Wood et al v. Betlach et al

Filing 102

ORDER that the Secretary's 29 Motion for Summary Judgment is denied; Plaintiffs' 67 Cross-Motion for Summary Judgment is granted with respect to their first claim for relief and denied with respect to their second claim. The Secretary& #039;s approval of Arizona's demonstration project on October 21, 2011 is remanded without vacatur for the Secretary to address the deficiencies set forth in this order. Director Betlach's 85 Cross-Motion for Summary Judgment on Pl ainiff's second claim for relief is granted; Plaintiffs' 77 Motion for Judicial Notice and Director Betlach's 80 Cross-Motion for Judicial Notice are denied; Plaintiffs' 90 Motion to Strike the declaration of Diana Alvarez is denied as moot. Signed by Judge David G Campbell on 2/6/13.(LFIG)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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No. CV-12-08098-PCT-DGC

Flint Wood, et al.,
Plaintiffs,

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v.

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ORDER

Thomas Betlach, Director of the Arizona
Health Care Cost Containment System, and
Kathleen Sebelius, Secretary of the United
States Department of Health and Human
Services, in their official capacities,

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Defendants.

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Defendant Thomas Betlach is Director of Arizona’s Medicaid program, known as

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the Arizona Health Care Cost Containment System (“AHCCCS”). Defendant Kathleen

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Sebelius (“the Secretary”) is Secretary of the United States Department of Health and

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Human Services (“DHHS”), which approves state Medicaid plans. Plaintiffs are low

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income residents of Arizona who qualify for medical assistance under a statewide,

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Medicaid-approved demonstration project administered by AHCCCS.

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The demonstration project provides coverage to low income childless adults who

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would not otherwise be Medicaid eligible. Patients in this “expansion population” are

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subject to mandatory copayments for doctor’s visits, non-emergency use of emergency

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rooms, and prescription drugs. These copayments, enacted under Arizona Administrative

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Code Rule R9-22-711(F), are higher than the nominal copayments charged to low income

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disabled individuals and families with dependent children – the “chronically needy”

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population that states participating in Medicaid must cover. Plaintiffs represent a class of

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persons defined as “All Arizona Health Care Cost Containment System eligible persons

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in Arizona who have been or will be charged copayments pursuant to Arizona

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Administrative Code Amended Rule R9–22–711(F).” Doc. 87.

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Plaintiffs filed a complaint seeking declaratory and injunctive relief from these

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copayment requirements.

Doc. 1.

Plaintiffs allege that the requirements violate

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Medicaid’s nominality limits and its prohibition on denial of services for inability to

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make copayments (id., ¶¶ 2, 36, 37); that the Secretary exceeded her authority under 42

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U.S.C. § 1315 when she granted approval to the heightened and mandatory copayments

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in the demonstration project and thereby violated the federal Medicaid Act and the

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Administrative Procedure Act (“APA”) (id., ¶¶ 60, 95-96); and that Director Betlach

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violated the due process requirements of the U.S. Constitution and the Medicaid Act

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when he sent legally insufficient notices to those subjected to the higher copayments (id.,

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¶¶ 44, 99).

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Plaintiffs filed a motion for class certification (Doc. 13) which the Court granted

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(Doc. 87), and a motion for preliminary injunction (Docs. 5) which the Court denied

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(Doc. 88). The Court now has before it the Secretary’s motion for summary judgment

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(Doc. 29), Plaintiffs’ cross-motion for summary judgment (Doc. 67), and Director

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Betlach’s cross-motion for summary judgment on Plaintiff’s second claim for relief.

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Doc. 85. These motions have been fully briefed. Docs. 68, 89; 83, 89, 91, 96; 90, 100.

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The Court also has before it Plaintiffs’ motion for judicial notice (Doc. 77), Director

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Betlach’s response in opposition and cross-motion for judicial notice (Doc. 80), and

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Plaintiffs’ reply (Doc. 81).

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Secretary’s motion for summary judgment, grant Plaintiffs’ cross-motion for summary

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judgment on their first claim for relief, remand without vacatur the Secretary’s approval

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of Arizona’s demonstration project, deny Plaintiffs’ motion for summary judgment on

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their second claim for relief, grant Director Betlach’s motion for summary judgment on

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Plaintiffs’ second claim for relief, and deny Plaintiffs’ and Director Betlach’s motions for

For the reasons stated below, the Court will deny the

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judicial notice.1

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I.

Background.

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A.

Overview of the Medicaid Program.

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Congress created Medicaid in 1965 by adding Title XIX to the Social Security

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Act, 42 U.S.C. §§ 1396-1396w-5. Medicaid was enacted, in part, to enable states “to

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furnish . . . medical assistance on behalf of families with dependent children and of aged,

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blind, or disabled individuals, whose income and resources are insufficient to meet the

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costs of necessary medical services.” 42 U.S.C. § 1396-1. States that wish to receive

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federal funds through Medicaid must submit a state plan for approval by the Secretary of

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DHHS.

Id. at § 1396a(a)-(b).

State Medicaid plans must cover those who are

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“categorically needy” (those with dependent children who qualify for welfare, the

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disabled, children, and pregnant women who qualify). 42 U.S.C. § 1396a(a)(10)(A)(i).

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Pharm. Research & Mfrs. of Am. (“PhRMA”) v. Walsh, 583 U.S. 644, 650-651, 651 n. 4

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(2003). States may additionally opt to cover the “medically needy” (those who meet the

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non-financial eligibility requirements of Medicaid, but whose incomes exceed the

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eligibility limits).

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specifically waived, state plans must comply with all provisions of the Medicaid Act.

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Spry v. Thompson, 487 F.3d 1272, 1273 (9th Cir. 2007); see also Beno v. Shalala, 30 F.

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3d 1057, 1068 (9th Cir. 1994) (“While states are not required to participate in these

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federal programs, if they elect to participate, compliance . . . is mandatory.”)

42 U.S.C. § 1396a(a)(10)(C); see PhRMA at 651 n. 5.

Unless

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Under Section 1115 of the Social Security Act, the Secretary of DHHS may waive

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certain Medicaid Act requirements for an approved “experimental, pilot, or

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demonstration project” that the Secretary finds “is likely to assist in promoting the

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objectives of” the Medicaid Act. 42 U.S.C. § 1315. Section 1115 demonstration projects

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Oral argument was scheduled for January 30, 2013, but was cancelled due to a
medical emergency in the family of the undersigned judge. The Court does not have
room in its schedule for another oral argument before the month of April, and concludes
that the parties’ briefs are sufficient for the Court to make a fully informed decision. The
Court therefore issues this order without oral argument. Fed. R. Civ. P. 78(b).

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may cover Medicaid ineligible populations – known as “expansion populations” – who

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are not covered under the state Medicaid plan. Id.; Spry, 487 F.3d at 1274-5. The waiver

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allows state expenditures for these projects to be counted as expenditures under the state

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plan for federal reimbursement purposes. 42 U.S.C. § 1315(a)(2)(A); Spry, 487 F.3d at

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1277.

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States are permitted, with some exceptions, to impose cost-sharing provisions for

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both the mandatory (“categorically needy”) and optional (“medically needy”) populations

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covered by Medicaid state plans. 42 U.S.C. § 1396o(a) & (b). These charges must be

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nominal in amount. Id. at § 1396o(a)(3) & (b)(3). See Spry, 487 F.3d at 1276. The

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nominality requirements do not apply to expansion populations. Id., Newton-Nations v.

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Betlach, 660 F.3d 370, 379-80 (9th Cir. 2011).

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B.

Arizona’s Medicaid-Funded Plans.

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Arizona participates in Medicaid through AHCCCS. Docs. 16 at 11, 39 at 7;

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A.R.S. §§ 36-2901-2972.

AHCCCS administers Arizona’s state Medicaid plan, its

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demonstration projects, and certain state-only initiatives. Doc. 39 at 6-7.

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In November 2000, Arizona citizens passed Proposition 204, which required the

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state to expand AHCCCS coverage to all persons with incomes below the federal poverty

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level (“FPL”). Doc. 16 at 13; A.R.S. § 36-2901.01. In 2001, the state received approval

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from DHHS for a demonstration project under Section 1115. Doc. 16 at 13. The

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Secretary’s approval allowed the state to provide federally-reimbursed AHCCCS

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coverage to individuals below the FPL who did not have dependent children living with

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them – the expansion population referred to as “childless adults” – who would not

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otherwise be Medicaid eligible under a state plan. Id.; Doc. 39 at 7.

