Asante et al v. California Department of Health Care Services et al

Filing 65

ORDER by Judge Edward M. Chen Granting #39 Plaintiffs' Motion for Partial Summary Judgment; and Granting in Part #51 Defendant's Motion for Summary Judgment. (emcsec, COURT STAFF) (Filed on 12/21/2015)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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Plaintiffs,

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v.

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Case No. 14-cv-03226-EMC

ASANTE, et al.,

CALIFORNIA DEPARTMENT OF
HEALTH CARE SERVICES, et al.,

Docket Nos. 39, 51

Defendants.
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For the Northern District of California

United States District Court

ORDER (1) GRANTING PLAINTIFFS’
MOTION FOR PARTIAL SUMMARY
JUDGMENT; (2) GRANTING IN PART
DEFENDANT’S MOTION FOR
SUMMARY JUDGMENT

Nineteen hospitals from Oregon, Nevada, and Arizona challenge California‘s Medi-Cal

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reimbursement policies for out-of-state hospitals. Compl. ¶ 1. Plaintiffs filed this action against

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California‘s Department of Health Care Services in June 2014. Docket No. 1 (―Compl.‖). Toby

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Douglas, Director of the California Department of Health Care Services, removed this action to

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federal court. Docket No. 1 (Not. of Removal). Plaintiffs bring the following causes of action: (1)

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violation of the Commerce Clause, Article I, Section 8, Clause 3 of the United States Constitution;

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(2) violation of the Equal Protection Clause under the Fourteenth Amendment to the United States

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Constitution; (3) violation of the Equal Protection Clause of the California Constitution; (4)

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violation of federal laws governing Medi-Cal DSH payments (42 U.S.C. § 1396a(a)(13)(A)); and

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(5) violation of federal laws governing Medi-Cal payments to out-of-state hospitals. (42 U.S.C. §

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1396a(a)(16) and 42 C.F.R. § 431.52). Plaintiffs seek a declaration that the Department violates

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these provisions and an injunction enjoining the Department from enforcing the law.
I.

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A.

FACTS AND PROCEDURAL HISTORY

The Federal Medicaid Program
Medicaid is a joint federal-state program that provides for the payment of medical services

pursuant to the Medicaid Act to the poor, elderly, and disabled. 42 U.S.C. § 1396 et seq. States

Health and Human Services (―HHS‖) for approval. The State Plan describes the policy and

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methods used to set payment rates for each type of service included in the program. See, e.g.,

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Wilder v. Virginia Hosp. Ass’n, 496 U.S. 498, 502 (1990). The Centers for Medicare and

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Medicaid Services (―CMS‖) administers the Medicaid Program on the Secretary‘s behalf,

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including approving State Plans and State Plan Amendments. Pharm. Research & Mfrs. of Am. v.

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Walsh, 538 U.S. 644, 650, n.3 (2003); 42 C.F.R. §§ 430.10, 430.15(b). A state may change its

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plan by obtaining approval of a State Plan Amendment (―SPA‖) from CMS. The amendment

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must meet federal requirements. 42 U.S.C. §§ 1396a(b); 42 C.F.R. §§ 430.10, 430.12. The CMS

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reviews a state‘s State Plan and State Plan Amendments to determine whether they comply with

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the statutory and regulatory requirements governing the Medicaid Program. Douglas v. Indep.

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For the Northern District of California

that choose to participate in Medicaid must submit a State Plan to the United States Department of

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United States District Court

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Living Ctr. of S. Cal., Inc., 132 S. Ct. 1204 , 1208 (2012). If the CMS determines that a state is

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out of compliance with either the State Plan or the Medicaid Act, it may withhold federal funds.

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42 C.F.R. §§ 430.15, 430.18, 430.35.

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B.

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The California Medi-Cal Program
Medi-Cal is California‘s state Medicaid healthcare program. Cal. Welf. Inst. Code §§

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14000 et seq. California‘s Department of Health Care Services (―Department‖) is the single state

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agency responsible for the administration of Medi-Cal. Cal. Welf. Inst. Code § 10740. California

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has an extensive regulatory framework for the setting of reimbursement rates. See e.g., Cal. Welf.

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Inst. Code §§ 14075, 14079, 14105. California‘s State Plan sets forth the standards and methods

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for reimbursement rates paid to Medi-Cal providers for Medi-Cal covered services. The United

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States makes contributions to a state‘s program provided the State Plan is consistent with the

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applicable Medicaid Act provisions. 42 C.F.R. § 430.35.

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Medi-Cal is required to provide acute inpatient services that are not available in California

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pursuant to part 431.52(b) of Title 42 of the Code of Federal Regulations.1 See Reimbursement to

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The Code of Federal Regulations states:
(b) Payment for services. A State plan must provide that the State
will pay for services furnished in another State to the same extent
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General Acute Care Hospitals For Acute Inpatient Services. D‘S RJN, Ex. B, State Plan

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Amendment (SPA) 13-004, approved by CMS on May 31, 2013, Attachment 4.19-A at 17.52.

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that it would pay for services furnished within its boundaries if the
services are furnished to a beneficiary who is a resident of the State,
and any of the following conditions is met:

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(1) Medical services are needed because of a medical emergency;

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(2) Medical services are needed and the beneficiary‘s health would
be endangered if he were required to travel to his State of residence;

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(4) It is general practice for beneficiaries in a particular locality to
use medical resources in another State.

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For the Northern District of California

United States District Court

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(3) The State determines, on the basis of medical advice, that the
needed medical services, or necessary supplementary resources, are
more readily available in the other State;

42 C.F.R. § 431.52(b).

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The Secretary adopted the regulation 42 C.F.R. § 431.52(b) to implement 42 U.S.C. §
1396a(a)(16). Section 1396a(a)(16) addresses services for beneficiaries who are absent from their
home state. Under section 1396a(a)(16), a State plan must:

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(16) provide for inclusion, to the extent required by regulations
prescribed by the Secretary, of provisions (conforming to such
regulations) with respect to the furnishing of medical assistance
under the plan to individuals who are residents of the State but are
absent therefrom.

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42 U.S.C. § 1396a(a)(16).

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In the course of other litigation, the Secretary of Health and Human Services has
interpreted 42 U.S.C. § 1396(a)(16) and the implementing regulation at 42 C.F.R. § 431. 52 to be:

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directed only at coverage services provided to recipients outside of
their home State, not at ensuring that a certain payment level is
achieved for providers. Thus, the Secretary interprets the language
in Section 431.52, which requires that a State plan ―pay for services
furnished in another State to the same extent that it would pay for
services furnished within its boundaries[,]‖ to mean that, if the State
plan covers, for example, a heart transplant for a particular recipient
if provided in the State, it also must cover a heart transplant to the
recipient when he or she is out of the State.
D‘S RJN, Ex. I at 19-20. Plaintiffs do not base any substantive claim on 42 C.F.R. § 431.52(b),
presumably because the Secretary has assumed it is directed only at coverage and not at ensuring
that the states achieve certain payment levels when reimbursing out-of-state hospitals. See Brief
of the United States as Amicus Curiae at 19-20, Children’s Hosp. and Health Center v. Belshe,
No. C 95-1076 (N.D. Cal. March 1, 1995).
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Title 42, Code of Federal Regulations, Section 431.52(b)(4), and title 22 California Code of

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Regulations, Section 51006, subdivision (a)(4)2 recognize that it may be a common practice for

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Medi-Cal recipients in some areas of California to obtain medical services in adjacent areas in the

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states of Oregon, Nevada, and Arizona. California Regulatory Notice Register 2015, Number 25-

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Z, published June 19, 2015. D‘s RJN, Ex. B at 1007. In addition, in 2009, California amended

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Section 51543 of Title 22 of the California Code of Regulations. Section 51543 states:

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Out-of-state hospital inpatient services which have been certified for
payment at the acute level and which are either of an emergency
nature or for which prior Medi-Cal authorization has been obtained,
shall be reimbursed the current statewide per diem average of
contract rates for acute inpatient hospital services provided by
California hospitals with at least 300 beds or the out-of-state
hospital‘s actual billed charges, whichever is less.

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For the Northern District of California

United States District Court

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Cal. Code Regs. tit. 22, § 51543
According to information published by the federal Medicare Program, there are over 3,000
hospitals across the country that may occasionally render services to a Medi-Cal beneficiary and

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The California Code of Regulations states:

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(a) Necessary out-of-state medical care, within the limits of the
program, is covered only under the following conditions:

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(1) When an emergency arises from accident, injury or illness; or

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(2) Where the health of the individual would be endangered if care
and services are postponed until it is feasible that he return to
California; or

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(3) Where the health of the individual would be endangered if he
undertook travel to return to California; or
(4) When it is customary practice in border communities for
residents to use medical resources in adjacent areas outside the
State; or
(5) When an out-of-state treatment plan has been proposed by the
beneficiary‘s attending physician and the proposed plan has been
received, reviewed and authorized by the Department before the
services are provided. The Department may authorize such out-ofstate treatment plans only when the proposed treatment is not
available from resources and facilities within the State.
Cal. Code Regs. tit. 22, § 51006.
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bill the Medi-Cal program for reimbursement.3 Rowan Decl. ¶ 11. The Department claims that

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close to 3,000 out-of-state hospitals didn‘t provide any Medi-Cal covered hospital inpatient

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services to a single Medi-Cal beneficiary during state fiscal year 2013/2014.4 Rowan Decl. ¶ 11.

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During that year, the nineteen plaintiff hospitals collectively rendered 859 Medi-Cal covered

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hospital stays resulting from admissions that were paid based on the APR-DRG methodology.

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Rowan Decl. ¶ 11. Twelve other out-of-state hospitals located in Arizona, Nevada, and Oregon

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that are within 55 miles of the California border rendered 143 Medi-Cal covered hospital stays.

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Rowan Decl. ¶ 12. 155 other out-of-state hospitals, not in proximity to the California border,

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rendered 338 hospitals stays. Rowan Decl. ¶ 12. While these stays represent only a small

state fiscal year 2013/2014, the amount of reimbursement at stake is not insignificant. For

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For the Northern District of California

percentage of all Medi-Cal covered admissions paid under the APR-DRG methodology during

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United States District Court

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example, Renown Regional Medical Center Nevada Uncompensated Care Report (FY 30, 2013)

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states that the hospital‘s inpatient out-of-state Medicaid cost of care was $11,444,335; total

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outpatient out-of- state Medicaid cost of care was $1,385,992; total inpatient dual eligible

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Medicaid cost of care was $12, 710,938. Docket No. 55, Exhibit 2 at 161. The report does not

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break down these numbers by state. However, the Department estimates that the 15-020

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Amendment will increase Medi-Cal out-of-state expenditures by $1.4 million per year. D‘s RJN,

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Ex. C at 1007.

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1.

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On July 1, 2013, the Department implemented All Patient Refined Diagnosis Related

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APR-DRG Methodology

Group (―APR-DRG‖)5 reimbursement methodology. Compl. ¶¶ 12, 13. All hospital patients are

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According to the December 22, 2011 Medi-Cal DRG Project Analytical Dataset
Summary, Medi-Cal out-of-state hospital volumes included 2,151 stays and 1,303 days. Plaintiffs
treated 1,385 of those Medi-Cal patients, which represents 64% of all Medi-Cal patients treated at
out-of-state hospitals. P‘s MSJ, Ex. 2; Johnson Decl. Ex. 1 at 155-64, Table 3.8.2.
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Fiscal year 2013/2014 covered hospital admission dates during the period July 1, 2013
through June 30, 2014. Rowan Decl. ¶ 11.
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The APR-DRG methodology does not apply to psychiatric hospitals and units,
rehabilitation hospitals and rehabilitation stays in general acute care hospitals, Indian Health
Service hospitals, swing-bed days, administrative days, and 21 designated public hospitals.
Rowan Decl. ¶ 4.
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categorized into APR-DRGs. Rowan Decl.6 ¶ 4 (Docket No. 51-3). Under the ARP-DRG

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methodology, the rate paid for Medi-Cal covered hospital in-patient stays is based in part on the

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All Patient Refined Diagnosis Related Group that a Medi-Cal patient is assigned to based on his or

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her diagnoses and other factors such as procedure codes, age, gender, admission date, and

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discharge date. Id. at ¶ 5. Each APR-DRG is assigned a numerical weight that reflects the typical

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hospital resources needed to care for the patient relative to the hospital resources needed to care

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for the average patient who is assigned an APR-DRG weight of 1.0. Vaida Decl.7 ¶¶ 5, 8. (Docket

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No. 39-1). Thus, a patient who consumes 5 times the hospital resources needed to care for an

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average patient would be assigned an APR-DRG weight of 5.0. Id.

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The Department‘s methodology for calculating a hospital‘s reimbursement for a particular
patient is equal to the ARP-DRG weight of that patient times the hospital‘s ―base price‖ times

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For the Northern District of California

United States District Court

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―policy adjustors.‖ Id. For the base price, the Department uses either a ―Statewide Base Price‖ or

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a ―Remote Rural Base Price‖ to establish the rates for all hospitals, except hospitals paid based on

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a transitional base price (an incremental change in base price). Rowan Decl. ¶ 6. The current

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Statewide base price is $6,289 and the current Remote Rural base price is $12,768. Id. at ¶ 6.

