (SPA) could not be implemented prior to federal approval, based on Ninth Circuit precedent directly on point.  The court rejected a challenge to  the prudential standing of the California Hospital Association to claim that the rate freezing violates the Medicaid Equal Access provision, 42 U.S.C. § 1396a(a)(30)(A).  But then reaching the substantive question, the court held that the study the state conducted was sufficient to comply with 30(A) and therefore plaintiffs were not likely to succeed on that claim.  The court found that the plaintiffs met all the other factors for a preliminary injunction.  The court refused to issue retroactive relief.  California Hospital Association v. Maxwell-Jolly, 2011 WL 836706 (N.D. Cal. Mar. 4, 2011).  The judge was nominated by Clinton.

The California law expressly nullifies any contract term that conflicts with the rate freeze, and the state conceded that this impaired hospitals’ contract with the states.  The state came up with a number of novel theories for why the impairment was not substantial, such as the hospitals should have expected their contracts to be impaired since the state heavily regulates Medicaid.  The court dismissed those rationalizations, noting that the loss of millions of dollars of revenue constituted a substantial impairment.  Next the state argued that the impairment of contracts was a necessary exercise of its police powers.  The court rejected that argument as well.

The state challenged the right of hospitals to bring a claim that the SPA could not be implemented prior to federal approval.  The Association had brought this claim as a preemption claim.  The court held, based on precedent, that the claim could proceed under 42 U.S.C. § 1983.  The court did not analyze whether there was rights-creating language, but rather treated it as a motion for reconsideration of prior caselaw.  The court noted in a footnote that the claim was also likely enforceable under the Supremacy Clause.

Turning to 30(A), the court held that the Association has prudential standing to raise that claim.  The court found that Ninth Circuit cases “suggest that providers have prudential standing to enforce Section 30(A), as their interests are precisely those that the statute affects in striving to ensure access to care for Medi-Cal beneficiaries.”  Support was also found in a California state court case holding that the interest of the Association in having its members compensated in accordance with federal law is above the interest of the general public.

But on the merits of the 30(A) claim, the plaintiff did not prevail.  The court stated that the study performed by the state established that the rates would bear a reasonable relationship to cost.

The state argued in the alternative that the court should not issue an opinion on whether a SPA could be implemented prior to federal approval or on 30(A), but rather should defer to CMS.  The court rejected this argument that the federal government had primary jurisdiction.  The court explained that it was “not, in deciding this action, infringing upon a decision that should rightfully be deferred to CMS; instead, this court, relying on a substantial body of case law, is simply deciding whether a preliminary injunction should issue, preventing DHCS from implementing the Rate Freeze until CMS determines whether the Rate Freeze in fact complies with the Federal Medicaid Act. Therefore, the doctrine of primary jurisdiction is inapplicable to this motion for preliminary injunction.”

Turning to irreparable harm, the court noted that the Eleventh Amendment prohibits providers from recovering money damages from the state.  The court concluded: “because plaintiff’s members will lose state contractual revenue that they will unable to recover due to the state’s Eleventh Amendment immunity, plaintiff has demonstrated irreparable harm sufficient to warrant issuance of a preliminary injunction.”

The court found that the balance of equities and public interest were in plaintiff’s favor.  The court enjoined future implementation of the state law, finding past relief to be barred by sovereign immunity.

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