Knapp et al v. Armstrong et al

Filing 41

MEMORANDUM DECISION AND ORDER granting 20 Motion to Vacate ; granting in part and denying in part 23 Motion for Leave to File; denying 26 Motion for Preliminary Injunction. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by cjm)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

RUSSELL KNAPP, SANDRA KNAPP,
as legal guardians of Jason Knapp; JANA
SCHULTZ, as legal guardian of Toby
Schultz,
Plaintiffs,
v.

Case No. 1:11-cv-00307-BLW
MEMORANDUM DECISION AND
ORDER

RICHARD ARMSTRONG and LESLIE
CLEMENT, in their official capacities as
Director and Medicaid Administrator of
the Idaho Department of Health and
Welfare,
Defendants.
Before the Court is Defendant’s Motion (Dkt. 20) to Vacate Preliminary
Injunction. Plaintiff filed a Motion for Leave to Amend the Complaint (Dkt. 23), and
also a Motion for Renewed Preliminary Injunction (Dkt. 26). The Court has fully
considered the parties’ briefing and is familiar with the record. For reasons set forth
below, the Court will grant Defendant’s Motion to Vacate Injunction, deny Plaintiffs’
Motion to Renew Injunction, and grant in part and deny in part Plaintiffs’ Motion for
Leave to Amend the Complaint.

MEMORANDUM DECISION AND ORDER - 1

BACKGROUND
States participating in the federal-state Medicaid program comply with Medicaid
Act requirements, and in turn, receive federal funding to provide medical assistance to
low-income individuals. See Douglas v. Indep. Liv. Ctr. of So. Cal., Inc., – S.Ct. – ,
2012 WL 555204 (U.S.); 42 U.S.C. § 1396 et seq.; 42 C.F.R. § 430.15(b). Among its
requirements, the Act mandates development of state plans that must be approved by the
Secretary of Health and Human Services, through the Centers for Medicare and Medicaid
Services (CMS). Id. States may seek waivers of some requirements, to allow Medicaid
participants to reside in home and community based – rather than institutional – settings.
42 U.S.C. § 1396a(a)(23). Like state plans, waivers and amendments to waivers must be
approved by CMS. The Idaho Department of Health and Welfare (IDHW) has requested
and received two waivers; the waiver at issue in this matter is the Developmental
Disabilities Home and Community Based Services Waiver (DD Waiver). Compl., Dkt. 1,
¶ 8.
Where a Medicaid participant chooses to reside in a Certified Family Home, that
Certified Family Home provider must engage with, and receive “affiliation” services
from a Residential Habilitation Agency. IDAPA 16.03.10.705.01. Affiliation services,
also referred to as residential habilitation services, includes provision of “oversight,
training, and quality assurance to the certified home provider,” IDAPA 16.03.10.705.01,
and also development and execution of plans to meet the Medicaid participant’s needs.
Scott Dec., Dkt. 2-2, ¶ 11.

MEMORANDUM DECISION AND ORDER - 2

On February 25, 2011, IDHW sought proposals for a single contractor to provide
all affiliation services, previously provided by various Residential Habilitation Agencies,
throughout Idaho. Dunagan Dec., Dkt. 2-5, ¶ 7. In June 2011, the IDHW selected
Community Partnerships of Idaho for that contract. Ex. 2 to Dunagan Dec., Dkt. 2-7.
Plaintiffs here are the legal guardians of Jason Knapp and Toby Schultz, suing on
their behalf. Compl., Dkt. 1, ¶ 2. Jason and Toby are both residents of Certified Family
Homes. Id. Plaintiffs assert that they will suffer harm if IDHW’s selective contract with
Community Partnerships of Idaho is allowed to take effect. According to Plaintiffs, the
selective contract will violate their right to exercise freedom of choice under 42 U.S.C.
1396a(a)(23), as well as their right to maintain adequate access to, and right to quality of,
services provided under the Medicaid Act. Compl., Dkt. 1, ¶¶ 25-26.
Plaintiffs moved for a preliminary injunction, which the Court granted on August
4, 2011. In finding the preliminary injunction appropriate, the Court concluded that
IDHW was required, but failed, to obtain CMS approval of a waiver amendment before
implementing the selective contract. Order, Dkt. 17 at 12. However, the Court also
determined that the relevant issue on the ultimate merits of Plaintiff’s complaint is
whether IDHW has properly obtained a waiver amendment, rather than a state plan
amendment. Id. at 15-16. The Court preliminarily enjoined implementation of the
selective contract “pending a decision by CMS on the IDHW’s waiver amendment,”
noting that it would consider a renewed motion from Plaintiffs if “CMS renders its
decision without analysis of the applicable provisions of the Medicaid Act.” Id. at 19.

