Dartmouth-Hitchcock et al v . NH DHHS 11-CV-358-SM 9/27/12 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Dartmouth-Hitchcock Clinic, et a l . , Plaintiffs

v. Case N o . 11-cv-358-SM Opinion N o .

Nicholas Toumpas, Commissioner, N.H. Dept. of Health and Human Services, Defendant

O R D E R

The Commissioner’s motion to dismiss the hospital and

beneficiary plaintiffs’ Supremacy Clause claims (Counts I-IV)

required additional briefing in light of the Supreme Court’s

decision in Douglas v . Independent Living Ctr. of S . Cal., 132

S . C t . 1204 (2012). The parties have addressed the issues

specified by the court and have further developed their

respective positions. Having carefully considered the matter,

the court denies the Commissioner’s motion to dismiss the

Supremacy Clause counts, without prejudice to renewing the motion

following receipt of the views o f , or administrative action by,

the Secretary of Health and Human Services.

Discussion

The plaintiff hospitals and Medicaid beneficiaries seek

preliminary and permanent injunctive relief enjoining the

defendant Commissioner from implementing certain Medicaid reimbursement rate reductions on grounds, inter alia, that those

rate reductions: 1 ) were dictated by state action taken pursuant

to state statutes that directly contravene, and are therefore

preempted by, applicable federal law; 2 ) were calculated using

methodologies that are not part of the federally-approved state

Medicaid plan, o r , alternatively, were the product of a

substantial misapplication of the federally-approved methodology

such that it was effectively changed without required federal

consent; and, 3 ) the rate reductions are inconsistent with the

State’s federal statutory obligations to set Medicaid

reimbursement rates at a level adequate to “assure that payments

are consistent with efficiency, economy, and quality of care and

are sufficient to enlist enough providers so that care and

services are available under the plan at least to the extent that

such care and services are available to the general population in

the geographic area.”

(a)(30)(A) (hereafter

“Section 30(A)”).

As noted in the court’s earlier order discussing the

background facts and granting limited injunctive relief, the

provider and beneficiary plaintiffs have made a strong showing

that the reduced Medicaid reimbursement rates at issue are likely

inconsistent with the State’s legal obligations to set Medicaid

rates at a level capable of sustaining the delivery of medical

2 care to the most needy, and in a manner consistent with the

federally approved state Medicaid plan. The reduced rates are

likely the impermissible product of a single and conclusive

factor: state budgetary concerns. See Indep. Living Ctr. of S .

Cal., Inc. v . Maxwell-Jolly,

(9th Cir. 2009)

(“State budgetary concerns cannot . . . be the conclusive factor

in decisions regarding Medicaid.”), vacated on other grounds sub

nom. Douglas v . Indep. Living Ctr. of S . Cal Inc., 132 S . C t .

1204 (2012); Amisub (PSL), Inc. v . Colorado Dep’t of Social

Services,

, 800-01 (10th Cir. 1989) (“While budgetary

constraints may be a factor to be considered by a state when

amending a current plan, implementing a new plan, or making the

annually mandated findings, budgetary constraints alone can never

be sufficient.”).

While state budgetary concerns cannot conclusively dictate

Medicaid reimbursement rates, they do play a significant and

legitimate role in the rate-setting process. But, even where

significant state budget issues arise, still, Medicaid

reimbursement rates must be set by participating states in

accordance with methodologies and standards that are published in

a state plan and approved by the United States Secretary of

Health and Human Services (currently through the Centers for

Medicare and Medicaid Services (“CMS”)). And, those rates must

3 meet minimum federal statutory standards, which generally require

that the rates be adequate to assure quality and availability of

medical care for those most in need of i t . See Section 30(A).

Plaintiffs have conceded that they cannot bring a private

cause of action to enforce Section 30(A)’s provisions.

Nevertheless, they say they may challenge the constitutionality

of state statutes, as applied, under the Supremacy Clause, to the

extent those state laws dictate reduced Medicaid rates that are

invalid under federal law. The Commissioner responds that

plaintiffs cannot be permitted to use the Supremacy Clause to

indirectly assert a private cause of action aimed at enforcing

Section 30(A)’s provisions. But that argument misses an

important and distinct point.

