Mission Hospital Regional Medical Center v. Shewry

168 Cal.App.4th 460

85 Cal. Rptr. 3d 639

MISSION HOSPITAL REGIONAL MEDICAL CENTER et al., Plaintiffs and Appellants, v. SANDRA SHEWRY, as Director, etc., Defendant and Appellant.

KAISER FOUNDATION HOSPITALS et al., Plaintiffs and Appellants, v. SANDRA SHEWRY, as Director, etc., Defendant and Appellant.

No. C054868.

Court of Appeals of California, Third District.

November 19, 2008.

Hooper, Lundy & Bookman, Lloyd A. Bookman, Byron J. Gross, Jordan B. Keville and Felicia Y. Sze for Plaintiffs and Appellants.

Edmund G. Brown, Jr., Attorney General, Douglas M. Press, Assistant Attorney General, Julie Weng-Gutierrez and Anthony V. Seferian, Deputy Attorneys General, for Defendant and Appellant.

OPINION

NICHOLSON, J.

We enter here into the arcane world of Medicaid law to answer a fundamental question: does a federal statute imposing notice and comment requirements apply to actions taken or mandated by a state legislature? In 2004, the California Legislature, as part of adopting a state budget after the constitutional budget deadline had expired, proposed and enacted over only a three-day period a freeze on the rates the state would use to reimburse certain hospitals that provided services to Medicaid beneficiaries during the state's 2004-2005 fiscal year. A large number of those hospitals sued for writ relief, claiming the state's action violated federal Medicaid statutes that require a public notice and comment period as part of the process used when revising rates and rate methodologies and that impose substantive findings necessary to support those rates.

The trial court disagreed with the hospitals except to the extent the freeze affected services rendered prior to the freeze's enactment. Both the hospitals and the state department responsible for administering the Medicaid program appealed. We conclude the federal statute requiring notice and comment procedures applied to the state's action, and that the state's process did not satisfy the federal statute. We reverse the trial court's judgment on that basis.

STATUTORY BACKGROUND

A. Federal law

"The Medicaid program was created in 1965, when Congress added Title XIX to the Social Security Act, 79 Stat. 343, as amended, 42 U.S.C. § 1396 et seq. ... [, the Medicaid Act], for the purpose of providing federal financial assistance to States that choose to reimburse certain costs of medical treatment for needy persons. Although participation in the Medicaid program is entirely optional, once a State elects to participate, it must comply with the requirements of Title XIX." (Harris v. McRae (1980) 448 U.S. 297, 301 [65 L.Ed.2d 784, 794, 100 S.Ct. 2671].) "As a participant in the federal Medicaid program, the State of California has agreed to abide by certain requirements imposed by federal law in return for federal financial assistance in furnishing medical care to the needy." (Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 804 [135 Cal.Rptr.2d 1, 69 P.3d 927] (Olszewski).)

Congress enacted the Medicaid Act pursuant to its power under the federal Constitution's spending clause. (U.S. Const., art. I, § 8, cl. 1; Independent Living Ctr. of Southern Cal. v. Shewry (9th Cir. 2008) 543 F.3d 1050.) The Medicaid Act is enforceable against conflicting state laws and actions pursuant to the federal Constitution's supremacy clause. (543 F.3d 1050; U.S. Const., art. VI, cl. 2.)

To qualify for federal assistance, a state must submit to the secretary of the federal Department of Health and Human Services (Secretary) for approval a "plan for medical assistance" (42 U.S.C. § 1396a(a)) that contains a comprehensive written statement describing the nature and scope of the state's Medicaid program.¹ (42 C.F.R. § 430.10 (2008).) Once approved by the Secretary, the state plan enables the state to receive federal funding. The plan is in effect in all political subdivisions of the state. (42 U.S.C. §§ 1396, 1396a(a)(1).)

The state must amend its state plan to reflect "[m]aterial changes" in state policy or in the state's operation of the Medicaid program. (42 C.F.R. § 430.12(c)(1)(ii) (2008).) Amendments approved by the state must also be approved by the Secretary. (42 C.F.R. §§ 430.10, 430.12 (2008).)

In the plan, the state creates or designates a single state agency to administer, or supervise the administration of, the plan. (42 U.S.C. § 1396a(a)(5).) The state plan is mandatory upon that agency. (42 U.S.C. § 1396a(a)(1).)