MEMORANDUM DECISION AND ORDER - 3

CMS approved IDHW’s waiver amendment on October 17, 2011. Ex. A to 3rd
Grooms Dec., Dkt. 20-2 at 5. Thus, Defendants now ask the Court to vacate the
preliminary injunction. Plaintiffs object and renew their request for preliminary
injunction; concerning these motions, Plaintiffs request an evidentiary hearing. Plaintiffs
also seek leave to amend their complaint, to which Defendants object.
DISCUSSION
1.

Motions To Vacate And Renew Injunction of IDHW’s Selective Contract
The motions to vacate and renew the previously-granted injunction present two

issues: (1) whether a presumption of regularity attaches to CMS’s approval of the IDHW
waiver amendment and proposed selective contract; and (2) whether a continued or
renewed injunction is now subject to the Administrative Procedure Act (APA), in light of
CMS’s approval of IDHW’s waiver amendment.
The district court has discretion to modify or overturn terms an injunctive decree
where subsequent circumstances of law or fact so warrant. Credit Suisse First Boston
Corp. v. Grunwald, 400 F.3d 1119, 1123-24 (9th Cir. 2005). The Court’s decision to
grant a preliminary injunction here was premised on IDHW’s failure to obtain CMS
approval for a waiver amendment. CMS has now granted approval for IDHW’s waiver,
thus it would appear that the basis for injunction has been addressed, and lifting of the
injunction is appropriate. Plaintiffs do not agree.
According to Plaintiffs, IDHW must receive CMS approval for a waiver “pursuant
to 42 U.S.C. § 1396n(b)(4),” which specifically permits waiver of the “freedom of

MEMORANDUM DECISION AND ORDER - 4

choice” requirement found in § 1396a(a)(23). Pl. Br. for Renewed PI, Dkt. 26-1 at 2.
The “freedom of choice” requirement, unless waived, prohibits selective contracting
through restrictions on Medicaid participants’ choice of qualified, available service
providers. 42 U.S.C. § 1396a(a)(23). For a waiver amendment to comply with
§ 1396n(b)(4), it must otherwise comply with standards in the state plan, including
consistency “with access, quality, and efficient and economic provision of covered care
and services.” 42 U.S.C. § 1396n(b)(4).
The letter approving the State’s waiver does not reference § 1396n(b)(4).
Plaintiffs argue that, absent evidence in the letter that CMS considered the requirements
of § 1396n(b)(4), or that it rendered any findings or analysis supporting approval of
IDHW’s waiver amendment, the foundation for the Court’s injunction still exists. In
other words, Plaintiffs contend that CMS must “show its work,” and until evidence of its
reasoning is shown, the Court should either deny the motion to vacate injunction, or grant
a renewed injunction. The Court disagrees.
A.

A Presumption of Regularity Attaches to CMS’s Approval

The United States Supreme Court has held that actions by government agencies
are presumed valid. U.S. Postal Serv. v. Gregory, 534 U.S. 1, 10 (2001). So long as the
mechanism for review of the agency’s action is adequate, id., or “unless rebutted by
evidence in the record,” this “presumption of regularity” will attach. Gifford Pinchot
Task Force v. U.S. Fish and Wildlife Serv., 378 F.3d 1059, 1071 (9th Cir. 2004). Applied
here, the Court presumes that CMS, acting on behalf of the United States’ Health and

