Heritage Operations Group, LLC v. Norwood et al

Filing 43

MEMORANDUM Opinion and Order Signed by the Honorable John Robert Blakey on 9/18/2018. Mailed notice(gel, )

Case: 1:17-cv-08609 Document #: 43 Filed: 09/18/18 Page 1 of 21 PageID #:273

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
HERITAGE OPERATIONS GROUP,
LLC, et al.,
Plaintiffs,

Case No. 17-cv-8609

v.
FELICIA NORWOOD, et al.,

Judge John Robert Blakey

Defendants.
MEMORANDUM OPINION AND ORDER
Plaintiff Heritage Operations Group, LLC sued Defendants Felicia Norwood
and Seema Verma in their official capacities as, respectively, the Director of the
Illinois Department of Healthcare and Family Services (HFS) and the Administrator
of the Centers for Medicare & Medicaid Services (CMS). Heritage, acting on behalf
of numerous long-term care facilities that it operates in Illinois, alleges that HFS
violated federal Medicaid laws and Heritage’s due-process rights when it
retroactively changed Medicaid’s reimbursement rates for those facilities. Heritage
alleges that CMS acted unlawfully by approving the Illinois Medicaid plan under
which HFS changed the reimbursement rates.
Heritage moved for a temporary restraining order (TRO) shortly after filing
this case.

Defendants opposed the TRO and simultaneously moved to dismiss

Heritage’s complaint for failure to state a claim. For the reasons explained below,
this Court grants Defendants’ motions and denies Heritage’s motion for a TRO.

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I.

The Complaint’s Allegations
Heritage operates long-term care facilities throughout Illinois. [1] ¶ 1. These

nursing facilities receive per diem reimbursement for Medicaid beneficiaries from
HFS, which administers the Illinois Medicaid program.

Id. ¶¶ 3, 21.

CMS

administers Medicaid at the federal level. Id. ¶ 8.
Medicaid is a voluntary program, jointly funded by the federal government and
state governments, that primarily provides medical care for poor, elderly, and
disabled people. Id. ¶ 6. States that choose to fund Medicaid must administer their
programs in accordance with the authorizing legislation in Title XIX of the Social
Security Act, 42 U.S.C. § 1396, et seq., also known as the Medicaid Act. To participate
in Medicaid, a state must submit its state plan for medical assistance to CMS for
approval. [1] ¶ 7.
The Medicaid Act requires each state plan to include certain procedural and
substantive elements. Id. ¶ 16. Relevant here, state plans must provide “a public
process for determination of rates under the plan” that involves: (1) publishing
proposed rates and the methodologies and justifications underlying the proposed
rates; (2) giving providers, beneficiaries, and “other concerned State residents” a
“reasonable opportunity” to review and comment on the published materials; and (3)
publishing the final rates and the methodologies and justifications underlying the
final rates. Id. (quoting 42 U.S.C. § 1396a(a)(13)(A)). States must also provide public
notice of any “significant proposed change” in their statewide methods and standards
for setting payment rates. Id. ¶ 17 (quoting 42 C.F.R. § 447.205(a)). CMS will

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approve a change to a state plan only after receiving satisfactory assurances from the
state’s Medicaid agency that the state employs “procedures under which the data and
methodology used in establishing payment rates are made available to the public.”
Id. ¶ 20 (quoting 42 C.F.R. § 447.253(b)(1)(iii)).
The per diem reimbursement that nursing facilities receive from HFS under
the Illinois plan consists of three separate components: (1) support cost; (2) nursing
cost; and (3) capital cost. Id. ¶ 21. This case concerns the nursing component, also
known as the direct care component. See id. ¶¶ 29–51.
A.

