G. et al v. State of Hawaii, Department of Human Services et al

Filing 91

ORDER GRANTING IN PART AND DENYING IN PART THE STATE DEFENDANTS' MOTION TO DISMISS, THE FEDERAL DEFENDANTS' SUBSTANTIVE JOINDER, AND INTERVENORS' JOINDERS 25 ; 47 ; 48 ; 49 ; 6 . Signed by JUDGE ALAN C KAY. (eps ) -- what would remain of the State Complaint is Plaintiffs' claims in counts I and V that seek to enforce 42 U.S.C. §§ 1396u-2(a)(1)(A)(i), 1396u-2(b)(5), and 1396b(m)(1) via 42 U.S.C. § 1983. And what would remain of the Federal First Amended Complaint is Plaintiffs' claim that the Secretary arbitrarily and capriciously approved the QExA Contracts.

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII G., PARENT AND NEXT FRIEND OF K., A DISABLED CHILD, ET AL., ) ) ) Plaintiffs, ) ) vs. ) ) STATE OF HAWAI`I, DEPARTMENT OF ) HUMAN SERVICES, ET AL., ) ) Defendants. ) ) ) G., PARENT AND NEXT FRIEND OF ) K., A DISABLED CHILD, ET AL., ) ) ) Plaintiffs, ) vs. ) ) UNITED STATES DEPARTMENT OF ) HEALTH AND HUMAN SERVICES, ET ) AL., ) ) Defendants. ) ) Civ. No. 08-00551 ACK-BMK Civ. No. 09-00044 ACK-BMK (Consolidated)

ORDER GRANTING IN PART AND DENYING IN PART THE STATE DEFENDANTS' MOTION TO DISMISS, THE FEDERAL DEFENDANTS' SUBSTANTIVE JOINDER, AND INTERVENORS' JOINDERS PROCEDURAL HISTORY On December 8, 2008, in Civil No. 08-00551 ACK-BMK, Plaintiffs filed a complaint ("State Complaint" or "St. Compl.") against Defendants, the State of Hawaii, Department of Human Services ("State DHS"), and Lillian B. Koller, in her official capacity as the Director of the DHS (collectively, "State Defendants"). The gravamen of the State Complaint is that the

State DHS has violated certain provisions of Title XIX of the Social Security Act, commonly known as the Medicaid Act, 42 U.S.C. § 1396 et seq., by requiring that Plaintiffs enroll with certain healthcare entities as a condition of receiving Medicaid benefits in connection with the agency's managed-care program. On December 29, 2008, the State Defendants filed a motion to dismiss the State Complaint ("St. Mot."), accompanied by a memorandum in support ("St. Mem. in Supp."), asserting that Plaintiffs have failed to state a claim upon which relief can be granted. On January 30, 2009, in Civil No. 09-00044 ACK-BMK, Plaintiffs filed a complaint against Defendants, the United States Department of Health and Human Services ("Federal DHHS") and Charles E. Johnson, in his official capacity as the Acting Secretary of the DHHS ("Secretary") (collectively, "Federal Defendants"). On February 4, 2009, in Civil No. 09-00044,

Plaintiffs filed a first amended complaint ("Federal First Amended Complaint" or "Fed. 1st Am. Compl."). Plaintiffs allege

that the Centers for Medicare and Medicaid Assistance ("CMS"), a division of the Federal DHHS, has violated certain provisions of the Medicaid Act by granting a waiver for the State DHS's managed-care program and by approving the State DHS's contracts with the healthcare entities. Plaintiffs contend that their

2

claims are actionable under the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq. On February 19, 2009, Magistrate Judge Barry M. Kurren entered an order granting motions to consolidate Civil Nos. 08-00551 and 09-00044. On February 25, 2009, the Federal

Defendants filed a substantive joinder in the State Defendants' motion to dismiss, accompanied by a supplemental memorandum of points and authorities ("Fed. Joinder Mem."). On March 5, 2009,

this Court granted the Federal Defendants leave to file their substantive joinder. On March 17, 2009, Judge Kurren granted motions for intervention filed by the healthcare entities, Wellcare Health Insurance of Arizona, Inc. d/b/a Ohana Health Plan ("Ohana") and United Healthcare Insurance Company d/b/a Evercare ("Evercare"). On March 18, 2009, Intervenors filed joinders in the State Defendants' motion to dismiss and the Federal Defendants' substantive joinder. On April 3, 2009, Plaintiffs filed an opposition to the State Defendants' motion to dismiss, the Federal Defendants' substantive joinder, and the Intervenors' joinders ("Pl. Opp'n"). On April 10, 2009, the State Defendants filed a reply memorandum in support of their motion to dismiss ("St. Reply"), and the Federal Defendants filed a reply brief in support of their

3

substantive joinder ("Fed. Reply").

On April 13, 2009,

Intervenors filed joinders in the replies. On April 21, 2009, this Court held a hearing on the motion and joinders and granted Plaintiffs leave to file a surreply as to the State Defendants' reply. On April 23, 2009, On April 28, 2009,

Plaintiffs filed a surreply ("Pl. Surreply").

the State Defendants submitted a copy of a hearings officer's decision in In re AlohaCare, No. IC-08-142, a matter that is currently pending before the Insurance Division of the Department of Commerce and Consumer Affairs of the State of Hawai`i. BACKGROUND The facts in this Order are recited only for the purpose of deciding the motion to dismiss and joinders. They are

not intended to be findings of fact upon which the parties may rely in future proceedings. I. The Medicaid Act In 1965, Congress established the Medicaid program. Clark v. Coye, 60 F.3d 600, 602 (9th Cir. 1995). Medicaid is "a

cooperative federal-state program that directs federal funding to states to assist them in providing medical assistance to lowincome individuals." Ball v. Rogers, 492 F.3d 1094, 1098 (9th "A state is

Cir. 2007) (citation and quotation marks omitted).

not required to participate in Medicaid, but once it chooses to do so, it must create a plan that conforms to the requirements of 4

the Medicaid statute and the federal Medicaid regulations." Dep't of Health Servs. v. Sec'y of Health & Human Servs., 823 F.2d 323, 325 (9th Cir. 1987). The Secretary "reviews each plan

to assure that it complies with a long list of federal statutory and regulatory requirements." Cmty. Health Ctr. v. Wilson-Coker,

311 F.3d 132, 134 (2d Cir. 2002) (citing 42 U.S.C. §§ 1396, 1396a; 42 C.F.R. § 430.15(a)). He "has delegated his power to Id.

review and approve plans to CMS Regional Administrators." (citing 42 C.F.R. § 430.15(b)).

In 1976, Congress amended the Medicaid statute, adding 42 U.S.C. § 1396b(m),1/ which allows states to implement their Medicaid programs through a "managed care" model, as opposed to the traditional fee-for-service structure. Health Maintenance

Organization Amendments of 1976, Pub. L. No. 94-460, § 202(a), 90 Stat. 1945, 1957 (1976). In a fee-for-service system, state

Medicaid programs directly contract with and pay health care providers, such as physicians, hospitals, and clinics, for services that they provide to Medicaid beneficiaries. Compl. ¶ 19; Fed. 1st Am. Compl. ¶ 21.) (St.

By contrast, under the

managed-care model, states enter into contracts with eligible risk-bearing entities, which are referred to as "managed care organizations" ("MCOs") and are commonly known as "health

42 U.S.C. § 1396b is the codification of Section 1903 of the Social Security Act. 5

1/

maintenance organizations" ("HMOs"). Am. Compl. ¶ 21.)