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AHCCCS beneficiaries covered as part of this “expansion population” were

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charged the same nominal copayments as regular Medicaid recipients – $1.00 per

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doctor’s visit, $5.00 for nonemergency use of emergency rooms, and $5.00 for

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nonemergency surgery. Doc. 16 at 13; Ariz. Admin. Code R9-22-711(A). The plan

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prohibited health care providers from refusing services to those who could not make the
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copayments. Ariz. Admin. Code R9-22-711(B).

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In 2003, Arizona implemented the Copayment Rule and increased copayments for

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those in the expansion population. Doc. 16 at 14; Ariz. Admin. Code R9-22-711(E). The

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Copayment Rule gave medical providers discretion to refuse services to members of the

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expansion population who failed to pay the increased copayments. Id. Arizona applied

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for and received approval from the Secretary of DHHS for this modification to its

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demonstration project. Doc. 39 at 7. The Copayment Rule, which was then found at

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Arizona Administrative Code R9-22-711(E), required members of the expansion

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population to pay $4.00 for every generic prescription or brand name prescription where

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no generic drug is available, $10.00 for every brand name prescription when a generic

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drug is available, $5.00 for every physician office visit, and $30.00 for non-emergency

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use of an emergency room. Doc. 16 at 14. The Secretary’s approval for the 2001

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demonstration project expired in 2006, but the Secretary approved an additional five-year

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demonstration project that included the Copayment Rule (renumbered to Rule R9-22-

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711(F)). Docs. 16 at 14; 39 at 7.

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The demonstration project was scheduled to expire on September 30, 2011. As a

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result, the State wrote to the Secretary on March 31, 2011, and asked her to approve “a

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new Section 1115 Research and Demonstration Project Waiver . . . for the period of

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October 1, 2011, through September 30, 2016.” AR 004219. The proposed new project

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covered the childless adult population covered by the previous demonstration project, but

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with enrollment frozen at lower levels. Id. at 004220. It also included the Copayment

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Rule, renumbered to R9-22-711(F), as well as other modifications to the program. Id.;

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Id. at 000018. The Secretary approved the new demonstration project on October 21,

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2011. Id. at 000001-5. The project was approved until 2016, with the Copayment Rule

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effective until December 31, 2013.2 Id.; Id. at 000033.

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The federal Affordable Care Act is set to go into effect on January 1, 2014. As
of that date, all those with incomes below the FPL will become a mandatory Medicaid

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Plaintiffs brought this lawsuit on the basis of the Secretary’s October 21, 2011

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decision, but they purport to challenge only the Copayment Rule portion of that decision.

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In other words, Plaintiffs ask the Court to vacate the Copayment Rule and leave the rest

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of the Secretary’s decision and the demonstration project in place.

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C.

Newton-Nations Litigation.

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Following the Secretary’s 2003 approval of the Copayment Rule, which modified

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the 2001 demonstration project by increasing copayments for the childless adult

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population, several plaintiffs who were part of this expansion population brought suit

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challenging the Secretary’s approval of the increased copayments as arbitrary and

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capricious and in violation of the Medicaid Act. See Newton-Nations v. Rogers, 221

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F.R.D. 509, 510 (D. Ariz. 2004). Judge Earl H. Carroll granted the plaintiffs’ motion for

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class certification, with the class defined as “all Arizona Health Care Cost Containment

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eligible persons in Arizona who have been or will be charged copayments pursuant to

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Arizona Administrative Code Amended Rule R9-22-711(E).” Id. at 512. Judge Carroll

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granted the plaintiffs’ request for a preliminary injunction and enjoined the state from

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imposing the higher copayments or allowing medical providers to refuse services for

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inability to pay. Newton-Nations v. Rogers, 316 F. Supp. 2d 883, 891 (D. Ariz. 2004).

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The injunction was lifted on March 29, 2010, when Judge Carroll granted summary

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judgment in favor of the defendants. Newton-Nations v. Rogers, No. CV 03-2506-PHX-

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EHC, 2010 WL 1266827 at *21 (D. Ariz. March 29, 2010).

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The Ninth Circuit affirmed Judge Carroll’s decision in part and reversed it in part.

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Newton-Nations v. Betlach, 660 F.3d 370, 383-84 (9th Cir. 2011). The Court of Appeals

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found that Judge Carroll had properly granted summary judgment in favor of the

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defendants and against the plaintiffs on the claim that the then-Secretary violated the

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Medicaid Act and the APA when he determined that a waiver of the copayment

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population. 42 U.S.C. § 1396a(a)(10)(A)(i)(VIII). AR 000036-37. (Section 36(b)).

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requirement was not required for Arizona’s expansion populations. Id. at 379-80. The

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Court of Appeals found that the Secretary had reasonably interpreted the Medicaid Act to

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mean that persons not covered by the state Medicaid plan “are expansion populations not

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protected by the § 1396o cost-sharing limits.” Id. at 379. 3 The Ninth Circuit reversed

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the grant of summary judgment in favor of defendants on the claim that the Secretary’s

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approval of the increased copayments was arbitrary and capricious, finding that “[t]he

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administrative record does not demonstrate that the Secretary made the requisite findings

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required by Beno.” Id. at 381 (citing Beno v. Shalala, 30 F.3d 1057 (2011)). The Ninth

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Circuit found “no evidence that the Secretary made ‘some judgment that the project ha[d]

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a research or a demonstration value.’” Id. (quoting Beno, 30 F.3d at 1069). The Ninth

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Circuit remanded to the district court with instructions to vacate the Secretary’s decision

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and remand to the Secretary for further consideration. Id. at 382.

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On remand, Judge Rosslyn O. Silver found the case moot because the Secretary’s

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2003 approval of the Copayment Rule had expired and “the copayments currently in

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effect are due to a new program based on a new administrative record.” Newton-Nations

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v. Betlach, 03-02506-PHX-ROS, Doc. 261 at 4 (emphasis in original). Judge Silver

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stated that the plaintiffs could file a new suit on the new record. Id. Plaintiffs promptly

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filed this action. Doc. 1.

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The argument the plaintiffs raised before the Ninth Circuit was more nuanced
than the one made before Judge Carroll. Judge Carroll had found on the basis of the
Ninth Circuit’s ruling in Spry that because the plaintiffs were part of an expansion
population and not covered by Arizona’s state Medicaid plan, there was no need for the
Secretary to waive the Medicaid Act’s copayment limitations in order to approve the
higher than nominal copayments at issue. Newton-Nations, 2010 WL 1266827 at *13,
*15; see Spry, 487 F.3d at 1276. The plaintiffs appealed on the basis that some plaintiffs
qualified as “medically needy,” and they argued that Medicaid’s copayment limitations
therefore applied to them because they could be covered as Medicaid-eligible individuals,
even though Arizona had opted not to cover the “medically needy” population under its
state plan. Newton-Nations, 660 F.3d at 378. The Ninth Circuit found that Congress had
not spoken directly to this issue and therefore deferred to the Secretary’s interpretation
that “where, as here, a state has not defined its ‘medically needy’ population pursuant to
the Medicaid Act, persons who are not mandatorily covered by the state plan are
expansion populations not protected by the § 1396o cost-sharing limits.” Id. at 379-80.

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II.

Legal Standards

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A.

Standard of Review.

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Under the APA, a reviewing court must hold unlawful and set aside agency action

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found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance

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with law[.]” 5 U.S.C. § 706(2)(A). A decision is arbitrary and capricious if the agency

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“has relied on factors which Congress has not intended it to consider, entirely failed to

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consider an important aspect of the problem, offered an explanation for its decision that

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runs counter to the evidence before the agency, or is so implausible that it could not be

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ascribed to a difference in view or the product of agency expertise.” O’Keeffe’s, Inc. v.

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U.S. Consumer Prod. Safety Comm’n, 92 F.3d 940, 942 (9th Cir.1996) (quoting Motor

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Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). The

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standard is deferential. The Court may not substitute its judgment for that of the agency.

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River Runners for Wilderness v. Martin, 593 F.3d 1064, 1070 (9th Cir.2010).

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B.

Summary Judgment Standard.

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A party seeking summary judgment “bears the initial responsibility of informing

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the district court of the basis for its motion, and identifying those portions of [the record]

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which it believes demonstrate the absence of a genuine issue of material fact.” Celotex

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Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is appropriate if the

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evidence, viewed in the light most favorable to the nonmoving party, shows “that there is

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no genuine dispute as to any material fact and the movant is entitled to judgment as a

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matter of law.” Fed. R. Civ. P. 56(a). Summary judgment is also appropriate against a

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party who “fails to make a showing sufficient to establish the existence of an element

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essential to that party’s case, and on which that party will bear the burden of proof at

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trial.” Celotex, 477 U.S. at 322. Only disputes over facts that might affect the outcome

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of the suit will preclude the entry of summary judgment – the disputed evidence must be

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“such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v.