The Nursing Component and On-Site Facility Reviews

HFS uses a Resource Utilization Groups (RUGs) system to calculate
reimbursement rates for nursing facilities. 1 305 ILCS 5/5-5.2. Under this “residentdriven, facility-specific, and cost-based” methodology, HFS updates individual
reimbursement rates on a quarterly basis. Id. To enable these updates, Illinois
facilities must submit Minimum Data Set (MDS) assessments to HFS quarterly. Ill.
Admin. Code tit. 89, § 147.315. MDS assessments provide information about the
medical needs of each resident in a given facility, which allows HFS to classify each
resident under a specific RUG code and establish a given facility’s “case mix.” See id.
§ 147.325. The facility’s case mix then factors into HFS’ calculation of the facility’s
nursing component, which “shall be the product of the statewide RUG-IV nursing
base per diem rate, the facility average case mix index, and the regional wage

This Court takes judicial notice of the Illinois statutes and regulations that establish how HFS
calculates reimbursement rates and how HFS audits nursing facilities. See Demos v. City of
Indianapolis, 302 F.3d 698, 706 (7th Cir. 2002). Even though Heritage’s complaint does not explain
the calculation process, understanding that process proves useful to analyzing Heritage’s claims.
1

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adjustor.” 5/5-5.2(e-2).
HFS sometimes conducts on-site reviews to verify the accuracy of a facility’s
MDS data. See Ill. Admin. Code tit. 89, § 147.340. HFS may randomly select the
facilities it audits or may audit a facility based upon discretionary factors, such as a
facility’s “atypical patterns of scoring MDS items.” Id. During a review, HFS informs
the facility of “any preliminary conclusions regarding the MDS items/areas that could
not be validated,” and the facility has an opportunity to present HFS with any
documentation supporting its position. Id. § 147.340(o). A facility must provide all
relevant documentation to the HFS team before the team finishes its on-site review.
Id. § 147.340(p).
If HFS concludes that a facility submitted inaccurate MDS data, HFS
reclassifies the necessary residents with the correct RUG codes and determines if
using accurate data would change the nursing component of the facility’s
reimbursement rate.

Id. § 147.340(s).

HFS may change a facility’s per diem

reimbursement rate “retroactive to the beginning of the rate period” if recalculating
the facility’s nursing component decreases the per diem rate by more than one
percent.

Id. § 147.340(t).

A facility may appeal any change to its specific

reimbursement rate within 30 days of receiving notice of the change from HFS; a
facility may not, however, rely upon additional documentation for the appeal that it
did not present to HFS during the original review. Id. § 147.340(u). HFS then has
120 days to address a facility’s request for reconsideration, and “individuals not
directly involved” in the original review determine whether to make further

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adjustments to the facility’s reimbursement rate. Id. § 147.340(v).
B.

State Plan Amendment and Heritage Audits

In 2017, CMS approved an amendment to Illinois’ state plan, effective
retroactive to January 2016, that provided for the MDS on-site reviews and
retroactive rate adjustments discussed above. [1] ¶ 55; [6-2] at 3 (letter from CMS to
Norwood describing the approved change). 2 Illinois codified that plan amendment in
section 147.340 of its Administrative Code. See [1] ¶ 55.
Throughout 2016 and 2017, HFS audited numerous Heritage facilities
pursuant to its authority under section 147.340. Id. ¶¶ 29–51. When Heritage filed
its complaint, it had not yet received audit results for two of its facilities, but HFS
significantly reduced the nursing component at every other Heritage facility that it
audited. See id. The per diem rate changes “affected all residents in the facilities
retroactively.” Id. ¶ 53. Heritage claims that the lost revenue from the HFS audits
negatively impacts its facilities’ abilities “to provide adequate quality of care” to their
nursing patients and might force it to reduce staffing. Id. ¶¶ 71–72.
II.

Legal Standard
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6),

a complaint must provide a “short and plain statement of the claim” showing that the
pleader merits relief, Fed. R. Civ. P. 8(a)(2), so the defendant has “fair notice” of the
claim “and the grounds upon which it rests,” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

This Court may consider the CMS approval letter and the plan amendment—which Heritage
attached as exhibits to its TRO motion—on a motion to dismiss because the documents are central to
the complaint and the complaint refers to them. See Williamson v. Curran, 714 F.3d 432, 436 (7th Cir.
2013).

2

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555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint must also
contain “sufficient factual matter” to state a facially plausible claim to relief—one
that “allows the court to draw the reasonable inference” that the defendant
committed the alleged misconduct.