(St. Compl. ¶ 19; Fed. 1st

Under such contracts, MCOs assume the

responsibility of providing Medicaid services through their own employees or by contracting with independent providers of such services. (St. Compl. ¶ 19; Fed. 1st Am. Compl. ¶ 21.) The

state pays each MCO on a "capitation" or fixed-amount-perenrollee basis. (St. Compl. ¶ 20; Fed. 1st Am. Compl. ¶ 22.);

see also Grijalva v. Shalala, 152 F.3d 1115, 1117 (9th Cir. 1998), rev'd on other grounds, 526 U.S. 1096 (1999) (discussing the foregoing framework); see also Equal Access for El Paso, Inc. v. Hawkins, 509 F.3d 697, 700 (5th Cir. 2007) (addressing the foregoing framework under Texas's Medicaid program). Prior to 1997, in order to require that Medicaid beneficiaries enroll in a managed-care program as a condition of receiving benefits, states generally had to obtain a waiver of the "freedom of choice" provision, 42 U.S.C. § 1396a(a)(23).2/ Harvey L. McCormick, Medicare and Medicaid Claims and Procedure § 26:3, at 399 (4th ed. 2005). Under that provision, 2

beneficiaries are, in effect, afforded "the right to choose among a range of qualified providers[] without government interference." O'Bannon v. Town Court Nursing Ctr., 447 U.S. A state could obtain a waiver of the "freedom

773, 785 (1980).

42 U.S.C. § 1396a is the codification of Section 1902 of the Social Security Act. 6

2/

of choice" provision from the Secretary pursuant to 42 U.S.C. § 1315(a)3/ and thereby limit a beneficiary's freedom to choose among providers through a managed-care system. See 42 U.S.C.

§ 1315(a) ("In the case of any experimental, pilot, or demonstration project which, in the judgment of the Secretary, is likely to assist in promoting the objectives of[, inter alia, the Medicaid Act,] in a State or States-- . . . (1) the Secretary may waive compliance with any of the requirements of[, inter alia, 42 U.S.C. § 1396a,], as the case may be, to the extent and for the period he finds necessary to enable such State or States to carry out such project . . . .").4/ In 1997, as part of the Balanced Budget Act of that year, Congress added 42 U.S.C. § 1396u-2,5/ which permits states to mandate enrollment in a managed-care program without obtaining a waiver of the "freedom of choice" provision from the Secretary. 2 McCormick, Medicare and Medicaid Claims and Procedure § 26:2, at 397; Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4701, 111 Stat. 251, 489­92 (1997). A waiver is not required because

42 U.S.C. § 1396u-2 was crafted as an express exception to the

42 U.S.C. § 1315 is the codification of Section 1115 of the Social Security Act. Alternatively, a state could obtain a waiver of the "freedom of choice" provision from the Secretary under 42 U.S.C. § 1396n(b). 42 U.S.C. § 1396u-2 is the codification of Section 1932 of the Social Security Act. 7
5/ 4/

3/

"freedom of choice" provision.

See 42 U.S.C. § 1396a(a)(23)

("except as provided . . . in [42 U.S.C. § 1396u-2(a)]"); 42 U.S.C. § 1396u-2(a)(1)(A) ("notwithstanding paragraph . . . (23)(A) of [42 U.S.C. § 1396a(a)]"). In order to utilize that

exception, 42 U.S.C. § 1396u-2 requires that a state adhere to certain provisions.6/ Two such provisions are 42 U.S.C. §§ 1396u-2(a)(1)(A)(i)(I) and (II). The former directs that the

entity receiving a managed care contract and the contract itself must meet the applicable provisions of 42 U.S.C. § 1396u-2 as well as 42 U.S.C. § 1396b(m). § 1396u-2(a)(1)(A)(i)(I). 42 U.S.C.

And the latter mandates that "the

requirements described in the succeeding paragraphs of this subsection [(i.e., subsection (a))] are met." One such

requirement is found in 42 U.S.C. § 1396u-2(a)(3)(A), which, like 42 U.S.C. §§ 1396u-2(a)(1)(A)(i)(I), states that "[a] State must

In addition to permitting states to utilize MCOs, 42 U.S.C. § 1396u-2 authorizes them to employ primary care case management. Under that model, "a Medicaid beneficiary selects or is assigned to a single primary care provider, which provides or arranges for all covered services and is reimbursed on a fee-forservices basis in addition to receiving a small monthly `management' fee." H.R. Conf. Rep. 105-217, at 845 (1997), as reprinted in 1997 U.S.C.C.A.N. 176, 466. This differs from fully capitated HMOs, which "contract on a risk basis to provide beneficiaries with a comprehensive set of covered services in return for a monthly capitation payment." Id. Because the primary care case management model is not at issue here, this Court has omitted certain references to that model in its discussion of 42 U.S.C. § 1396u-2. 8

6/

permit an individual to choose a managed care entity from not less than two such entities that meet the applicable requirements of this section, and of [42 U.S.C. § 1396b(m)]." Turning to the "applicable requirements . . . of [42 U.S.C. § 1396b(m)]," subsection (1)(C)(i) states that, in order for an entity to be an MCO, it has to be one that "meets solvency standards established by the State for private health maintenance organizations or is licensed by the State as a risk-bearing entity." And, with respect to the "applicable requirements of

[42 U.S.C. § 1396u-2]," one such requirement is set forth in subsection (b)(5), under which an MCO must provide the state with "adequate assurances (in a time and manner determined by the Secretary)" that it: "(A) offers an appropriate range of

services and access to preventive and primary care services for the population expected to be enrolled in such service area"; and "(B) maintains a sufficient number, mix, and geographic distribution of providers of services." The Secretary has

determined that such assurances must be provided as specified by the state, but no less frequently than "at the time [an MCO] enters into a contract with the State." § 438.207(c)(1). Aside from conditioning the state's authority to compel enrollment on those requirements, 42 U.S.C. § 1396u-2(a) also provides that a state "may restrict the number of provider 9 42 C.F.R.

agreements with managed care entities under the State plan if such restriction does not substantially impair access to services." 42 U.S.C. § 1396u-2(a)(1)(A)(ii). In addition, the

statute provides that a state may not, under 42 U.S.C. § 1396u-2(a)(1), require certain classes of Medicaid beneficiaries to participate in a managed-care program. U.S.C. § 1396u-2(a)(2). Those classes include: See 42

(1) "certain

children with special needs," 42 U.S.C. § 1396u-2(a)(2)(A);7/ and (2) "dual eligibles" or beneficiaries who are eligible for services under both Medicaid and Medicare programs, 42 U.S.C. § 1396u-2(a)(2)(B); see also First Med. Health Plan, Inc. v. Vega-Ramos, 479 F.3d 46, 48 (1st Cir. 2007) ("Medicare beneficiaries who are indigent are referred to as `dual eligible' beneficiaries, meaning that they also qualify for Medicaid assistance." (citing 42 U.S.C. § 1396u-5(c)(6)(A))).

Under the exemption for "certain children with special needs": A State may not require under [42 U.S.C. § 1396u-2(a)(1)] the enrollment in a managed care entity of an individual under 19 years of age who-(i) is eligible for supplemental security income under title XVI; (ii) is described in [42 U.S.C. § 701(a)(1)(D)]; (iii) is described in [42 U.S.C. § 1396a(e)(3)]; (iv) is receiving foster care or adoption assistance under part E of title IV; or (v) is in foster care or otherwise in an out-of-home placement. 42 U.S.C. § 1396u-2(a)(2)(A). 10

7/

II.

Hawaii's QUEST and QExA Managed-Care Programs Hawai`i has elected to participate in the Medicaid

program.

"Prior to August 1, 1994, the State of Hawaii provided

medical benefits to some of its most financially needy residents through a fee-for-service [] Medicaid program." Chandler, 303 F.3d 1039, 1045 (9th Cir. 2002). Lovell v. "Medicaid served

the aged, blind, and disabled ("ABD") population, those receiving Aid to Families with Dependent Children [], and those receiving general assistance [] benefits." Id.

On July 16, 1993,8/ the Secretary approved a 42 U.S.C. § 1315 demonstration project for Hawai`i to conduct the "Hawaii Health QUEST" program, which transformed the state's fee-forservice program into a more cost-effective managed-care-based plan. See Lovell, 303 F.3d at 1045; Burns-Vidlak by Burns v. Hawai`i

Chandler, 165 F.3d 1257, 1259 n.1. (9th Cir. 1999). launched the program on August 1, 1994. at 1045.