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For in-state hospitals, the Department adjusts the labor component of the ―base price‖ of

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each California hospital by the highest of the following Medicare wage indices: (1) the Medicare

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wage index for the geographical area in which the hospital is located; (2) the California rural floor

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wage index; or, (3) the wage index for the area in which the hospital has been reclassified by

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Medicare. Vaida Decl. ¶ 10. The State Plan 13-020 provides that a uniform wage index 1.0

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applies to all out-of-state hospitals, which means that the base price for an out-of-state hospital is

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not adjusted upward or downward. Rowan Decl. ¶ 8. In 2013, ―18 of the 19 [out-of-state

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hospital] plaintiffs . . . had a wage index that was greater than 1.0.‖ Vaida Decl. ¶ 12. According

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to the Complaint, ―[a] California hospital with a wage index of 1.5 would have its ‗base price‘

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Chief of the Diagnosis Related Group (DRG) section of the Safety Net Financing
Division, Department of Health Care Services. Rowan Decl. ¶ 1.
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Plaintiffs‘ expert in the area of health care reimbursement and health care statistics.
Vaida Decl. ¶ 2.
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increased by $2,141 ($6,223 times 68.8% times 0.5), or from $6,223 to $8,364.‖ Compl. ¶ 16.

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Thus, ―the California hospital with a wage index of 1.5 would receive 34% more per Medi-Cal

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discharge (i.e., $8,364 divided by $6,223) than an out-of-state hospital with the same wage index.‖

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Id.

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The qualifications for the higher remote rural base price are laid out in the State Plan. The

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State Plan uses the Remote Rural Base Price only for hospitals that qualify as ―remote rural.‖

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Rowan Decl. ¶ 8. California‘s rural wage index is calculated based on the wage costs of nine rural

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hospitals and then applied to 211 urban hospitals. Vaida Decl. ¶ 14. The Remote Rural Base

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Price is only available for California hospitals. Rowan Decl. ¶ 16. ―Thus, a California hospital

similarly situated would receive a ‗base price‘ of only $6,223. In this case, the California hospital

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For the Northern District of California

that is ‗remote rural‘ would receive a ‗base price‘ of $10,218, while an out-of-state hospital that is

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United States District Court

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that is deemed to be ‗remote rural‘ would receive 64% more per Medi-Cal discharge (i.e., $10,218

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divided by $6,223) than an out-of-state hospital that is similarly situated.‖8 Compl. ¶ 18.

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With the third wage adjustment, the Department permits in-state hospitals to use Medicare

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wage index reclassifications that increase their index values, but does not extend that same benefit

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to out-of-state hospitals. Vaida Decl. ¶ 17.

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According to the Complaint, the Department also applies ―policy adjustors‖ that increase

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its payments for particular services. Compl. ¶ 19. First, for stays in a neonatal intensive care unit

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(―NICU‖), California hospitals receive a 75 percent payment increase. Compl. ¶ 19. Second, the

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Department makes ―outlier payments.‖ Vaida Decl. ¶ 22. If a hospital‘s ―estimated cost‖ for

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rendering services exceeds the Medi-Cal reimbursement by certain ―thresholds,‖ the hospital is

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entitled to ―outlier‖ payments. Rowan Decl. ¶ 19. The ―estimated cost‖ is determined by

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multiplying the hospital‘s cost-to-charge ratio (CCR) by the hospital‘s charges for the admission.

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Id. The Department annually receives a cost report from each California hospital to determine a

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hospital-specific CCR. Id. The Department claims it does not have access to cost reports for out-

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of-state hospitals. Id. Thus, ―policy adjustors‖ are not available to out-of-state hospitals.

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In their calculations, Plaintiffs use the 2013 ―base price‖ of $6,223 and ―remote rural‖
price of $10,128. Compl. ¶¶ 16, 18, Vaida Decl. ¶ 11.
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According to Plaintiffs, the effect of the Department‘s reimbursement policies is even

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more pronounced when two or more of these policies are combined. For example, ―a California

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hospital with a qualifying NICU and a wage index of 1.5 would receive 235% more per Medi-Cal

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discharge than a similarly situated out-of-state hospital[].‖ Compl. ¶ 20.

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2.

Disproportional Share Hospital Payments

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Under the State Plan, Medi-Cal also makes Disproportional Share Hospital (―DSH‖)

standards under applicable federal law and the State Plan. Chao Decl.9 ¶ 3. DSH payments are

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made to eligible hospitals to compensate those which provide a disproportionate share of hospital

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services to Medicaid eligible and other low-income people that lack health insurance. Id. Federal

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law and the State Plan specify standards that a hospital must meet to be eligible for DSH

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For the Northern District of California

payments. DSH payments are supplemental payments to hospitals meeting DSH eligibility

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United States District Court

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payments. Id. ¶ 15. One requirement for DSH eligibility is that a hospital must either (a) have a

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Medicaid Inpatient Utilization Rate (MIUR) that is at least one standard deviation above the mean

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MIUR for all hospitals in the State receiving Medicaid payments, or (b) have a low income

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utilization rate (LIUR) that exceeds 25 percent. Id. Consistent with federal law and the State

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Plan, the Department performs the MIUR calculation and determination of the mean MIUR for

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hospitals ―in the State.‖ Id. The Department claims that it needs a massive amount of data to

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determine if a hospital qualifies for DSH payments. Id. For example, the Department requires

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California hospitals to perform the MIUR and LIUR calculations that include each hospital‘s

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inpatient days provided to Medicaid eligible patients of any state, total inpatient days, total Medi-

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Cal revenues received for all hospital services, cash subsidies from other government units, total

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revenues from all sources, total hospital charges for hospital inpatient services related to charity

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care, and total hospital charges for all inpatient services. Id. It has been longstanding policy in

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State Plan provisions that the Medi-Cal program makes DSH payments only to eligible California

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hospitals. Id. Thus, out-of-state hospitals have been categorically excluded from DSH payments.

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Chief of the Disproportional Share Hospital (DSH) Financing and Non-Contract Hospital
Recoupment (NHR) Section of the Safety Net Division of the Department. Chao Decl. ¶ 2.
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3.

Recently Approved State Plan Amendment 15-020

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On September 29, 2015, the Department obtained CMS approval of the new State Plan

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Amendment 15-020 (―15-020 Amendment‖). Docket No. 59 at 2 (―D‘s Reply to P‘s Opp‘n‖);

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Rowan Decl. ¶¶ 21-26; Second Supp. Rowan Decl. ¶¶ 3-4. On June 19, 2015, the Department

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published notice that it was planning to submit a State Plan Amendment to CMS with proposed

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changes to the APR-DRG policies concerning the wage index, remote rural base price, NICU

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policy adjustment, and CCR with respect to out-of-state border hospitals. Rowan Decl. ¶ 21. The

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notice stated:

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For the Northern District of California

United States District Court

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It may be common practice for Medi-Cal recipients residing in some
areas of California to obtain medical services in adjacent areas in the
states of Oregon, Nevada and/or Arizona. In recognition of the role
that border hospitals may play in providing services to those MediCal beneficiaries, the Department intends to submit a SPA to further
align payment standards applicable to California hospitals and [outof-state] border hospitals to the greatest extent reasonably
practicable.
Rowan Decl., Ex. C at 1007. (25-Z Cal. Regulatory Notice Reg. (June 19, 2015)).
The amendment defines ―border hospitals‖ as those hospitals located outside of California

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that are within 55 miles driving distance from the nearest physical location at which a road crosses

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the California border, and includes all plaintiff hospitals. Rowan Decl. ¶¶ 11, 22.

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The 15-020 Amendment provides for the following changes in the APR-DRG
methodology that impact out-of-state border hospitals:

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(1)

For California hospitals and border hospitals, the Department will apply the

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same hospital specific wage area index value that the Medicare program applies to

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that hospital, further adjusted by the California Wage Area Neutrality Adjustment

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of .9797. Rowan Decl., Ex. B at 17.49.

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(2)

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program and meets the California State Plan definition of a ―remote‖ hospital and

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complies with the State Plan non-combined license/provider number standard, it

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will qualify for the remote rural base price. Rowan Decl. ¶ 24.

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(3)

If a border hospital is defined as a rural hospital by the federal Medicare

A border hospital will qualify for the 1.75 policy adjustor for a neonate
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hospital stay if the hospital submits an application for neonatal intensive care unit

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status to California Children‘s Services. Rowan Decl. ¶ 25.

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(4)

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payments will be based on a formula using data from the Medicare average cost-to-

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charge ratios for operating and capital costs for hospitals in the state in which the

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border hospital is located. Rowan Decl. ¶ 25.

For border hospitals, the cost-to-charge ratio used to determine outlier

The effective date of these changes is July 1, 2015. Attachment 4.19-A, Docket No. 51-3

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at 112. The Amendment does not change the Department‘s policy excluding DSH payments to

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out-of-state hospitals. According to Plaintiffs, out-of-state hospitals are also excluded from the

charge ratio. Plaintiffs also complain that under the new State Plan, the ―remote rural‖ definition

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For the Northern District of California

California ―rural‖ floor wage index, Medicare wage index reclassifications, and Medicaid cost-to-

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United States District Court

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for out-of-state hospitals remains very restrictive. P‘s MSJ at14.

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C.

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The Parties
Plaintiffs are hospitals located in Oregon, Nevada, and Arizona that treat a significant

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number of Medi-Cal beneficiaries.10 They do so for two reasons. Compl. ¶ 1. First, Plaintiffs are

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the trauma facilities most conveniently available to Medi-Cal patients in Oregon, Nevada, or

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Arizona. 11 Compl. ¶ 9. As the California Court of Appeal noted in Children’s Hospital &

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Medical Center v. Bontá, 97 Cal. App. 4th 740 (Cal. App. 1st Dist. 2002):

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Plaintiff hospitals are: Asante Ashland Community Hospital in Ashland, Oregon; Asante
Rogue Regional Medical Center (Medford, Ore.); Asante Three Rivers Medical Center (Grants
Pass, Ore.); University Medical Center of Southern Nevada (Las Vegas, Nev.); Renown Regional
Medical Center (Reno, Nev.); Renown South Meadows Medical Center (Reno, Nev.); Sky Lakes
Medical Center (Klamath Falls, Ore.); Southern Hills Hospital & Medical Center (Las Vegas,
Nev.); Sunrise Hospital & Medical Center (Las Vegas, Nev.); Sunrise Mountain View Hospital
(Las Vegas, Nev.); Valley View Medical Center (Fort Mohave, Ariz.); Havasu Regional Medical
Center (Lake Havasu City, Ariz.); Centennial Hills Hospitals Medical Center (Las Vegas, Nev.);
Desert Springs Hospital (Las Vegas, Nev.); Spring Valley Hospital Medical Center (Las Vegas,
Nev.); Valley Hospital Medical Center (Las Vegas, Nev.); Northern Nevada Medical Center
(Sparks, Nev.); Summerlin Hospital Medical Center (Las Vegas, Nev.); and Yuma Regional
Medical Center (Yuma, Ariz.). Compl. ¶ 4.
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See Myron Gomez, M.D., Chief of Trauma Services at Renown Regional Medical
Center. Gomez Decl. ¶ 2.
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Unlike the vast majority of out-of-state hospitals, respondents are
located close to the California border and serve bi-state regions
encompassing large rural areas of California in which the level of
medical care immediately available is considerably lower than that
provided by respondents. [The] respondents ―provide the full
medical services needed for acute care Medi-Cal patients not just
visiting the states of Arizona, Oregon or Nevada, but also those
Californians who must avail themselves of [respondents‘ facilities]
... because they are the closest major trauma centers available to
Medi-Cal participants residing in California.‖ (original italics.) For
example, because large numbers of Medi-Cal beneficiaries residing
in California can so easily reach respondent Washoe Medical
Center, located in Reno, Nevada, it treats more Medi-Cal patients
than any other hospital in the nation located outside California.
Moreover, due to the trauma care and other forms of intensive care
respondent hospitals provide, they attract ―Medi-Cal patients who
are much sicker, and therefore require a greater expenditure of
resources and costs, than the typical in-state Medi-Cal patient.‖

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Bontá, 97 Cal. App. 4th at 760. One plaintiff, the University Medical Center of Southern Nevada,
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For the Northern District of California

United States District Court

is the only Level I trauma center within a 200 mile radius of Las Vegas, NV. Id. ¶ 10. Another
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plaintiff, the Renown Regional Medical Center, is the only Level II Trauma Center between
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Sacramento, CA, and Salt Lake City, UT. Plaintiffs serve Medi-Cal patients from far northern and
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eastern reaches of California. Id. ¶ 9. These regions do not have many large medical facilities
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providing high levels of intensive care. Id. Defendants are the Department of Health Care
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Services and Toby Douglas. Toby Douglas is sued in his official capacity as Director of the
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Department.
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II.

REQUESTS FOR JUDICIAL NOTICE

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Without opposition from Plaintiffs, the Department requested judicial notice over nine
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exhibits: (A) Excerpt from California‘s State Medicaid Plan; (B) State Plan Amendment 13-004;

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(C) California Regulatory Notice Register 2000, Number 3-Z, published June 19, 2015; (D)
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Excerpt from the California Regulatory Notice Register 2000, Number 3-Z, published January 21,
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2000; (E) Excerpt from the California Regulatory Notice Register 2000, Number 3-Z, published
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March 2, 2000; (F) May 31, 2013 approval Letter from Cindy Mann, Director of CMS, regarding
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State Plan Amendment 4.19-A; (G) December 5, 2013 approval Letter from Cindy Mann, Director
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of CMS, regarding State Plan Amendment 4.19-A; (H) Memorandum and Order, Children’s Hosp.

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and Health Ctr. v. Belshe, United States District Court, Northern District of California, Case No.
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11

1

C 95-01076 MHP, filed June 13, 2001; (I) Brief of the United States as Amicus Curiae, Children’s

2

Hosp. and Health Center v. Belshe, United States District Court, Northern District of California,

3

Case No. C 95-1076, filed March 1, 1995. Defendants‘ Request for Judicial Notice in Support of

4

Motion for Summary Judgment. (―D‘s RJN‖), Docket No. 51-1.

5

Under Federal Rule of Evidence 201, ―[a] judicially noticed fact must be one not subject to
reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the

7

trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy

8

cannot reasonably be questioned.‖ Fed. R. Evid. 201. Courts may take judicial notice of

9

―undisputed matters of public record,‖ but generally may not take judicial notice of ―disputed facts

10

stated in public records.‖ Lee v. City of Los Angeles, 250 F.3d 668, 690 (9th Cir. 2001) (emphasis

11

in original).