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(quoting Twombly, 550 U.S. at 570). This plausibility standard “asks for more than
a sheer possibility” that a defendant acted unlawfully. Williamson, 714 F.3d at 436.
In evaluating a complaint, this Court accepts all well-pled allegations as true
and draws all reasonable inferences in the plaintiff’s favor. Iqbal, 556 U.S. at 678.
This Court does not, however, accept a complaint’s legal conclusions as true. Brooks
v. Ross, 578 F.3d 574, 581 (7th Cir. 2009).

Rule 12(b)(6) limits this Court to

considering the complaint, documents attached to the complaint, documents central
to the complaint (to which the complaint refers), and information properly subject to
judicial notice. Williamson, 714 F.3d at 436.
III.

Analysis
Heritage’s complaint asserts four claims. Count I alleges that HFS violated

Heritage’s substantive and procedural due-process rights when HFS audited
Heritage’s facilities and retroactively adjusted the facilities’ per diem reimbursement
rates. [1] ¶¶ 73–83. Count II alleges that HFS violated the Medicaid Act and its
implementing regulations by changing Heritage’s reimbursement rates after the
audits without going through a public notice and comment process first. Id. ¶¶ 84–
92. Count III, brought under 42 U.S.C. § 1983, seeks declaratory and injunctive relief
against HFS and CMS based upon the alleged violations of the Medicaid Act. Id. ¶¶

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93–107. Finally, Count IV alleges that this Court, pursuant to the Administrative
Procedure Act (APA), 5 U.S.C. § 706, should set aside CMS’ approval of Illinois’ state
plan amendment as “based on errors of law” and “unsupported by substantial
evidence.” Id. ¶¶ 108–10. This Court addresses the claims against each Defendant
in turn, starting with HFS.
A.

Claims Against HFS
1.

Count I: Due-Process Violations

Count I alleges that HFS violated Heritage’s substantive and procedural dueprocess rights by auditing Heritage’s facilities and retroactively adjusting their per
diem reimbursement rates. [1] ¶¶ 73–83. HFS argues that both the substantive and
procedural portions of Count I fail because Heritage cannot identify any protected
property interest with which HFS interfered. [19] at 5–6.
As always, protected property interests must arise from an independent
source, such as state or federal law. See Gen. Auto Serv. Station v. City of Chicago,
526 F.3d 991, 1000 (7th Cir. 2008). For a property interest to merit due-process
protection, the plaintiff must have “a legitimate claim of entitlement” to that property
interest, not simply “a unilateral expectation of it.” Bd. of Regents of State Colls. v.
Roth, 408 U.S. 564, 577 (1972). And the interest itself must be “substantive rather
than procedural in nature.” Manley v. Law, 889 F.3d 885, 890 (7th Cir. 2018).
The complaint asserts that Heritage has a protected property interest, [1] ¶¶
74, 80–82, but offers no allegations to properly define or otherwise identify the
property interest. In its response brief, Heritage argues that the Seventh Circuit has

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held that healthcare providers have a constitutionally protected property interest in
payments for providing services to Medicaid patients.

[25] at 8 (citing BT

Bourbonnais Care, LLC v. Norwood, 866 F.3d 815, 824 (2017)). Heritage, however,
misrepresents the holding in BT Bourbonnais. There, the Seventh Circuit held that
the plaintiff nursing-home operators had “an enforceable procedural right” to the
public process outlined in § 1396a(a)(13)(A) of the Medicaid Act, and so could proceed
with their claim against HFS under § 1983. BT Bourbonnais, 866 F.3d at 824
(emphasis added). But the court said nothing about substantive property rights and
nothing about constitutional due process.