Lovell, 303 F.3d

The ABD population was categorically excluded from the

QUEST managed-care program, and instead received benefits on a fee-for-services basis. Id. at 1045.

On October 10, 2007, the State DHS launched a new managed-care program for ABD Medicaid beneficiaries. (St. Compl.

The approval date is provided on the CMS's website. Hawaii QUEST Fact Sheet 1 (2008), http://www.cms.hhs.gov/ MedicaidStWaivProgDemoPGI/downloads/Hawaii%20QUEST%20Fact%20Sheet .pdf. 11

8/

¶ 23; Fed. 1st Am. Compl. ¶ 26.)

The State DHS issued a request

for proposal ("RFP"), No. RFP-MQD-2008-006, entitled "QUEST Expanded Access (QExA) Managed Care Plans to Cover Eligible Individuals Who Are Aged, Blind, or Disabled." Fed. 1st Am. Compl. ¶ 26.) (St. Compl. ¶ 23;

The purpose of the QExA RFP was to

procure the services of private entities that would be responsible for providing all of the Medicaid-required care to the ABD population. (St. Compl. ¶ 23; Fed. 1st Am. Compl. ¶ 26.)

While the Medicaid Act authorized the State DHS to contract with as many qualified MCOs (and other statutorily eligible entities) as were willing to participate in the new program, the agency decided to limit the number of contracts to two, the statutory minimum under 42 U.S.C. § 1396u-2(a)(3)(A). ¶ 24; Fed. 1st Am. Compl. ¶ 27). On February 1, 2008, the State DHS awarded managed-care contracts to the Intervenors in this action, Ohana and Evercare (collectively, "QExA Contractors"), and the contracts ("QExA Contracts") were signed on February 4, 2008. 56-57; Fed. 1st Am. Compl. ¶ 58.) (St. Compl. ¶¶ 27, See (St. Compl.

The services the QExA

Contracts call for include providing the care for all ABD beneficiaries. (St. Compl. ¶ 2; Fed. 1st Am. Compl. ¶ 2.)

The Plaintiffs in this case are current Hawai`i Medicaid program beneficiaries who are within the ABD population. (St. Compl. ¶¶ 7-9; Fed. 1st Am. Compl. ¶ 7.) 12 They allege that

Ohana and Evercare were unqualified to receive the QExA Contracts because they did not (1) have HMO insurance licenses issued by the state, as required by 42 U.S.C. § 1396(m)(1)(C)(i), or (2) provide the State DHS with adequate assurances that they had an appropriate range of services and maintained sufficient number, mix, and geographic distribution of providers of services, as required by 42 U.S.C. § 1396u-2(b)(5). 66, 69; Fed. 1st Am. Compl. ¶¶ 72, 74.) (St. Compl. ¶¶ 55, 61-62, Plaintiffs further

allege that, at the time the QExA RFP was issued, the State DHS lacked (and still lacks) the information necessary to determine whether limiting the number of managed-care contracts to two would substantially impair access to services, in contravention of 42 U.S.C. § 1396u-2(a)(1)(ii). Fed. 1st Am. Compl. ¶ 28.) By letters dated February 7, 2008 and September 12, 2008, the CMS approved the QExA program. 5.) (St. Mot., Ex. 1 at 1, (St. Compl. ¶¶ 25, 83; cf.

By letters transmitted on or around June 13, 2008 and

December 17, 2008, counsel for one of the unsuccessful health plans that had submitted a bid for a QExA Contract, AlohaCare, sent complaints to a CMS regional administrator in San Francisco. (Fed. 1st Am. Compl. ¶¶ 88, 91.) that: The complaints advised the CMS

(1) neither entity that was awarded a QExA Contract was

properly licensed at the time the contracts were signed; (2) both QExA Contractors failed to develop and document an actual 13

provider network at the time their contracts were signed; and (3) Hawaii's 42 U.S.C. § 1315 waiver could not override the statutory exemption for children with special needs. (Id. ¶¶ 88, 92­93.)

Plaintiffs allege that, despite the correspondence, the CMS has not considered or investigated any of the violations that AlohaCare's counsel had identified and documented. (Id. ¶ 94.)

In fact, on January 30, 2009, the CMS approved the QExA Contracts. (Fed. Compl. ¶ 2, 18, 95.e; Fed. Joinder Mem. 5.)

Under the QExA program, as of February 1, 2009, all ABD beneficiaries have been required to enroll with a managed care organization to receive Medicaid benefits. 27, 72; Fed. 1st Am. Compl. ¶¶ 3, 30, 72.) Plaintiffs allege that their rights under the "freedom of choice" provision have been violated. (St. Compl. ¶ 26.) (St. Compl. ¶¶ 3, 17,

They further assert that they cannot be required to enroll with the QExA Contractors because (1) the MCOs were not statutorily eligible for Medicaid managed-care contracts, as contemplated by 42 U.S.C. § 1396u-2(a)(i), and (2) there has been no determination as to whether restricting the number of provider agreements with managed care entities under the State plan to two would substantially impair access to services, as required by 42 U.S.C. § 1396u-2(a)(ii). (St. Compl. ¶ 3; Fed. 1st Am. Compl.

14

¶ 3.)

Plaintiffs also contend that all but one of them9/ cannot

be required to obtain Medicaid-covered care through the QExA program for the additional reason that they fall under 42 U.S.C. §§ 1396u-2(a)(2)(A) and (B)'s exemptions for certain children with special needs and dual eligibles. Fed. 1st Am. Compl. ¶¶ 4, 8-9.) The CMS allowed the State DHS to mandate enrollment of those exempt classes of beneficiaries by virtue of the waiver authority under 42 U.S.C. § 1315(a). ¶ 78.) (See Fed. 1st Am. Compl. (St. Compl. ¶¶ 4, 8-9;

Specifically, the CMS granted the State DHS a waiver of

the "freedom of choice" provision, 42 U.S.C. § 1396a(a)(23), "[t]o enable Hawaii to restrict the freedom of choice of providers to groups that could not otherwise be mandated into managed care under [42 U.S.C. § 1396u-2]." at 8.)10/ In the State Complaint, Plaintiff R. was alleged to be a dual eligible. (St. Compl. ¶¶ 8-9.) However, in the Federal First Amended Complaint, which was filed after the State Complaint, Plaintiff R. is not alleged to be a dual eligible, but instead "a severely disabled adult." (Fed. 1st Am. Compl. ¶¶ 8­9.) Thus, it appears that Plaintiff R. is no longer a dual eligible. (See id. ¶ 8.) Exhibit A to the State Defendants' motion is a copy of the documents from the CMS approving the QExA program, which are public documents. The documents are available on the CMS's website. See Hawaii QUEST Current Approval Documents, http://www.cms.hhs.gov/MedicaidStWaivProgDemoPGI/downloads/Hawaii %20QUEST%20Current%20Approval%20Documents.zip. This Court has taken judicial notice of fact that the Secretary has waived the "freedom of choice" provision, 42 U.S.C. § 1396a(a)(23), "[t]o (continued...) 15
10/ 9/

(St. Mot., Ex. 1

LEGAL STANDARDS Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)") permits dismissal of a complaint that fails "to state a claim upon which relief can be granted." "A Rule 12(b)(6)

`dismissal is proper only where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory.'" Zamani v. Carnes, 491 F.3d 990,

996-97 (9th Cir. 2007) (quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)) (brackets omitted). Under Rule 12(b)(6), review is generally limited to the contents of the complaint. Sprewell v. Golden State Warriors,

266 F.3d 979, 988 (9th Cir. 2001); Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996). Courts may also "consider

certain materials--documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice--without converting the motion to dismiss into a motion for summary judgment." 903, 908 (9th Cir. 2003).
10/

United States v. Ritchie, 342 F.3d

Documents whose contents are alleged

(...continued) enable Hawaii to restrict the freedom of choice of providers to groups that could not otherwise be mandated into managed care under [42 U.S.C. § 1396u-2]." (St. Mot., Ex. 1 at 8.) That fact does not appear to be in dispute. See (Pl. Mem. in Supp. 14­18; Fed. 1st Am. Compl. ¶¶ 78); Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (explaining that a "court may take judicial notice of `matters of public record' without converting a motion to dismiss into a motion for summary judgment," but that it "may not take judicial notice of a fact that is `subject to reasonable dispute'" (quoting Fed. R. Evid. 201)). 16

in a complaint and whose authenticity are not questioned by any party may also be considered in ruling on a Rule 12(b)(6) motion to dismiss. 1994). On a Rule 12(b)(6) motion to dismiss, all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Fed'n of African Am. See Branch v. Tunnell, 14 F.3d 449, 453-54 (9th Cir.