12
For the Northern District of California

United States District Court

6

The Court GRANTS the Department‘s request for judicial notice of Exhibits A–I. A trial

13

court can take judicial notice of public documents in connection with a motion for summary

14

judgment. Cash Inn of Dade, Inc. v. Metro. Dade Cnty, 938 F.2d 1239, 1242-43 (11th Cir. 1991).

15

First, it is appropriate to take judicial notice of California‘s State Medicaid Plan and its legislative

16

histories. See, e.g., Chaker v. Crogan, 428 F.3d 1215, 1223 n.8 (9th Cir. 2005) (granting

17

plaintiff‘s request to take judicial notice of the legislative history of a state statute). Second, it is

18

proper to take judicial notice of the court‘s own records in prior litigation related to the case before

19

it. Amphibious Partners, LLC v. Redman, 534 F.3d 1357, 1361-62 (10th Cir. 2008) (district court

20

was entitled to take judicial notice of its memorandum of order and judgment from a previous case

21

involving the same parties); United States ex rel. Robinson Rancheria Citizens Council v. Borneo,

22

Inc., 971 F.2d 244, 248 (9th Cir. 1992) (―[W]e may take notice of proceedings in other courts,

23

both within and without the federal judicial system, if those proceedings have a direct relation to

24

matters at issue.‖); see also United States v. Wilson, 631 F.2d 118 (9th Cir. 1980) (stating that a

25

court may take judicial notice of court records in another case). Notice can be taken, however,

26

―only for the limited purpose of recognizing the ‗judicial act‘ that the order represents on the

27

subject matter of the litigation.‖ United States v. Jones, 29 F.3d 1549, 1553 (11th Cir. 1994)

28

(citing Liberty Mut. Ins. Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d Cir.1992)).
12

1

See also General Electric Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1082, n.6 (7th

2

Cir. 1997) (―We agree that courts generally cannot take notice of findings of fact from other

3

proceedings for the truth [of the matter] asserted therein because these findings are disputable and

4

usually are disputed‖); San Luis v. Badgley, 136 F.Supp.2d 1136, 1146 (E.D. Cal. 2000) (quoting

5

Jones for the proposition that a court ―may take judicial notice of a document filed in another

6

court not for the truth of the matters asserted in the litigation, but rather to establish the fact of

7

such litigation and related filings‖). Applying this standard, the Court takes judicial notice of the

8

existence and legal effect of the memorandum and order in Children’s Hosp. and Health Ctr. v.

9

Belshe, United States District Court, Northern District of California, Case No. C 95-01076 MHP,

10

filed June 13, 2001.
Third, it is proper to take judicial notice of the United States‘ Amicus Curiae brief. Estate

12
For the Northern District of California

United States District Court

11

of Blue v. County of Los Angeles, 120 F.3d 982, 984 (9th Cir. 1997) (noting that a court ―may

13

properly take judicial notice of the papers filed‖ in both federal and state court proceedings). ―As

14

the brief is not a ‗fact,‘ legal or adjudicative, but only legal argument, Fed. R. Evid. 201 is not a

15

bar.‖ Natural Res. Def. Council v. Sw. Marine, Inc., 39 F. Supp. 2d 1235, 1236 n.1 (S.D. Cal.

16

1999) aff’d, 236 F.3d 985 (9th Cir. 2000) (taking judicial notice of the U.S. Government‘s amicus

17

curiae brief) . The Court takes notice of the argument contained in the amicus brief.
Finally, it is proper to take judicial notice of CMS‘s letters. Kottle v. Northwest Kidney

18
19

Centers, 146 F.3d 1056, 1064 n.7 (9th Cir. 1998) (holding that state health department records

20

were proper subjects of judicial notice); Mack v. South Bay Beer Distribs, Inc., 798 F.2d 1279,

21

1282 (9th Cir. 1986) (observing that the court may take judicial notice of the records and reports

22

of state administrative bodies), overruled on other grounds by Astoria Fed. Sav. & Loan Ass’n v.

23

Solimino, 501 U.S. 104 (1991).
III. DISCUSSION

24
25
26

A.

Legal Standard
The purpose of summary judgment is to avoid unnecessary trials when there is no dispute

27

as to the facts before the court. Zweig v. Hearst Corp., 521 F.2d 1129 (9th Cir. 1975), cert.

28

denied, 423 U.S. 1025, 96 (1975).
13

Under Federal Rule of Civil Procedure 56(a), ―[t]he court shall grant summary judgment if

1
2

the movant shows that there is no genuine dispute as to any material fact and the movant is

3

entitled to judgment as a matter of law.‖ Fed. R. Civ. P. 56(a). ―The moving party has the burden

4

of establishing the absence of a genuine dispute of material fact. The court must view the

5

evidence in the light most favorable to the non-movant and draw all reasonable inferences in the

6

non-movant‘s favor.‖ City of Pomona v. SQM N. Am. Corp., 750 F.3d 1036, 1049-50 (9th Cir.

7

2014). ―‗Where the record taken as a whole could not lead a rational trier of fact to find for the

8

nonmoving party, there is no genuine issue for trial.‘‖ Id.
Once the moving party has shown that there is an absence of evidence to support the

9

allegations in its complaint. See Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Instead, it

12
For the Northern District of California

claims of the non-moving party, the non-moving party may not simply sit back and rest on the

11

United States District Court

10

must ―go beyond the pleadings and by [its] own affidavits, or by the depositions, answers to

13

interrogatories, and admissions on file, designate specific facts showing that there is a genuine

14

issue for trial.‖ Id. (internal quotations omitted). Summary judgment should be granted where a

15

party ―fails to make a showing sufficient to establish the existence of an element essential to that

16

party‘s case, and on which that party will bear the burden at trial.‖ Id. at 322-23. On cross-

17

motions for summary judgment on the same issues, the court must ―evaluate each motion

18

separately, giving the non-moving party the benefit of all reasonable inferences.‖ Am. Civil

19

Liberties Union of Nev. v. City of Las Vegas, 333 F.3d 1092, 1097 (9th Cir. 2003).

20

B.

21

Plaintiffs‘ Statutory Claim to Disproportionate Share Payments
In order to assert claims for violations of 42 U.S.C. § 1396a(a)(13)(A), Plaintiffs must first

22

establish that the statute in question creates a private cause of action. In Cort v. Ash, 444 U.S. 66

23

(1975), the Supreme Court set out a four-factor test for determining whether a federal statute

24

implies a private right of action:

25
26
27
28

First, is the plaintiff one of the class for whose especial benefit the
statute was enacted, -- that is, does the statute create a federal right
in favor of the plaintiff? Second, is there any indication of
legislative intent, explicit or implicit, either to create such a remedy
or to deny one? Third, is it consistent with the underlying purposes
of the legislative scheme to imply such a remedy for the plaintiff?
14

And finally, is the cause of action one traditionally relegated to state
law, in an area basically the concern of the States, so that it would
be inappropriate to infer a cause of action based solely on federal
law?

1
2
3
4

Id. at 78 (citations and quotation marks omitted).
In two cases after Cort, the Supreme Court emphasized that congressional intent is the

5

primary determinant in this inquiry. See Touche Ross & Co. v. Redington, 442 U.S. 560, 575-76

6

(1979) (stating that ―[t]he central inquiry remains whether Congress intended to create, either

7

expressly or by implication, a private cause of action‖ and that the remaining three factors are

8

―traditionally relied upon in determining legislative intent.‖); Transamerica Mortgage Advisors,

9

Inc. v. Lewis, 444 U.S. 11, 24 (1979) (reiterating that ―[t]he dispositive question remains whether

inferred from the language of the statute, the statutory structure, or some other source, the essential

12
For the Northern District of California

Congress intended to create any such remedy‖). ―[U]nless this congressional intent can be

11

United States District Court

10

predicate for implication of a private remedy simply does not exist.‖ Northwest Airlines, Inc. v.

13

Transp. Workers Union of America, 451 U.S. 77, 94 (1981).12

14

As demonstrated below, with regard to DSH payments, there is no evidence that Congress

15

intended to confer enforceable rights and remedies upon health care providers under the current

16

version of 42 U.S.C. § 1396a(a)(13)(A).

17
12

18

The same analysis applies when the claim based on a statutory violation is brought under
Section 1983:

19

A court‘s role in discerning whether personal rights exist in the §
1983 context should therefore not differ from its role in discerning
whether personal rights exist in the implied right of action [under a
federal statute] context . . . . Both inquiries simply require a
determination as to whether or not Congress intended to confer
individual rights upon a class of beneficiaries.

20
21

22
23

Gonzaga Univ. v. Doe, 536 U.S. 273, 285 (2002) (citations and internal quotations omitted).

24

In Santiago ex rel. Muniz v. Hernandez, 53 F.Supp.2d 264 (E.D.N.Y.1999), the district
court explained:

25

Both tests first ask whether a plaintiff is the intended beneficiary of
a given statute. If a plaintiff fails to meet this intended beneficiary
criterion, then the plaintiff does not have a federally enforceable
right under § 1983 or a private right of action under the statute, and
there is no need to consider the remaining Blessing or Cort factors.

26
27
28

Id. at 268.
15

1

1.

2

Pursuant to 42 U.S.C. § 1396a(a)(13)(A)(2006), a state plan changing Medicaid rates must

3

Section 1396a(a)(13)(A) and Section 1396r-4

provide:

4
5
6
7
8
9
10

12
For the Northern District of California

United States District Court

11

13
14
15
16

(A) for a public process for determination of rates of payment under
the plan for hospital services, nursing facility services, and services
of intermediate care facilities for the mentally retarded under which
-(i) proposed rates, the methodologies underlying the establishment
of such rates, and justifications for the proposed rates are published,
(ii) providers, beneficiaries and their representatives, and other
concerned State residents are given a reasonable opportunity for
review and comment on the proposed rates, methodologies, and
justifications
(iii) final rates, the methodologies underlying the establishment of
such rates, and justifications for such final rates are published, and
(iv) in the case of hospitals, such rates take into account (in a
manner consistent with section 1923) the situation of hospitals
which serve a disproportionate number of low-income patients with
special needs.
42 U.S.C. § 1396a(a)(13)(A).
In addition, section r-4(c)(3)(B), entitled ―Payment adjustment,‖ provides:

17
18
19
20
21

22
23
24
25

[A] payment adjustment for a disproportionate share hospital
must . . .
(3) provide for a minimum specified additional payment amount (or
increased percentage payment) that varies according to type of
hospital under a methodology that—
(B) results in an adjustment for each type of hospital that is
reasonably related to the costs, volume, or proportion of services
provided to patients eligible for medical assistance under a State
plan approved under this subchapter or to low-income patients . . .
42 U.S.C. § 1396r–4(c)(3)(B).
By their plain language, neither Section 13(A) or 1396a(a) nor Section 1396r-4 contain

26

express rights creating language that would confer private rights of action on health care

27

providers. See Gonzaga, 536 U.S. at 287 (statutory provision fails to confer enforceable rights

28

when it ―entirely lack[s] the sort of ‗rights-creating‘ language critical to showing the requisite
16

1

Congressional intent to create new rights‖); Cannon v. Univ. of Chicago, 441 U.S. 677, 690 n.13

2

(1979) (stating that rights-creating language ―confer[s] a right directly on a class of persons that

3

include[s] the plaintiff in the case‖ rather than ―for the benefit of the public at large.‖; ASW v.

4

Oregon, 424 F.3d 970, 975 (9th Cir. 2005) (stating that ―[o]ur initial inquiry is whether the text

5

and structure of the Act contains the requisite ‗rights-creating‘ language that evinces a

6

congressional intent to confer an entitlement to individualized payment determinations.‖) (internal

7

citations omitted).

8

As a starting point, the current wording of the statute must be juxtaposed against prior

which Plaintiffs rely. Prior to 1980, states were required to reimburse hospitals ―the reasonable

11

cost[s]‖ of providing inpatient services. Folden v. Washington State Dep’t of Soc. & Health

12
For the Northern District of California

language at issue in Children’s Hosp. & Health Ctr. v. Belshe, 188 F.3d 1090 (9th Cir. 1999), on

10

United States District Court

9

Servs., 981 F.2d 1054, 1056 (9th Cir. 1992). In response to concerns that the Medicaid

13

reimbursement standard did not give enough authority to the states, Congress enacted the Boren

14

Amendment as part of the Omnibus Reconciliation Act of 1980, Pub.L. No. 96-499, § 8962(a), 94

15

Stat. 2599 (1980). The Boren Amendment provided additional payments for disproportionate

16

share hospitals. Belshe, 188 F.3d at 1093; Children’s Seashore House v. Waldman, 197 F.3d 654,

17

656 (3d Cir. 1999). Disproportionate share hospitals are those hospitals that serve a larger number

18

of Medicaid recipients and other low-income persons than other hospitals. Chao Decl. ¶ 3. The

19

Boren Amendment also gave states greater flexibility in calculating reasonable costs and in

20

containing the continuing escalation of those costs.‖ Folden, 981 F.2d at 1056. Importantly,

21

however, the Boren Amendment required that states establish payment and reimbursement rates

22

that were ―reasonable and adequate‖ to cover the costs that must be incurred by efficiently and

23

economically operated facilities. Omnibus Budget Reconciliation Act of 1980, Pub.L. No. 96-

24

499, § 962(a), 94 Stat. 2599, 2650 (1980) (codified at 42 U.S.C. § 1396a(a)(13)) (repealed 1997).

25

In 1997, Congress amended the Medicaid Act to ―eliminate the Boren Amendment and

26

establish instead a notice and comment provision.‖ Exeter Memorial Hosp. Ass’n v. Belshe, 145

27

F.3d 1106, 1108 (9th Cir.1998) (citing Balanced Budget Act of 1997, Pub.L. No. 105-33, 111 Stat.

