The Ninth Circuit held August 7 that the Department of Health and Human Services Secretary erred in approving a Medicaid State Plan Amendment (SPA) that cut reimbursement for outpatient hospital services in California by 10% for eight months in 2008-2009. The Hoag Memorial decision sided with the 57 hospitals that challenged the SPA under the theory that the reimbursement cut violated the federal Medicaid requirement that payment rates be sufficient to provide Medicaid beneficiaries with equal access to care and services.

In Hoag Memorial, the Court Did Not Defer to the Secretary’s Interpretation of the Medicaid Statute

The decision is particularly significant because prior Ninth Circuit caselaw had largely deferred to the Secretary when considering how reimbursement cuts would impact the availability of Medicaid services. In 2013, the court rejected a hospital challenge in Managed Pharmacy Care v. Sebelius, in which plaintiffs had alleged that a reimbursement cut did not satisfy the Medicaid requirement under section 1902(a)(30)(A) of the Social Security Act (Section 1902(a)(30)(A)) to “assure that payments are consistent with efficiency, economy, and quality of care” because the Secretary did not consider provider costs.

Hoag Memorial distinguished Managed Pharmacy Care by relying on a different clause in section 1902(a)(30)(A). The court wrote that the requirement that payments “are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area,” unambiguously expressed Congress’ intent such that the court need not defer to the Secretary’s interpretation about whether the requirement was met. It said that the equal-access requirement is a “concrete standard, objectively measurable against the health care access afforded among the general population,” in contrast to the “broad and diffuse” requirement that payments be “consistent with efficiency, economy and quality of care.” Based on this analysis, the court held that the Secretary’s approval of the SPA was arbitrary and capricious under the Administrative Procedure Act (APA) because it failed to consider Medicaid beneficiaries’ access to care relative to that of the general (i.e., non-Medicaid) population.

The APA’s Role in Challenging Medicaid State Plan Amendments

About two years ago, in Armstrong v. Exceptional Child Center, the United States Supreme Court rejected a Section 1902(a)(30)(A) Medicaid reimbursement challenge brought against the state of Idaho for lack of a viable cause of action. In that case, the plaintiff providers had argued that they were entitled to challenge the sufficiency of Idaho’s Medicaid rates pursuant to the Supremacy Clause of the United States Constitution. The Court held that the Supremacy Clause “instructs courts what to do when state and federal law clash, but is silent regarding who may enforce federal laws in court, and in what circumstances they may do so.” The Court also asserted that “the Medicaid Act implicitly precludes private enforcement of §30(A)” and expressed skepticism of efforts to “circumvent Congress’s exclusion of private enforcement.” Notwithstanding the Supreme Court’s observation that the Medicaid Act precludes private enforcement, Hoag Memorial allowed a challenge to the sufficiency of Medicaid rates in federal court based on the express statutory cause of action in section 702 of the APA for persons who suffer legal wrong because of agency action.

CMS is Likely to React to the Decision by Considering Additional Evidence When Approving Medicaid Reimbursement SPAs

The holding in Hoag Memorial relied on what the court found to be the Secretary’s failure to consider any evidence regarding the general population’s access to care and services. In the court’s view, such oversight rendered it logically impossible for the Secretary to meet the statutory standard because there could be no way of proving that Medicaid beneficiaries had at least the same level of access to care and services as the general population if the Secretary did not know anything about the general population’s access. Without the ability to make the statutorily mandated comparison, it was not enough that the administrative record included evidence that Medi-Cal beneficiary utilization of hospital outpatient services had not decreased after the payment cut, nor that it included evidence that just as many hospitals provided outpatient services to Medi-Cal beneficiaries.

In 2015, the Centers for Medicare and Medicaid Services (CMS) issued a final rule requiring states considering reductions or restructuring of Medicaid reimbursement that could have an adverse impact on beneficiary access to care to conduct access reviews and submit those findings to CMS along with the request for approval of the reimbursement change. Although the rule references section 1902(a)(30)(A), it does not provide detailed instruction about the evidence that CMS needs from states to evaluate whether the equal-access-to-service component of section 1902(a)(30)(A) has been satisfied. CMS may propose modifications to the rule in response to the Ninth Circuit’s ruling, and begin directing states to submit the kind of evidence the court did not find in the administrative record in Hoag Memorial —either studies directly comparing access to care and services for Medicaid beneficiaries with access for the general population, or independent evidence of the level of access for both groups that CMS can compare when evaluating the SPA.

If CMS modifies the information it requires states to submit in an access review, or if states independently collect comparison data as part of their access reviews, the next round of litigation over equal access for Medicaid beneficiaries may focus not on the Secretary’s failure to consider any evidence at all, but on whether the Secretary considered the right kinds of evidence and drew reasonable conclusions from it. If so, the question of deference will again become paramount because plaintiffs will continue to face uphill battles challenging SPA approvals if courts defer to CMS’ evaluation and interpretation of the evidence. On the one hand, the complexity of the Medicaid program and CMS’ agency expertise in administering it may counsel in favor of deference to the agency. But on the other hand, plaintiffs are likely to argue that deference is not warranted based on the court’s statement in Hoag Memorial that a “straightforward comparison of data under the equal-access requirement would derive little benefit from the Secretary’s expertise.”

It is also possible that the federal government will appeal Hoag Memorial by requesting en banc review at the Ninth Circuit or by appealing to the Supreme Court. As of publication of this article, no petition for further review had been filed.

The Path for Future Medicaid Reimbursement Challenges

Ultimately, Hoag Memorial proves the continuing viability of section 1902(a)(30)(A) challenges to Medicaid reimbursement, even after the defeats for providers in the last few years in the Ninth Circuit and Supreme Court. While APA litigation over the federal approval of Medicaid SPAs is likely to remain challenging for plaintiffs, Hoag Memorial potentially lays the groundwork for future equal-access-to-care arguments and provides support for an argument that courts need not defer to CMS’ conclusions if they are convinced that the Medicaid statute is clear.

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