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Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

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III.

The Secretary’s Motion for Summary Judgment.

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Approval of a demonstration project under Section 1115 requires that the

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Secretary examine three issues: “first, whether the project is an ‘experimental, pilot or

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demonstration project.’ Second, whether the project is ‘likely to assist in promoting the

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objectives of the act.’ Third, ‘the extent and period’ for which she finds the project is

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necessary.”

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(internal citations and initial capitals omitted). The Secretary seeks summary judgment

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on Plaintiffs’ first claim for relief, arguing that she considered each of these factors and

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reasonably determined that the demonstration project could yield useful information for

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demonstration purposes, serves the objectives of the Medicaid Act by providing coverage

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to those who would not otherwise be entitled to federally-funded medical assistance, and

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is limited in extent and duration. Doc. 30 at 3. The Secretary argues that § 1315 requires

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no more. Id., id. at 16.

Newton-Nations, 660 F.3d at 380 (quoting Beno, 30 F.3d at 1068-71)

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As an initial matter, Plaintiffs’ repeatedly assert on the basis of Newton-Nations

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that the Secretary’s approval can only be upheld if the copayments, viewed in isolation,

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satisfy each of the three prongs under the Medicaid Act, and that it is impermissible for

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the Secretary to base her considerations of these factors upon the demonstration project

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as a whole. See, e.g., Doc. 76 at 12, 14, 15. The Court does not agree.

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In Newton-Nations, the Ninth Circuit applied the three-pronged analysis

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specifically to the Secretary’s approval of Arizona’s Copayment Rule, finding inadequate

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the Secretary’s discussion on the record as to “why the copayments were approved.” 660

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F.3d at 381. In finding that the Secretary had failed to make “‘some judgment that the

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project has a research or a demonstration value’” (Beno, 30 F.3d at 1069), the court noted

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the Secretary’s failure to show that the project’s copayment provisions would reveal

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anything new for demonstration purposes. Id. But as the Court previously discussed in

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its order denying Plaintiffs’ motion for preliminary injunction (see Doc. 88 at 9), the only

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issue before the Ninth Circuit in Newton-Nations was the Secretary’s 2003 approval of

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the Copayment Rule. The Section 1115 demonstration project, which had been approved
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by the Secretary in 2001, was not at issue. Here, by contrast, the Copayment Rule has

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not been approved separately. The Secretary decided on October 21, 2011 to approve a

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“new Section 1115 Demonstration” that included far more than just increased

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copayments. See Doc. 32-1 at 4. Plaintiffs’ argument that the timing of the Secretary’s

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approval does not change the legal requirements of what she must consider ignores the

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fact that what the Secretary was asked to approve in 2003 is materially different from the

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new demonstration project the Secretary was asked to approve in 2011. The Court is not

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persuaded that copayments challenged as part of a larger demonstration project must

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independently merit approval under Section 1115. To so hold would mean that any

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provision of a larger demonstration project could be challenged as not independently

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warranting approval under Section 1115, notwithstanding that provision’s relationship to

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and interaction with the project as a whole. Newton-Nations does not compel such a

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result.

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The statutory language of Section 1115, and the Ninth Circuit’s opinion in Beno,

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upon which Newton-Nations relied, do not require such myopic analysis. Section 1115(a)

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refers to whether the “experimental, pilot, or demonstration project” is, in the judgment

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of the Secretary, likely to further the objectives of the Medicaid Act. 42 U.S.C. § 1315(a)

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(emphasis added). In applying this section, Beno stated that the Secretary must determine

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“that the project has a research or demonstration value” and that “the proposed project”

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is likely to promote the objectives of the Act. 30 F.3d at 1069 (emphasis added).

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Beno also presented different facts than those presented here. Beno dealt with the

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Secretary’s grant of a waiver allowing California to reduce its statewide benefits to

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families with dependent children below statutorily-required levels as part of a purportedly

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experimental “work incentive” project.

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Secretary had considered whether the benefits cut served an experimental purpose and

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furthered the objectives of the Medicaid Act. Id. at 1073-76. But in Beno, California had

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hypothesized that the benefits cut would create work incentives – the purported purpose

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of the demonstration. Id. at 1060-61. Thus, the cut itself was integral to the project’s

Id. at 1060, 1061.

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The court asked if the

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experimental purpose. The benefits cut also applied to California residents who had a

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statutory right to greater benefits absent the Secretary’s waiver. Id. at 1061. Thus, the

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issue presented in Beno was the lawfulness of the Secretary’s waiver, for experimental

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purposes, of a discrete statutory provision mandating a minimum level of coverage. Id.

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It was in this context that Beno focused on the benefits cut in particular.

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In this case, the state has no obligation to provide benefits to expansion

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populations, and the Medicaid Act’s limitations on copayments do not apply to the

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childless adult population. Spry, 487 F.3d at 1276; Newton-Nations, 660 F.3d at 379-80.

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The relevant “waiver” allows the State to receive federal funds for extending benefits to a

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population which otherwise would not qualify for federal reimbursement. See Spry, 497

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F.3d at 1277.4 The imposition of copayments on the expansion population may be

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relevant or even central to the Secretary’s consideration of the experimental purpose of

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the demonstration project and of its overall effectiveness in furthering the objectives of

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the Medicaid Act, but nothing in Newton-Nations, Beno, or the language of Section 1115

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persuades the Court that compliance with Section 1115 must be found in the copayments

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alone rather than the demonstration project as a whole.

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A.

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Congress enacted Section 1115 of the Social Security Act to ensure that certain of

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the Act’s otherwise mandatory requirements did not “stand in the way of experimental

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projects designed to test out new ideas and ways of dealing with the problems of public

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welfare recipients.” S. Rep. No. 1589, 87th Cong., 2d Sess. 20, reprinted in 1962

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U.S.C.C.A.N. 1943, 1961, cited in Beno, 30 F.3d at 1069. Thus, approval for a project

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under this provision requires the Secretary to “make some judgment that the project has a

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research or a demonstration value.” Beno, 30 F.3d at 1069. The Ninth Circuit has

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Is the Project an Experimental, Demonstration, or Pilot Project?

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This waiver has also been referred to as the Secretary’s “expenditure authority”
under Section 1115, as distinguished from the Secretary’s “waiver authority” under that
section with regard to other substantive provisions of the Medicaid Act. Doc. 30 at 5-6;
see, e.g., AR 5020 (referring to expansion populations previously made eligible for
coverage “through section 1115 expenditure authority.”).

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explained that a simple benefits cut unconnected to a research or experimental goal does

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not satisfy this requirement. Id. Instead, the Secretary “must make at least some inquiry

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into the merits of the experiment – she must determine that the project is likely to yield

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useful information or demonstrate a novel approach to program administration.” Id.

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The Secretary argues that she easily met this burden when granting approval to

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Arizona’s demonstration project because she identified four elements of the project that

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would be tested with respect to the effects of copayments on the state’s childless adult

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population. Doc. 30 at 19-20. These include:

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1. Utilization of needed preventative, primary care, and
treatment services;

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2. Appropriate utilization of emergency room care, and
appropriate cost and clinically effective use of generic and
brand name drugs;

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3. State and Federal expenditures (per enrollee) in the short
and long term; and

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4. Physician participation, including physician willingness to
accept appointments from the adults without dependent
children population.”

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Doc. 32-1 at 10, AR 000008; see Doc. 30 at 19. 5

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The Special Terms and Conditions (“STCs”) included with the Secretary’s

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approval letter further designate that Arizona must conduct an evaluation of the cost-

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The Program Overview included in the Special Terms and Conditions of
AHCCCS suggests that the demonstration project approved in this case has a broader
experimental or demonstration purpose than simply testing the copayment-related factors
the Secretary identifies. It states that all of AHCCCS was approved as a demonstration
project that “provides health care services through a prepaid, capitated managed care
delivery model that operates statewide for both Medicaid State plan groups as well as
Demonstration expansion groups.” AR 000008. For Medicaid-eligible groups, the
project requires enrollment in the managed care system and thereby tests “the use of
managed care entities to provide cost effective care and coordination.” Id. By
additionally covering expansion groups – including childless adults – for whom the state
would not otherwise receive Medicaid assistance, the project also tests “the benefits of
providing [the managed care approach] to a wider population.” Id. The specific tests to
which the Secretary points are said to be “in addition” to these demonstration purposes.
Id. Because the Secretary points only to the experimental or demonstration purposes
identified with respect to the copayments and other cost-sharing provisions, however, the
Court will focus its discussion of the project’s demonstration purposes on these factors.

