This article was published in the September 30, 2011 issue of Health Lawyers Weekly, a publication of the American Health Lawyers Association.
Next week, the Supreme Court of the United States will hear oral arguments in a case that could eliminate the ability of providers and Medicaid beneficiaries to challenge state Medicaid rates in federal courts. The case is a consolidation of three cases on appeal from the Ninth Circuit: Douglas v. Santa Rosa Memorial Hospital,[1] Douglas v. Independent Living Center of Southern California,[2] and Douglas v. California Pharmacists Association.[3]
All three of these cases stem from cuts, ranging from five to ten percent, that the State of California sought to impose on Medicaid payment rates to help alleviate the state’s severe budget shortfalls. In response to the cuts, several Medicaid providers and beneficiaries initiated these three lawsuits against the state and argued that the rate cuts would violate the equal access clause of the Medicaid statutes.
The equal access clause requires states to set rates that are “consistent with efficiency, economy, and quality of care” and “sufficient to enlist enough providers so that such care and services are available . . . at least to the extent that such care and services are available to the general population in the geographic area.”[4] The providers argued to lower courts that the cuts to California’s Medicaid rates, which were already some of the lowest in the nation, were not “consistent with efficiency, economy, and quality of care” and would not enlist enough providers to serve Medicaid beneficiaries as required by the equal access clause. The Ninth Circuit agreed with the providers and beneficiaries in each case and issued injunctions preventing the state from implementing the cuts.[5]
The issue in the Supreme Court case is not whether the rate cuts violate the equal access clause. The Court declined to address that issue. Rather, the issue is if Medicaid providers and beneficiaries even have a cause of action to bring lawsuits to enforce the equal access clause. There is no dispute that providers and beneficiaries do not have a statutory private right of action to enforce the provisions of the Medicaid statutes because Congress withdrew the providers’ statutory right to sue by repealing the Boren Amendment in 1997, which required rates to be “reasonable and adequate.”[6] Since repeal of the Boren Amendment, providers can no longer sue states for damages, but they have continued to bring preemption lawsuits demanding equitable relief (i.e., injunctions) under the Supremacy Clause.
The Supremacy Clause in the United States Constitution embodies one of the pillars of federalism: federal law is the “supreme Law of the Land” and consequently valid federal law preempts conflicting state law. Conceptually, the providers’ legal arguments in Supremacy Clause lawsuits have been straightforward: a) under the Supremacy Clause, federal laws preempt conflicting state laws; b) the state rate cuts conflict with the requirements of the federal equal access clause; and c) therefore the equal access clause preempts the state rate cuts and invalidates them. The issue that the Supreme Court must decide is not whether the providers’ legal arguments are valid, but whether the Supremacy Clause grants Medicaid recipients and providers a cause of action to make their legal arguments to a federal court. Providers and beneficiaries argue that the Supremacy Clause permits them to bring these actions, but California argues that only the federal government should be able enforce the equal access clause through a preemption action.
Surprisingly, the Supreme Court has never directly addressed this issue. But the Supreme Court has decided dozens of preemption claims by private parties against state officials without questioning whether the private parties had a cause of action to bring the claims. For this reason, California does not argue that private parties should never be able to bring preemption claims under the Supremacy Clause. Rather, the state argues that individuals should not be able to bring preemption claims when the cases involve legislation such as the Medicaid program.
The state argues that these Medicaid preemption cases are unlike other preemption cases that the Supreme Court has decided in the past. First, except for one case, the other preemption cases did not address Spending Clause legislation. The Spending Clause of the United States Constitution allows Congress to tax and spend for the general welfare—a power that Congress has used frequently to create joint state-federal programs such as Medicaid. Through Spending Clause legislation, Congress offers funds to each state if the state agrees to perform certain functions or use the funds in a certain manner. Thus, under the Medicaid program, states are entitled to federal matching funds for the money they devote to their state Medicaid programs as long as they operate the Medicaid programs according to the requirements set out by the federal government.
In the past, the Supreme Court has analogized Spending Clause legislation to a contract between the federal government and the states because, if a state abides by the terms of its agreement with the federal government, it receives the benefits that the federal government has promised. California has expanded on this contract analogy by arguing that Medicaid providers and recipients are third-party beneficiaries of the contract between the federal government and the state governments. Under contract law, only intended third-party beneficiaries can enforce a contract against one of the parties, and California argues that providers and beneficiaries cannot be intended third-party beneficiaries of the Medicaid contract because Congress specifically took away their right of action when it repealed the Boren Amendment. Therefore, argues California, providers and beneficiaries have no power to enforce the Medicaid contract against the states through preemption actions or other lawsuits.