28

251, § 4711, codified at 42 U.S.C. § 1396a(a)(13)(A)). Congress replaced ―reasonable and
17

1

adequate‖ rate requirement in the Boren Amendment with a ―public participation‖ process, which

2

requires the states to publicize their reimbursement methodologies and subject them to public

3

comment. U.S.C. § 1396a(a)(13)(A).

4

Plaintiffs urge this Court to follow the Ninth Circuit‘s decision in Belshe, 188 F.3d 1090.

5

In Belshe, the Ninth Circuit held that the Boren Amendment unambiguously applied to out-of-

6

state as well as in-state hospitals, and thus out-of-state hospitals could not be excluded from DSH

7

payments. Belshe, 188 F.3d at 1097. However, the Ninth Circuit emphasized that its holding in

8

Belshe was based on the now-repealed Boren Amendment. Id. at 1099. The Belshe court had no

9

occasion to interpret the new statutory language of the Balanced Budget Act of 1997.13

10

The question before the Court is whether the Plaintiffs still have a private right of action
under the § 1396a(a)(13)(A) as amended by the Balanced Budget Act of 1997 to challenge the

12
For the Northern District of California

United States District Court

11

Defendant‘s exclusion of out-of-state hospitals from DSH payments. The Court concludes that

13

unlike the Boren Amendment, the current statute does not confer such a private right of action.

14

In Children’s Seashore House v. Waldman, the Third Circuit squarely addressed this

15

question. The Court held Congress removed a party‘s ability to enforce any substantive rights to

16

payments when it replaced the Boren Amendment (and its ―reasonable and adequate rate‖

17

requirement) with a requirement that a state establish a public process by which its rates would be

18

determined. 197 F.3d 654, 659 (3d Cir. 1999). Specifically, the Waldman court stated that ―it is

19

clear that by amending a-13 in 1997, Congress eliminated the Boren Amendment‘s requirement

20

that a state must provide . . . ‗reasonable and adequate‘ [rates].‖ Id. at 659. By doing so Congress

21

removed ability of a disproportionate share hospital to enforce any statutory substantive right to

22

reasonable and adequate adjustment on account of treatment of Medicaid enrollees from another

23
13

24
25
26
27
28

In January 2000, the Department implemented the revised § 1396a(a)(13)(A) (amended
by the Balanced Budget Act of 1997) by publishing a notice in the California Regulatory Notice
Register about its reimbursement policy for hospital inpatient services. D‘s RJN, Ex. D. The
notice specified that ―the Department plans to continue its longstanding policy of not making DSH
payment adjustments to out-of-state hospitals for their treatment of Medi-Cal patients.‖ D‘s RJN,
Ex. D at 83. In March 2000, after providing a reasonable time for public comment and review, the
Department published a final notice in accordance with the new § 1396a(a)(13)(A). D‘s RJN, Ex.
E, Docket No. 51 at 12. The notice reiterated that the Department is not going to make DSH
payments to out-of-state hospitals. D‘s RJN, Ex. E at 520-21.
18

1

state. Id. The court explained:

2

[I]t is clear that if Congress had not repealed the Boren Amendment
in 1997, we would be bound to follow the holdings in West Virginia
v. Casey.14 But inasmuch as we based West Virginia v. Casey on
our conclusion that Pennsylvania‘s denial of adjustments to out-ofstate hospitals violated the ―reasonable and adequate‖ requirement
of a-13 as it then existed, see 885 F.2d at 29, we now must
determine whether Congress‘s removal of the ―reasonable and
adequate‖ language from a-13 requires a different result than that we
reached in West Virginia v. Casey. [W]e conclude that the repeal of
the Boren Amendment does require a result different from that in
West Virginia v. Casey.

3
4
5
6
7
8
9
10

action.
The court also held that a disproportional share hospital could not maintain an action for

12
For the Northern District of California

United States District Court

11

Id. at 656-57. The court held that the public process provision did not confer a private right of

DSH adjustments under definitional provision 42 U.S.C. § 1396r-4. Id. at 660. Section § 1396r-4

13

sets the parameters of what is a DSH, what constitutes and adequate payment adjustment, and

14

what limits are placed on federal financial participation and on state allotments for each year. Id.

15

The court explained that unless section § 1396r-4 establishes an enforceable right on its own, the

16

hospital does not have an enforceable statutory claim. ―Yet, r-4 imposes neither procedural nor

17

substantive requirements on a state that provide a basis for the [hospital] to press such claims.

18

Rather r-4 is a definitional provision that describes certain procedures that a state must satisfy,

19

such as submitting a qualified plan to the Secretary of Health and Human Services by a certain

20

date to establish an adequate state disproportionate share hospital adjustment plan.‖ Id. at 659.

21

For these reasons, the Third Circuit affirmed the district‘s court dismissal of the hospital‘s section

22

1983 statutory claim and held that the hospital cannot maintain an action to enforce the Medicaid

23

Act with respect to DSH adjustments. Id. at 660.

24
25

Although the Ninth Circuit has not ruled on the precise question here, in Alaska Dep’t of
Health & Soc. Servs. v. Centers for Medicare & Medicaid Servs., 424 F.3d 931, 941 (9th Cir.

26
14

27
28

Like Belshe, West Virginia Univ. Hosps. Inc. v. Casey, 885 F.2d 11, 17-22 (3d
Cir.1989), aff'd on other grounds, 499 U.S. 83 (1991) held that a state cannot set
disproportionately low rates for out-of-state hospital services, including DSH adjustments, merely
because the hospital is an out-of-state provider.
19

1

2005), the Ninth Circuit noted (consistent with Waldman) that in 1997, when Congress repealed

2

the Boren Amendment and replaced it with the notice and comment rulemaking requirements,

3

―Congress intended that there be no ‗cause of action for [providers] relative to the adequacy of the

4

rates they receive.‘‖ (quoting Evergreen Presbyterian Ministries Inc. v. Hood, 235 F.3d 908, 919

5

n. 12 (5th Cir. 2000) (citing H.R. No. 105-149, at 1230 (1997)). The H.R. report, cited in

6

Evergreen, stated, ―It is the Committee‘s intention that, following the enactment of the [Balanced

7

Budget Act of 1997], neither this nor any other provision of [§ 1396] will be interpreted as

8

establishing a cause of action for hospitals and nursing facilities relative to the adequacy of the

9

rates they receive.‖ Likewise in Developmental Servs. Network v. Douglas, 666 F.3d 540, 543

by limiting reimbursement rates under California‘s Medicaid program. Id. The providers argued

12
For the Northern District of California

(9th Cir. 2011), the providers claimed that the Department violated 42 U.S.C. § 1396a(a)(30)(A)

11

United States District Court

10

that the implementation of the statute was unlawful because it violated section 1396a(a)(30)(A)‘s

13

requirement that the states consider quality of care in setting Medicaid payment rates.15 Id.

14

Quoting Alaska Department of Health, 424 F.3d at 941, the court concluded that because no

15

individual right has been created for providers relative to the adequacy of the rates they receive,

16

the providers had no cause of action under § 1983. Id. at 547-48.

17

The Second and Fourth Circuits have also held that there is no private right of action after

18

the repeal of the Boren Amendment by the Budget Reconciliation Act of 1997. See e.g., New York

19

Ass’n of Homes & Servs. for the Aging, Inc. v. DeBuono, 444 F.3d 147, 148 (2d Cir. 2006)

20

(affirming the district court‘s conclusion that plaintiff-providers‘ claims, based on sections 13(A)

21

and 30(A) of the Medicaid Act, were ―unenforceable against the defendants by providers through

22

42 U.S.C. § 1983‖ and its further conclusion that ―§ 1396r does not create a federally enforceable

23

right because it was obviously intended to benefit Medicaid beneficiaries, not providers.‖); HCMF

24

Corp. v. Allen, 238 F.3d 273, 276 (4th Cir. 2001) (affirming the district‘s court conclusion in

25
26
27
28

15

Title 42, United States Code, § 1396a(a)(30)(A) provides that state plans must: ―assure
that payment are consistent with efficiency, economy, and quality of care and are sufficient to
enlist enough providers so that care and services are available under the plan at least to the extent
that such care and services are available to the general population in the geographic area . . . .‖ 42
U.S.C. § 1396a(a)(30)(A).
20

1

HCMF Corp. v. Gilmore, 26 F. Supp. 2d 873, 880 (W.D. Va. 1998) that ―[w]ith the repeal of the

2

Boren Amendment nothing remains that remotely resembles a federal right to reasonable and

3

adequate rates‖). See also In re NYAHSA Litig., 318 F.Supp.2d 30, 39-40 (N.D.N.Y. 2004) aff’d

4

sub nom. New York Ass’n of Homes & Servs. for the Aging, Inc. v. DeBuono, 444 F.3d 147 (2d

5

Cir. 2006) (stating that providers cannot use § 1983 to enforce any rights contained in §

6

1396a(a)(30)(A)). Cf. Am. Soc’y of Consultant Pharmacists v. Concannon, 214 F. Supp. 2d 23, 29

7

(D. Me. 2002) (recognizing a limited private cause of action enforceable under § 1983 for

8

violation of section 13(A)‘s guarantee of a ―reasonable opportunity to comment‖ on a change in

9

the rate of service reimbursement).
The Court finds Waldman‘s analysis persuasive and consistent with the thrust of Ninth

10

Circuit decisions which have opined on the effect of the Balanced Budget Act of 1997. Plaintiffs

12
For the Northern District of California

United States District Court

11

have failed to state a private cause of action under 42 U.S.C. §§ 1396a(a)(13)(A) and 42 U.S.C. §

13

1396r-4.16 Accordingly, the Court grants the Defendant summary judgment on Plaintiffs‘ claim

14

under § 1396a(a)(13)(A).

15

C.

16

The Dormant Commerce Clause
Plaintiffs contend that the disparity between the amounts the Department pays for Medi-

17

Cal covered hospital in-patient stays to California and out-of-state hospitals violates the

18

Commerce Clause. Compl. ¶¶ (26-29); P‘s MSJ at 16.

19

The Department argues the dormant Commerce Clause analysis does not apply here

20

because the Medicaid program is authorized by Congress. The Department bases this argument on

21

several grounds. D‘s MSJ at 14. First, Congress is spending federal funds to finance Medicaid.

22

D‘s MSJ at 15. Second, Congress provided a ―series of federal checkpoints‖ by delegating its

23

authority to the Secretary of Health and Human Services. Id; Merrion v. Jicarilla Apache Tribe,

24

455 U.S. 130 (1982). In the alternative, the Department claims that even if the payments are

25

subject to the dormant Commerce Clause analysis, the Department is exempt from Commerce

26
16

27
28

Although Plaintiffs argue they are not suing under 42 U.S.C. § 1983 to enforce §
1396a(a)(13)(A), but rather, seeking a writ of mandate under C.C.P. § 1085, they cite no authority
for the proposition that a federal court may issue a writ created by California law against the state
government, especially when based on a federal statute which contains no private right of action.
21

1

Clause restrictions because it is a market participant. D‘s MSJ at 17.

2

1.

Legal Standard

3

The Commerce Clause states that ―Congress shall have Power . . . To regulate Commerce

4

with foreign Nations, and among the several States, and with the Indian Tribes.‖ U.S. Const., art.

5

I, § 8, cl. 3. Although the Commerce Clause speaks only of Congress‘s power, it has long been

6

understood that there is a dormant or negative aspect of the Commerce Clause that limits the

7

power of the states to regulate commerce. The Commerce Clause both permits Congress to

8

regulate commerce among the States and ―also directly limits the power of the States to

9

discriminate against interstate commerce.‖ New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273

economic interests by burdening out-of-state competitors.‖ Id. Under the dormant Commerce

12
For the Northern District of California

(1988). This limitation on the states prohibits states from enacting laws that ―benefit in-state

11

United States District Court

10

Clause analysis, courts ―protect [ ] the free flow of commerce, and thereby safeguard[ ] Congress‘

13

latent power from encroachment by the several States[ ]‖ when Congress has not affirmatively

14

exercised its Commerce Clause power. Merrion v. Jicarilla Apache Indian Tribe, 455 U.S. 130,

15

154 (1982).

16

Thus, the threshold question in dormant Commerce Clause cases is whether Congress has

17

exercised its Commerce Clause power in a particular field; if so, judicial review under the dormant

18

Commerce Clause is precluded. See Wyoming v. Oklahoma, 502 U.S. 437, 457-58 (1992); South-

19

Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 87-93, (1984). For a statute to preclude

20

dormant Commerce Clause review, however, congressional intent to authorize the challenged

21

act(s) must be unmistakably clear. E.g., Wyoming, 502 U.S. at 458; Wunnicke, 467 U.S. at 91-92;

22

Hillside Dairy, Inc. v. Lyons, 539 U.S. 59, 66 (2003) (―Congress certainly has the power to

23

authorize state regulations that burden or discriminate against interstate commerce, . . . but we

24

will not assume that it has done so unless such an intent is clearly expressed.‖).

25

2.

Congressional Authorization

26

The Department relies on White v. Massachusetts Council of Const. Emp’rs, Inc., 460 U.S.

27

204 (1983) and Merrion v. Jicarilla Apache Tribe, 455 U.S. 130 (1982) in arguing that Congress

28

implicitly approved the practice of discrimination against out-of-state hospitals in respect to
22

1
2

Medicaid payments. D‘s MSJ at 14-16.
At issue in White was an executive order issued by Boston‘s Mayor requiring all

3

construction projects funded by the city or by funds that the city had authority to administer, to be

4

performed by a work force consisting of at least 50% residents of the city. White, 460 U.S. at 205-

5

06. A number of the projects were funded in part with federal Urban Development Action Grants.

6

Id. at 212. The Supreme Court held that the order did not violate the dormant Commerce Clause

7

for two reasons. First, insofar as the city expended its own funds and projects, it was a market

8

participant unconstrained by the dormant Commerce Clause. Id. at 215. Second, because the city

9

expended federal funds, the order was ―affirmatively sanctioned‖ by the federal regulations of

10

The Department relies on the Court‘s statements in White that the federal regulations

12
For the Northern District of California

United States District Court

11

those programs. Id.