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sharing provisions of the project – including copayments for medical services and for taxi

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rides in Maricopa and Pima County for non-emergency medical transportation – in order

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to test the following hypotheses:

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i. How will utilization of needed preventive, primary care,
and treatment services be affected;
ii. To what extent will the imposition of the pharmacy copayments and copayments related to non-emergent [sic] use
of emergency rooms ensure appropriate utilization of
emergency room care and appropriate utilization of cost and
clinically effective generic and brand name drugs; and
iii. Will the mandatory co-payments affect State and federal
expenditures (per enrollee) in the short and long term; and

11

iv. Will there be an impact on physician participation, or
physician willingness to accept appointments from the adults
without dependent children population.

12

AR 000018, 000032. In addition to evaluating the copayments on the basis of these

13

inquiries, the state was required to make a number of findings related to the program’s

14

permissible provider fee for missed appointments, such as whether the missed

15

appointment fees reduced the number of missed appointments and whether missed

16

appointments varied by provider type or region of the state. AR 000033.

17

The statements in the Secretary’s approval letter and the requirements set forth in

18

the STCs amply demonstrate that the Secretary made at least “some judgment that the

19

project has a research or a demonstration value.” Beno, 30 F.3d at 1069. The Secretary’s

20

finding that the project met this requirement may yet be “arbitrary and capricious,”

21

however, if the Secretary “entirely failed to consider an important aspect of the problem,

22

offered an explanation for [her] decision that runs counter to the evidence before the

23

agency, or is so implausible that it could not be ascribed to a difference in view or the

24

product of agency expertise.” O’Keeffe’s, Inc., 92 F.3d at 942.

25

Plaintiffs argue that the Secretary failed to consider or address substantial

26

evidence showing that none of the project’s identified hypotheses tests anything new for

27

demonstration purposes. Doc. 76 at 17-22. Plaintiffs rely principally on a 2008 Second

28

Declaration of Dr. Leighton Ku (“Ku Declaration”), first submitted in Newton-Nations, in
- 13 -

1

which Dr. Ku – Plaintiffs’ expert on Medicaid and cost sharing – opined that numerous

2

studies have looked at the effects of cost-sharing on the poor over the past 35 years, with

3

the effects of copayments being “the most heavily studied[.]” AR 003315, ¶ 9. Based on

4

his review of “ample research about the effects of copayments in Medicaid[,]” Dr. Ku

5

opined that he was “not aware of any ‘unique or untested’ aspect of cost-sharing or

6

copayments that would be examined under this project[.]” AR 003322, ¶ 24. Plaintiffs

7

argue that Dr. Ku’s Declaration applies equally to the copayments at issue in this case

8

because they are the same copayments as approved in 2003. Doc. 76 at 21. Plaintiffs

9

submitted Dr. Ku’s opinion to DHHS in April of 2011 as part of their objection to

10

AHCCCS’s request for approval of the new demonstration project. Plaintiffs argue that

11

nothing in the administrative record shows that the Secretary considered Dr. Ku’s opinion

12

when granting approval to the demonstration project or that she relied on other expert

13

opinions that disagreed with Dr. Ku when she made her decision. Id., at 17-21.

14

The Secretary argues that the Ku Declaration is irrelevant because it predates her

15

approval of the challenged demonstration project by three years and applies to an earlier

16

decision in which the research value of the demonstration project had not been discussed.

17

Doc. 30 at 20-21. The Secretary also argues that the Ku Declaration does not refute the

18

research value of the current demonstration project because Dr. Ku’s opinion is limited to

19

the general topic of the effect of copayments on low-income populations, and the current

20

project’s research aims are more targeted, including whether charging different

21

copayments for generic and non-generic drugs or for doctor’s office visits and non-

22

emergency use of emergency room care will direct low income populations to more cost-

23

and clinically-effective uses of prescription drugs and medical services. Id. at 20.

24

The Court is not persuaded that the fact that the Ku Declaration relates to the 2003

25

copayments rather than the specific demonstration project at issue here makes it

26

irrelevant to whether the Secretary “failed to address an important aspect of the problem”

27

or “offered an explanation for [her] decision that runs counter to the evidence before the

28

agency[.]” O’Keeffe’s, Inc., 92 F.3d at 942. Plaintiffs submitted the Ku Declaration to
- 14 -

1

DHHS as part of the administrative process and as evidence that studying the effects of

2

copayments on the childless adult population would not produce any new information.

3

Plaintiffs’ administrative submission related to an important aspect of the Secretary’s

4

required analysis, namely, whether the project was approved for a demonstration or

5

experimental purpose. As the following discussion demonstrates, the Secretary was

6

required to address Plaintiffs’ submission and their contention that the opinion of Dr. Ku

7

regarding the lack of experimental value of testing the 2003 copayments also applied in

8

this case.6

9

In Beno, the Ninth Circuit found that evidence that the Department had put a good

10

deal of thought into the research component of the project at issue was not sufficient to

11

show that the Secretary had considered all relevant issues where the record contained no

12

evidence that the Secretary or the State of California had considered or responded to the

13

substance of the plaintiffs’ administrative objections. 30 F.3d at 1075. The Ninth Circuit

14

distinguished Aguayo v. Richardson, 473 F.2d 1090, 1106 (2d. Cir. 1973), in which the

15

Secretary sought additional information from the state in response to the plaintiffs’

16

objections and provided a state memorandum addressing the plaintiffs’ concerns. 30 F.

17

3d at 1074. Beno found that “[t]he instant case contains no such memoranda, no request

18

for additional information related to the project’s impact on recipients, no statement

19

explaining the need for a statewide benefits cut, and no indication that the Secretary had

20

any information refuting plaintiffs’ substantial documentary evidence[.]” Id.

21

Here, as in Beno, the record contains no evidence that the Secretary considered or

22

responded to Plaintiffs’ substantive objections during the administrative process. The

23

Secretary points to two statements in the record from healthcare providers expressing

24
25
26
27
28

6

Plaintiffs submitted to the Court two supplemental declarations of Dr. Ku that
contained similar objections regarding the Secretary’s October 21, 2011 approval of
Arizona’s Section 1115 demonstration project and responding to the declaration of
Victoria Wachino (Doc. 89) that the Secretary submitted in response. Docs. 51, 72.
Because these declarations post-date the Secretary’s decision and are not part of the
administrative record, the Court will not address them.

- 15 -

1

support for the implementation of the proposed copayments (AR 003266, 003912), but

2

these statements do not relate to the objections made by Plaintiffs and therefore provide

3

no evidence that the Secretary considered these objections. “[A] court should not infer

4

that an agency considered an issue merely because it was raised, where there is no

5

indication that the agency or other proponents refuted the issue.” Beno, 30 F. 3d at 1074-

6

75; see National Wildlife Fed'n v. FERC, 801 F.2d 1505, 1512 (9th Cir.1986) (vacating

7

and remanding for further consideration of petitioners’ objections where the agency

8

“simply did not mention the extensive and uncontradicted evidence offered by

9

petitioners” or explain its rejection of the options they proposed).

10

As evidence that she considered the relevant factors bearing on the project’s

11

demonstration purpose, the Secretary cites the Declaration of Victoria Wachino, Director

12

of the Children and Adults Health Programs Group at the Centers for Medicare &

13

Medicaid Services (CMS) within DHHS.

14

responsible for overseeing and supervising the Division of State Demonstrations and

15

Waivers, which analyzes and processes state Section 1115 applications, and she was

16

involved in approving Arizona’s demonstration project. Doc. 66-1, ¶¶ 1-2, 5. Director

17

Wachino affirms Dr. Ku’s opinion that cost-sharing has been extensively researched, but

18

states that “[c]ontrary to Dr. Ku’s belief, CMS believes that the hypotheses outlined in

19

the New Demonstration with respect to cost sharing may address existing gaps in or

20

otherwise strengthen the research literature and will render information useful in crafting

21

future public policy.” Doc. 66-1, ¶¶ 12, 14. The Wachino Declaration additionally cites

22

to the opinions of other experts lending support to the conclusion that Arizona’s

23

demonstration project will yield useful information related to the use of copayments that

24

has not previously been studied. Id., ¶¶ 15-16, 18-19.

Doc. 89 at 6-7.

Director Wachino is

25

The Secretary argues that the Court may consider Director Wachino’s declaration

26

even though it is not part of the administrative record because it explains the Secretary’s

27

decision. Doc. 89 at 7, n. 3. But even if the Wachino Declaration refutes the objections

28

raised by Plaintiffs, Director Wachino does not assert that the Secretary responded to
- 16 -

1

plaintiffs’ objections during the administrative process or that the findings put forth in her

2

Declaration entered into the agency’s analysis prior to the Secretary’s approval decision

3

on October 21, 2011.