The Court did address one Spending Clause case in the past, PhRMA v. Walsh, but it again decided the case on the merits without questioning whether the providers could bring the suit.[7] The drug manufacturers that were the petitioners in PhRMA used preemption as an affirmative defense to a regulation that the state sought to impose on them. The Untied States, in its brief in support of California, argues that preemption claims by individuals might be permitted in cases such as PhRMA in which individuals invoke the Supremacy Clause to protect themselves from some regulation or rule that a state seeks to impose on them.[8] But the United States argues that preemption actions by individuals should not be permitted in cases such as this one in which California is not trying to regulate the conduct of providers and, at least in theory, the providers do not even have to participate in the Medicaid program.
From a policy standpoint, California and its supporters argue that it is detrimental to the Medicaid program to allow providers and beneficiaries to bring private actions under the Supremacy Clause because the litigation adds to the cost of the Medicaid program and injects a great amount of uncertainty into the program for states. States’ primary complaint it that instead of only seeking approval of the federal government for their rates, they now must also defend their rate changes in federal courts. Even if the federal government is willing to accept the rate changes proposed by a state, individuals may still challenge them in federal court under the equal access clause.
Providers counter that California is trying to parse the Supremacy Clause in ways that are inconsistent with the language of the Constitution. The Supremacy Clause says that federal laws are supreme; there is nothing in the language of the Supremacy Clause that suggests that the Court should carve out a special exception for Spending Clause legislation. From a policy standpoint, providers argue that the Secretary of Health and Human Services will never have the resources to police all fifty states for compliance with the Medicaid statutes absent provider lawsuits. Finally, providers and beneficiaries bolster their arguments with decisions from multiple federal courts of appeals that have allowed individuals to bring preemption actions involving Spending Clause legislation. Furthermore, to date, no court of appeals has adopted California’s position.
Because the issue of whether private parties may bring an action to enforce the Supremacy Clause could have wide-ranging and long-term consequences far beyond Medicaid, this case has garnered attention from advocacy groups, state governors, members of Congress, and the White House. The White House, which originally requested that the Supreme Court not review the case, has weighed in on the side of California. The chief concern of the White House appears to be that equal access cases have the potential to scuttle agreements between the federal government and the states as well as drive up the cost of Medicaid. Essentially, equal access clause cases mean that the federal government will not always be the final arbiter of what the Medicaid program permits—at least without amending the Medicaid legislation.
The White House’s brief in favor of California angered many Democratic members of Congress who responded by filing their own amicus curiae brief in favor of the providers and beneficiaries. Not surprisingly, many states as well as the National Governors Association filed briefs in support of California. But the Chamber of Commerce of United States submitted perhaps one of the best written amicus curia briefs in favor of the providers and beneficiaries. The Chamber of Commerce expressed concern that the limiting of Supremacy Clause actions by the Supreme Court in this case could hurt the ability of businesses to challenge local laws that restrain them in violation of federal laws.
The result in this case is far from certain. Given the multitude of preemption cases that the Supreme Court has decided on the merits over the decades without questioning the right of individuals to sue under the Supremacy Clause, it seems unlikely that the Court will drastically reverse course and declare that private individuals can never bring preemption actions under the Supremacy Clause. The more likely result would be for the Court to carve out an exception for Spending Clause cases as California and the United States request. Two current justices have previously expressed tentative support for the arguments that California is making in this case. In the 2003 case of PhRMA v. Walsh, a preemption case dealing with portions of the Medicaid program, Justice Thomas expressed “serious questions as to whether third parties may sue to enforce Spending Clause legislation through preemption or otherwise.”[9] Similarly, in an earlier case, Blessing v. Freestone, Justice Scalia said, “I am not prepared without further consideration to reject the possibility that third-party beneficiary suits simply do not lie.”[10]
The oral arguments on October 3rd may give a clearer picture of which way the justices are leaning on this issue, but ultimately the states, Medicaid beneficiaries, and providers will have to wait until the Court issues its opinion in the spring to learn their fate.
David Dirr is a Northern Kentucky attorney practicing at Dressman Benzinger LaVelle psc.
[1] U.S. Supreme Court Docket No. 10-283.
[2] U.S. Supreme Court Docket No. 09-958.
[3] U.S. Supreme Court Docket No. 09-1158.
[4] 42 U.S.C. § 1396a(a)(30)(A) (2006).
[5] California Pharmacists Association v. Maxwell-Jolly, 563 F.3d 847 (9th Cir. 2009); Independent Living Ctr. of S. Cal, Inc. v. Maxwell-Jolly, 572 F.3d 644 (9th Cir. 2009); Santa Rosa Memorial Hospital v. Maxwell-Jolly, 380 Fed. Appx. 656 (9th Cir. 2009).
[6] 42 U.S.C. § 1396a(a)(13)(A) (1982)
[7] 538 U.S. 644 (2003).
[8] The Solicitor General submitted a brief on behalf of the United States as amicus curiae supporting California.
[9] 538 U.S. at 683 (Thomas, J., concurring).
[10] 520 U.S. 329, 349 (1997) (Scalia, J., concurring).
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