A procedural right to enforce certain

procedural guarantees contained in the Medicaid Act does not necessarily equate
with a protected property interest for purposes of a due-process claim. See Manley,
889 F.3d at 890.
Heritage also cites the concurring opinion from Tekkno Laboratories, Inc. v.
Perales, 933 F.2d 1093 (2d Cir. 1991), to argue that it has a protected property
interest in per diem Medicaid reimbursement. [25] at 8. That case does not help
Heritage either. In Tekkno, the plaintiff clinical lab sued New York’s Medicaid
agency after the agency withheld payment on about $700,000 in claims, pending an
investigation into whether the lab submitted false claims and accepted illegal
kickbacks. 933 F.2d at 1094. Although the concurrence acknowledged that New York
law creates a property interest “in money paid for services already performed in
reliance on a duly promulgated reimbursement rate,” id. at 1100 (Oakes, J.,
concurring) (quoting Oberlander v. Perales, 740 F.2d 116, 120 (2d Cir. 1984)), the

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majority distinguished Oberlander because Oberlander did not involve “the State’s
withholding of payments pending investigation,” id. at 1098; see also Yorktown Med.
Lab., Inc. v. Perales, 948 F.2d 84, 89 (2d Cir. 1991) (“Yorktown has no property
interest grounded in either the Medicaid Act or New York regulations to payment for
claims pending investigation to determine illegality.”).
Likewise, Oberlander proves inapplicable here. HFS did not retroactively
change a duly promulgated reimbursement rate; it retroactively changed a
reimbursement rate contingent upon quarterly patient data that was subject to MDS
audits and resulting adjustments per the terms of the Illinois state plan.

Cf.

Oberlander, 740 F.2d at 118 (New York’s Department of Health informed the plaintiff
provider months in advance that “its reimbursement rate for calendar year 1983 had
been fixed at $99.84 per patient per day”). Notably, while Heritage’s complaint offers
a barrage of attacks against the procedures that HFS used (or failed to use) to
retroactively adjust Heritage’s reimbursement rates, the complaint does not suggest
that HFS erred in concluding that Heritage’s facilities submitted inaccurate MDS
data. See generally [1]. Against that background, it is difficult to conceive how
Heritage could assert “a legitimate claim of entitlement” to reimbursement rates
based upon inaccurate medical records that it submitted to HFS. See Roth, 408 U.S.
577. Holding that Heritage has a protected property interest here would effectively
recognize a property interest in reimbursement for claims that Heritage “knew or
should have known contravened state regulations” requiring it to submit accurate
MDS assessments to HFS each quarter. See Yorktown, 948 F.2d at 89; Ill. Admin.

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Code tit. 89, § 147.315 (facilities must submit data that “accurately reflects the
resident’s status during the timeframes identified”).

Aside from the two cases

discussed above, Heritage provides no other authority supporting its claim that it has
a protected property interest in its per diem Medicaid reimbursement rates. Thus,
this Court dismisses Count I.
2.

Count II: Medicaid Act Violations

Count II alleges that HFS violated the Medicaid Act and its implementing
regulations by reducing Heritage’s reimbursement rates after the MDS reviews
without going through a public notice and comment process, and by reducing rates
for each facility, rather than for individual residents. [1] ¶¶ 84–92. HFS argues that
this claim fails because Heritage misinterprets the Medicaid Act and the Illinois state
plan. [19] at 15–18. This Court agrees.
Simply put, Heritage stakes this claim on procedural requirements that do not
apply when HFS changes reimbursement rates at specific facilities pursuant to the
Illinois state plan, as opposed to when HFS seeks to change the state plan itself.
Although this Court must accept Heritage’s factual allegations as true on a motion to
dismiss, Iqbal, 556 U.S. at 678, this Court need not (and does not) accept Heritage’s
erroneous legal conclusions as true, Brooks, 578 F.3d at 581.
As HFS notes, Heritage’s position that the Medicaid Act requires public notice
and comment every time a state Medicaid agency changes the reimbursement rate at
a particular facility (because the facility could not validate its previously submitted
patient data) is “staggeringly impractical.” [35] at 7. It also has no basis in law.

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Section 1396a(a)(13)(A) of the Medicaid Act establishes procedural requirements that
states must follow when they change the rate-setting methodologies in their state
plans, not when they apply existing state plans to adjust payment rates at individual
facilities. See Christ the King Manor, Inc. v. Sec’y of U.S. Dep’t of Health & Human
Servs., 730 F.3d 291, 315 (3d Cir. 2013) (explaining that § 1396a(a)(13)(A)’s “notice
requirements must be satisfied in order for a state plan amendment to receive
approval”) (emphasis added).