―affirmatively sanctioned‖ the executive order because Boston‘s construction project was funded

13

by federal funds. D‘s MSJ at 16. The Department, however, reads too much into White.

14

In White, the Supreme Court examined the applicable statutes and found that the federal

15

programs ―were intended to encourage economic revitalization, including improved opportunities

16

for the poor, minorities, and unemployed,‖ particularly to distressed cities and urban counties17

17
18
19
20
21

22
23
24
25
26
27
28

17

For example, 42 U.S.C. § 5318 (―Urban Development Action Grants‖) provides:
(a) The Secretary is authorized to make urban development action
grants to cities and urban counties which are experiencing severe
economic distress to help stimulate economic development activity
needed to aid in economic recovery.
(b)(1) Urban development action grants shall be made only to cities
and urban counties which have, in the determination of the
Secretary, demonstrated results in providing housing for low- and
moderate-income persons and in providing equal opportunity in
housing and employment for low- and moderate-income persons and
members of minority groups. The Secretary shall issue regulations
establishing criteria in accordance with the preceding sentence and
setting forth minimum standards for determining the level of
economic distress of cities and urban counties for eligibility for such
grants.
(d) (B) other factors determined to be relevant by the Secretary in
assessing the comparative degree of economic deterioration in cities
and urban counties: []
23

1

White 460 U.S. at 213. Thus, the mayor‘s executive order was ―harmonious‖ with federal law

2

because ―the federal regulations for each program affirmatively permit[ted] the type of parochial

3

favoritism expressed in the order.‖18 Id.

4

White is distinguishable from the case at bar for two reasons. First, as discussed below, the

5

Department is not a market participant. Second, unlike in White, where the mayor‘s executive

6

order was consistent with Congress‘ goal of improving the opportunities for the poor, minorities,

7

and unemployed in targeted areas, here, the Department‘s policies are far from being in harmony

8

with Medicaid. Moreover, in White, the implementing regulations expressly authorized ―the type

9

of parochial favoritism [towards distressed cities and urban counties] expressed in the [challenged]

Congress in enacting the Medicaid Act; nor has the Secretary promulgated regulations authorizing

12
For the Northern District of California

order.‘‖ Id. at 215; 42 U.S.C. § 5318 (b)(1). No such geographic targeting was contemplated by

11

United States District Court

10

the discrimination challenged harmonious with Congress‘ intent. Indeed, if anything, Congress

13

was concerned with ensuring that cross-border medical services be available to all Medicare

14

recipients.

15
16

At its core, the purpose of the Medicaid Act is to enable ―each state, as far as practicable
under the conditions in such state, to furnish . . . medical assistance on behalf of families with

17
18

(v) the extent to which the project will relieve the most pressing
employment or residential needs of the applicant by –
(I) reemploying workers in a skill that has recently suffered a sharp
increase in unemployment locally;
(II) retraining recently unemployed residents in new skills;
(III) providing training to increase the local pool of skilled labor []

19
20
21

(e) The Secretary may not approve any grant to a city or urban
county . . . unless –
[] (3) the grant will be used in connection with a project which will
directly benefit the low- and moderate-income families and
individuals residing in the area . . . .

22
23
24
25
26
27
28

42 U.S.C.A. § 5318 (emphasis added).
18

The regulation implementing 42 U.S.C. § 5318 provided that ―to the greatest extent
feasible opportunities for training and employment arising in connection with the planning and
carrying out of any project assisted under any such program be given to lower income persons
residing in the area of such project....‖ 24 CFR § 135.1(a)(2)(i) (emphasis added). White, 460
U.S. at 213 n.11.
24

1

dependent children and of aged, blind, or disabled individuals, whose income and resources are

2

insufficient to meet the costs of necessary medical services . . . .‖ 42 U.S.C. § 1396-1. As noted

3

in Belshe, discrimination against out-of-state hospitals which provide medical care to residents of

4

the state undermines that purpose.

5

The Department also argues that Merrion v. Jicarilla Apache Tribe, 455 U.S. 130 (1982),

6

shields the Department from the reach of the dormant Commerce Clause. In Merrion, the

7

Commissioner of Indian Affairs, on behalf of the Secretary of the Interior, approved petitioners‘

8

leases with the Tribe to extract and produce oil and gas from the reservation. Merrion, 455 U.S. at

9

133-35. The Tribe was organized under the Indian Reorganization Act of 1934, which authorizes

of the Interior. Id. at 134. The Secretary approved the Tribe‘s Revised Constitution that allowed

12
For the Northern District of California

any tribe residing on a reservation to adopt a constitution subject to the approval of the Secretary

11

United States District Court

10

the Tribal Council ―to enact ordinances, subject to approval by the Secretary of the Interior, to

13

impose taxes and fees on non-members of the tribe doing business on the reservation.‖ Id. at 135.

14

(citing Revised Constitution of the Jicarilla Apache Tribe, Art. XI, § 1(e)). Pursuant to its Revised

15

Constitution, the Tribal Council adopted an ordinance imposing a severance tax on oil and gas

16

production on tribal land. Id. at 135-36. The Secretary then approved the ordinance. Id. at 136.

17

The petitioners, non-Indian lessees producing oil and gas from within the tribe‘s reservation,

18

challenged the tax on the grounds that the severance tax violated the dormant Commerce Clause.

19

Id. at 135, 152-53.

20

The Department relies on Merrion for the proposition that ―a series of federal checkpoints‖

21

for the Department‘s State plans and amendments authorizes the Department to discriminate

22

against out-of-state hospitals. However, Merrion does not apply as broadly to this case as the

23

Department suggests. In upholding the Apache severance tax, the Court observed that the ability

24

to tax is an inherent power exercisable by all sovereigns. Id. at 141. It ―simply does not make

25

sense to expect the tribes to carry out municipal functions . . . without being able to exercise at

26

least minimal taxing powers.‖ Id. at 138 n.5. The Court also observed that Congress knew that

27

Indian tribes were imposing mineral severance taxes such as the one challenged by the petitioners

28

when it enacted the Natural Gas Policy Act of 1978, 15 U.S.C. § 3301 et seq. Section 3320(c)
25

1

defined, for purposes of the Act, ―State Severance Tax‖ as any ―severance, production, or similar

2

tax . . . imposed on the production of natural gas . . . by any State or Indian Tribe.‖ 15 U.S.C. §

3

3320(c), Repealed. Pub.L. 101-60, § 2(b), July 26, 1989, 103 Stat. 158.

4

The inherent sovereign power of a Tribe to tax is not at issue in the case at bar. While

5

Merrion found that the Apache‘s taxing power was an inherent attribute of tribal sovereignty that

6

has not been divested by Congress, id. at 152, that issue of sovereignty is not relevant here.

7

Merrion‘s analysis in upholding the severance tax because Congress ―has affirmatively

8

acted by providing a series of federal checkpoints that must be cleared before a tribal tax can take

9

effect,‖ id. at 155, is more on point. Before the Tribe could impose a severance tax on non-Indian

lease with the Tribe, the Secretary‘s approval of the Tribe‘s Revised Constitution, as well as the

12
For the Northern District of California

lessees, the Tribe had to pass three ―federal checkpoints‖: the Secretary‘s approval of Merrion‘s

11

United States District Court

10

Secretary‘s specific approval of the ordinance.

13

Nonetheless, Merrion is distinguishable. Congress has done far less here than in Merrion;

14

unlike Merrion, it has not set up a ―series of federal checkpoints.‖ Although Congress delegated

15

authority to approve state plan to CMS,19 the administrative oversight of state Medicaid payments

16

policies is limited to but one ―checkpoint,‖ wherein CMS reviews State plans. See 42 U.S.C. §§

17

1396a(b); 42 C.F.R. §§ 430.10, 430.15(b). CMS has not promulgated any regulation expressly

18

authorizing the discrimination challenged herein. Moreover, whereas in Merrion, Congress was

19

―well aware that Indian tribes impose mineral severance taxes‖ of the sort in question, Merrion,

20
19

21

22

The applicable Medicaid regulations state:
(1)

23
24

(2)

25
26
27
28

(3)

―The State plan contains all information necessary for CMS
to determine whether the plan can be approved to serve as a
basis for Federal financial participation (FFP) in the State
program.‖ 42 C.F.R. § 430.10.
―CMS regional staff reviews State plans and plan
amendments, discusses any issues with the Medicaid agency,
and consults with central office staff on questions regarding
application of Federal policy.‖ 42 C.F.R. § 430.14.
―The Regional Administrator exercises delegated authority
to approve the State plan and plan amendments on the basis
of policy statements and precedents previously approved by
the Administrator. [] The Administrator does not make a
final determination of disapproval without first consulting
the Secretary.‖ 42 C.F.R. § 430.15 (b),(c)(2).
26

1

455 U.S. at 156, there is no evidence here that Congress expected or authorized states to

2

discriminate in rate setting. Unlike Merrion, there is no unmistakably clear congressional intent to

3

permit discrimination against out-of-state hospitals in respect to reimbursement under Medicaid.

4

The Fourth Circuit‘s decision in Environmental Technology Council v. Sierra Club, 98

5

F.3d 774 (4th Cir. 1996) is persuasive on this point. In Sierra, the South Carolina Department of

6

Health and Environmental Control promulgated a set of laws that restricted in-state treatment and

7

disposal of hazardous waste generated in other states. 98 F.3d at 780. South Carolina argued that

8

Congress affirmatively authorized the South Carolina laws when Congress delegated the

9

authorization of state programs to the Environmental Protection Agency. Id. at 782-83. Under the

task of reviewing and authorizing state programs as consistent with the federal program. Id. at

12
For the Northern District of California

Resource Conservation and Recovery Act of 1976 (―RCRA‖),20 Congress delegated to EPA the

11

United States District Court

10

779. RCRA allows a state to implement its own program in lieu of the federal program if the

13

state‘s program is ―equivalent to‖ and ―consistent with‖ the federal program and provides for the

14

―adequate enforcement of compliance.‖ 42 U.S.C. § 6926(b).

15

In 1985, EPA gave South Carolina RCRA authorization to operate its waste program

16

despite the argument that the program was ―inconsistent‖ with federal law by imposing a

17

discriminatory fee on waste generated out of state. Under the Comprehensive Environmental

18

Response, Compensation, and Liability Act of 1980 (―CERCLA‖), South Carolina submitted to

19

EPA a Capacity Assurance Plan (―CAP‖).21 CAP requires that each state submit a proposal to

20

EPA demonstrating that over a 20-year period the state will have either: (1) adequate capacity

21

22
23
24

20

RCRA establishes a national program for hazardous waste management administered by
the EPA. RCRA encompasses most aspects of hazardous waste management, including
identification of waste, standards for generators, transporters, and operators of treatment, storage,
and disposal facilities, and procedures for permits. 42 U.S.C. §§ 6901-92k.
21

25
26
27
28

Congress enacted other federal statutes to deal with the need to clean up improperly
disposed hazardous waste. The Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (―CERCLA‖) created a ―Superfund‖ of federal money available for state
cleanup efforts. 42 U.S.C. §§ 9601-75. Several years later, Congress amended CERCLA by
enacting the Superfund Amendments and Reauthorization Act of 1986 (―SARA‖), Pub. L. No. 99499, 100 Stat. 1613 (1986). SARA requires each state to present a Capacity Assurance Plan
(―CAP‖) to EPA. 42 U.S.C. § 9604(c)(9) (1995).
27

1

available to dispose of hazardous wastes generated within the state; or (2) arrange for the disposal

2

of wastes generated in-state in other states through interregional agreements. 42 U.S.C. §

3

9604(c)(9)22; Sierra, 98 F.3d at 779-80. South Carolina‘s CAP did not discriminate. South

4

Carolina designed several laws that attempted to limit the level of out-of-state hazardous wastes

5

entering its borders: South Carolina‘s legislature passed two statutes, its Governor signed two

6

Executive Orders, and the South Carolina Department of Health and Environmental Control

7

promulgated one regulation. Sierra, 98 F.3d at 780. EPA approved South Carolina‘s CAP and

8

South Carolina‘s hazardous waste program under RCRA. Sierra, 98 F.3d at 781. Because South

9

Carolina is one of the few states which had large hazardous waste treatment and disposal facilities,

borders. Id. at 780. South Carolina‘s legislature enacted a blacklisting provision that prohibited

12
For the Northern District of California

it attempted, through a series of measures, to reduce the amount of hazardous waste entering its

11

United States District Court

10

entry into the state of certain out-of-state wastes and imposed a discriminatory fee on waste

13

generated out-of-state. Id.

14

When out-of-state waste facilities challenged South Carolina‘s waste program as violation

15
16
22

17
18
19
20
21

22
23

42 U.S.C. § 9604(c) provides:
(9) Siting
Effective 3 years after October 17, 1986, the President shall not provide any
remedial actions pursuant to this section unless the State in which the release
occurs first enters into a contract or cooperative agreement with the President
providing assurances deemed adequate by the President that the State will assure
the availability of hazardous waste treatment or disposal facilities which –
(A) have adequate capacity for the destruction, treatment, or secure disposition of
all hazardous wastes that are reasonably expected to be generated within the State
during the 20-year period following the date of such contract or cooperative
agreement and to be disposed of, treated, or destroyed,

24

(B) are within the State or outside the State in accordance with an interstate
agreement or regional agreement or authority,

25

(C) are acceptable to the President, and

26

(D) are in compliance with the requirements of subtitle C of the Solid Waste
Disposal Act. [42 U.S.C. § 6921 et seq.]