Contractors v. City of Oakland, 96 F.3d 1204, 1207 (9th Cir. 1996). However, conclusory allegations of law, unwarranted

deductions of fact, and unreasonable inferences are insufficient to defeat a motion to dismiss. See Sprewell, 266 F.3d at 988;

Nat'l Ass'n for the Advancement of Psychoanalysis v. Cal. Bd. of Psychology, 228 F.3d 1043, 1049 (9th Cir. 2000); In re Syntex Corp. Sec. Litig., 95 F.3d 922, 926 (9th Cir. 1996). Moreover,

the court need not accept as true allegations that contradict matters properly subject to judicial notice or allegations contradicting the exhibits attached to the complaint. 266 F.3d at 988. DISCUSSION The State Defendants have moved to dismiss the five counts in the State Complaint, and the Federal Defendants seek dismissal of the one count asserted in the Federal First Amended Complaint. This Court will first address the Federal Defendants' Sprewell,

charge against the Federal First Amended Complaint and then 17

consider the State Defendants' contentions relating to the State Complaint. I. The Federal First Amended Complaint: the APA Reviewability Under

In the sole count in the Federal First Amended Complaint, Plaintiffs allege that the CMS exceeded its authority under 42 U.S.C. § 1315(a) by waiving the prohibition against requiring dual eligibles and certain children with special needs to enroll in managed care, as prescribed by 42 U.S.C. §§ 1396u-2(a)(2)(A) and (B). (Fed. 1st Am. Compl. ¶ 95.d.) In

addition, Plaintiffs contend that, when the CMS approved the QExA Contracts: (1) it was aware that the two QExA Contractors were

not licensed HMOs, in violation of 42 U.S.C. §§ 1396b(m), 1396b(m)(2)(A)(xii), and 1396u-2(a)(3); (2) it failed to determine whether the State DHS's decision to limit the number of contracts to two would substantially impair access to services, in contravention of 42 U.S.C. § 1396u-2(a)(1)(A)(ii); and (3) neither Ohana nor Evercare provided adequate assurances as to their coverage and provider networks, as required by 42 U.S.C. § 1396u-2(b)(5). (Fed. 1st Am. Compl. ¶¶ 74, 95.a-c, 95.e, 96.)

Plaintiffs assert that, in the face of the foregoing violations, the CMS has taken no action to enforce the law. ¶ 96.) (Id.

They allege that the CMS either ignored information that

demonstrated the existence of the violations in giving the QExA project its approval or failed to understand that the violations 18

negated the eligibility of the two entities to which contracts were awarded. (Id.) Plaintiffs further posit that the CMS

effectively authorized Hawai`i to compel Medicaid beneficiaries to enroll with the QExA Contractors even though neither of the QExA Contractors nor the QEXA Contracts met relevant statutory and regulatory conditions. (Id. ¶ 97.) Plaintiffs allege that

the conduct of the Federal DHHS, by virtue of the CMS, constitutes "agency action" under 5 U.S.C. §§ 706(2)(A)­(C). (Id. ¶ 98.) The Federal Defendants assert that Plaintiffs cannot compel them to enforce the Medicaid Act and its related regulations or to investigate whether the QExA Contractors made false representations to the State DHS. (Fed. Joinder Mem. 2-3.)

While it is true that Plaintiffs allege that the Federal Defendants did not enforce the Medicaid Act, at no point do they ask this Court to compel the Federal Defendants to launch an affirmative investigation. Rather, in their prayer for relief,

Plaintiffs ask this Court to (1) declare that the CMS's decisions to approve the QExA Contracts and to grant a 42 U.S.C. § 1315 waiver were arbitrary and capricious and (2) enjoin the CMS from making any payments for the QExA program. ¶ 49.) (Fed. 1st Am. Compl.

Accordingly, this Court need not decide whether

Plaintiffs have stated a claim to compel the Federal Defendants to conduct an investigation pursuant to the Medicaid Act. 19

The Federal Defendants next argue that Plaintiffs' claims against them cannot proceed under the Medicaid Act or the APA because neither statute affords Plaintiffs a private right of action. (Fed. Joinder Mem. 3.) Plaintiffs do not challenge the

Federal Defendants' contention that they have no express or implied right of action under the Medicaid Act. Their argument

is instead that this Court may review the CMS's decisions to grant a 42 U.S.C. § 1315(a) waiver and approve the QExA Contracts under the APA. (Pl. Opp'n 26-27.)

Plaintiffs point out that they may contest the 42 U.S.C. § 1315 waiver under the APA in view of the Ninth Circuit's decision in Beno v. Shalala, 30 F.3d 1057 (9th Cir. 1994), which specifically held that "§ 1315(a) waivers are subject to APA review." Id. at 1067. The Federal Defendants' concede as much,

but contend that nowhere in the Plaintiffs' pleadings do they challenge the CMS's decision to approve a 42 U.S.C. § 1315(a) waiver. (Fed. Reply 3 n.1, 5 n.2.) The Federal Defendants are

incorrect.

Plaintiffs have plainly asked this Court to declare

that the CMS's decision to allow the state to proceed with the QExA program under its 42 U.S.C. § 1315 waiver authority was arbitrary, capricious, and contrary to law. Compl. 49; see also id. ¶¶ 78, 95.d.) The remaining question is whether this Court can review the Secretary's decision to approve the QExA Contracts under the 20 (See Fed. 1st Am.

APA.

"The APA embodies a `basic presumption of judicial Beno, 30 F.3d at 1066 (quoting Lincoln v. Vigil, 508 "Absent an explicit statutory bar,

review.'"

U.S. 182, 190 (1993)).

judicial review of agency action is available except in those rare instances where statutes are drawn in such broad terms that in a given case there is no law to apply and a court would have no meaningful standard against which to judge the agency's exercise of discretion." marks omitted). In this case, according to the Federal Defendants, the Secretary reviewed and approved the QExA Contracts pursuant to 42 U.S.C. § 1396b(m). (Fed. Joinder Mem. 5.) That section states Id. (citations and internal quotation

in relevant part that: [N]o payment shall be made to a State with respect to incurred by it for payment provided by any entity . . under this title expenditures . . . for services . unless--

(i) the Secretary has determined that the entity is a medicaid managed care organization as defined in paragraph (1); ... (iii) such services are provided for the benefit of individuals eligible for benefits under this title in accordance with a contract between the State and the entity . . . under which the Secretary must provide prior approval for contracts providing for expenditures in excess of $ 1,000,000 for 1998 and, for a subsequent year, the amount established under this clause for the previous year increased by the percentage 21

increase in the consumer price index for all urban consumers over the previous year; [and] ... (xii) such contract, and the entity complies with the applicable requirements of [42 U.S.C. § 1396u-2]. 42 U.S.C. § 1396b(m)(2)(A). This section plainly contemplates that the Secretary will review managed-care contracts and approve them if (1) the contractor meets the definition of an MCO and (2) the contract and contractor comply with the applicable requirements of 42 U.S.C. § 1396b(m)(2)(A). implementing regulations. This reading is confirmed by the See 42 C.F.R. § 438.6 ("The CMS

Regional Office must review and approve all MCO . . . contracts . . . ."); id. § 438.806(a) (directing that federal financial participation "is available under a comprehensive risk contract only if -- (1) The [CMS] Regional Office has confirmed that the contractor meets the definition of an MCO . . . ; and (2) The contract meets all the requirements of [42 U.S.C. § 1396b(m)(2)(A)], the applicable requirements of [42 U.S.C. § 1396u-2], and the implementing regulations in this part"). This Court agrees with Plaintiffs that there is no explicit statutory bar against review of the CMS's approval under 42 U.S.C. § 1396b(m)(2)(A). Furthermore, the statute is not

drawn in such broad terms that in a given case there is no law to apply. See Beno, 30 F.3d at 1066. 22 The Federal Defendants do not

argue otherwise.