Plaintiffs are challenging the constitutionality of two

state statutes and the rate-setting action taken under the power

purportedly established by those statutes. They are not,

strictly speaking, challenging the Commissioner’s rate-setting

action under the Medicaid Act itself (which plaintiffs say

amounted to little more than acquiescence in unlawful rate-

setting directives issued by the Governor and Legislature). That

i s , plaintiffs do not sue to establish Medicaid-compliant rates,

4 but rather seek to invalidate what they assert are unlawful rates

dictated by preempted state law.

“Although participation in the Medicaid program is entirely

optional, once a State elects to participate, it must comply with

the requirements of [the Act].” Harris v . McRae,

(1980). One such requirement is that the State must have

(and must adhere to) a federally-approved plan for reimbursing

health care providers, 42 U.S.C. §§ 1396a(a), 1396d(a), and the

State must also promptly file any “[m]aterial changes in State

law, organization, or policy, or in the State’s operation of the

Medicaid program,”

(e).

To the extent N.H. Rev. Stat. Ann (“RSA”) 126-A:3, VII(a)

and RSA 9:16-b, the state statutes at issue, authorize the

Governor and Legislature to usurp the Commissioner’s obligations

under federal law to properly set Medicaid reimbursement rates —

by dictating across-the-board percentage reductions completely

divorced from the approved rate-setting methodology published in

the State’s approved plan, and without regard to the processes

and standards required by the Medicaid Act — those state statutes

would no doubt be declared invalid (as applied) under the

5 Supremacy Clause.1 Such state legislation would necessarily

purport to override clear provisions of federal law and would

“seriously compromise important federal interests.” Pharm.

Research & Mfrs. of Am. v . Walsh,

(2003)

(Breyer, concurring). See also Arkansas Elec. Cooperative Corp.

v . Arkansas Pub. Serv. Comm’n,

(1983).

The New Hampshire statutes at issue here, as applied (i.e.,

the rate-setting actions taken under their authority) are highly

suspect. But, as noted in the court’s earlier order, RSA 126-A:3

is by its terms permissive, rather than mandatory (the

RSA 126-A:3, VII(a) provides in pertinent part:

If [Medicaid outpatient reimbursement] expenditures are projected to exceed the annual appropriation, the department may recommend rate reduction for providers to offset the amount of any such deficit. The department of health and human services shall submit to the legislative fiscal committee and to the finance committees of the house and the senate, the rates that it proposes to pay for hospital outpatient services. The rates shall be subject to the prior approval of the legislative fiscal committee.

RSA 9:16-b provides in pertinent part:

Notwithstanding any other provision of law, the governor may, with the prior approval of the fiscal committee, order reductions in any or all expenditure classes within any or all department . . . if he determines at any time during the fiscal year that:

(a) Projected state revenues will be insufficient to maintain a balanced budget and the likelihood of a serious deficit exists.

6 Commissioner “may” seek approval by the Fiscal Committee of a

“proposed” rate reduction). RSA 9:16-b, is broad in scope, and

does not directly focus on Medicaid rate-setting. Each statute

might plausibly be construed in this context as (implicitly)

requiring that any directed Medicaid rate reductions must also

necessarily comport with substantive and procedural rate-setting

requirements mandated by controlling federal law. It is also

conceivable that what may well have been intended by the Governor

and Legislature as arbitrary budget-driven rate reductions, in

disregard of the State’s voluntarily-assumed federal legal

obligations, might nevertheless be found to be consistent with

those controlling federal obligations and, therefore, might

eventually be approved by the Secretary of Health and Human

Services. But the Secretary has yet to weigh-in on those issues.

That fact puts this case in a different posture than

Douglas. Here, there is no final administrative decision by the

Secretary with respect to the propriety of the challenged rate

reductions, and it is not even clear that an administrative

proceeding that will produce a final (appealable) agency decision

is ongoing. Thus, it is hardly clear that plaintiffs are without

a Supremacy Clause remedy, or that they must first pursue

administrative remedies (that may not be available).

