March 2012 Volume 8 Number 7

U.S. Supreme Court Issues First Medicaid Decision This Term in Douglas v. Independent Living Centers of Southern California, Inc.

By Felicia Y Sze, Hooper, Lundy & Bookman, P.C., San Francisco, CA

AuthorIn light of financial challenges, many states, including California, have proposed or implemented cuts to their Medicaid programs in the form of rate reductions to healthcare providers. The U.S. Supreme Court, on February 22, 2012, issued its decision in Douglas v. Independent Living Centers of Southern California, Inc., U.S.S.C. No. 09-958, 565 U.S. ___ (Feb. 22, 2012) (“Douglas”). The Court had granted review to determine whether private individuals were authorized by the Supremacy Clause of the U.S. Constitution to sue state Medicaid officials on preemption grounds to determine whether provider payment rates violated federal requirements designed to assure “equal access to care” for Medicaid beneficiaries. In Douglas, the Court indicated that private litigants “may” have a cause of action under the Supremacy Clause; however, it need not decide the constitutional question at this time because of changed circumstances in the case occasioned by a subsequent decision by the Secretary of the U.S. Department of Health & Human Services (“HHS”) to approve and disapprove portions of California’s rate-cutting scheme. The Court remanded the case back to the lower courts to determine in the first instance the impact of the Secretary’s approval on the plaintiffs’ preemption lawsuit.


Douglas was the consolidation of several California cases brought by providers and beneficiaries against the Director of the California Department of Health Care Services.1 In these cases, providers and beneficiaries challenged a series of across-the-board Medicaid reductions mandated by the California Legislature from 2008 to 2009 that were enacted by the California legislature in response to a fiscal crisis. Neither the California Legislature nor the California Department of Health Care Services had performed any analysis prior to the adoptions of the rate reductions as to the impact of those reductions on beneficiary access to or quality of care. Plaintiffs in these cases asserted that the enactments of these rate reductions were preempted by the requirement in 42 U.S.C. section 1396a(a)(30)(A) (“Section 30(A)”). Section 30(A) requires that a State’s Medicaid plan “provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan . . . as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency, economy, and quality of care and 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.”

In each of these cases, the Ninth Circuit affirmed or ordered preliminary injunctions against the California Department of Health Care Services from implementing the rate reductions. These decisions: (1) held that the Medicaid providers and beneficiaries could directly bring an action based on the Supremacy Clause (notwithstanding Ninth Circuit precedent that Section 30(A) did not confer a private right of action enforceable under 42 U.S.C. section 1983); (2) essentially accepted the claim that the State had not demonstrated that its Medicaid plan, as amended, would provide sufficient access to services; (3) held that the amendments consequently conflicted with Section 30(A); and (4) held that, given the Constitution’s Supremacy Clause, Section 30(A) must prevail, preempting the rate reductions.

Although the California Department of Health Care Services initially did not request HHS approval of some of these rate reductions, it subsequently submitted State Plan Amendments (“SPAs”) for the rate reductions in 2008. In November 2010, HHS initially disapproved the SPAs on the basis that the California Department of Health Care Services had not demonstrated compliance with Section 30(A).

The Supreme Court granted certiorari on January 18, 2011, on the limited issue of whether the plaintiffs in these cases could mount a Supremacy Clause preemption challenge to the state statutes and obtain a court injunction preventing California from implementing the rate reductions. Approximately a month after oral argument, HHS reversed its decision on the SPAs and granted approval of the SPAs for a limited retroactive implementation of some of the rate reductions.

The Ruling

Justice Breyer, writing for the majority of five justices, held that the posture of the cases had significantly changed, warranting a remand to the Ninth Circuit. The opinion suggests that this changed posture “may require respondents now to proceed by seeking review of the agency determination under the Administrative Procedure Act (APA), 5 U.S.C. § 701 et seq., rather than in an action against California under the Supremacy Clause.” The Court suggested that “the APA would likely permit respondents to obtain an authoritative judicial determination of the merits of their legal claim.” The Court declined to formally address whether the Ninth Circuit properly recognized a Supremacy Clause action to enforce Section 30(A).


The District Court for the Central District of California has recently granted preliminary injunctions in four cases challenging HHS’ approval of newer rate reductions proposed by California and California’s intended implementation of these reductions.2 In these cases, the plaintiffs asserted that HHS’ approval of these SPAs was arbitrary and capricious in violation of the APA. All four of these injunctions are currently before the Ninth Circuit on appeal. These cases highlight the ongoing importance for providers to submit comments and evidence to HHS during the SPA review process to ensure that the record accurately reflects the impact of the State’s proposed actions on the Medicaid program as the APA review is conducted on the basis of the evidence before CMS in the decision-making record.

In light of the Douglas decision, it appears that with respect to future rate reductions and other significant changes to Medicaid programs: (1) states likely are not permitted to implement these changes prior to HHS approval; (2) if states implement prior to HHS approval, beneficiaries and plaintiffs may be able to obtain preliminary injunctive relief in federal court preventing the pre-approval implementation of those changes; and (3) after HHS approval, beneficiaries and plaintiffs may still be able to obtain judicial relief by challenging HHS’ approval of the changes under the APA.

Ms. Sze is an associate with Hooper, Lundy & Bookman, P.C., where she has worked extensively with providers and trade associations to challenge reductions to Medicaid programs. She can be contacted at (415) 875-8503 or


Mr. Toby Douglas became the Director of the California Department of Health Care Services after the cases were decided by the Ninth Circuit Court of Appeals.

2 California Hosp. Ass'n v. Douglas, 2011 WL 6820229 (C.D. Cal. Dec. 28, 2011) (granting preliminary injunction of hospital distinct part nursing facility rate reduction); Managed Pharmacy Care v. Sebelius, 2011 WL 6820288 (C.D. Cal. Dec. 28, 2011) (granting preliminary injunction of pharmacy rate reduction); California Medical Transp. Assoc. v. Douglas, CV 11-9830 CAS (MANx) (C.D. Cal. Jan. 10, 2011) (granting preliminary injunction of non-emergency transportation service rate reduction); California Med. Ass'n v. Douglas, 2012 WL 273768 (C.D. Cal. Jan. 31, 2012) (granting preliminary injunction of reductions as to physician, dental, pharmacy, durable medical equipment, medical supplies, clinic and emergency transportation services).

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