They simply point out that, in determining

whether agency action is subject to review, a court should closely review the statutory language. (Fed. Reply 5 n.2.)

After carefully reviewing the statutory language set forth in 42 U.S.C. § 1396b(m)(2)(A), this Court concludes that the CMS's decision to approve the QExA Contracts is subject to review under the APA. Accordingly, the claims that are asserted in the Federal First Amended Complaint are reviewable under the APA.11/ This Court will now turn to the State Defendants' contentions as to the State Complaint. II. Counts I, III, and V of the State Complaint: Statutory Standing To Enforce Certain Provisions of the Medicaid Act Through 42 U.S.C. § 1983 In counts I, III, and V of the State Complaint, Plaintiffs claim that the State DHS may not deprive them of their rights under the "freedom of choice" provision, 42 U.S.C. § 1396a(a)(23)(A), by requiring them to enroll with the QExA Contractors because the preconditions for compelling managed care

The Federal Defendants posit that this Court may not review the Secretary's decision not to take action against the QExA Contractors for their alleged misrepresentation of information pursuant to 42 U.S.C. § 1396b(m)(5)(A)(iv). (Fed. Reply 4.) That provision states that the Secretary "may" impose monetary penalties upon, or deny payment to, a contractor who has misrepresented or falsified information. See 42 U.S.C. §§ 1396b(m)(5)(A)(iv), (B). Yet Plaintiffs have not asked this Court to order that the Secretary take such action in the Federal First Amended Complaint. 23

11/

enrollment set forth in 42 U.S.C. § 1396u-2(a)(1)(A) have not been met. The allegedly unsatisfied preconditions are that: (1)

the QExA Contractors do not meet the solvency standards established by the state for private HMOs and are not licensed or certified by the state as a risk-bearing entity, as required by 42 U.S.C. § 1396b(m)(1)(C)(i) (count I), and (2) the contractors have not shown that they have adequate services and provider networks, as required by 42 U.S.C. § 1396u-2(b)(5) (count V). Plaintiffs further allege that the State DHS has not determined whether limiting the number of contractors to two will substantially impair access to services, as required by 42 U.S.C. § 1396u-2(a)(1)(A)(ii) (count III). The State Defendants argue that this Court should dismiss Plaintiffs' claims because Plaintiffs do not have a right to enforce 42 U.S.C. §§ 1396u-2(a)(1)(A)(i), 1396b(m)(1)(C)(i), 1396u-2(b)(5), or 1396u-2(a)(1)(A)(ii) through 42 U.S.C. § 1983. (Mem. in Supp. 11-16, 22-23, 26-27.) Plaintiffs counter that

their right of action derives not only from those provisions, but also from 42 U.S.C. § 1396a(a)(23)(A), the "freedom of choice" provision itself. (Pl. Opp'n 5-6.) Plaintiffs assert (1) that

the "freedom of choice" provision confers upon them a right enforceable under 42 U.S.C. § 1983 and (2) that they therefore have statutory standing to claim that, in order for the State DHS to deny them that right by requiring that they enroll in a 24

managed-care program, it must comply with the requirements of 42 U.S.C. §§ 1396u-2(a)(1)(A)(i), 1396b(m)(1)(C)(i), 1396u-2(b)(5), and 1396u-2(a)(1)(A)(ii). (Pl. Opp'n 8, 12.) Plaintiffs thus

seek to enforce the foregoing provisions through 42 U.S.C. § 1983. A. The Blessing framework In Blessing v. Freestone, 520 U.S. 329 (1997), the Supreme Court held that, in "`determining whether a particular statutory provision gives rise to a federal right' redressable via § 1983," courts must consider whether: (1) "Congress intended that the provision in question benefit the plaintiff"; (2) the plaintiff has "demonstrated that the right assertedly protected by the statute is not so `vague and amorphous' that its enforcement would strain judicial competence"; and (3) "the statute unambiguously imposes a binding obligation on the States," such that "the provision giving rise to the asserted right is couched in mandatory, rather than precatory terms." Ball, 492 F.3d at 1104 (quoting Blessing, 520 U.S. at 340­41). If all three elements are satisfied, a federal right is "`presumptively enforceable by § 1983,' subject only to a showing by the state that `Congress specifically foreclosed a remedy under § 1983.'" Id. at 1116 (quoting Gonzaga Univ. v. Doe, 536

U.S. 273, 284 & n.4 (2002)). As to the first Blessing prong, "`it is rights, not the broader or vaguer "benefits" or "interests," that may be enforced 25

under the authority of that section.'" Gonzaga, 536 U.S. at 283).

Id. at 1105 (quoting

Evidence of congressional intent for

a provision to benefit the plaintiff "can be found in a statute's language as well as in its overarching structure." Id. "[T]he

statutory provision in question must focus on individual rights to benefits, rather than only the aggregate or systemwide policies and practices of a regulated entity." 436 F.3d 1152, 1159 (9th Cir. 2006). Watson v. Weeks,

"[T]he statute must be

`phrased in terms of the persons benefitted with an unmistakable focus on the benefitted class.'" Ball, 492 F.3d at 1106 (quoting

Gonzaga, 536 U.S. at 284) (ellipsis omitted) (emphasis in original). Some phrases, such as "No person shall," clearly Sanchez v. Johnson, 416 F.3d

establish an individual right.

1051, 1058 (9th Cir. 2005); see also Ball, 492 F.3d at 1108 ("While express use of the term `individuals' (or `persons' or similar terms) is not essential to finding a right for § 1983 purposes, usually such use is sufficient for that purpose."). However, "statutory language less direct . . . must be supported by other indicia so unambiguous that we are left without any doubt that Congress intended to create an individual, enforceable right remediable under § 1983." Sanchez, 416 F.3d at 1058.

While a statute's language is the primary source of congressional intent to confer a right, a court may also look to the statute's implementing regulations and legislative history in ascertaining 26

whether the statute was intended to benefit the plaintiff. 492 F.3d at 1106; Sanchez, 416 F.3d at 1057 ("`The question

Ball,

whether Congress intended to create a private right of action is definitively answered in the negative where a statute by its terms grants no private rights to any identifiable class.'" (quoting Gonzaga, 536 U.S. at 283-84) (emphasis in original)). With respect to the second Blessing prong, the question is whether "`the plaintiff has `demonstrated that the right assertedly protected by the statute is not so "vague and amorphous" that its enforcement would strain judicial competence.'" at 340­41). Ball, 492 F.3d at 1104 (quoting Blessing, 520 U.S.

A statute that, on its face, employs ambiguous

standards, such as "reasonable benefits" or "reasonable and adequate," may nevertheless be enforceable if it is accompanied by sufficiently detailed guidance as to how such standards are to be measured. See Watson, 436 F.3d at 1157-58; Price v. City of Such

Stockton, 390 F.3d 1105, 1111 (9th Cir. 2004) (per curiam). guidance may be found in implementing regulations. F.3d at 111.

Price, 390

With these precepts in mind, this Court will now turn to the questions of whether Plaintiffs may enforce, via § 1983, the "freedom of choice" provision and the requirements of 42 U.S.C. § 1396u-2(a).

27

B.

