Department of Justice Opposes Rehearing on California Rate Reduction

In an appeal before the Ninth Circuit Court of Appeals, the Obama administration has submitted arguments supporting CMS’ approval of amendments to the California state Medicaid plan that cut rates for many Medicaid providers. Specifically, the government’s brief opposes the providers’ request for reconsideration of the Ninth Circuit’s ruling in Managed Pharmacy Care v Sebelius by the entire court.

The issue in the litigation was whether Soc. Sec. Act sec. 1902(a)(30)(A) requires state Medicaid agencies to undertake cost studies to support proposed state plan amendments (SPAs) that would change rates. The district court decisions reviewed in Managed Pharmacy Care were the latest of many that held that the state required proposed state plan amendments to be based on cost studies. The Ninth Circuit had affirmed those decisions, which followed its 1997 ruling in Orthopaedic Hospitals v Belshe, 103 F.3d 1492.

The United States Supreme Court held oral argument in one of the earlier cases, Douglas v Independent Living Center of Southern California, Inc., in 2011. After oral argument, but before the Supreme Court made a decision, CMS approved the SPA. The Supreme Court remanded that case to the Ninth Circuit because the issues changed once CMS acted. The court noted that CMS’ decision “carries weight” and was subject to review under the Administrative Procedure Act.

In the Managed Pharmacy Care appeal, four later district court decisions were consolidated. The Ninth Circuit ruled that its interpretation of the statute in Orthopaedic Hospital was no longer viable. Because the federal government was not a party to the case in 1997, the court did not have the benefit of its interpretation. But, the court reasoned, section 706 of the Administrative Procedure Act (5 U.S.C. sec. 706) and related case law required it to defer to the agency’s interpretation of a law that it administered when Congress has given the agency authority to do so and the agency’s interpretation was reasonable. Therefore, the court vacated the injunctions.

The providers’ petition for rehearing in Managed Pharmacy Care argued that the agency’s interpretation of the statute was not entitled to deference under the APA because: (1) it was not stated or explained in the letter approving the SPAs; and (2) it did not result from a thorough consideration in formal proceedings. The government responded that the agency is not required to spell out its interpretation in detail and that the court had previously upheld the agency’s interpretation of the statute in a case involving disapproval of a proposed SPA; the authoritativeness of the agency’s interpretation did not depend on whether it approved a proposed SPA. The government also argued that the Supreme Court decision reflected its probable ruling on the issue and that reversal of the Ninth Circuit’s ruling would create a conflict among the circuits.