27
28

42 U.S.C. § 9604(c).
28

1

of the Commerce Clause, South Carolina asserted that RCRA and CERCLA embody a

2

congressional exercise of the commerce power rendering the dormant Commerce Clause analysis

3

irrelevant. Sierra, 98 F.3d at 782. First, South Carolina argued that under RCRA, Congress has

4

expressly authorized any state program that meets ―EPA‘s consistency standard of

5

‗reasonableness.‘‖ Id. at 782. The Fourth Circuit, rejecting the argument, stated that ―[w]hile

6

EPA may change its position on what ‗consistency‘ entails, 23 the Constitution has not changed

7

and, in the absence of a clear Congressional statement authorizing discrimination by the states

8

with respect to hazardous wastes, we must apply the Constitution‘s dictates.‖ Id. at 783. (citing C

9

& A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383, 407-10 (1994)) (emphasis added).

10

Also, South Carolina, like the Department here, heavily relied on Merrion to argue that by
delegating the authorization of state programs to the EPA under RCRA and CERCLA, Congress

12
For the Northern District of California

United States District Court

11

created a system of ―checkpoints‖ for South Carolina‘s waste program. Id. at 782. The state

13

argued that Congress‘s ―checkpoints‖ affirmatively authorized the challenged state laws because

14

EPA approved RCRA program and CAP. Id. at 782-83. The Fourth Circuit rejected the argument

15

and distinguished Merrion for several reasons. First, unlike in Merrion, where Congress was

16

aware that Indian tribes were imposing taxes on non-members, Congress did not anticipate or

17

authorize a discriminatory fee for disposal of waste generated out of state. See id. at 784. Second,

18

the court found that EPA had not expressly approved South Carolina‘s discriminatory laws; absent

19

was ―express congressional authorization.‖ Id. at 784 n. 17.

20

Here, the Secretary of Health and Human Services engaged in the same type of

21

administrative review similar to that described in Sierra. With little comment, CMS approved

22

California‘s State Plan Amendments 13-033 and 15-020.24 As in Sierra, and as noted above, the

23
23

24
25
26

At different times, EPA has taken contradictory positions on how it will apply and
interpret the consistency requirement. Sierra, 98 F.3d at 783 n.14. The EPA‘s regulation
explaining how a state‘s program must be consistent with the federal program requires a state
program not to unreasonably impede or restrict interstate commerce. Id. at 779 (citing 42 C.F.R. §
271.4).
24

27
28

Approval letters from CMS Director state: ―We conducted our review of your submittal
according to the statutory requirements at sections 1902(a)(13), 1902(a)(30), 1903(a), and 1923 of
the Social Security Act and the implementing federal regulations at 42 CFR 447 subpart C.[] We
are enclosing the HCFA-179 and the amended plan pages.‖ D‘s RJN, Ex. G; Rowan Second
29

1

CMS did not enact regulations authorizing the Department‘s discriminatory practices. D‘s RJN,

2

Ex. G; Rowan Second Suppl. Decl. Ex. A. Nor is any evidence that Congress knew of and

3

intended to authorize such practices.

4

The Department argues that Congress intended that states be allowed in particular to limit

5

DSH payments to out-of-state hospitals (see D‘s Opp‘n to P‘s MSJ, pp. 11-12). Though this

6

argument was made on the merits in opposing Plaintiffs‘ claim that the Department violated

7

federal statutory law, this contention could implicate the dormant Commerce Clause analysis as

8

well. If Congress was unmistakably clear in authorizing states to exclude out-of-state hospitals

9

from DSH payments, this would remove this aspect of discrimination from Commerce Clause

10

scrutiny. The Court, however, finds no such clear authorization.
In support of its argument, the Department cites provisions from 42 U.S.C. § 1396r-4. In

12
For the Northern District of California

United States District Court

11

particular, the Department cites phrases such as ―to a State‖ (subdivision(f)), ―for hospitals in the

13

State‖ (subdivision (f)(6)), ―any hospital in such State‖ (subdivision (g)(2)(B)), ―to hospitals in the

14

State‖ (subdivision (h)(1)(B)), and ―in the State‖ (subdivision (j)(2)).

15

However, the core of this argument was soundly rejected by the Ninth Circuit in Belshe:

16
17
18
19
20
21

22
23
24
25
26

Belshe refers to the definitions section of the Medicaid statute, 42
U.S.C. § 1396r-4(b)(1)(A), which sets forth the requirements for a
hospital to be eligible for DSH payments. That section defines
hospitals eligible for DSH payments by comparing them to the mean
of ―hospitals receiving Medicaid payments in the State.‖ Belshe
argues this language proves that the DSH payment requirement in
the Boren Amendment applies only to in-state hospitals. This
argument fails.
Section 1396r-4(b)(1)(A) provides that states administering their
Medicaid programs are required to determine whether a hospital
qualifies for DSH payments by referring to the mean number of
Medicaid patients served by hospitals in their state. This language
does not say that only hospitals within the state can qualify for DSH
payments; instead, it uses in-state hospitals to calculate a benchmark
for the number of Medicaid patients.
188 F.3d at 1096-97.
The Ninth Circuit‘s conclusion is underscored when reading the entirety of Section 1396r-

27
28

Suppl. Decl. Ex. A.
30

1

4 – throughout its lengthy text spanning from subdivision (a) through (j) with many subparts,

2

reference is made repeatedly to ―hospitals‖ without limiting them to in-state hospitals. Out of the

3

scores of repeated references to hospitals generically, the Department is able to identify but a

4

handful of references to hospitals ―within the state,‖ and these provisions pertain to the level of

5

federal reimbursement to states which appear to be keyed to in-state hospital statistics and to

6

reporting requirements. As in Belshe, none of these provisions say that ―only hospitals within the

7

state can qualify for DSH payments.‖ 188 F.3d at 1096. Even if one or two provisions might be

8

deemed to create some ambiguity in this regard,25 none make Congress‘ authorization of the

9

categorical exclusion of out-of-state hospitals from DSH payments ―unmistakably clear.‖ No

10

Parties seeking to establish that Congress has authorized otherwise invalid legislation face

12
For the Northern District of California

United States District Court

11

provision expressly authorizes the exclusion of payments to out-of-state hospitals.

a heavy burden: ―when Congress has not ‗expressly stated its intent and policy‘ to sustain state

13

legislation from attack under the Commerce Clause, we have no authority to rewrite its legislation

14

based on mere speculation as to what Congress ‗probably had in mind.‘‖ New England Power Co.

15

v. New Hampshire, 455 U.S. 331, 343 (1982) (citations omitted). The Department has not met

16

that burden. Absent unmistakably clear Congressional authorization, the dormant Commerce

17

Clause analysis applies to all of the Department‘s policies at issue which exclude or discriminate

18

against out-of-state hospitals.

19

3.

Market Participant Exception

20

The Department contends that even if the Commerce Clause applies, the Department is

21

exempt from Commerce Clause restrictions because it is a market participant. D‘s MSJ at 17.

22

Under the market participant exception, a discriminatory law does not violate the Constitution if

23

the state is acting as a market participant. New Energy Co. of Indiana v. Limbach, 486 U.S. 269,

24

277 (1988). For a state to be labeled a ―market participant,‖ however, a state must be acting as a

25

private company would act, not ―in its distinctive governmental capacity.‖ New Energy Co., 486

26

U.S. at 277. Conversely, when a state flexes its sovereign muscle to regulate the behavior of other

27
25

28

Section 1396r-4(3) which refers to the possibility of a ―statewide pooling arrangement‖
which would appear to include only in-state hospitals appears to raise the greatest ambiguity.
31

1
2

players in the market, the market participant exception does not apply. See id. at 277-78.
The Department contends that ―[b]y using 50% of its own state funds to reimburse out-of-

3

state hospitals‖ it is acting as a market participant because it is purchasing the medical treatment

4

from Plaintiffs for Medi-Cal beneficiaries. D‘s MSJ at 17.

5

The market participant exception is inapplicable. The Department advanced the same

6

argument in Children’s Hospital & Medical Center v. Bontá, 97 Cal. App. 4th 740 (Cal. App. 1st

7

Dist. 2002). The California Court of Appeal correctly rejected it. In Bontá, 11 out-of-state

8

hospitals from Nevada, Oregon, and Arizona sued the Department claiming that the difference

9

between the reimbursement of in-state and out-of-state hospitals for treatment of Medi-Cal

Institutions Code provided that reimbursement for out-of-state acute inpatient hospital services

12
For the Northern District of California

beneficiaries violated the Commerce Clause. Id. at 747, 752. In Bontá, California‘s Welfare and

11

United States District Court

10

provided to Medi-Cal beneficiaries shall not exceed the current statewide average of contract rates.

13

Id. at 749. Out-of-state hospitals challenged the statute on the ground that the Department did not

14

pay out-of-state hospitals the ―current‖ statewide average of contract rates, but rather used a

15

previous year‘s average of the different rates paid to in-state hospitals. Id. The plaintiffs alleged

16

that in ―[i]n an inflationary economy, such as the one that hospitals operate in, last year‘s average

17

rate is always less than the ‗current‘ rate.‖ Id.

18
19

Addressing the Department‘s market participation argument, the Court of Appeal
explained:

20
21

22
23
24
25
26
27
28

The defects in this argument are readily apparent. First, the state is
not itself a consumer of the service in question, nor does it pick and
choose service providers. Discharging conventional regulatory
responsibilities imposed on it by state and federal law, the state,
through [the Department], merely reimburses those service
providers selected by Medi-Cal recipients in need of medical care.
The level of reimbursement [the Department] allows is clearly not
responsive to market forces. Moreover, as [the Department] itself
correctly points out in a different connection, there is no genuine
private market regarding the delivery of care to Medi-Cal patients in
which the state could participate. Though the treatment of Medi-Cal
patients is less costly for in-state than out-of-state hospitals, it is in
both cases inherently unprofitable; hospitals serve Medi-Cal patients
only because they cannot legally refuse to do so. In sum, when it
determines the level of compensation hospitals are entitled to
receive for the treatment of Medi-Cal patients, [the Department] is
32

not participating in an open market but simply carrying out a
traditional state regulatory responsibility. The market participation
exception therefore does not apply.

1
2
3
4

Id. at 768.
Bontá‘s analysis of market participation is equally applicable here. First, the Department

5

is not acting as a market participant because it controls the rates that out-of-state hospitals have to

6

accept when they treat Medi-Cal patients. Second, the Department is not ―pick[ing] and

7

choos[ing] its business partners, its terms of doing business, and its business goals – just as it were

8

a private party.‖ Id. (internal citations omitted). Plaintiffs are legally obligated26 to treat Medi-Cal

9

patients as Plaintiffs are the only trauma facilities that can provide a high level of intensive care to
Medi-Cal patients in Oregon, Nevada, and Arizona. Compl. ¶¶ 9-11. The Department‘s role in

11

administering the federal-state Medicaid program is that of a sovereign, not a market participant.

12
For the Northern District of California

United States District Court

10

4.

Commerce Clause Analysis

13

Because the Department‘s policies are subject to the Commerce Clause, the Court

14

addresses whether the Department‘s reimbursement rates for out-of-state hospitals violate the

15

Clause. The dormant Commerce Clause ―prohibits economic protectionism – that is, regulatory

16

measures designed to benefit in-state economic interests by burdening out-of-state competitors.‖

17

New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273 (1988). Under the dormant Commerce

18

Clause, the Court applies a two-step inquiry.

19

The first inquiry requires a court to determine whether ―a state statute directly regulates or

20

discriminates against interstate commerce, or [whether] its effect is to favor in-state economic

21

interests over out-of-state interests.‖ Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth.,

22

476 U.S. 573, 579 (1986). If a state statute directly discriminates, it is ―generally struck down . . .

23

without further inquiry.‖ Id.; see also Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 338 (2008)

24

(holding that a discriminatory state law is ―virtually per se invalid‖ and ―will survive only if it

25

advances a legitimate local purpose that cannot be adequately served by reasonable

26
27
28

26

Under the Federal Emergency Medical Treatment and Active Labor Act (―EMTALA‖),
any hospital that accepts payment from Medicare must treat patients who seek emergency services
without inquiry into the patient‘s insurance coverage or ability to pay. 42 U.S.C. § 13955dd.
33

1

nondiscriminatory alternatives‖ (citation and internal quotation marks omitted)). Laws that

2

directly discriminate against interstate commerce are subject to strict scrutiny. Rocky Mountain

3

Farmers Union v. Corey, 730 F.3d 1070, 1087 (9th Cir. 2013) cert. denied, 134 S. Ct. 2875

4

(2014).

5

If the ―statute has only indirect effects on interstate commerce and regulates

6

evenhandedly,‖ Brown-Forman, 476 U.S. at 579, the court then applies the balancing test set forth

7

in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). That test upholds a state regulation unless the

8

burden it imposes upon interstate commerce is ―clearly excessive in relation to the putative local

9

benefits.‖ Id. at 142.

10

Discrimination is defined as the ―differential treatment of in-state and out-of-state
economic interests that benefits the former and burdens the latter.‖ Oregon Waste Sys. Inc. v.

12
For the Northern District of California

United States District Court

11

Dep’t of Envtl. Quality of Oregon, 511 U.S. 93, 99 (1994). A statute can discriminate against out-

13

of-state interests in three different ways: (a) facially, (b) purposefully, or (c) in practical effect.

14

Wyoming v. Oklahoma, 502 U.S. 437, 454-55 (1992).

15

a.

Plaintiffs‘ Commerce Clause Claim Before the 15-020 Amendment.

