The Supreme Court and Medicaid Payment Issues: The Drama Continues

This year, the Supreme Court began its term with the argument of three cases involving fundamental questions about what federal Medicaid law requires when a state sets or changes payment rates:

  • Who can determine the rates paid to Medicaid providers?
  • What factors must be considered?
  • What procedure must be followed?
  • If a state agency tries to implement a change without following the law, what can be done to stop it?

As we discussed previously these cases involve rate reductions enacted by the state legislature to avert a budget crisis.  Providers and beneficiaries asked the courts prohibit the implementation of the cuts.  The argued that the cuts were established in violation of Soc. Sec. Act Section 1902(a)(30)(A), which  requires the state to set rates that are consistent with efficiency, economy and quality of care and sufficient to ensure that Medicaid beneficiaries have the same access to services as the general population in the geographic area. Why? Because the state did not consider the factors set forth in the statute. The challengers also argued that the agency could not lawfully implement proposed changes to the state Medicaid plan before CMS had approved them.

Federal courts in California and the Ninth Circuit Court of Appeals entered or approved injunctions several times in 2009, 2010 and 2011.  The injunctions were granted, and the court barred the agency from implementing the cuts at all, without referring to the effect of CMS approval.

There were two components to the issue of rate-setting, procedural and substantive.  Substantively, the state had to consider particular issues, including the effect on access to care, in setting rates. Procedurally, there had to be a stage at which the state agency considered the required factors.

Last May, CMS published a proposed  rule that would require states wishing to reduce or restructure Medicaid payment rates to undertake a more definite process in order to get information about the effects of the proposed changes on rs and beneficiaries. The agencies must specifically seek beneficiaries’  input on the need for and availability of the services. The state agency would have to submit an analysis of the information, reflecting consideration of  the effect of the proposed changes on beneficiaries’ access to services. as part of the proposed state plan amendment package. CMS “may disapprove” the proposed amendment if it finds the analysis insufficient. After the changes are implemented, the states would have to monitor the beneficiaries’ access to the service.  The state would review the rates for each service every five years. The proposed rule would not apply to rates set by Medicaid managed care organizations.

The Supreme Court held oral argument on October 3, 2011.  At the argument, the Solicitor General was asked about the status of the rule making process and said that the agency might not publish a final rule before the end of 2011 because it was still considering the comments on the proposed rule.

On October 28, the Solicitor General wrote to inform the Court and the parties that CMS had approved the proposed state plan amendments. Apparently, CMS approved many of the pending amendments implementing the  legislation from 2009, 2010 and 2011 cutting payment rates, while California withdrew others. The amendments approved included cuts that had been implemented before entry of any injunction and others that were based on later legislation and later lawsuits.

The court required the parties and the Solicitor General to submit additional briefs addressing the effect of the approvals on the issues to be decided.  Did CMS’ approval or the state’s withdrawal of proposed state plan amendments make the claims moot? Did CMS’ approval defeat the argument that federal Medicaid law preempted the state legislation?  In those briefs,  the California agency and the Solicitor General both argued that the case was not moot; a live dispute remained because the terms of the injunctions were unrelated to CMS approval and because the counsel for some of the providers and beneficiaries had argued that there would still be a cause of action to challenge the rates under the Supremacy Clause even if CMS approved the proposed cuts.

Meanwhile,a week after CMS approved the state plan amendments, many of the same providers and beneficiaries brought two more actions to enjoin implementation of the cuts. This time, they named the HHS Secretary as a defendant , contending that CMS acted in disregard of the statutory requirements and binding precedent in the Ninth Circuit.

A 1997 Ninth Circuit decision held that the rates must be based on the costs of providing quality care efficiently and economically.  Although the statute does not use the word “sufficient”  in relation to costs, the court reasoned,  the language requiring that rates be “consistent with efficiency, economy and quality of care”  demanded that the providers’ operating costs be considered.

At the hearing, CMS argued that it was not required to consider providers’ costs in approving state plan amendments involving rates.  The court rejected this interpretation of the statute. First, the interpretation was not reached after deliberation, such as a public hearing and argument. Second, the agency had not interpreted the statute consistently.  The court also maintained its previous rulings that providers and beneficiaries could challenge the  state plan amendments, including CMS’ actions, because they would suffer direct injury, and their interests were within the zone the statute was intended to protect.  On Wednesday, December 28, the court granted preliminary injunctions in both cases.