Where Does the Supreme Court’s Ruling Leave Medicaid Rate Reductions?

To follow up on our “Breaking News” post, today we’ll look at the Supreme Court’s decision in more detail and consider what the views of the majority and the dissent might tell us about the possibilities for later rulings. The decision was split; the four conservative justices would have ruled that neither the providers nor the beneficiaries could sue under the Supremacy Clause. If the minority had prevailed, the possibility of future rate challenges based on the Supremacy Clause would have been foreclosed.

The majority opinion states that CMS’ approval of the challenged rate reductions changes the posture of the case and may also change the answer to the question whether the rate reductions violated the Social Security Act. The court stated that the availability of review of CMS’ approvals under the Administrative Procedure Act (APA) might render any challenge under the Supremacy Clause redundant and unnecessary. APA review might change the outcome because the court usually must defer to an agency’s interpretation of a statute it administers.

Actually, the CMS approval letter, which was attached to correspondence directed to the Supreme Court, did not reverse the agency’s original position. Rather, it approved some of the proposed amendments based on additional information that the state provided in 2011, and the approval was limited to specified dates during which the state had implemented the cuts. The state officials agreed to withdraw some of the pending requests and not to seek reimbursement from providers because of the likely effect on beneficiaries’ current access to services.

California Medicaid officials submitted the following for state fiscal years 2008, 2009 and 2010:

  • the total number of providers by type and location;
  • the number of providers participating in Medi-Cal, the state’s Medicaid program, by type and geographic area;
  • utilization of services by beneficiary type over a period of time; and
  • benchmark utilization data, to the extent available.

CMS then studied the changes in access and utilization, comparing utilization during the periods that the cuts were in effect to the periods when they were not. In addition to the data submitted, CMS based its approval on the state’s agreement to a plan to monitor access to each of the services services that were at issue in the disputed amendments.

Because the state passed rate-cutting legislation again in 2011, some of the providers and beneficiaries had filed another lawsuit by the time the Supreme Court reached its decision. CMS approved this amendment on the same date as the others, so the providers and beneficiaries sued both the director of the California agency and the HHS Secretary. On January 31, 2012, a federal court granted another preliminary injunction barring the state from implementing the cuts.

The district court found that the director’s submission and CMS’ approval of the proposed amendment both were arbitrary and capricious. Although the state had submitted some data to show that the rate cuts would not impair beneficiaries’ access to care, the court found it insufficient. The agency counted every doctor who had submitted even one Medicaid claim in the last year to be available to new Medicaid patients. The agency also failed to consider an established problem with beneficiaries’ access to some services and measured access using geographic “peer groups” from different regions of the state.

CMS’ approval of these latest amendments also was based, in part, on the state agency’s monitoring plan discussed above. In granting the injunction, the district court found that the monitoring plan did not render the flawed amendments acceptable. The court reasoned that the plan addressed the action to be taken after an access problem has been identified; it does not prevent the problem from arising.

In judicial review of a determination under the APA, a court also would consider whether CMS’ action was arbitrary and capricious. Although another court might possibly reach a different conclusion, nothing in the Supreme Court’s ruling would affect its findings.

The district court also considered whether it must defer to CMS’ interpretation of Section 1902(a)(30)(A) of the Social Security Act. The court found it unnecessary either to defer or give “serious respect” to CMS’ position that cost studies were not required. First, the position was not developed in a process involving review or consideration of opposing views, such as an administrative hearing or notice-and-comment rule making. Second, the agency had taken the opposite position in the past. In a previous proceeding before the Ninth Circuit Court of Appeals, HHS had argued that it could not find that rates were consistent with efficiency, economy and quality of care while ignoring the providers’ costs.

In addition, the letter approving the state plan amendment did not include any explanation of the reasoning behind the conclusion that cost studies were not required. Finally, CMS’ position was not firm or settled; the agency had told the court that it was reviewing and refining its interpretation through the rule making process.

CMS has not completed the rule making process it began last May. Given that the agency approved California’s  proposed amendments only after additional information was provided and a monitoring plan was in place, its approval of future across-the-board cuts mandated by a state legislature is unlikely. Maybe this lengthy litigation was necessary to prompt CMS into making rules everyone can live with. On the other hand, if the Court of Appeals decides that no one can sue to stop rate cuts before they are implemented, CMS might be free to let the proposed rule die.