The "Freedom of Choice" Provision, 42 U.S.C. § 1396(a)(23) In a recent case, the Ninth Circuit held that certain

provisions of the Medicaid Act created private rights that can be enforced by beneficiaries via § 1983. Ball, 492 F.3d at 1103.

In so holding, the court repeatedly relied upon the Sixth Circuit's decision in Harris v. Olszewski, 442 F.3d 456 (6th Cir. 2006), which determined that the "freedom of choice" provision "created individual rights enforceable under § 1983." Ball, 492

F.3d at 1109, 1115, 1117 (citing Harris, 442 F.3d at 461-63). The Harris court's analysis under the Blessing framework is discussed in the following subsections. 1. Congressional intent to benefit the plaintiff

Applying the first Blessing prong, the Harris court looked to the language of the "freedom of choice" provision, which states in relevant part that: A State plan for medical assistance must-. . . (23) except as provided . . . in [42 U.S.C. § 1396u-2(a)] . . . provide that (A) any individual eligible for medical assistance (including drugs) may obtain such assistance from any institution, agency, community pharmacy, or person, qualified to perform the service or services required (including an organization which provides such services, or arranges for their availability, on a prepayment basis), who undertakes to provide him such services . . . . 42 U.S.C. § 1396a(a) (emphasis added). The Harris court

explained that, "in giving any individual eligible for medical 28

assistance a free choice over the provider of that assistance, the statute uses the kind of `individually focused terminology' that `unambiguously confers' an `individual entitlement' under the law." 442 F.3d at 461 (quoting Gonzaga, 536 U.S. at 283,

287) (some internal quotation marks omitted), quoted in Ball, 492 F.3d at 1109; see also Silver v. Baggiano, 804 F.2d 1211, 1217 (11th Cir. 1986) (explaining that "the language of [the `freedom of choice'] provision is clearly drawn to give Medicaid recipients the right to receive care from the Medicaid provider of their choice, rather than the government's choice"), abrogated on other grounds by Lapides v. Bd. of Regents of Univ. Sys. of Ga., 535 U.S. 613 (2002). The court also found instructive the

Supreme Court's observation that the "freedom of choice" provision "`gives recipients the right to choose among a range of qualified providers[] without government interference.'" Harris,

442 F.3d at 462 (quoting O'Bannon, 447 U.S. at 785) (brackets in original). The Harris court's textual analysis is reinforced by the "freedom of choice" provision's legislative history and the administrative regulations interpreting the provision. See Ball,

492 F.3d at 1105­06 (observing that evidence of Congressional intent to create a federal right may be found in a statute's legislative history and agency regulations promulgated under the statute); S. Rep. No. 90-744, at 5, 19, 122 (1967), as reprinted 29

in 1967 U.S.C.C.A.N. 2834, 2838, 2868, 3021 (explaining that the freedom of choice provision was intended to: (1) "[a]llow

recipients free choice of qualified providers of health services"; (2) provide that "people covered under the medicaid program would have free choice of qualified medical facilities and practitioners"; and (3) require that "recipients of medical assistance under a State title XIX program . . . have freedom in their choice of medical institution or medical practitioner"), quoted in Silver, 804 F.2d at 1217; 42 C.F.R. § 431.51(a)(1) ("[42 U.S.C. § 1396a(a)(23)] provides that recipients may obtain services from any qualified Medicaid provider that undertakes to provide the services to them."). 2. Vagueness and mandatory obligations

As to the second the Blessing prong, the Harris court observed that, "while there may be legitimate debates about the medical care covered by or exempted from the freedom-of-choice provision, the mandate itself does not contain the kind of vagueness that would push the limits of judicial enforcement." 442 F.3d at 462. The court further noted that "[w]hether a state

plan provides an individual with the choice specified in the provision is likely to be readily apparent . . . ." in Ball, 492 F.3d at 1115. And, with respect to the third Blessing prong, the Harris court noted that "the `must . . . provide' language of the 30 Id., quoted

provision confirms that the statute is `couched in mandatory, rather than precatory, terms.'" at 341). 3. Congressional intent to foreclose a remedy Id. (quoting Blessing, 520 U.S.

Finally, the Harris court reasoned that other provisions of the Medicaid Act do not "explicitly or implicitly foreclose the private enforcement of [the `freedom of choice' provision] through § 1983 actions." Id. The court observed that

"[t]he Medicaid Act does not provide other methods for private enforcement of the Act in federal court." Id. The court noted

that the fact "[t]hat the Federal Government may withhold federal funds to non-complying States is not inconsistent with private enforcement." Id. at 463, quoted in Ball, 492 F.3d at 1117.

This Court finds the Harris court's analysis of the "freedom of choice" provision persuasive and therefore concludes that the provision gives rise to a federal right for Medicaid beneficiaries that is redressable via § 1983. See Ball, 492 F.3d

at 1104; Harris, 442 F.3d at 461; Silver, 804 F.2d at 1217 (explaining that "it is clear that recipients have enforceable rights under § 1396a(a)(23)"); Women's Hosp. Found. v. Townsend, Civ. No. 07-711-JJB-DLD, 2008 U.S. Dist. LEXIS 52549, at *23-*24 (D. La. July 10, 2008) (concluding that "the Freedom of Choice Provision satisfies the Blessing and Gonzaga tests" and that a medicaid beneficiary therefore had an enforceable right under 31

that provision through § 1983).

Here, as Plaintiffs are Medicaid

beneficiaries, they may enforce their rights under the "freedom of choice" provision through this § 1983 action. C. The requirements of the managed-care exception to the "freedom of choice" provision The "freedom of choice" provisions is, however, subject to exceptions, one of which is set forth in 42 U.S.C. § 1396u-2(a). That section authorizes states to mandate

enrollment in managed care as a condition of receiving benefits if the state meets certain requirements. In theory, if a state

were to mandate enrollment pursuant to 42 U.S.C. § 1396u-2(a) (as opposed to a § 1315 waiver) without meeting the requirements of that section, the state would be without authority to mandate managed care, and its failure to provide benefits consistent with the "freedom of choice" provision would arguably constitute a violation of that provision. But that is not to say that

Plaintiffs necessarily have statutory standing to enforce those requirements. Plaintiffs contend that they must have the right to enforce the requirements of 42 U.S.C. § 1396u-2(a) simply because it is an exception to the "freedom of choice" provision. Opp'n 8.) (Pl.

While the fact that Plaintiffs' have a right to

enforce the "freedom of choice" provision is relevant in deciding whether they may also enforce the requirements of 42 U.S.C. § 1396u-2(a), insofar as it speaks to the overall statutory 32

scheme, that fact is by no means determinative.

Rather, in order

for Plaintiffs to enforce those requirements, they must first have a right to do so under the Blessing framework, which calls for a particularized inquiry of the specific provision at issue. With an eye toward that framework, this Court will now consider whether Plaintiffs have a right to enforce the requirements set forth in 42 U.S.C. §§ 1396u-2(a)(1)(A)(i), 1396u-2(a)(1)(A)(ii), 1396u-2(b)(5), and 1396b(m)(1). 1. 42 U.S.C. § 1396u-2(a)(1)(A)(ii)

42 U.S.C. § 1396u-2(a)(1)(A)(ii) provides that, when a state employs a mandatory managed-care system, it "may restrict the number of provider agreements with managed care entities under the State plan if such restriction does not substantially impair access to services." In Hawaii Coalition for Health v. Hawaii, Department of Human Services, 576 F. Supp. 2d 1114 (D. Haw. 2008) ("HCH"), the court explained that the plain language of this section "focuses on when a State may limit the number of managed care provider agreements," and that the section does not identify or refer to "any particular individuals to be benefitted." Id. at 1121. The

court further observed that, "[w]hile program recipients will certainly benefit from having access to services, it does not appear that Congress intended to create an enforceable right through this statute." Id. The court thus found no evidence 33

that "indicates an `unmistakable focus on the benefitted class.'" Id. (quoting Gonzaga, 536 U.S. at 284). Rather, the court

determined that the "broad and nonspecific" language of 42 U.S.C. § 1396u-2(a)(1)(A)(ii) supports the conclusion that "it is directed to a general goal and policy, as opposed to conferring individually enforceable rights on Medicaid recipients." at 1122. This Court agrees with the HCH court's textual analysis of 42 U.S.C. § 1396u-2(a)(1)(A)(ii) and therefore concludes that the provision was not intended to benefit Plaintiffs. See Id.