7 While a strong minority in Douglas would have held that the

Supremacy Clause is unavailable to medical service providers as a

means to enforce state obligations under Spending Clause

legislation (like the Medicaid Act) in which Congress has not

created a private right of action, the Court did not actually

adopt that view. Rather, the Court bypassed the Supremacy Clause

issue altogether, finding that intervening administrative action

by the Secretary of Health and Human Services put the case in a

different posture and posed a risk that the Supremacy Clause

claims, if adjudicated, would result in a decision that either

subjected states to conflicting interpretation of federal law, or

was redundant. See Douglas, 132 S . C t . at 1211. But in Douglas,

there was an appealable final agency administrative decision.

Here there is none. Consequently, it is not apparent at all that

plaintiffs’ Supremacy Clause claims are, at this point, either

unnecessary or redundant.

In this circuit, applicable precedent generally supports

plaintiffs’ claim of right to a cause of action challenging the

validity of state laws under the Supremacy Clause on grounds that

they conflict with federal law and undermine important federal

interests. See e.g. Pharm. Research & Mfrs. of Am. v . Concannon,

(1st Cir. 2001), aff’d Pharm. Research & Mfrs. of Am.

v . Walsh,

(2003). S o , while the differing views

8 expressed in Douglas concededly add up to serious doubt about the

future viability of private suits like this one, the law remains

unchanged by Douglas. This court is obliged to rule in a manner

consistent with applicable circuit and Supreme Court precedent

and cannot ignore that precedent in anticipation of future

change. See Lewis v . Alexander,

,

(3d Cir. June 2 0 , 2012). See also Koenning v . Suehs,

(S.D. Tx. Sept 1 8 , 2012); Arizona Hosp. and Healthcare

Ass’n v . Betlach,

(D. Ariz. Mar. 2 3 , 2012)

(“[a]lthough Douglas provides ample reason to doubt the viability

of such a claim, the current state of Ninth Circuit law seems to

support such claims under the Supremacy Clause.”).

Plaintiffs’ Supremacy Clause claims (Counts I-IV) are not

subject to dismissal at this point. That conclusion gives rise

to another potentially critical matter. As noted in Douglas and

by the court of appeals, the goals expressed in Section 30(A) of

the Medicaid Act (efficiency, quality of care, geographic

equality, reasonable rates) are “highly general and potentially

in tension.” Long Term Care Pharm. Alliance v . Ferguson,

0 , 58 (1st Cir. 2004). Indeed, “read literally the statute

does not make these [criteria] directly applicable to individual

state decisions; rather state plans are to provide ‘methods and

procedures’ to achieve these general ends.”

“Thus, the

9 generality of the [Medicaid Act’s] goals and the structure for

implementing them suggest that plan review by the Secretary is

the central means of enforcement intended by Congress.”

Accordingly, “the [Secretary of Health and Human Services’]

expertise is relevant in determining [the Act’s] application.”

Douglas 132 S.Ct. at 1211. “After all, the agency is

comparatively expert in the statute’s subject matter” and

Congress has committed to the Secretary the power to administer

the Medicaid program, including the power to exercise discretion

in enforcing its requirements. Id.

Here, as in Douglas, the underlying substantive legal

question is whether the challenged New Hampshire statutes, as

applied, are sufficiently inconsistent with federal statutory

provisions that the imposed rate reductions should be invalidated

and future implementation of those reduced rates enjoined. It is

evident, then, that the Secretary’s views as to whether New

Hampshire acted inconsistently with its legal obligations under

the Act, would materially aid the court in deciding whether

injunctive relief should issue. That is to say, the primary

jurisdiction doctrine may well favor referring those potentially

dispositive issues to the Secretary (CMS) for her initial

consideration and expert resolution. Referral seems appropriate

here as the Secretary’s views will certainly advance the sound

10 disposition of this litigation, facilitate the Secretary’s own

exercise of her administrative enforcement authority, and insure

uniformity and consistency in results in similar cases

nationwide. See e.g. Texas & P. R. C o . v . Abilene Cotton Oil

Co.,

(1907); Ass’n of Intern. Auto. & Mfrs., Inc. v .

Comm’n of Mass. Dept. of Envtl. Protection,

(1st Cir.

1998).