4

Additionally, even if the Court were to find, as the Secretary argues, that the

5

research aims of the current demonstration project are sufficiently targeted to produce

6

useful information not already available from the body of research reviewed by Dr. Ku,

7

this is not for the Court to decide. “The APA does not give this court power ‘to substitute

8

its judgment for that of the agency’ but only to ‘consider whether the decision was based

9

on a consideration of the relevant factors and whether there has been a clear error of

10

judgment.’” Beno, 30 F.3d at 1073 (citing Citizens to Preserve Overton Park, Inc. v.

11

Volpe, 401 U.S. 402, 416 (1971)).

12

The Secretary correctly maintains that “[w]hen specialists express conflicting

13

views, an agency must have discretion to rely on the reasonable opinions of its own

14

qualified experts even if, as an original matter, a court might find contrary views more

15

persuasive.” Doc. 31 at 22 (quoting Marsh v. Or. Nat. Res. Council, 490 U.S. 360, 378

16

(1989)). But the Secretary has not pointed to any expert opinion or evidence in the

17

administrative record that refutes the objections put forth by Plaintiffs on the basis of Dr.

18

Ku’s research. The Wachino Declaration may show after-the-fact that the Secretary’s

19

differing opinion is not “so implausible that it could not be ascribed to a difference in

20

view or the product of agency expertise” (O’Keeffe’s, Inc., 92 F.3d at 942), but the Court

21

“may not consider reasons for agency action which were not before the agency.” Beno,

22

30 F.3d at 1073 (citing Bowen v. American Hosp. Ass'n, 476 U.S. 610, 627 (1986)). As

23

discussed above, Director Wachino does not assert that the arguments and opinions she

24

presents in her Declaration were considered by DHHS during the administrative process

25

or that the agency relied on them when making its decision. Although “the court will

26

uphold a decision of less than ideal clarity if the agency’s path may reasonably be

27

discerned” River Runner for Wilderness, 593 F.3d at 1078 (internal quotation and

28

brackets omitted), the record must be sufficient “to show that the agency has reviewed
- 17 -

1

the relevant factors.” Beno, 30 F.3d at 1073 (citing Florida Power & Light Co. v. Lorion,

2

470 U.S. 729, 744 (1985)). Here, the administrative record provides no evidence that the

3

Secretary considered plaintiffs’ objections during the administrative process as she was

4

required to do (Beno, 30 F.3d at 1075) or that she reasonably relied on her own expertise

5

when she reached a conclusion that runs counter to the expert opinion submitted by

6

Plaintiffs.

7

B.

8

The purpose of the Medicaid Act, as previously noted, is to enable states “to

9

furnish . . . medical assistance on behalf of families with dependent children and of aged,

10

blind, or disabled individuals, whose income and resources are insufficient to meet the

11

costs of necessary medical services.” 42 U.S.C. § 1396-1. In furtherance of this purpose,

12

Section 1115 waivers allow states to extend medical assistance to expansion populations.

13

42 U.S.C. § 1315(a)(2). This includes the childless adult population at issue in this case.

Will the Project Likely Assist in Promoting the Objectives of the Act?

14

The Secretary argues that she “‘considered the impact of [Arizona’s] project on

15

the persons’ the Medicaid Act ‘was enacted to protect” as required under Ninth Circuit

16

precedent. Doc. 30 at 16 (quoting Newton-Nations, 660 F.3d at 381). As evidence that

17

she met this requirement, the Secretary points to the approval letter from CMS which

18

states:

19

Maintaining as much of the current coverage of the childless
adult population as possible is an important feature of the
Demonstration as it furthers the coverage objectives of the
Medicaid program. As such, we understand from the State
that the imposition of the mandatory copayments on this
population is necessary in order to prevent the State from
implementing alternatives such as covering this population at
a lower percentage of the Federal poverty level (FPL), a result
that would jeopardize current coverage levels or result in
diminished benefits for this population.

20
21
22
23
24
25

Doc. 39 at 16; Doc. 32-1 at 5, AR 3. The letter goes on to explain that the demonstration

26

project “is intended to increase access to care and improve quality of care for the State’s

27

population as a whole and for the expansion populations in particular.” Doc. 32-1 at 5,

28

AR 000003.
- 18 -

1

Plaintiffs argue that the Secretary improperly considered cost-savings in violation

2

of Newton-Nations and Beno (Doc. 16 at 18, 19), but these cases did not hold that the

3

Secretary could not consider cost-saving measures when determining whether to grant

4

approval to a state demonstration project. Rather, they stated that cost-savings do not

5

satisfy the requirement that the project be for an experimental purpose. See Newton-

6

Nations, 660 F.3d at 380; Beno, 30 F.3d at 1071 (finding that “a simple benefits cut,

7

which might save money, but has no research or experimental goal, would not satisfy this

8

requirement [that the project has a research or demonstration value.]”) Here, the cost-

9

saving measures are identified as a means to continue providing medical benefits that the

10

state would otherwise have to cut due to budgetary concerns. See Doc. 32-1 at 5; AR

11

000003. This is relevant to whether the project as a whole furthers the goals of the

12

Medicaid Act.

13

Plaintiffs ask the Court to take judicial notice of a June 2012 report from

14

AHCCCS to the Arizona State Legislature showing that AHCCCS had a budget surplus

15

of $167 million for fiscal year 2012 as evidence that the heightened and mandatory

16

copayments were not needed for Arizona to continue offering medical coverage to the

17

childless adult population.7 Doc. 77. This evidence is irrelevant to the Secretary’s

18

decision to approve the copayments in October 2011 because it predates that decision by

19

eight months and was not part of the information before the agency at the time of the

20

Secretary’s decision. As Plaintiffs note, the record contains a March 31, 2011 letter from

21

the Governor of Arizona stating that despite deep budget cuts in almost every other area,

22

the State’s Medicaid expenditures had increased by 65 percent over the past four years

23
24
25
26
27
28

7

In response, Defendant Betlach requests judicial notice of documents showing
that as of May 5, 2012, AHCCCS was running a projected deficit of more than $167
million, and that the problem was remedied by a number of factors, including
supplemental appropriations of the state legislature, changes in enrollment trends, delays
in CMS approval of certain programs, and the receipt of tobacco settlement funds.
Doc. 80 at 2. Director Betlach also points to A.R.S. § 35-190A which provides that any
agency budget surpluses revert to the general fund at the close of the fiscal year, meaning
that AHCCCS surpluses are not available to assist the childless adult population. Id. at 23.

- 19 -

1

and that changes in the program were needed “to assure its future sustainability.”

2

Doc. 71, ¶ 25; AR 004219. The Governor’s amended waiver request refers to “Arizona’s

3

unprecedented budget crisis” and explains that changes such as payment innovations are

4

needed to “allow the State to manage its Medicaid program within budgetary

5

constraints.” AR 004223.

6

The Secretary argues that in light of Arizona’s budgetary constraints, and because

7

the demonstration project provides benefits that the childless adult population would not

8

otherwise have had, it was reasonable for the Secretary to conclude that the objectives of

9

the Medicaid Act would best be served by offering continued coverage to this population

10

even if it meant imposing higher copayments. Doc. 30 at 17-18. As the Ninth Circuit

11

stated in Spry, “[p]eople in the expansion population are not made worse off by inclusion

12

in a demonstration project less favorable to them than to the categorically and medically

13

needy because, without the demonstration project, they would not be eligible for

14

Medicaid at all.” 487 F.3d at 1276. The Court agrees that the Secretary could reasonably

15

have concluded that approval of the copayments in lieu of the State’s avowed alternatives

16

would help further the purposes of the Medicaid Act.

17

As with the Secretary’s consideration of the project’s experimental or

18

demonstration purpose, however, Plaintiffs have presented evidence that the Secretary

19

failed to consider an important aspect of the problem raised by imposing the mandatory

20

copayments.

21

extensive research on cost sharing for the poor has shown that copayments are not an

22

effective Medicaid cost-saving measure for states. Doc. 76 at 18; see AR 003315, ¶ 9.

23

The research reviewed by Dr. Ku showed, in part, that the imposition of copayments for

24

preventative, primary care leads to low income beneficiaries seeking fewer essential

25

medical services and relying more on emergency room care and hospitalizations, and that

26

higher copayments for prescription drugs cause low income beneficiaries to forgo

27

essential and effective medications, leading to a higher incidence of serious medical

28

conditions such as heart attacks and strokes. Id.; see AR 003315, ¶ 10. Plaintiffs’

According to the Ku Declaration that Plaintiffs submitted to CMS,

- 20 -

1

counsel also submitted the statements of previous AHCCCS directors noting similar

2

findings and stating that cost sharing is not compatible with managed care which is

3

already designed to reduce costs and to direct participants to the most effective services.