MEMORANDUM DECISION AND ORDER - 5

Human Services Department, conducted a proper analysis of the applicable provisions of
the Medicaid Act in approving IDHW’s waiver.
Plaintiffs understandably rely on the Court’s suggestion, in its decision granting
preliminary injunction, that the Court “may consider a renewed motion by Plaintiffs”
where CMS “renders its decision without analysis of the applicable provisions of the
Medicaid Act.” But despite its cautionary tone, the Court’s language was meaningfully
open-ended. While conveying concern that CMS comply with the Medicaid Act, the
Court did not dictate how CMS should exercise its delegated authority. Notably, the
comment is consistent with the limits attending the presumption of regularity.
As contemplated under the presumption, the Court must consider the evidence in
the record before it. CMS’s approval letter provides that it “has completed its review of
[IDHW’s] request to amend Idaho’s Home and Community Based Services (HCBS)
Waiver for individuals with developmental disabilities.” Ltr., Ex. A to 3rd Grooms Dec.,
Dkt. 20-2 at 5. Citing the lack of further detail in CMS’s letter, Plaintiffs urge the Court
to find that no review, or at least an inadequate review, was conducted. However, there
being no evidence in the record that CMS failed to conduct a valid review, the Court
must presume that it did, pending further judicial review under the Administrative
Procedures Act (APA). See Gifford Pinchot Task Force, 378 F.3d at 1071; Gregory, 534
U.S. at 10. In other words, the absence of specific findings in CMS’s approval letter will
not, by itself, negate the conclusion clearly stated, so as to prevent a lift of the injunction.

MEMORANDUM DECISION AND ORDER - 6

Plaintiffs next argue that an evidentiary hearing is necessary for the Court to hear
evidence concerning the adequacy of CMS’s review and approval, before the injunction
can be lifted. The Court disagrees. Requiring an evidentiary hearing to review CMS’s
approval, in order to lift the Court’s injunction, would ignore both the presumption of
regularity and also the process for judicial review of agency action under the APA.
B.

The Administrative Procedure Act Applies

Defendants correctly state that challenges to CMS’s determination are governed
by the APA, 5 U.S.C. §§ 701-06; see Alaska Dept. of Health and Soc. Servs. v. Centers
for Medicare and Medicaid Servs., 424 F.3d 931 (9th Cir. 2005). Plaintiffs do not
disagree. Rather, Plaintiffs re-examine their likelihood of success on the merits (a
necessary component for a preliminary injunction), conspicuously avoiding any mention
of the APA.
Plaintiffs argue against application of agency deference, discussing Chevron and
other case law regarding deference to governmental action, and asserting their right to
due process. The Court reiterates that primary jurisdiction for the validity of the selective
contract and waiver amendment is properly left to CMS. Mem. Dec. & Ord., Dkt. 17 at
14-16, 19. CMS having approved of IDHW’s waiver and selective contract, any
challenge to that determination must be pursued in proceedings governed by the APA. In
such proceedings, the Court would adjudicate Plaintiffs’ challenge based on an agency
record, to include evidence provided by CMS in support of its conclusions. See Jennings
v. Mukasey, 511 F.3d 894, 900 (9th Cir. 2007)(generally, agency actions are reviewed on

MEMORANDUM DECISION AND ORDER - 7

consideration of the agency record, without discovery).1 At this stage in litigation, there is
no basis for the Court to conduct an evidentiary hearing.
C.

There Is No Basis For Continued Or Renewed Injunction

Given the evidence before it, the circumstances on which the preliminary
injunction was founded have changed. IDHW has since requested a waiver amendment;
and CMS has approved the waiver amendment, acknowledging that its purpose is to
enable use of “one selective contract provider to render administrative activities to
certified family home providers.” Ex. A to 3rd Grooms Dec., Dkt. 20-2 at 5. These facts
warrant lifting the injunction. Defendants’ Motion to Vacate will therefore be granted.
Because the presumption of regularity attaches to CMS’s waiver amendment approval,
there is no basis for a renewed injunction. Rather, the validity of CMS’s approval may be
appropriately raised under the APA. Thus, the Court will also deny Plaintiffs’ Motion to
Renew Preliminary Injunction.
2.

Motion to Amend Complaint
Because Defendants have filed an answer, Plaintiffs may only amend their

complaint with leave from the Court. Fed. R. Civ. P. 15(a)(2). Leave should be “freely
given when justice so requires.” Id. The courts apply this policy “with extreme
liberality.” Moss v. U.S. Secret Service, 572 F.3d 962, 972 (9th Cir. 2009)(other citations
omitted). In deciding whether to permit amendment, the court evaluates the presence of

1
See also City & Cy. of San Francisco v. United States, 130 F.3d 873, 877 (9th Cir. 1997)(district court’s
role in reviewing the decision of an administrative agency is to determine, as a matter of law, whether the
agency’s decision was supported by the evidence in the record).