Sanchez, 416 F.3d at 1057 ("`The question whether Congress intended to create a private right of action is definitively answered in the negative where a statute by its terms grants no private rights to any identifiable class.'" (quoting Gonzaga, 536 U.S. at 283-84) (emphasis in original)). As such, they lack

statutory standing to enforce that provision through § 1983. 2. 42 U.S.C. §§ 1396u-2(a)(1)(A)(i), 1396u-2(b)(5), and 1396b(m)(1)

This Court will next consider whether Plaintiffs have a right to enforce 42 U.S.C. §§ 1396u-2(a)(1)(A)(i), 1396u-2(b)(5), and 1396b(m)(1). This Court evaluates these

provisions together because they are closely related.

34

a.

Congressional intent to benefit the plaintiff and mandatory obligations

To begin with, 42 U.S.C. § 1396u-2(a), entitled "State option to use managed care," directs in relevant part: (1) Use of medicaid managed care organizations . . . . (A) In general. Subject to the succeeding provisions of this section, and notwithstanding paragraph . . . (23)(A) of [42 U.S.C. § 1396a(a)], a State-(i) may require an individual who is eligible for medical assistance under the State plan under this title to enroll with a managed care entity as a condition of receiving such assistance (and, with respect to assistance furnished by or under arrangements with such entity, to receive such assistance through the entity), if-(I) the entity and the contract with the State meet the applicable requirements of this section and . . . [42 U.S.C. § 1396b(m)]; and (II) the requirements described in the succeeding paragraphs of this subsection are met . . . . 42 U.S.C. § 1396u-2(a) (emphasis added). One of the "requirements" of "this subsection," subsection (a), is found in 42 U.S.C. § 1396u-2(a)(3)(A), which states that "[a] State must permit an individual to choose a managed care entity from not less than two such entities that meet the applicable requirements of this section, and of [42

35

U.S.C. § 1396b(m)]."

(Emphasis added.)12/

And one of the

requirements of "this section" pertaining to MCOs is set forth in 42 U.S.C. § 1396u-2(b), which states in relevant part that: (b) Beneficiary protections. .... (5) Demonstration of adequate capacity and services. Each medicaid managed care organization shall provide the State and the Secretary with adequate assurances (in a time and manner determined by the Secretary) that the organization, with respect to a service area, has the capacity to serve the expected enrollment in such service area, including assurances that the organization-(A) offers an appropriate range of services and access to preventive and primary care services for the population expected to be enrolled in such service area, and (B) maintains a sufficient number, mix, and geographic distribution of providers of services. (Emphasis added.) In addition, the "requirements" of 42 U.S.C. § 1396b(m), inter alia, define the necessary qualifications of an MCO as follows: (m) "Health maintenance organization" defined ....

This Court notes that, although Plaintiffs rely on 42 U.S.C. § 1396u-2(a)(1)(A), which incorporates the requirements of 42 U.S.C. § 1396u-2(a)(3)(C), they do not specifically rely on 42 U.S.C. § 1396u-2(a)(3)(C). This Court nevertheless finds 42 U.S.C. § 1396u-2(a)(3)(C) instructive and discusses its implications where appropriate. 36

12/

(1) (A) The term "health maintenance organization" means[, inter alia,] a health maintenance organization . . . , which . . . -... (ii) has made adequate provision against the risk of insolvency, which provision is satisfactory to the State, meets the requirements of subparagraph (C)(i) (if applicable), and which assures that individuals eligible for benefits under this title are in no case held liable for debts of the organization in case of the organization's insolvency. .... (C) (i) . . . a provision meets the requirements of this subparagraph for an organization if the organization meets solvency standards established by the State for private health maintenance organizations or is licensed or certified by the State as a risk-bearing entity.[13/] 42 U.S.C. § 1396b (emphasis added). To summarize, under 42 U.S.C. § 1396u-2(a), a state need not "[]withstand" or comply with the "freedom of choice" provision, and "may" thereby employ a mandatory managed-care program, "if" certain requirements are met, including the requirement that the state permit an "individual to choose a

42 U.S.C. § 1396b(m)(1)(C) includes a number of exceptions; however, the parties do not contend that those exceptions are applicable here. 37

13/

managed care entity from not less than two such entities that meet the applicable requirements of this section, and of [42 U.S.C. § 1396b(m)]." This language is "unmistakably focused" on

the right of an "individual," a Medicaid beneficiary, to choose from at least two MCOs that meet the "applicable requirements" of 42 U.S.C. §§ 1396u-2 and 1396b(m). See Ball, 492 F.3d at 1106;

Watson, 436 F.3d at 1160 (holding that the terms of 42 U.S.C. § 1396a(a)(10), which provides that "`[a] State plan . . . must provide for making medical assistance available . . . to all individuals,'" were "unmistakably focused on the specific individuals benefitted" (quoting 42 U.S.C. § 1396a(a)(10)) (ellipses, brackets, and emphasis in original)). Those "requirements" were plainly intended to benefit the "individual" by ensuring that, in instances where a beneficiary is not permitted to choose his own healthcare providers, the MCOs that a state selects for the beneficiary will meet certain minimum standards, including the standards pertaining to provider-networks and solvency. The former

provides "[b]eneficiary protections" by guaranteeing that an MCO has "the capacity to serve the expected enrollment," while the latter serves to protect "individuals" eligible for Medicaid against the risk of being held liable for debts in the event of the MCO's insolvency. 1396b(m)(1)(A)(ii). 38 42 U.S.C. §§ 1396u-2((b)(5),

The foregoing analysis is reinforced by the legislative history underlying the enactment of 42 U.S.C. § 1396u-2 in 1997. See Ball, 492 F.3d at 1105­06 (observing that evidence of Congressional intent to create a federal right may be found in a statute's legislative history). The legislative history

indicates that, "[t]o control the costs and quality of healthcare, states are increasingly delivering services to their Medicaid populations through [HMOs] and other managed care arrangements." H.R. Conf. Rep. No. 105-217, at 845 (1997), as The conference report

reprinted in 1997 U.S.C.C.A.N. 176, 466.

states that, prior to the 1997 amendment, "to mandate that a beneficiary enroll in a managed care organization, . . . a state [had to] first obtain a waiver of the freedom-of-choice provision of Medicaid law," but that, under the House bill, states would have "the option of requiring individuals eligible for medical assistance under the state plan to enroll in a capitated managed care plan . . . without a . . . waiver." reprinted in 1997 U.S.C.C.A.N. at 467. In further discussing the House bill, the conference report states that: "[The bill] also permits states to restrict Id. at 846, as

the number of plans or providers it contracts with, consistent with quality of care. Individuals must be permitted to choose

their . . . managed care entity from among those that meet Medicaid requirements. Individuals must be given a choice of at 39

least two managed care entities . . . ."

Id. (emphasis added);

see also id. at 848, as reprinted in 1997 U.S.C.C.A.N. at 469. This language, consistent with the actual statutory language, is clearly focused on the right of "[i]ndividuals" to choose an MCO that meets "Medicaid requirements," and not merely on "the aggregate or systemwide policies and practices of a regulated entity." See Watson, 436 F.3d at 1159. In light of 42 U.S.C.