4

Doc. 76 at 19; see AR 3351-52, 3355. Although the approval letter from CMS states that

5

the agency considered how the imposition of mandatory copayments would allow

6

Arizona to cover a higher number of individuals in the expansion population, thus

7

furthering the objectives of the Medicaid Act, the Secretary points to no evidence that the

8

agency considered the corresponding tradeoffs when evaluating the impact of the

9

copayments on those covered by the project or that it made any effort to address

10

Plaintiffs’ administrative objections that copayments are not an effective cost saving

11

measure.

12

C.

13

The Secretary argues that she only approved the copayments for a limited time,

14

ending on December 31, 2013, thus fulfilling her obligation under Section 1115(a)(2)(A)

15

to consider the extent and duration of the project. Doc. 30 at 16. Plaintiffs argue that the

16

Secretary failed to meet this obligation because she approved the demonstration project to

17

begin prior to the evaluation being in place, the approval continues beyond the projected

18

time of the proposed evaluation, and the project was approved statewide. Doc. 76 at 34.

19

Plaintiffs cite no case law showing that a demonstration project or the experimental

20

component of it must be coextensive with the proposed evaluation or that a

21

demonstration project cannot be approved statewide. In both Beno and Newton-Nations,

22

the Ninth Circuit declined to address the precise meaning of the “extent and period”

23

language of Section 1115(a)(2)(A), finding that this was not necessary in light of its

24

findings that the Secretary’s review of the first two Section 1115 requirements was

25

inadequate. See Newton-Nations, 660 F.3d at 382, n. 3 (citing Beno, 30 F.3d at 1072). In

26

the absence of any authority showing that the Secretary’s consideration of this factor was

27

in error, and in light of the statutory language that the approval be “to the extent and for

28

the period prescribed by the Secretary,” 42 U.S.C. § 1315(a)(2)(A) (emphasis added), the

Was the Project Approved for the Extent and Period Necessary?

- 21 -

1

Court is not persuaded that the Secretary’s consideration of the extent and duration of the

2

project was arbitrary and capricious.

3

D.

Summary.

4

The Court will deny the Secretary’s motion for summary judgment on Plaintiffs’

5

first claim for relief on the ground that the Secretary’s review of the first two

6

Section 1115 requirements was arbitrary and capricious.

7

IV.

Plaintiffs’ Cross Motion for Summary Judgment.

8

A.

Plaintiffs’ First Claim for Relief.

9

Plaintiffs move for summary judgment on their first claim for relief, alleging that

10

the Secretary’s approval of Arizona’s Section 1115 demonstration project was arbitrary

11

and capricious and exceeded her authority under Section 1115 and § 1396o-1. Doc. 76;

12

see Doc. 1, ¶¶ 94-97. As previously noted on the basis of Spry and Newton-Nations, the

13

nominality requirements that Plaintiffs invoke under § 1396o-1 pertain only to

14

mandatory, not expansion populations. Accordingly, only Section 1115 is applicable in

15

this case. For the reasons discussed above, the Court will grant Plaintiffs’ motion on the

16

ground that the Secretary’s review of the first two Section 1115 requirements was

17

arbitrary and capricious and will remand to the Secretary for further consideration of

18

Plaintiffs’ objections under these two factors.

19

Plaintiffs ask the Court to vacate the Copayment Rule, but as the Court previously

20

discussed in detail in its order denying Plaintiffs’ motion for a preliminary injunction, the

21

copayment provisions approved in this case are not severable from the Secretary’s

22

approval of the project as a whole and cannot be vacated separately. See Doc. 88 at 6-

23

10.8 Vacating the entire demonstration project would, of course, deny Plaintiffs and the

24
25
26
27
28

8

Plaintiffs attempt to reopen this issue in their reply brief by distinguishing two of
the cases the Court cited in its prior order and relying on the Ninth Circuit’s remands of
distinct provisions in Newton-Nations and Beno to show that only the copayment
provision need be remanded or set aside. Doc. 96 at 8-12. As the Court has already
discussed in detail in this order, the circumstances leading to the Ninth Circuit’s remand
of distinct provisions in Beno and Newton-Nations do not apply here. The Court also

- 22 -

1

class the very health benefits they claim to require. A remand of the Secretary’s decision

2

without vacating the project is the clearly preferable alternative and comports with Ninth

3

Circuit precedent holding that agency action in violation of the APA can be left in place

4

during remand “when equity demands.” Idaho Farm Bureau Found. v. Babbitt, 58 F.3d

5

1392, 1395 (9th Cir. 1995); see also Allied-Signal, Inc. v. NRC, 988 F.2d 146, 151 (D.C.

6

Cir. 1993) (finding that a decision should remain in place during remand where there is

7

“a serious possibility” that the agency could remedy the alleged APA violation, and

8

“consequences of vacating may be quite disruptive.”).

9

B.

Plaintiffs’ Second Claim for Relief.

10

Plaintiffs move for summary judgment on their claim that the notices Director

11

Betlach provided regarding the increased copayments fail to comply with due process

12

requirements of the United States Constitution and Medicaid law. Doc. 76 at 34. Due

13

process and Medicaid regulations require that a beneficiary of public health benefits

14

receive written notice of the loss of benefits and the opportunity for a hearing if

15

requested. U.S. Const. Amend. XIV; Goldberg v. Kelly, 397 U.S. 254, 267-68 (1970);

16

Perry v Chen, 985 F. Supp. 1197, 1202-04 (D. Ariz. 1996). Medicaid Act regulations

17

specify that the notice must be mailed at least ten days prior to the date of the action and

18

must contain a statement of the intended action, the reasons for the action, the specific

19

regulations or change in federal or state law that require the action, and an explanation of

20
21
22
23
24
25
26
27
28

finds Plaintiffs’ attempts to distinguish cases in which courts have declined to remand
distinct provisions of agency actions unpersuasive. The legal principle relied upon by
those cases and this Court is clear – where there is “substantial doubt” that the agency
would have approved the project without the challenged provision, the challenged
provision cannot be severed and invalidated on its own. North Carolina v. FERC, 730
F.2d 790, 795-96 (D.C. Cir. 1984). Plaintiffs argue that the Secretary’s statements in the
record that rejecting the copayments as part of the overall plan could result in loss of
coverage or diminished benefits for Arizona’s low-income childless adult population and
that the copayments “are not viewed in isolation, but are considered in the context of the
Demonstration as a whole,” are not sufficient to show the agency’s intent to link approval
of the program to the copayments. But the record need only provide “substantial doubt”
that the agency would have approved the project without the challenged provision. North
Carolina, 730 F.2d at 795-96. As the Court fully explained in its prior order, such doubt
exists in this case. See Doc. 88 at 6-10.

- 23 -

1

the circumstances under which benefits will remain in place if a hearing is requested. 42

2

C.F.R. §§ 431.211; 231.210(a)-(c) & (e). For actions based on a change in law, the

3

notice must “state the circumstances under which a hearing will be granted.” Id. at (d).

4

“The agency need not grant a hearing if the sole issue is a Federal or State law requiring

5

an automatic change adversely affecting some or all beneficiaries.” Id. at 431.220(b).

6

Plaintiffs maintain, and Director Betlach does not dispute, that these notice

7

requirements apply to an increase in copayments because this effectively represents a

8

reduction in benefits. Doc. 76 at 35-36; see Becker v. Blum, 464 F. Supp. 152, 155-56,

9

n.5 (S.D.N.Y 1978) (requiring adequate notices under the Medicaid Act where

10

“[r]ecipients who must co-pay will be receiving 50 cents less aid for each prescription

11

than if they did not have to co-pay.”); Newton-Nations, 660 F.3d at 383 (holding that

12

constitutional and statutory due process requirements applied to AHCCCS copayment

13

notice).

14

The notice at issue in this case informs recipients that “[y]ou will have higher co-

15

payments (co-pays) for AHCCCs medical services beginning October 1, 2010 because

16

you are getting AHCCS services in the AHCCCS Care or Medical Expense Deduction

17

(MED) programs.” Doc. 73-2 at 2. It further explains

18

21

You get services through AHCCS Care because you are an
adult who is 1) not pregnant, 2) not 65 or over or 3) not
determined disabled, and you do not have an eligible deprived
child living with you. For information on who is considered a
deprived child, see Arizona Administrative Code R-22-1427.
If you meet one of the above, contact your local DES office to
ask them to review your eligibility.

22

OR

23

You get services through MED because

19
20

24
25
26

 Your income is too high for any other AHCCCS
program, and
 You have medical costs that, when subtracted from
your income, make you eligible for AHCCS.