The doctrine of primary jurisdiction seeks to promote proper

relationships between the courts and administrative agencies

charged with particular administrative duties. See United States

v . Western P. R. Co.,

9 , 63-64 (1956). When a

cognizable legal claim turns on issues that fall within the

special competence of an administrative agency, and the court

would benefit from the agency’s expertise, it is appropriate to

refer those issues to the agency and obtain its views. See

Pejepscot Indus. Park v . Maine Central R.R.,

(1st Cir. 2000). Indeed, “if the issues referred to the agency

. . . are critical to judicial resolution of the underlying

dispute, the court cannot proceed with the trial of the case

until the agency has resolved those issues. In many

circumstances, the court that referred the issues to the agency

also must wait until the agency’s decision has been either upheld

or set aside by a different reviewing court.” Assn. of Intern.

11 Auto Mfrs., Inc. v . Commissioner,

(1st Cir.

1999) (quoting 2 Kenneth Culp Davis & Richards Pierce, Jr.,

Administrative Law Treaties, 271, 272-73 (3d ed. 1994)).

The defendant Commissioner asserts that the Secretary has

been actively reviewing the propriety of the rate reductions at

issue, as well as the procedure that produced them, for some

months now. Regularly scheduled meetings between CMS and the

Commissioner’s office have taken place and the Commissioner has

apparently responded in detail to numerous CMS requests for

information and clarification. Indeed, it is suggested that some

pending state plan amendment (SPA) requests have been modified in

ways that may be pertinent to the issues raised in this

litigation. Given that circumstance, the Secretary may well be

fully prepared to assist the court in addressing some or all of

the following questions:

1) Whether the issues raised by plaintiffs with respect to the validity of rate-reductions fall within the primary jurisdiction of the Secretary such that the case should be stayed pending final administrative resolution of those issues. See Ass’n of Intern. Auto. Mfrs.,

;

2) What, if any, administrative proceeding is ongoing relative to determining the propriety of the rate reductions at issue;

3) Whether any final agency action is expected with respect to the rate reductions that are subject to the complaint in this case, and if s o , when;

12 4) Whether, in the Secretary’s view, the Commissioner’s imposition of the rate reductions at issue comports with the substantive and procedural requirements of the Medicaid Act and implementing regulations;

5) Whether the imposed rate reductions at issue have been, or are likely to b e , approved by the Secretary;

6) Whether issuance of equitable relief enjoining implementation of the reduced rates at issue would be in the public interest in that such an injunction would facilitate the Secretary’s exercise of her enforcement responsibilities under the Medicaid Act.

Given that plaintiffs have made a substantial showing that

hardship is being suffered by both providers and Medicaid

eligible patients due to the reduced rates, and that continuing

enforcement of those rates, if unlawful, will at some point

result in irreparable injury (e.g., loss of medical care

facilities, providers, and the concomitant inability of Medicaid

patients to obtain needed care), the court will schedule a

hearing at which the Secretary’s expert views, and those of the

parties, will be heard on the questions posed above, as well as

on any related matters. The Secretary is invited to appear on an

amicus basis or otherwise, through counsel, and the Secretary and

parties may address the issues raised either orally or in written

submissions, as they prefer.

Conclusion

The defendant’s motion to dismiss Counts I-IV of the

complaint (document n o . 48) is denied.

13 The Clerk shall schedule a hearing on the matter on November

1 , 2012. A copy of this order shall be provided to the United

States Attorney, who shall insure that the appropriate

responsible officers within the Department of Health and Human

Services are made aware of its contents in sufficient time to

allow a meaningful response to the issues raised, particularly

the Secretary’s position with respect to her primary jurisdiction

to administratively determine the validity of the rate reductions

at issue under the Medicaid Act.

SO ORDERED.

Steven J. McAuliffe / T - ^ n -I- ^ ^I o-i-^-i-^^ T ^ -; ^ -i- -^ Jnited States District Judge

September 27, 2012

cc: John P. Kacavas, United States Attorney, NH Martha Van Oot, Esq. William L. Chapman, Esq. Anthony J. Galdieri, Esq. Emily P. Feyrer, Esq. Gordon J. MacDonald, Esq. W . Scott O’Connell, Esq. John E . Friberg, Jr., Esq. Erica Bodwell, Esq. Mitchell B . Jean, Esq. Nancy J. Smith, Esq. Jeanne P. Herrick, Esq. Laura E . B . Lombardi, Esq. Constance D. Sprauer, Esq.

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