Similarly, the implementing regulation requires

“public notice of any significant proposed change” to “Statewide methods and
standards for setting payment rates.” 42 C.F.R. § 447.205 (emphasis added). Thus,
HFS’ actions—applying its existing, CMS-approved plan to reduce reimbursement
rates at Heritage’s facilities after conducting on-site MDS reviews—did not trigger
the Medicaid Act’s procedural safeguards. See id.; § 1396a(a)(13)(A). As CMS notes,
an MDS review “no more changes Medicaid payment rates” under a state plan “than
an IRS audit changes tax rates.” [23] at 11.
Heritage also claims that § 1396a(a)(13)(A) does not allow retroactive rate
adjustments. [25] at 15. Again, Heritage misinterprets the Medicaid Act. True, §
1396a(a)(13)(A)’s notice and comment requirements would not allow retroactive
adjustments to the state plan’s payment methodologies. But HFS did not make any
changes to the state plan here; it simply applied the existing state plan to
retroactively adjust reimbursement rates at specific facilities that submitted
inaccurate MDS data for that quarter.

See [1] ¶¶ 29–51.

Both the state plan

amendment that CMS approved and section 147.340 plainly allow retroactive rate

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adjustments at individual facilities after MDS reviews. See [6-2] at 6 (amendment
provides that “a facility’s rate shall be subject to change” after an audit reveals
“unverifiable” MDS data, and the recalculated rate will be “retroactive to the
beginning of the rate period”); § 147.340(t) (same language). If HFS could not update
reimbursement rates retroactively after audits, that would lead to the absurd result
of providers keeping windfalls that they gained from submitting inaccurate or
fraudulent MDS data. 3
Finally, contrary to Heritage’s arguments, [25] at 17, HFS could not possibly
adjust reimbursement rates for individual residents without changing the overall
facility’s rate. A facility’s MDS assessments provide clinical information about each
resident, which HFS uses to establish the facility’s overall case mix. See § 147.325.
The facility’s case mix is one of three elements that HFS uses to calculate the nursing
component of the facility’s reimbursement rate. See 5/5-5.2(e-2). And a facility
receives the same per diem reimbursement for each resident; it does not receive a
uniquely calculated per diem for each resident, because that would defeat the purpose
of using a case-mix system to capture the scope of medical needs across a facility’s
residents.

See § 147.325; § 147.310 (implementing the case mix system).

So,

reclassifying individual residents after an MDS review necessarily changes a
facility’s case mix and thus its overall reimbursement rate.
Considering that statutory scheme, Heritage has no legal basis to assert that
HFS has authority only to update reimbursement rates for individual residents
For example, Heritage alleges that many of its facilities had to return hundreds of thousands of
dollars to HFS after their audits. [1] ¶¶ 29–49.
3

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rather than a facility as a whole. Accordingly, this Court dismisses Count II.
3.

Count III: Declaratory and Injunctive Relief Under § 1983

Count III seeks declaratory and injunctive relief against HFS based upon the
alleged violations of the Medicaid Act. [1] ¶¶ 93–107. HFS argues that the Eleventh
Amendment bars the relief that Heritage seeks in this claim, and that the claim fails
on the merits regardless. [19] at 18–21.
Broadly speaking, the Eleventh Amendment bars private individuals from
suing nonconsenting states for money damages in federal court. Bd. of Trs. of the
Univ. of Ala. v. Garrett, 531 U.S. 356, 363 (2001). That bar extends to suits that seek
to recover money from a state—“the real, substantial party in interest”—regardless
of whether the plaintiff names the state as a party. Edelman v. Jordan, 415 U.S. 651,
663 (1974).