27

Id. The notice goes on to explain that “[y]ou will have to pay higher co-pays for some

28

medical services and will need to make the co-pays in order to get the services.” Id. It
- 24 -

1

then lists the co-pays, informs recipients that they can be denied services for failure to

2

pay, lists categories of individuals, such as “children under 19” or “people determined to

3

be seriously mentally ill,” and services, such as “emergency use of an emergency room,”

4

for which copayments are not required. Id. The notices also provide the legal basis for

5

the decision, citing “AHCCS Rule A.A.C. R9-22-711(F),” and state that “[b]ecause the

6

higher copays are due to a law affecting all members in the AHCCCS Care and MED

7

programs, a hearing is not required under federal law.” Id. at 3.

8

Plaintiffs argue that the notices fail to provide sufficient information about the

9

reasons for the action for recipients to determine the accuracy of AHCCCS’s decision to

10

apply the heightened and mandatory copayments to them so that they can determine

11

whether or not to contest that decision, fail to provide information about appeal rights,

12

and fail to explain that current copayments would remain in effect during appeal.

13

Doc. 76 at 36. Plaintiffs also argue that there is no evidence that the notices were timely

14

mailed. Id. at 38-39. The Court finds that each of these arguments lacks merit.

15

1.

Adequacy of Information.

16

Plaintiffs assert that the notices fail to provide adequate information and could

17

confuse recipients about whether the copayments have been accurately applied to them

18

and whether they should contest the copayment decision. Plaintiffs argue that the notices

19

do not define “adult” and “deprived child,” fail to state where the administrative code

20

defining “deprived child” may be found, and do not explain what “income is too high for

21

any other AHCCCS program.” Doc. 76 at 36.

22

Plaintiffs seek to turn the notice requirement regarding the copayments into a

23

requirement that AHCCCS fully explain the eligibility requirements for the AHCCCS

24

programs to which the copayments apply. But the descriptions of the two groups subject

25

to copayments merely refer to assessments AHCCCS made when determining each

26

recipient’s eligibility for coverage – assessments the recipient would have been aware of

27

when he or she qualified for benefits. These assessments have not been changed by the

28

new demonstration project or the Copayment Rule, and do not have any bearing on the
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1

appropriateness of applying that rule to individuals in the two groups at issue where such

2

application was mandated by state law.

3

To the extent Plaintiffs argue that proper notice must provide sufficient

4

information for a recipient to know whether he or she can be subjected to the new rule,

5

the notice’s descriptions of the programs to which the copayments apply, coupled with its

6

enumerations of the categories of individuals and types of services that are exempt,

7

provides such information. The notice also provides the reason for the action (“due to a

8

law affecting all members in the AHCCCS Care and MED programs”) and cites its

9

statutory basis. Doc. 73-2 at 3.

10

If Plaintiffs’ objection is based, as it appears, on the fact that the notice does not

11

discuss the reasons for the change in state law or the legislative history leading up to that

12

change, Plaintiffs cite no cases dealing with benefits reductions due to changes in law

13

that require such explanations. This stands to reason because “matters of law and policy

14

are not subject to any hearing requirements under the applicable regulations.” Benton v.

15

Rhodes, 586 F.2d 1, 3 (6th Cir. 1978).

16

In short, Plaintiffs do not show that the notice failed to provide sufficient

17

information for recipients to understand the intended action, including its applicability,

18

the reasons for it, and the law upon which it was based in order to know whether to

19

contest the noticed action.

20

Plaintiffs’ cases are easily distinguishable. Rodriguez v. Chen, 985 F.Supp 1189,

21

1194-95 (D. Ariz. 1996), found that a notice pertaining to an individual’s loss of

22

AHCCCS benefits that merely explained that he was “now in a new category for his age

23

and no longer is eligible due to household excess income,” and a notice to a married

24

couple that they were ineligible for Medicaid because their “net income exceeds [the]

25

maximum allowable,” without referring to any figures to explain this income

26

determination, were too vague for the recipients to test the accuracy of these decisions.

27

Unlike Rodriguez, there is no individualized assessment at issue in this case, and the

28

notice clearly explained that the increase in copayments was the result of a state law that
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1

applied across-the-board to anyone covered by the two identified programs. Anyone

2

wishing to contest the copayments was given sufficient information to know to whom the

3

copayments applied and to verify the legal basis upon which they were imposed.

4

Rodriguez went on to determine that not all cases require financial calculations

5

and that a sample notice stating that benefits were terminated because quarterly reports

6

had not been received provided all the information a recipient would need to “ascertain

7

whether an error had been made.” Id. at 1195. The same is true here. The applicability

8

of the copayments to individual beneficiaries depends on readily verifiable facts that

9

either apply or do not apply. As explained above, the notices were not issued to inform

10

recipients of the reasons for their prior coverage determinations, but to inform them of a

11

discrete statutory change in benefits that relates to them as members of one of the two

12

identified AHCCCS programs.

13

The other cases cited by Plaintiffs deal with notice recipients’ inability to evaluate

14

the accuracy of individualized assessments, and do not involve rules that apply

15

categorically based solely on whether the recipient is or is not in a particular program.

16

See, e.g., Barnes v. Heany, 980 F.2d 572, 579 (9th Cir. 1992) (notices to custodial parents

17

informing them that they did not receive pass-through child support payments were

18

inadequate because they provided conclusory statements that “any money that was

19

collected was not current support,” without providing any information about the

20

collections from which to determine the accuracy of this statement); Cherry v.

21

Thompkins, No. C-1-94-60, 1995 WL 502403, *17 (S.D. Ohio Mar. 31, 1995) (notices of

22

termination of care that simply stated “you do not have an appropriate level of care”

23

failed to give factual detail that beneficiaries needed to determine the accuracy of their

24

terminations). These cases have no bearing here, where the notices provided the factual

25

information recipients would need to understand the applicability of and basis for the

26

copayment decision that is the subject of the notice.

27
28

2.

Rights to a Hearing.

The notice informs recipients that “[b]ecause the higher copays are due to a law
- 27 -

1

affecting all members in the AHCCCS Care and MED programs, a hearing is not

2

required under federal law.” Plaintiffs claim that this is incorrect because the copayments

3

are not due to an across-the-board program change; rather, they depend on individual

4

assessments of whether a recipient fits into the programs to which the copayments apply.

5

Doc. 76 at 37. Plaintiffs again conflate the right to challenge individual eligibility

6

assessments with the right to challenge the new demonstration program. The notices

7

were not issued to inform recipients of the reasons for their prior individualized coverage

8

determinations, but only to inform those for whom such determinations have previously

9

been made of changes to their programs. Because these changes are due to state law

10

which applies to “all members in the AHCCCS Care and MED programs,” the notices

11

correctly state that “a hearing is not required under federal law.” 42 C.F.R. § 431.220(b).

12

Plaintiffs’ cases do not require a different conclusion. In Soskin v. Reinertson, 353

13

F.3d 1242 (10th Cir. 2004), the state of Colorado passed a law to withdraw optional

14

Medicaid coverage from legal aliens. Id. at 1244. The Tenth Circuit found that the

15

notice of this change must inform affected individuals of their right to a hearing because

16

the change in law was not “the sole issue” affecting the benefits cut. Id. Rather,

17

application of the law depended on each county completing a process to ascertain which

18

legal aliens were affected by the law and which would remain eligible for benefits. The

19

notices of loss of coverage went to those who “did not provide the required verification

20

of their immigration status to complete the redetermination of eligibility.” Id. at 1258,

21

1260.

22

redetermination requirements raised a number of factual issues that necessitated the

23

opportunity for a hearing. Id. at 1263. Although Soskin supports the proposition that

24

public health recipients must be granted a right to a hearing to challenge negative

25

eligibility determinations, no negative eligibility determinations were involved in this

26

case. The notified recipients consisted solely of individuals who were already covered

27

and continued to be covered under existing AHCCCS plans. Nor was a “redetermination

28

of eligibility” required, as it was in Soskin, for the state law to take affect with respect to

The Tenth Circuit found that whether a person had complied with the

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1

those covered by the affected programs.

2

In Clause v. Smith, 519 F.Supp 829, 833 (N.D. Ind. 1981), the court found that a

3

state welfare department was required to afford hearings to individuals affected by new

4

copayment provisions under state law. But this was because the law required the welfare

5

department to exercise discretion, including whether to exempt certain individuals due to

6

undue hardship. Id. The court stated that where “no interpretation or discretion [is]

7

required of IDPW by a given state statute, IDPW could satisfy its procedural duties by

8

complying with the notice publication requirement, of 42 C.F.R. s 447.205(d), and the

9

recipient informing requirement, of 42 C.F.R. s 431.210(a), (b), and (c).” Id. Clause thus

10

supports the conclusion that where, as here, the copayment provisions enacted by state

11

law are not discretionary, but apply equally to all those participating in the identified

12

programs, no individualized hearings are required.