§ 1396u-2(a)(1)(A)(i)'s language, the overall statutory structure, and the legislative history, this Court concludes that the requirements set forth in 42 U.S.C. §§ 1396u-2(a)(3)(A), 1396u-2(b)(5), and 1396b(m)(1) were intended to benefit Plaintiffs as Medicaid beneficiaries.14/ The State Defendants argue that Plaintiffs may not enforce those requirements, citing HCH. There, the court held that Medicaid beneficiaries did not have enforceable rights under 42 U.S.C. § 1396(a)(1)(A)(i) or 1396u-2(b)(5), because those provisions were not intended to benefit recipients. 576 F. Supp. 2d at 1121­24. However, the court does not appear to have been presented with the questions of whether Medicaid beneficiaries have enforceable rights under the "freedom of choice" provision or 42 U.S.C. § 1396u-2(a)(3)(A). This Court believes that, when those provisions are factored into the analysis, 42 U.S.C. §§ 1396(a)(1)(A)(i) and 1396u-2(b)(5) were intended to benefit Medicaid recipients. The State Defendants also rely on AlohaCare v. Hawaii, Department of Human Services, 567 F. Supp. 2d 1238 (D. Haw. 2008), which held that a healthcare provider did not have statutory standing to enforce, inter alia, 42 U.S.C. § 1396b(m), 1396u-2(b)(5), or 1396u-2(a)(1)(A)(ii) through 42 U.S.C. § 1983, because those Medicaid provisions were not intended to benefit providers. Id. at 1243, 1255­56. That case is distinguishable from the case at bar because it considered the rights of healthcare providers, as opposed to recipients. The status of the plaintiff is critical under the first Blessing prong. See (continued...) 40
14/

With respect to the third Blessing prong, because those Medicaid provisions are phrased as "requirements," this Court concludes that they impose binding obligations on the states in the event that the states exercise their option of mandating managed-care enrollment. See Ball, 492 F.3d at 1104. In

summary, the relevant requirements under 42 U.S.C. § 1396u-2(a) satisfy the first and third prongs of the Blessing framework. See id. b. Vagueness

As to the second Blessing prong, the question is whether the pertinent requirements under 42 U.S.C. § 1396u-2(a)--namely, 42 U.S.C. §§ 1396u-2(b)(5) (assurances as to capacity) and 1396b(m)(1)(C)(i) (solvency standards)--are "`so "vague and ambiguous" that [their] enforcement would strain judicial competence.'" See Ball, 492 F.3d at 1104 (quoting Each provision is addressed in

Blessing, 520 U.S. at 340­41). turn.

(...continued) Ball, 492 F.3d at 1104 (considering whether "`Congress intended that the provision in question benefit the plaintiff'" (quoting Blessing, 520 U.S. at 340­41)); see also Silver, 804 F.2d at 1216­18 (distinguishing between healthcare providers and recipients in discussing whether each had enforceable rights under the "freedom of choice" provision). Thus, the State Defendants' reliance on AlohaCare is misplaced. 41

14/

i.

42 U.S.C. § 1396u-2(b)(5)

The Supreme Court's decision in Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498 (1990), is instructive in ascertaining whether the assurances provision is enforceable via § 1983. That

case involved a Medicaid provision which required that the rates for a state's plan for reimbursing healthcare providers be "reasonable and adequate" to meet the cost of the Medicaid scheme. Id. at 519. The Court held that the provision was not Id. The

too "vague and amorphous" to be judicially enforceable.

Court reasoned that the statute and regulation set out factors which a State must consider in adopting its rates. Id. The

Court illustrated by explaining that, when determining methods of calculating rates that are reasonably related to the costs of an efficient hospital, a state had to consider (1) the unique situation (financial and otherwise) of a hospital that serves a disproportionate number of low income patients, (2) the statutory requirements for adequate care in a nursing home, and (3) the special situation of hospitals providing inpatient care when long term care at a nursing home would be sufficient but is unavailable. Id. at 519 n.17. The Court further reasoned that, "[w]hile there

may be a range of reasonable rates, there certainly are some rates outside that range that no State could ever find to be reasonable and adequate under the Act." Id. at 519-20. The

Court concluded that, "[a]lthough some knowledge of the hospital 42

industry might be required to evaluate a State's findings with respect to the reasonableness of its rates, such an inquiry is well within the competence of the judiciary." Id. at 520.

In this case, 42 U.S.C. § 1396u-2(b)(5) requires that an MCO provide the state and the Secretary with "adequate assurances," "in a time and manner determined by the Secretary," that it: "(A) offers an appropriate range of services and access

to preventative and primary care services for the population to be enrolled"; and "(B) maintains a sufficient number, mix, and geographic distribution of providers of services." added.) (Emphasis

The Secretary has directed that MCOs must "submit

documentation to the State, in a format specified by the State[,] to demonstrate that it complies with [these] requirements." C.F.R. § 438.207(b). 42

The Secretary has further determined that

such assurances must be provided "at the time [an MCO] enters into a contract with the State." 42 C.F.R. § 438.207(c).

At first blush, the statutory terms "adequate," "appropriate," and "sufficient" might seem too vague for judicial enforcement. However, one of the implementing regulations of 42

U.S.C. § 1396u-2(b)(5) appears to furnish specific criteria for states to evaluate in determining whether the assurances are adequate. Specifically, 42 C.F.R. § 438.206(b) provides in

relevant part that:

43

The State must ensure, through its contracts, that each MCO . . . meets the following requirements: (1) Maintains and monitors a network of appropriate providers that is supported by written agreements and is sufficient to provide adequate access to all services covered under the contract. In establishing and maintaining the network, each MCO . . . must consider the following: (i) The anticipated Medicaid enrollment. (ii) The expected utilization of services, taking into consideration the characteristics and health care needs of specific Medicaid populations represented in the particular MCO . . . . (iii) The numbers and types (in terms of training, experience, and specialization) of providers required to furnish the contracted Medicaid services. (iv) The numbers of network providers who are not accepting new Medicaid patients. (v) The geographic location of providers and Medicaid enrollees, considering distance, travel time, the means of transportation ordinarily used by Medicaid enrollees, and whether the location provides physical access for Medicaid enrollees with disabilities. (2) Provides female enrollees with direct access to a women's health specialist within the network for covered care necessary to provide women's routine and preventive health care services. This is in addition to the enrollee's designated source of primary care if that source is not a women's health specialist. (3) Provides for a second opinion from a qualified health care professional within the network, or arranges for the enrollee to 44

obtain one outside the network, at no cost to the enrollee. (4) If the network is unable to provide necessary services, covered under the contract, to a particular enrollee, the MCO . . . must adequately and timely cover these services out of network for the enrollee, for as long as the MCO . . . is unable to provide them. (5) Requires out-of-network providers to coordinate with the MCO . . . with respect to payment and ensures that cost to the enrollee is no greater than it would be if the services were furnished within the network. (6) Demonstrates that its providers are credentialed as required by [42 C.F.R. §] 438.214. Given this detailed list of factors, it would appear that a court could ascertain whether an entity has provided at least "adequate" assurances pursuant to 42 U.S.C. § 1396u-2(b)(5) by evaluating the factors in light of "a state's Medicaid plan, agency records and documents, and the testimony of Medicaid recipients and providers." See Ball, 492 F.3d at 1115. Thus,

the requirements set forth in 42 U.S.C. § 1396u-2(b)(5) are not so "vague or amorphous" that their enforcement would strain judicial competence. See Wilder, 496 U.S. at 519-20; cf. Wright

v. Roanoke Redevelopment & Housing Auth., 479 U.S. 418, 431-32 (1987) (holding that a provision requiring that a "reasonable" amount of utilities be included in rent for low-income housing was not too "vague and amorphous" to confer an enforceable right because the regulations specifically set out guidelines that 45

public housing authorities were to follow in establishing utility allowances). ii. 42 U.S.C. § 1396b(m)(1)(C)(i)

42 U.S.C. § 1396b(m)(1)(C)(i) states that an MCO must make adequate provision against the risk of insolvency and that a provision meets that standard "if the organization meets solvency standards established by the State for private health maintenance organizations or is licensed or certified by the State as a riskbearing entity." 42 U.S.C. §§ 1396b(m)(1)(A)(ii), (C)(i). Here,

Plaintiffs allege that, under the State DHS's RFP, the QExA Contractors had to comply with "`the solvency standards established by the State Ins