But private individuals may sue state officials to challenge “the

constitutionality of a state official’s action in enforcing state law,” and federal courts
may grant “prospective injunctive relief to prevent a continuing violation of federal
law.” Green v. Mansour, 474 U.S. 64, 68 (1985).
First, Heritage seeks a declaration that HFS violated Heritage’s civil rights by
refusing “to allow for a public process under which it determines the Medicaid daily
rate.” [1] ¶¶ 100–01. As this Court held above, HFS did not have to comply with such
procedural requirements when it simply applied its existing state plan to
retroactively adjust quarterly reimbursement rates at audited facilities. Regardless,
even if Heritage understood the Medicaid Act properly (which it does not), the
Eleventh Amendment does not allow a federal court to issue a declaratory judgment

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that a state official’s past conduct violated federal law. See Green, 474 U.S. at 74.
Heritage unconvincingly argues that its requested relief concerns only “ongoing
violations of the Medicaid Act,” [25] at 19, but that argument remains untethered to
the complaint, which seeks a judgment that HFS violated Heritage’s rights by
completing audits in the past, see [1] ¶¶ 100–01.
Next, Heritage seeks a “preliminary injunction” and a “mandatory injunction”
under § 1983, “retroactive to January 1, 2016,” that will force HFS to “establish the
appropriate reimbursement rates” for Heritage through the public process that
Heritage believes the Medicaid Act requires. [1] ¶¶ 102–04 (emphasis added). Again,
Heritage’s complaint fails to show that HFS did anything wrong in retroactively
adjusting reimbursement rates at audited facilities without providing for a public
notice and comment process. Regardless, the Eleventh Amendment prohibits the
retroactive relief that Heritage seeks, which would force the state of Illinois to pay
Heritage retroactive benefits after establishing different reimbursement rates. See
Edelman, 415 U.S. at 678 (a federal court may not issue “a retroactive award which
requires the payment of funds from the state treasury”); see also Christ the King
Manor, 730 F.3d at 319–20 (holding that the Eleventh Amendment barred the
plaintiff providers’ request that the court order Pennsylvania’s Medicaid agency to
pay them “prospective corrective payments” as compensation for incorrect rates that
the agency paid five years previously).
Heritage also seeks a “mandatory injunction pursuant to the due process
clause” requiring HFS to provide Heritage with “sufficient fair hearing and appeal

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rights concerning any audit process.” [1] ¶ 105. As this Court held above, Heritage
does not have a viable due-process claim (substantive or procedural) because it fails
to articulate any protected property interest to support such a claim, so Heritage has
no right to the requested injunction.
Besides, the appeals process established in section 147.340 appears entirely
consistent with due process. Heritage challenges, for example, the fact that section
147.340(p) does not permit a facility to submit additional documentation on appeal
that the facility did not submit to HFS during the initial on-site MDS review. [25] at
12. Heritage fails, however, to provide any legal authority explaining why that
provision violates its due-process rights—a glaring omission considering the obvious
similarities between that provision and the well-accepted rule that a litigant cannot
present arguments to an appellate court that it did not first present to the district
court.

See, e.g., Puffer v. Allstate Ins. Co., 675 F.3d 709, 718 (7th Cir. 2012)

(Arguments “not raised to the district court are waived on appeal” because “it is the
parties’ responsibility to allege facts and indicate their relevance under the correct
legal standard.”).
Finally, Heritage seeks an injunction requiring HFS to cease an ongoing audit
of Heritage’s Pana facility. [1] ¶ 106. As discussed more below, because Heritage
fails to establish any legal reason to end the audit, this request also does not get off
the ground.
Heritage raises one more argument in its response brief that deserves
discussion.

In full, the argument reads: “A state’s decision to accept financial

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assistance from the federal government waives any Eleventh Amendment immunity.
Stanley v. Litscher, 213 F.3d 340, 344 (7th Cir. 2000). Damages for violations of the
Rehabilitation Act, therefore, may be sought by Plaintiffs.” [25] at 20. This argument
fails for several reasons. First, the Supreme Court has expressly held—in a case
involving the Medicaid program—that a state does not waive its sovereign immunity
simply by accepting federal funds. See Fla. Dep’t of Health & Rehabilitative Servs. v.
Fla. Nursing Home Ass’n, 450 U.S. 147, 150 (1981) (the “mere fact” that a state
participates in a cooperative federalism program does not establish “consent on the
part of the State to be sued in the federal courts”). Second, Heritage blatantly
misreads Stanley. In Stanley, the Seventh Circuit held that “the Rehabilitation Act
is enforceable in federal court against recipients of federal largesse,” 213 F.3d at 344,
because Congress included unequivocal language in that Act abrogating states’
sovereign immunity for suits under § 504 of the Act, see Lane v. Pena, 518 U.S. 187,
198 (1996). Stanley in no way issued a blanket holding that states waive their
sovereign immunity by accepting federal funds.