One of the mandatory provisions in the state plan concerns the rates by which the state will reimburse health care providers for their services to Medicaid patients. The state plan must establish "a scheme for reimbursing health care providers for the medical services provided to needy individuals." (Wilder v. Virginia Hospital Assn. (1990) 496 U.S. 498, 501 [110 L.Ed.2d 455, 462, 110 S.Ct. 2510].) The plan must "specify comprehensively the methods and standards" the state will use to set reimbursement rates. (42 C.F.R. § 447.252(b) (2008).)

The Medicaid Act contains two requirements at issue here that apply to the state plan's rate setting provision: subdivisions (a)(13)(A) and (a)(30)(A) of section 1396a of title 42 of the United States Code (section (13)(A) and section (30)(A)). In general, section (13)(A) imposes procedural requirements the state must follow when establishing reimbursement rates, and section (30)(A) imposes substantive findings the state must make when establishing rates. We review section (13)(A) first.

1. Section (13)(A)

a. Former statute

Prior to 1997, section (13)(A) imposed a substantive requirement on the states' establishment of reimbursement rates. Former section (13)(A) required the state plan to provide for payment for services through the use of rates that were "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities ..." (Former § (13)(A) (1985).) States were required to provide the Secretary with assurances that their rates satisfied this substantive requirement. This provision was known as the "Boren Amendment" (see Evergreen Presbyterian Ministries Inc. v. Hood (5th Cir. 2000) 235 F.3d 908, 919, fn. 12 (Evergreen), overruled on a different ground in Equal Access for El Paso, Inc. v. Hawkins (5th Cir. 2007) 509 F.3d 697, 704), and we refer to it as the Boren Amendment to distinguish it from the current version of section (13)(A).

(1) A corresponding regulation, 42 Code of Federal Regulations part 447.205 (2008) (part 447.205), imposes notice requirements the state must follow in developing reimbursement rates. (As will be explained shortly, although the Boren Amendment has been repealed, part 447.205 has not been repealed.) Under part 447.205, the state agency must provide public notice of "any significant proposed change in its methods and standards for setting payment rates for services." (Pt. 447.205(a).) The notice must describe the proposed change in methods and standards, explain why the agency is changing the methods and standards, state where written comments may be received, and, if there are public hearings on the proposal, give the locations, dates and times of the hearings. (Pt. 447.205(c).) The notice must be published "before the proposed effective date of the change," and it must appear in a state register or certain newspapers of large circulation. (Pt. 447.205(d).)²

b. Current statute

In 1997, Congress repealed the Boren Amendment. (Pub.L. No. 105-33, § 4711(a)(1) (Aug. 5, 1997) 111 Stat. 251, 507.) The Boren Amendment's substantive standards had generated significant amounts of litigation, resulting in higher Medicaid costs. Congress repealed the Boren Amendment "`to provide States with greater flexibility in setting provider reimbursement rates under the Medicaid Program.' [Citation.]" (Evergreen, supra, 235 F.3d at p. 919, fn. 12.)

In place of the Boren Amendment's substantive standard, Congress adopted procedural requirements applicable to setting reimbursement rates for certain health care services, including inpatient hospital services. Current section (13)(A) now requires the state plan to provide for a "public process" for determining rates of payment. The public process must provide that:

"(i) proposed rates, the methodologies underlying the establishment of such rates, and justifications for the proposed rates are published,

"(ii) providers, beneficiaries and their representatives, and other concerned State residents are given a reasonable opportunity for review and comment on the proposed rates, methodologies, and justifications, [and]

"(iii) final rates, the methodologies underlying the establishment of such rates, and justifications for such final rates are published ...." (§ (13)(A)(i)-(iii).)

"Broadly speaking, subsection (13)(A) requires something on the order of notice and comment rulemaking for states in their setting of rates for reimbursement of `hospital services ...' provided under the Medicaid Act." (Long Term Care Pharmacy Alliance v. Ferguson (1st Cir. 2004) 362 F.3d 50, 54 (Long Term Care)).

In a 1997 letter to state Medicaid directors, the Secretary stated section (13)(A)'s intent "is to provide states with maximum possible flexibility, as well as to minimize [the Secretary's] role in reviewing inpatient hospital and long-term care state plan amendments involving payment rate changes. [The Secretary] would consider the state to be in compliance with this provision if it elected to use a general administrative process similar to the Federal Administrative Procedures Act that satisfies the requirements for a public process in developing and inviting comment in [section (13)(A)]. This will allow states the flexibility to follow current state public procedures. If a state's public process is not currently being applied to rate setting, or does not currently include a comment period, then the state would need to modify the process."

The Secretary interpreted section (13)(A)'s use of the term "publi...