13

Harriman v. Dep’t of Children and Families, 867 So. 2d 1264 (Fla. App. 2004),

14

held that a recipient of Medicaid services was entitled to a hearing to determine if she

15

qualified for another Medicaid program after she was terminated from her existing

16

program because of a statutory amendment that changed the income requirements for

17

eligibility. “It [was] clear that appellant was, at least in part, challenging the termination

18

of her benefits for reasons other than the change in law automatically affecting her

19

benefits.” Id. The court found that she was entitled to a hearing “on these issues.” Id.

20

The court did not hold that she was entitled to a hearing to challenge the new income

21

requirements imposed by state law, and there was no notice issue raised with respect to

22

the changes in law.

23

determinations have been made.

Harriman does not apply here because no individualized

24

Becker v. Toia, 439 F. Supp. 324, 331 (S.D.N.Y. 1977), dealt with copayment

25

requirements that were tied to grant recalculations, and the court found that notice and a

26

hearing were required so that the recipients could challenge whether the grant

27

calculations were correct. No grant calculations are at issue here.

28

Becker v. Blum, 464 F. Supp. at 155-56, n. 5, found that hearings were required for
- 29 -

1

a statutory increase in copayments where exemptions for certain recipients required

2

making individual factual determinations, including whether medical services were

3

required to complete a course of treatment initiated prior to the copayments going into

4

effect. Id. The court reasoned that hearings were required because “this exemption could

5

produce thorny questions of fact demanding expert medical testimony on what supplies

6

or services are necessitated by a course of treatment beginning before passage of the act.”

7

Id. No such individualized factual determinations are required here.

8

Plaintiffs’ remaining cases have little or no bearing on the facts in this case. Perry

9

v. Chen, 985 F.Supp. 1197 (D. Ariz. 1996), involved three plaintiffs who qualified for

10

benefits under various AHCCCS programs. These individuals never received written

11

notice and an opportunity for a hearing regarding their plans’ verbal or telephonic

12

refusals to authorize specific medical services. Id. at 1199-1203. No change in law was

13

at issue, and the denials of coverage were unique to each individual and not based solely

14

on plan affiliation. Id.

15

Cramer v. Chiles, 33 F.Supp.2d 1342, 1052 (S.D. Fla. 1999), found that a state

16

was required to make hearings available to developmentally-disabled individuals before

17

transferring them from a Medicaid-funded care program that provided institutional care

18

to another program that provided home-based care. The court found that transfer to a

19

new program implicated the rights of the developmentally-disabled to exercise freedom

20

of choice over services.

21

AHCCCS program is at issue in this case.

22

Id. at 1352.

No such involuntary transfer to a different

Plaintiffs argue that the Copayment Rule is subject to agency discretion because it

23

does not apply to all AHCCCS recipients.

24

copayments do not apply to members of every AHCCCS program does not mean it is

25

discretionary with respect to the two covered programs, or that individual reassessments

26

are required to determine who was enrolled in these programs at the time the copayments

27

went into effect.

28

Doc. 76 at 36.

But the fact that the

Plaintiffs similarly argue that exceptions to the copayments apply, making their
- 30 -

1

application subject to factual determinations. Doc. 91 at 5. But express exceptions for

2

such things as family planning and emergency use of emergency rooms are clearly

3

identified in the notices, and they apply equally to all program members. Applying

4

blanket exceptions to a rule does not necessitate individualized hearings. “While an

5

across-the-board reduction will always raise factual questions about the effect of the

6

reduction on specific individuals, it does not create factual questions as to the reduction

7

itself.” M.R. v. Dreyfus, 767 F.Supp.2d 1149, 1167 (W.D. Wash.2011), reversed on

8

other grounds, -- F.3d --, 2012 WL 2218824 (9th Cir. 2012). Plaintiffs’ attempt to

9

bootstrap the right to hearings for individual reductions or terminations into an across-

10

the-board right to hearings is not well taken. “The limitation on the hearing requirement

11

arises out of the practical consideration that, absent some factual dispute about an

12

individual’s right to benefits, a hearing would serve little, if any purpose.” Id. at 1166.

13

Plaintiffs have failed to show that recipients of the copayment notices were

14

entitled to a hearing. The Court therefore need not address Plaintiffs’ contention that the

15

notices failed to state that prior copayment terms would remain in effect pending appeal.

16

3.

Timeliness.

17

Plaintiffs move to strike the Declaration of AHCCCS Operations Manager Diana

18

Alvarez stating that she surveyed the relevant AHCCCS contracted health plans and

19

received confirmation that each plan mailed the notices during the weeks of August 23 or

20

30, 2010, more than ten days prior to the copayments going into effect on October 1,

21

2010. Docs. 90 at 2, 91 at 7; see Doc. 84-1, ¶¶ 2-3. Plaintiffs argue that this evidence is

22

inadmissible hearsay because Ms. Alvarez does not rely on personal knowledge. Doc. 91

23

at 7. In response, Director Betlach asks to withdraw this evidence and has instead

24

provided the declarations of representatives of the eight contracted AHCCCS health plans

25

attesting to the same information provided to Ms. Alvarez and including copies in both

26

English and Spanish of the notices that were sent. Doc. 100 at 2; 11-54. The Court

27

accepts this as probative evidence that the notices were timely mailed.

28

Plaintiffs point to evidence in their supplemental statement of facts that two named
- 31 -

1

Plaintiffs never received notices. Doc. 91 at 8; see Doc. 92, ¶¶ 86-87. Plaintiffs argue

2

that they have presented admissible evidence that the copayment notices were not sent

3

timely or at all. Doc. 91 at 8. Plaintiffs’ rely on the declarations of Cynthia Roberts and

4

Flisha Mumaw that they never received written notice of the copayments. Docs. 10, ¶ 8,

5

11, ¶ 9. But as Director Betlach points out (Doc. 100 at 2), neither of these Plaintiffs

6

claims to have been enrolled in either of the two affected AHCCCS programs at the time

7

the notices were issued in 2010. Moreover, even if two members of the plaintiff class

8

failed to receive written notice of the copayments, this does not raise a genuine issue of

9

material fact in light of the uncontradicted evidence from representatives of each of the

10

AHCCCS health plans that notices were timely mailed. Doc. 100 at 11-54. Plaintiffs’

11

motion for summary judgment on their second claim for relief is denied.

12

V.

Director Betlach’s Cross-Motion on Plaintiffs’ Second Claim for Relief.

13

Director Betlach cross-moves for summary judgment on Plaintiffs’ second claim

14

for relief. Doc. 86. Director Betlach argues that there is no genuine issue of fact that any

15

member of the plaintiff class found the copayment notices confusing, and the notices

16

complied with the requirements of due process and federal law. Doc. 86 at 1. For the

17

reasons discussed in detail above, the Court agrees and will grant the cross-motion.9

18

IT IS ORDERED:

19

1.

The Secretary’s motion for summary judgment (Doc. 29), is denied.

20

2.

Plaintiffs’ cross-motion for summary judgment (Doc. 67) is granted with

21

respect to their first claim for relief and denied with respect to their second claim. The

22

Secretary’s approval of Arizona’s demonstration project on October 21, 2011 is

23

remanded without vacatur for the Secretary to address the deficiencies set forth in this

24

order. The Secretary shall complete this re-evaluation within 60 days of the date of this

25
26
27
28

9

The Court will deny Plaintiffs’ and Director Betlach’s cross motions for judicial
notice of documents pertaining to the financial state of AHCCCS. Docs. 77 and 80. As
noted above, these documents post-date the Secretary’s approval of the demonstration
project. Accordingly, the Court finds that they are not relevant to the analysis of whether
the Secretary adequately considered the information put before the agency.

- 32 -

1

order and shall provide copies of the revised analysis to the parties and the Court. Within

2

10 days of receiving the revised analysis, the parties shall place a joint conference call to

3

the Court to discuss what, if any, additional action is required in this case.

4
5
6
7

3.

Director Betlach’s cross-motion for summary judgment on Plaintiffs’

second claim for relief (Doc. 85) is granted.
4.

Plaintiffs’ motion for judicial notice (Doc. 77) and Director Betlach’s

cross-motion for judicial notice (Doc. 80) are denied.

8

5.

9

denied as moot.

10

Plaintiffs’ motion to strike the declaration of Diana Alvarez (Doc. 90) is

Dated this 6th day of February, 2013.

11
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13
14
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16
17
18
19
20
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22
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27
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