Finally, the Rehabilitation Act

protects disabled individuals from discrimination. See id.; 29 U.S.C. § 791, et seq.
Heritage is an LLC; it is not a disabled person and so could not bring a Rehabilitation
Act claim. This Court dismisses Count III as to HFS.
B.

Claims Against CMS
1.

Count III: Declaratory and Injunctive Relief Under § 1983

CMS argues that Count III fails because it acted under color of federal law
when it approved the amendment to the Illinois state plan. [23] at 10. To state a

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claim under § 1983, a plaintiff must allege that someone acting under color of state
law deprived the plaintiff of a constitutional or statutory right. See Colbert v. City of
Chicago, 851 F.3d 649, 656 (7th Cir. 2017). Put differently, a § 1983 action “cannot
lie against federal officers acting under color of federal law.” Case v. Milewski, 327
F.3d 564, 567 (7th Cir. 2003).
Heritage’s complaint alleges that CMS, a federal agency, relied upon its
authority under the federal Medicaid Act when it approved the amendment to Illinois’
state plan that provided for MDS on-site reviews. See [1] ¶¶ 7, 20. Thus, Heritage’s
§ 1983 claim against CMS cannot proceed. See Case, 327 F.3d at 567. Heritage
argues that CMS qualifies as a state actor here because CMS and HFS have a
“symbiotic relationship,” stating: “Thus, CMS as the agency charged with
implementing the Medicaid Act, acts as a state by adopting State Plan Amendments
for implementation at the state [sic] as drafted by the state.”

[34] at 7.

That

characterization does not comport with the complaint’s allegations or the reality of
the Medicaid program, and thus, it does not save Heritage’s claim. See Strickland ex
rel. Strickland v. Shalala, 123 F.3d 863, 867 (6th Cir. 1997) (reversing a district
court’s award of attorney’s fees against the Secretary of Health and Human Services,
and stating that no other court “has extended the ‘under color of state law’ element
of § 1983 to the implementation of a cooperative federalism program by federal
officials”).
Heritage next moves (in a footnote) for leave to amend its complaint to add a §
1983 conspiracy claim against CMS (but interestingly, not against HFS), and asserts

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that request in its response brief. [34] at 8, 8 n.1. Although a plaintiff ordinarily may
not amend its complaint by filing a response brief, see Pirelli Armstrong Tire Corp.
Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 448 (7th Cir. 2011), this
Court, however, has no need to grant Heritage’s motion, because adding a conspiracy
claim would not change the result.
The Seventh Circuit has assumed without deciding that federal employees may
face liability under § 1983 if they “conspire or act in concert with state officials” to
violate a plaintiff’s rights under color of state law. Case, 327 F.3d 564, 567. So, to
state a § 1983 conspiracy claim here, Heritage must allege that: (1) CMS employees
and state actors reached an agreement to deprive Heritage of its constitutional or
statutory rights; and (2) overt acts in furtherance of the conspiracy actually deprived
Heritage of those rights. See Beaman v. Freesmeyer, 776 F.3d 500, 510 (7th Cir. 2015).
Heritage’s claim fails there is no factual basis that CMS or its employees reached an
improper agreement with state actors. See generally [1]. Indeed, Heritage’s response
brief does not even attempt to identify any such agreement; Heritage argues only that
CMS’ approval of the Illinois MDS amendment “is an overt act by CMS inflicting
unconstitutional injury by denying due process in furtherance of the state objective.”
[34] at 8. Absent any good faith basis of an unlawful agreement between CMS and
state actors, that alleged overt act does not suffice to maintain a conspiracy claim
against CMS. See Beaman, 776 F.3d at 510. Thus, this Court dismisses Count III as
to CMS.

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2.