16

Plaintiffs contend that under the APR-DRG reimbursement methodology, ―[t]he

17

[Department] pay[s] California hospitals significantly more money for every Medi-Cal patient

18

treated than they pay California hospitals for the exact same services.‖ Compl. ¶ 2. The stipulated

19

facts confirm that the APR-ARG reimbursement scheme directly discriminates on its face against

20

interstate commerce. In addition from being excluded from DSH payments, out-of-state

21

hospitals have categorically been excluded from reimbursement adjustments accorded to in-state

22

hospitals. In particular, the APR-ARG reimbursement scheme excludes out-of-state hospitals

23

from various wage indices, rural, and policy adjustments (as well as DHS payments which this

24

Court has determined in violation of statutory law):

25
26
27

(1)
The Department increases the labor component of the ―base
price‖ of each in-state hospital by using the Medicare wage index
for the geographical area in which the hospital is located, but makes
no such adjustment for out-of-state hospitals;

28

34

(2)
The Department increases the labor component of the ―base
price‖ of each in-state hospital by using the California ―rural floor‖
wage index, but makes no such adjustment for out-of- state
hospitals;

1
2

(3)
The Department increases the labor component of the ―base
price‖ of each in-state hospital by using the Medicare wage index
for the area in which the hospital has been reclassified in California,
but makes no such adjustment for out-of-state hospitals;

3
4
5

(4)
The Department has classified 52 in-state hospitals as
―remote rural‖ and significantly increases their ―base price,‖ but
makes it impossible for out-of-state hospitals to be classified as
―remote rural‖;

6
7
8

(5)
The Department has classified 21 in-state hospitals as
―NICU-Surgery,‖ and increases by 75% the payments they receive
for neonate cases, but makes it impossible for out-of-state hospitals
to be classified as ―NICU-Surgery‖;

9
10

(6)
In its outlier calculations the Department uses a hospitalspecific CCR for each in-state hospital, but for out-of-state hospitals
applies a fixed Medicare CCR of 22% that is much lower than the
average Medi-Cal CCR of California hospitals.

12
For the Northern District of California

United States District Court

11

13
14
15

P‘s MSJ at 16-17.
While the line between the per se rule and the Pike balancing test is not always clear, see

16

Raymond Motor Transportation, Inc. v. Rice, 434 U.S. 429, 440-41 (1978) (recognizing that there

17

is no clear line separating the category of state regulation that is virtually per se invalid under the

18

Commerce Clause and the category subject to the Pike v. Bruce Church balancing approach), it is

19

here. The Department rules clearly discriminate against out-of-state hospitals. 27

20

To survive a constitutional challenge under the Commerce Clause, facially discriminatory

21

laws must demonstrate both the existence of a legitimate, non-protectionist local purpose and the

22

absence of nondiscriminatory alternatives. Hughes v. Oklahoma, 441 U.S. 322, 337 (1979).

23
24
25
26
27
28

27

The discrimination here is facial. For example, before the 15-020 Amendment, the
Department applied a uniform wage index 1.0 to all out-of-state hospitals. Rowan Decl. ¶ 8.
Thus, a California hospital with a wage index of 1.5 was receiving 34% more per Medi-Cal
discharge than an out-of-state hospital with the same wage index. Compl. ¶ 16. In addition, a
remote rural California hospital was receiving a base price of $10,218, while a similarly situated
out-of-state hospital was receiving a base price of $6,223. Moreover, the Department estimates
that the 15-020 Amendment will increase Medi-Cal out-of-state expenditures by $1.4 million per
year. D‘s RJN, Ex. C at 1007.
35

1

Facially discriminatory state regulations must be stricken ―unless the discrimination is

2

demonstrably justified by a valid factor unrelated to economic protectionism.‖ New Energy

3

Company of Indiana v. Limbach, 486 U.S. 269, 274 (1988). The Supreme Court has upheld only

4

one such discriminatory law. See Maine v. Taylor, 477 U.S. 131, 141 (1986) (upholding Maine‘s

5

statute banning the importation of live baitfish because of ―significant threats to Maine‘s unique

6

and fragile fisheries‖).

7

The Department attempts to overcome the presumption of invalidity by claiming 1) that

year 2013/201428 and 2) that it would have been administratively burdensome and potentially

10

impossible for the Department to establish hospital specific wage indexes for all out-of-state

11

hospitals, establish hospital specific cost-to-charge ratios for thousands of out-of-state hospitals,

12
For the Northern District of California

out-of-state hospitals provided only .3% of all Medi-Cal covered hospital stays during state fiscal

9

United States District Court

8

determine rural remote status for thousands for out-of-state hospitals, and determine whether any

13

out-of-state hospital that decides to submit an application for a NICU status. D‘s MSJ at 7-9; D‘s

14

Opp‘n to P‘s MSJ at 6.29

15

To support its first argument, the Department claims ―that out-of-state hospitals are not

16

similarly situated to the designated public hospitals as Plaintiffs allege because, unlike the

17

designated public hospitals, they do not serve an ‗unusually large portion of California‘s uninsured

18

and Medi-Cal populations.‘‖ D‘s MSJ at 9. However, out-of-state hospitals are similarly situated

19

inasmuch as they provide the same services to Medi-Cal beneficiaries. Additionally, in fact,

20

Plaintiffs are the only large medical facilities available to California Medi-Cal beneficiaries

21

residing in far northern and eastern reaches of California. Compl. ¶ 9. Indeed, Washoe, known as

22

the Renown Regional Medical Center, ―treat[s] more Medi-Cal patients than any other out-of-state

23
28

24
25
26
27
28

The 19 plaintiff hospitals collectively rendered 895 Medi-Cal covered hospital stays
resulting from admissions during fiscal year 2013/2014 that were paid based on the APR-DRG
methodology. One plaintiff hospital had only 2 Medi-Cal admissions for a total of 4 days of care
during fiscal year 2014/2014. Four other plaintiff hospitals had less than 10 Medi-Cal admissions
for fiscal year 2013/2014. The admissions for 3 of those 4 plaintiffs involved less than 20 days of
care. Rowan Decl. ¶ 11.
29

For example, the task of determining whether a hospital meets the standards for being
approved as a Regional or Community NICU, including meeting the CCS neonatal surgery
standards, typically involves at least one field visit to the hospital. Dimand Decl. ¶ 6.
36

1

hospital.‖ Docket No. 39-4, ¶ 7 (―Plaintiffs‘ Findings of Fact‖). The relatively low number of

2

Medi-Cal hospital stays does not gainsay the fact that out-of-state hospitals are in fact similarly

3

situated to in-state hospitals vis-à-vis Medicaid reimbursement. Cf. Bontá, 97 Cal. App. 4th at 766

4

(even slight disparity in treatment may violate the Commerce Clause); Wyoming, 502 U.S. at 455

5

(―The volume of commerce affected measures only the extent of the discrimination; it is of no

6

relevance to the determination whether a State has discriminated against interstate commerce.‖);

7

Maryland v. Louisiana, 451 U.S. 725, 760 (1981) (―We need not know how unequal [a] [t]ax is

8

before concluding that it . . . discriminates.‖).

9

Likewise, the Department‘s administrative burden argument fails. This argument was

―could develop a reasonable methodology for reimbursement different from its in-state provider

12
For the Northern District of California

already twice rejected in Bontá and Belshe. Belshe, 188 F.3d at 1098 (stating that the Department

11

United States District Court

10

methodology.‖); Bontá, 97 Cal. App. 4th at 764 n.15 (stating that the Department did not explain

13

why it cannot contract with the few large hospitals in nearby states that treat a significant number

14

of Medi-Cal patients). As Plaintiffs point out, it ―would not be administratively difficult for the

15

Department to apply many of the same adjustments that it applies to in-state hospitals to out-of-

16

state hospitals‖ for four reasons. Opp‘n to D‘s MSJ at 10. First, it would be easy for the

17

Department‘s employees to find an applicable wage index for a hospital in Nevada, Oregon, or

18

Arizona. Id. Second, the Department can apply the same Medi-Cal cost-to-charge ratio to every

19

out-of-state hospital. Id. at 11. Third, for remote rural base prices the Department would not have

20

to evaluate ―thousands of out-of-state hospitals‖ because even under the 15-020 Amendment only

21

four plaintiffs would meet the requirements of remote rural hospitals. Id. Finally, only six

22

plaintiffs might qualify for the 1.75 policy adjustor for a neonate stay. Id. There is no

23

insurmountable burden to eliminate the challenged disparity.30 Notably, the Ninth Circuit in

24

Belshe permits less the perfect equality where it is not arbitrary and truly justified by

25
26
27
28

30

As Plaintiffs point out, with respect to DSH payments, the Director may request the
information necessary to provide DSH payments to the 19 plaintiff-hospitals. Opp‘n to D‘s MSJ
at 16. Moreover, several states make DSH payments to out-of-state hospitals. These states include
Arizona, Connecticut, Florida, Iowa, Kansas, Minnesota, Pennsylvania, South Carolina, Virginia,
and Washington. See Johnson Decl. ¶ 7.
37

1

administrative impracticability; though decided in the context of a statutory analysis, that logic

2

could equally be applied to the Commerce Clause analysis. See Belshe, 188, F.3d at 1098.

3

In sum, the Department‘s claimed administrative burden in reimbursing out-of-state

4

hospitals is insufficient to overcome the presumption of invalidity that attaches to practices which

5

explicitly discriminate against interstate commerce. The lack of an insurmountable or even

6

substantial administrative burden undermines any claim to a legitimate non-protectant local

7

purpose. Nor has the Department established the absence of a nondiscriminatory purpose. Cf.

8

Maine v. Taylor, 477 U.S. 131 (1986) (upholding a state ban on importation of live baitfish where

9

the state demonstrated that there was no other adequate means to prevent the spread of invasive

10

The Court finds persuasive two cases which have examined issues closely related to that at

12
For the Northern District of California

United States District Court

11

aquatic species).

issue here. In Bontá, supra, the California Court of Appeal struck down the Department‘s

13

reimbursement practices that discriminated against out-of-state hospitals as unconstitutional.

14

Bontá, 97 Cal. App. 4th 740. The court found the Department‘s discriminatory hospital

15

reimbursement scheme violated the dormant Commerce Clause, even though the disparity in the

16

treatment of in-state and out-of-state hospitals ―[was] slight.‖ Id. at 763. In Bontá, the Court of

17

Appeal examined the ―fundamental dissimilarities‖31 between the Department‘s treatment of in-

18
19
20
21

22
23
24
25
26
27
28

31

For example, the Court of Appeal relied on the following factual determinations: ―(1) the
unweighted average of in-state contract rates for acute inpatient hospital services used by DHS as
the basis for reimbursing out-of-state hospitals was 23.8 percent lower than a weighted average
would be and the use of an unweighted average compensated respondents nearly $3 million less
than they would have received if DHS employed a weighted average; (2) in-state contract rates
consistently increased over time and that ―use of a rate that is set on December 1, and not adjusted
until the next year, inevitably results in out-of-state hospitals being paid less than the ‗current‘
average contract rate,‖ as mandated by state law implementing the Medicaid Act; (3) DHS
annually distributes over $2 billion in disproportionate share adjustments to state hospitals, but
―has never made a payment of disproportionate share moneys to any out-of-state hospital‖;[] (8)
during the relevant time period (i.e., Apr. 1, 1994 to Aug. 14, 2000) the expenses incurred by
respondent hospitals in treating Medi-Cal patients that were allowable under the principles of cost
reimbursement reflected in the Medicaid Act were $22,660,318, but the compensation respondents
received for the services they provided such patients during that period was $14,696,955, which
was ―only sixty-five percent ... of their ‗allowable costs‘ for the Medi–Cal patients they treated,‖
―leaving a net shortfall based on ‗allowable costs‘ (exclusive of interest) of $7,963,363‖; and (9)
under the reimbursement system employed by DHS prior to its use of the present system
38

1

state and out-of-state hospitals with regard to Medicaid payments for acute care services. Bontá,

2

97 Cal. App. 4th at 759-60. The court defined the discrimination broadly as ―[a]ny disparity in the

3

treatment of in-state and out-of-state interests – whether businesses, users, or products – . . . even

4

if the disparity is slight‖) (quoting L. Tribe, American Constitutional Law, § 6-6, 1059-60). Id. at

5

763. Moreover, the court stated that if ―discrimination is patent, . . . neither a widespread

6

advantage to in-state interests nor a widespread disadvantage to out-of-state competitors need be

7

shown in order to invalidate the law. Nor does a finding of ‗discrimination‘ necessarily depend on

8

economic analysis.‖ Id. (internal citation omitted). The court applied ―the most rigorous judicial

9

scrutiny‖ to the Department‘s payment scheme and struck it down as facially discriminatory. Id. at

protectionism,‖32 the Department ―obviously discriminate[d] against out-of-state hospitals . . . that

12
For the Northern District of California

763-64. Because the Department did not present any valid defenses ―unrelated to economic

11

United States District Court

10

treat significant numbers of Medi-Cal patients.‖ Id. at 762, 764.

13

In W. Va. Univ. Hospitals, Inc. v. Rendell, No. CIV. 1: CV-06-0082, 2007 WL 3274409, at

14

*11 (M.D. Pa. Nov. 5, 2007), the court invalidated Pennsylvania‘s Trauma DSH payment scheme.