MEMORANDUM DECISION AND ORDER - 8

the following factors: bad faith, undue delay, prejudice to the opposing party, and futility.
Serra v. Lappin, 600 F.3d 1191, 1200 (9th Cir. 2010)(other citations omitted).
Plaintiffs seek to add a claim under the APA, naming Secretary of the United
States’ Health and Human Services Department, Kathleen Sebelius, as a defendant. The
proposed amended complaint challenges Secretary Sebelius’ action, through CMS,
approving IDHW’s waiver amendment. According to Plaintiffs, that approval of
IDHW’s waiver amendment is in violation of the Medicaid Act.
Defendants argue that Plaintiffs’ motion to amend should be denied based on two
arguments. The first argument concerns Plaintiffs’ proposed APA claim. Defendants
begin the argument with defense of CMS’s action, then provide a laborious discussion of
Chevron deference2, and end with a primer on the standard of review in APA
proceedings. Ultimately, Defendants conclude that procedural restrictions on Plaintiffs’
proposed APA claim would cause undue complication if allowed to “intermingle” with
Plaintiffs’ existing § 1983 claim; thus, the APA claim should be brought in an
independent action. See Def. Resp., Dkt. 29 at 5-13. The argument – which seems better
suited in a motion to dismiss – does not address any of the four factors the Court must
consider in evaluating a motion to amend. The Court will therefore reject the argument,
but allow Defendants to re-raise it in a subsequent motion to dismiss or for other relief.
Defendants’ second argument is that Plaintiffs’ proposed due process claim under
§ 1983 is futile. According to Defendants, there is no right to notice and a hearing

2
The discussion appears to counterpoint Plaintiffs’ arguments supporting Motion to Renew Preliminary
Injunction; Plaintiffs did not raise the argument in their Motion for Leave to Amend Complaint.

MEMORANDUM DECISION AND ORDER - 9

regarding “systemic modifications” such as those caused by IDHW’s waiver amendment.
In support of this proposition, Defendants cite a Sixth Circuit Court of Appeals decision
that reversed a district court injunction of a cost-saving process implemented by a state
Medicaid agency. Rosen v. Goetz, 410 F.3d 919 (6th Cir. 2005). The cost-saving process
in that case was approved by CMS; and the Sixth Circuit held that substantial deference
was owed to CMS in evaluating the “fact/law dichotomy” and determining what process
was due. Id. Defendants also cite a Western District of Washington case in which the
court found that “[a] mass change[ ] to public benefits programs . . . does not give rise to
hearing rights,” where it involves no factual dispute beyond the impact of the change on
specific individuals. M.R. v. Dreyfus, 767 F.Supp.2d 1149, 1166-67 (W.D. Wash. 2011).
These cases establish that Medicaid participants are not guaranteed a hearing
before implementation of an across-the-board measure aimed at cost-cutting. They also
reinforce the Court’s above analysis of the presumption of regularity in addressing
Plaintiffs’ renewed motion for injunction. To the extent that Plaintiffs’ due process claim
seeks a preliminary injunction, the Court rests on its discussion above. Thus, the Court
agrees with Defendants that, under existing case law, Plaintiffs are not entitled to relief
on their proposed due process claim. That claim is futile. Therefore, Plaintiffs’ motion
to add the claim will be denied.
As to Plaintiffs’ other proposed claims, Defendants have not persuaded the Court
that the liberal amendment policy should not apply. Accordingly, Plaintiffs’ motion to
amend the complaint to add those claims will be granted.

MEMORANDUM DECISION AND ORDER - 10

ORDER
IT IS ORDERED THAT:
1.

Defendants’ Motion to Vacate Injunction (Dkt. 20) is GRANTED.

2.

Plaintiffs’ Motion to Renew Preliminary Injunction (Dkt. 26) is DENIED.

3.

Plaintiffs’ Motion for Leave to Amend Complaint (Dkt. 23) is DENIED in

part, GRANTED in part. Plaintiffs’ request to add a Due Process claim under § 1983 is
DENIED. As to all other proposed claims, the Motion is GRANTED.

DATED: February 26, 2012 

_________________________  
B. Lynn Winmill 
Chief Judge 
United States District Court 

MEMORANDUM DECISION AND ORDER - 11