Count IV: APA Review

Count IV asks this Court, pursuant to the APA, to set aside CMS’ approval of
Illinois’ state plan amendment as “based on errors of law” and “unsupported by
substantial evidence.” [1] ¶¶ 108–10. CMS raises numerous arguments against
Count IV, including that Heritage does not have standing to assert an APA claim
against CMS because Heritage fails to allege facts demonstrating that its injury is
traceable to CMS’ actions or that a favorable decision against CMS would likely
redress Heritage’s alleged injury. [23] at 14–15 (citing Lujan v. Defenders of Wildlife,
504 U.S. 555, 560–61 (1992)).
Heritage responds by (again) misinterpreting BT Bourbonnais and claiming
that BT Bourbonnais demonstrates its standing here.

[34] at 2–3.

Heritage’s

response on the issue of standing essentially quotes from BT Bourbonnais in which
the Seventh Circuit discusses and applies the Supreme Court’s three-factor test for
determining whether a statute creates a federal right that a plaintiff may enforce
through a § 1983 claim. Id. (quoting BT Bourbonnais, 866 F.3d at 821–22). As this
Court discussed above, however, the Seventh Circuit answered that question
affirmatively regarding § 1396a(a)(13)(A) of the Medicaid Act. BT Bourbonnais, 866
F.3d at 824. But the fact that § 1396a(a)(13)(A) creates an enforceable procedural
right does not, on its face, show that Heritage has standing under the APA to
challenge CMS’ approval of a specific state plan amendment; BT Bourbonnais did not
involve any APA claims or claims against CMS.

See id.

Heritage quotes BT

Bourbonnais ad nauseam but fails to connect BT Bourbonnais to its purported

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standing under the APA. Indeed, Heritage fails to address any of CMS’ specific
arguments regarding traceability and redressability, see [34] at 2–3, both of which
Heritage must demonstrate to show its standing to bring this claim, see Lujan, 504
U.S.at 561 (“The party invoking federal jurisdiction bears the burden of establishing
these elements.”). Thus, Heritage has waived any argument on those issues, Crespo
v. Colvin, 824 F.3d 667, 674 (7th Cir. 2016) (“perfunctory and undeveloped
arguments, and arguments that are unsupported by pertinent authority, are
waived”), so this Court dismisses Count IV for lack of standing.
Alternatively, this Court observes that Heritage’s complaint fails to plead any
facts suggesting that CMS acted arbitrarily and capriciously in approving the Illinois
amendment. For example, Heritage alleges that CMS “approved a process whereby
a facility was granted the ability to recalculate a particular resident’s daily rate,” and
that HFS unlawfully implemented section 147.340 in a manner inconsistent with the
substance of the amendment that CMS approved. [1] ¶¶ 55–56. Those allegations
do not show any wrongdoing by CMS; instead, they claim that HFS went rogue and
strayed from CMS’ approval. Count IV remains dismissed.
C.

Heritage’s Motion for a TRO

Heritage moved for a TRO to prevent HFS from continuing to audit two of
Heritage’s facilities and from recouping any further amounts from Heritage’s
previously audited facilities. [4] at 2. To obtain a TRO, Heritage must show that it
meets the standard for obtaining a preliminary injunction. See YourNetDating, Inc.
v. Mitchell, 88 F. Supp. 2d 870, 871 (N.D. Ill. 2000). Thus, among other things,

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Heritage must show that: (1) without a TRO, it will suffer irreparable harm in the
interim period prior to this Court resolving its claims; (2) traditional legal remedies
would be inadequate; and (3) its claims have some likelihood of succeeding on the
merits. See Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the U.S.A., Inc., 549
F.3d 1079, 1086 (7th Cir. 2008). At this stage, Heritage has no chance of success on
the merits, given this Court’s dismissal of each of its claims. Accordingly, this Court
denies Heritage’s motion for a TRO.
IV.

Conclusion
This Court grants Defendants’ motions to dismiss [18, 22] and denies

Heritage’s motion for a TRO [4]. If Plaintiff’s counsel can file an amended complaint
consistent with this order and the ethical requirements of Rule 11, then it must be
filed on or before 10/8/18. If no amended complaint is filed by that date, then the case
will be terminated.

Dated: September 18, 2018

Entered:
____________________________________
John Robert Blakey
United States District Judge

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