15

The issue in Rendell was whether the plaintiff, West Virginia University Hospitals, Inc. (―the

16

Hospital‖), was entitled to trauma disproportionate share hospital (―Trauma DSH‖) payments

17

under the Pennsylvania Trauma Systems Stabilization Act, 35 P.S. §§ 6943.1 et seq. (―Trauma

18
19
20
21

22
23
24
25
26
27
28

respondents would have received $19,380,433 for the services they provided Medi-Cal patients
during the relevant time period, leaving a net shortfall (exclusive of interest) of $4,683,478.‖
Bontá, 97 Cal. App. 4th at 642-43.
32

Instead, the Department argued that the disparate compensation of in-state and out-ofstate hospitals was justified because it was impossible for the Department ―to enter into a cost
sensitive contract with ‗every hospital across the nation,‘ most of which are distant and rarely treat
Medi-Cal patients.‖ Bontá, 97 Cal. App. 4th at 764 n.15. The Court of Appeal rejected the
argument: ―[The] Department does not explain why it cannot either contract with the relatively
few large hospitals in nearby regions of adjacent states that treat significant numbers of such
patients (if they are willing to make their cost figures available and submit to audits), or
voluntarily comply with federally approved procedures for reimbursing out-of-state hospitals that
require the reasonable costs of such hospitals to be taken into account . . . . Nor has [the
Department] offered any explanation why large out-of-state hospitals that treat significant
numbers of Medi-Cal patients and are willing to submit to the authority of [the Department] and
the jurisdiction of California courts cannot be allowed administrative and judicial processes to
challenge the adequacy of the compensation they receive.‖ Id.
39

1

Act‖). Id. at *1. Pennsylvania enacted the Trauma Act, which authorized the distribution of a

2

new disproportionate share payment, the Trauma DSH, to Pennsylvania‘s trauma centers. Id. at

3

*2. However, the statute limited the definition of ―trauma center‖ to include only hospitals located

4

within Pennsylvania. See 35 Pa. Cons.Stat. Ann. § 6943.2 (defining a hospital as ―[a]n entity

5

located in this Commonwealth that is licensed as a hospital [under the] Health Care Facilities

6

Act.‖). Id. To escape the dormant Commerce Clause, the state argued that Pennsylvania was a

7

market participant because the Trauma DSH payments were a permissible subsidy to domestic

8

industry. Id. at *8. The court rejected this argument explaining that by definition the payments

9

are a form of compensation for hospitals which provide a disproportionate share of trauma

not fall within the market participant exception because the payments were incorporated into the

12
For the Northern District of California

treatment for Medicaid patients. Id. at *9. The court concluded that Trauma DSH payments did

11

United States District Court

10

Medicaid State Plan, jointly funded by Pennsylvania and the federal government. Id.

13

Because the Trauma Act was facially discriminatory, the court invoked the per se rule of

14

invalidity. Id. at *10. The state attempted to overcome the presumption of invalidity by claiming

15

that the Trauma Act served a legitimate purpose of providing trauma care for Pennsylvania

16

citizens. Id. According to Pennsylvania, that purpose would have been undermined if the state

17

distributed scarce resources to out-of-state hospitals. Id. The court, however, explained that the

18

state was undermining its important goal of improving access to trauma care for Pennsylvania

19

citizens because out-of-state hospitals, as the Plaintiffs here, provided trauma care to a significant

20

number of Pennsylvania residents.33 Id. The court concluded that because Pennsylvania‘s

21

statutory scheme excluded all out-of-state hospitals from Trauma DSH payments, the Trauma Act

22

was per se invalid under the dormant Commerce Clause. Id. at *10.

23

For reasons noted above, the same reasoning applies to the instant case. Thus, the

24

Department‘s APR-ARG reimbursement scheme as it relates to out-of-state hospitals along with

25

the DSH payment policy are invalid under the dormant Commerce Clause.

26
27
28

33

West Virginia University Hospital was located six miles from the border between West
Virginia and Pennsylvania. Id at *2. Due to its proximity to the Pennsylvania border, the hospital
treated more than 400 Pennsylvania medical assistance inpatients per fiscal year. Id.
40

b.

1
2

Plaintiffs‘ Commerce Clause Claim After the 15-020 Amendment.

As discussed above, the 15-020 Amendment (1) will apply the same wage index policy for

3

California hospitals and border hospitals; (2) will apply the ―remote rural‖ base price to border

4

hospitals that are determined to be ―rural‖ by the Medicare program; (3) border hospitals will

5

qualify for 1.75 policy adjustors; and (4) the cost-to-charge ratio will be based on the Medicare

6

reported average CCRs. Rowan Second Suppl. Decl. ¶ 4, Docket No. 59-1.

7

The Department claims that the 15-020 Amendment ―addresses most, if not all, of the

8

discrepancies plaintiffs complain about.‖ D‘s Opp‘n to P‘s MSJ at 7. Plaintiff respond that even

9

after the enactment of the 15-020 Amendment, out-of-state hospitals are not going to get: (1) the

rural‖ definition for out-of-state hospitals remains very restrictive; and (4) the cost-to-charge ratio

12
For the Northern District of California

California ―rural‖ floor wage index; (2) Medicare wage index reclassifications; (3) the ―remote

11

United States District Court

10

that is based on Medicaid (35%), rather than Medicare (22%) patients. P‘s MSJ at 14. In

13

addition, as discussed above, out-of-state hospitals continue to be excluded from DSH payments.

14

Section 4410 of the Balanced Budget Act of 1997 established the ―rural floor‖ by requiring

15

that the Medicare wage index for a hospital in an urban area of a State cannot be less than the area

16

wage index determined for that State‘s rural area. Vaida Decl. ¶ 13. According to Plaintiffs, the

17

Department‘s use of the California ―rural floor‖ as a Medi-Cal adjustor for urban California

18

hospitals resulted in substantial windfall payments to 211 in-state hospitals that had nothing to do

19

with their actual wage costs. Id. For FYE 2013-2014, the California ―rural floor‖ wage index was

20

1.2282. Id. The use of this ―rural floor‖ increased the labor component of the ―base price‖ of 211

21

California urban hospitals by $977.02 (i.e., 22.82% X $4,281.42), resulting in a new total ―base

22

price‖ of $7,200.02, and an increase of 15.7% in the Medi-Cal reimbursement. Id.

23

With respect to Medicare wage index reclassifications, which increase wage index values,

24

Plaintiffs assert that nationwide almost 40% of hospitals have been reclassified. Johnson Decl.

25

Ex.3. In the case of hospitals that the Department deems ―remote rural,‖34 the Department uses a

26
34

27
28

―Remote Rural Border Hospital‖ is a border hospital that is defined as a rural hospital by
the Federal Medicare Program, is at least fifteen (15) miles in driving distance from the nearest
GAC hospital that has a basic level emergency room, and does not operate under a combined
license or bill under a common National Provider Index (NPI) number with a non-remote rural
41

1

―base price‖ of $10,218, rather than the unadjusted ―base price‖ of $6,223. Vaida Decl. ¶ 13. To

2

receive the remote rural base price, a border hospital must be defined as ―rural‖ by the federal

3

Medicare program and meet the same remote and non-combined license/provider number

4

standards applicable to California hospitals. Rowan Second Suppl. Decl. ¶ 4.35

5

There remains disparity between in- and out-of-state hospitals because out-of-state

6

hospitals are being paid less. If out-of-state hospitals received the ―rural‖ floor wage index, their

7

base prices would have increased by 15.7%. Vaida Decl. ¶ 13. Moreover, the remote rural base

8

price is higher than a regular base price by 64%. ($10, 218 v. $6,223). Id.; Compl. ¶ 18. In

9

addition, California hospitals receive Medicare wage index reclassifications that increase their

22%, whereas for California hospitals the cost-to-charge ratio is 35%. P‘s MSJ at 14. A hospital‘s

12
For the Northern District of California

wage index values. Vaida Decl. ¶ 13. Finally, the cost-to-charge ratio for out-of-state hospitals is

11

United States District Court

10

estimated cost on a discharge claim is determined by multiplying the Medi-Cal covered charges by

13

a cost-to-charge ratio. Vaida Decl. ¶ 22. If there is a loss, then the hospital may qualify for a

14

substantial additional payment. The higher the cost-to-charge ratio, the more likely it is that there

15

will be a loss and thus an additional outlier payment. Id.

16
17

hospital. Rowan Decl. Ex. B, State Plan Attachment 4.19-A at 17.41).
35

18
19
20
21

22
23
24
25
26
27
28

According to Plaintiffs, the definition of ―remote rural‖ that the State has proposed for
out-of-state hospitals is not consistent with, and is more restrictive than the definition that the
Department applies to in-state hospitals. P‘s MSJ at 14; Plaintiffs‘ Findings of Fact ¶ 41(C). State
Plan Amendment 15-020 defines ―border hospitals‖ as those hospitals located outside of California
that are within 55 miles driving distance from the nearest physical location at which a road crosses
the California border, and includes all plaintiff hospitals. Rowan Decl. ¶¶ 11, 22. ―Remote Rural
Border Hospital‖ is a border hospital that is defined as a rural hospital by the Federal Medicare
Program, is at least fifteen (15) miles in driving distance from the nearest GAC hospital that has a
basic level emergency room, and does not operate under a combined license or bill under a
common National Provider Index (NPI) number with a non-remote rural hospital. Rowan Decl.
Ex. B, State Plan Attachment 4.19-A at 17.41). ―Remote Rural Hospital‖ is a California hospital
that is defined as a rural hospital by the Office of Statewide Health Planning and Development
(OSHPD), is at least fifteen (15) miles in driving distance from the nearest GAC hospital that has
a basic level emergency room, and does not operate under a combined license or bill under a
common National Provider Index (NPI) number with a non-remote rural hospital.‖ Rowan Decl.
Ex. B, State Plan Attachment 4.19-A at 17.41. Plaintiffs contend that the Department should
apply to the plaintiffs the same definition of a ―remote rural‖ hospital that it applies to hospitals
located in California, except that in doing this the Department would not apply any state-specific
requirements that can only be met by hospitals that are physically located in the State of
California. P‘s MSJ at 23. Plaintiffs, however, do not explain in their pleadings how many
hospitals (if any) did not receive the ―Remote Rural Border Hospital‖ designation under the 15020 Amendment.
42

During the oral argument, the Department argued that after the 15-020 Amendment the

1
2

State became ―as close as the State can get‖ in its alignment of in-state and out-of-state

3

reimbursement rates. Yet, the courts have held that even a ―slight disparity in the treatment of in-

4

state and out-of-state interests may offend the dormant commerce clause.‖ Bontá, 97 Cal. App.

5

4th at 766. For example, in Oregon Waste Systems, Inc. v. Department of Environmental Quality,

6

511 U.S. 93 (1994), the Supreme Court found that a $2.25 per ton surcharge on out-of-state waste

7

impermissibly burdened interstate commerce despite an increase of only 14 cents per week for the

8

average user. The Court stated that its precedents ―clearly establish that the degree of a

9

differential burden or charge on interstate commerce ‗measures only the extent of the

against interstate commerce.‘‖ Id. at 100 n. 4 (quoting Wyoming, 502 U.S. at 455). Hence, the

12
For the Northern District of California

discrimination‘ and ‗is of no relevance to the determination whether a State has discriminated

11

United States District Court

10

fact that the 15-020 Amendment substantially lessens the disparity in treatment, but does not

13

eliminate that disparity, does not obviate the Commerce Clause infirmity. Moreover, the

14

Amendment does nothing to alleviate the disparity caused by the exclusion of DSH payments to

15

out-of-state hospitals.
Because the Department continues to reimburse out-of-state hospitals at lower rates than

16
17

in-state hospitals resulting in out-of-state hospitals being paid less and excludes such hospitals

18

from DSH payments, the Department directly discriminates against out-of-state hospitals even

19

after the 15-020 Amendment. The Department has not justified the residual disparity as required

20

by strict scrutiny under the Commerce Clause. Cf. New Energy Co. of Indiana v. Limbach, 486

21

U.S. 269, 278 (1988). The Department did not advance any justification for discrimination in this

22

case. The administrative burden argument, rejected herein, is the Department‘s only defense.

23

―[A] State may validate a statute that discriminates against interstate commerce by showing that it

24

advances a legitimate local purpose that cannot be adequately served by reasonable

25

nondiscriminatory alternatives.‖ New Energy Co, 486 U.S. at 278 (1988). It has failed to do so

26

here.

27

5.

Equal Protection Claims

28

In view of the holding above, the Court need not reach Plaintiffs‘ Equal Protection claims.
43

are significant disparities) against out-of-state hospitals violate the Equal Protection Clause even

3

under rational basis review. See e.g., Children’s Seashore House v. Waldman, 197 F.3d 654, 661

4

(3d Cir. 1999) (stating that plaintiffs‘ Equal Protection claim for disproportionate share hospital

5

adjustments should have survived defendant‘s motion to dismiss); W. Va. Univ. Hospitals v.

6

Casey, 701 F. Supp. 496, 518-20 (M.D. Pa. 1988), rev’d in part on other grounds by 885 F.2d 11

7

(3d Cir.1989), rev’d on other grounds by 499 U.S. 83 (1991) (holding that a considerably lower

8

Medicaid reimbursement to out-of-state hospitals violated the Equal Protection Clause); W. Va.

9

Univ. Hospitals, Inc. v. Rendell, No. CIV. 1: CV-06-0082, 2007 WL 3274409, at *7 (M.D. Pa.

10

Nov. 5, 2007) (holding that denying trauma disproportionate share hospital payments to out-of-

11

state hospitals violated the Equal Protection Clause); Children’s Hospital & Medical Center v.

12
For the Northern District of California

The Court notes that several other courts have found that the discrimination (at least where there

2

United States District Court

1

Bontá, 97 Cal. App. 4th 740, 771 (Cal. App. 1st Dist. 2002) (holding that the Department failed to

13

demonstrate that ―differential treatment of respondent hospitals on the basis of their location out of

14

state is rationally related to a legitimate governmental purpose.‖).
IV.

15

CONCLUSION

16

For the foregoing reasons, the Court partially GRANTS the Defendant‘s summary

17

judgment motion on Plaintiffs‘ claim under § 1396a(a)(13)(A) and GRANTS Plaintiffs‘ summary

18

judgment motion on the ground that the discrimination in payments to out-of-state hospitals

19

violates the Commerce Clause.

20

This order disposes of Docket Nos. 39 and 51.

21

22

IT IS SO ORDERED.

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24
25
26

Dated: December 21, 2015
______________________________________
EDWARD M. CHEN
United States District Judge

27
28

44