California Legal Challenge

On October 3rd, the U.S. Supreme Court opened its 2011-2012 term by hearing arguments in a lawsuit to determine whether Medicaid beneficiaries and providers can sue states over cuts to the Medicaid program. The California Pharmacists Association, Santa Rosa Memorial Hospital and the Independent Living Center of Southern California are challenging the state's reimbursement cuts. The Supreme Court will not rule on the actual reductions in reimbursement – but whether medical professionals have a right to sue under the Constitution.

HealthCare Providers & Medicaid Beneficiaries Challenge the State of California

California spends more than $41 billion per year on its Medicaid program, Medi-Cal, which consumes about 13 percent of the state's budget and provides care to more than 55 million people. In 2008 and 2009, faced with what the state's attorneys described as a "devastating, ongoing and deepening financial crisis," the California legislature:

• cut reimbursement rates for Medi-Cal providers by ten percent including doctors, pharmacies, home health agencies
• reduced future reimbursement rates by one percent from their pre-2008 levels
• reduced the maximum Medi-Cal contribution for wages/benefits for in-home supportive services

The state said that these cuts would generate savings of $700 million, but did not study the impact of these cuts or submit them to federal Medicaid regulators at CMS, as required by federal law.

Medi-Cal providers, hospitals, unions and beneficiaries sued in five separate cases in state and federal courts under the Supremacy Clause, arguing that California’s cuts were preempted by federal Medicaid requirements. In particular, the plaintiffs argued that California’s cuts failed to satisfy the requirements of Section1902(a)(30)(A) of the Social Security Act, which says that participating states must ensure that state Medicaid payments to health care providers “are consistent with efficiency, economy, and quality of care” and “sufficient to enlist enough providers so that care and services are available...to the general population in the geographic area.” Under Section1902(a)(30)(A), states also have to study the impact of any proposed rate reductions on health care services and submit them to the CMS for review.

The 9th Circuit Court of Appeals ruled that California's reimbursement cuts violated federal Medicaid law and compromised beneficiaries' access to "much-needed medical care” and blocked the reductions from taking effect. It also ruled that beneficiaries could sue under the U.S. Constitution's supremacy clause. Under this reasoning, the California laws imposing reimbursement cuts violated the 1965 Medicaid law's requirement state payments remain "consistent with efficiency, economy and quality of care" and be "sufficient" for medical professionals. California then appealed the case to the U.S. Supreme Court.

U.S. Supreme Court to Consider the Case

The case before the high court, which is the first item on its 2011-2012 agenda, is a consolidated set of three separate lawsuits* on the issue that had been filed by providers and beneficiaries. The main issue before the high court will be whether private parties have the legal standing to challenge reimbursement rate cuts under the supremacy clause. The outcome of the case could affect the scheduled expansion of Medicaid in 2014, which would add millions of new beneficiaries to state Medicaid rolls.

A brief filed by California and 30 defendant states expressed concern about a system of "enforcement by potentially millions of private litigants and court injunctions." Meanwhile, health care providers in August 2011 filed a brief that argued if the high court rules in favor of California, it would "allow not only California, but all states, to defy federal law with virtual impunity." 

Implications

The consequences of this verdict extend beyond the Medicaid program. The case intersects state politics, finance, health care, and federalism - considerations and interests that pull in different directions at a time when states face increasing fiscal challenges, rising health care costs, coverage issues and the implementation of federal healthcare reform.

A ruling for the state would allow states to continue to balance their budgets on the backs of Medicaid providers and recipients, often their most vulnerable populations, checked only by the administrative process at the CMS, which California has demonstrated that a state can manipulate (through delay and foot-dragging). 

However, a ruling for the plaintiffs would mean that plaintiffs could tie up states in litigation any time a state wanted to cut Medicaid rates, or to make other significant changes to their Medicaid program.

As of early November, the decision had not been issued by the Supreme Court. The arguments were heard on the first day of the 2011-2012 term, so the decision should be one of the first handed down, but there is no guarantee. Usually, the Court issues a few decisions before the end of the calendar year. 

Pharmacy Update

Following the controversy, in September 2011, California enacted AB 102, which changes the drug reimbursement methodology for Medicaid to now include Average Acquisition Cost (AAC) in the calculation of the lowest among: AAC, AWP-17%, FUL, state MAC or selling price. The state Medicaid program is now authorized to contract with a vendor to survey for AAC, with AWP-based calculations no longer to be used once the AAC methodology is fully implemented. Pharmacies that do not supply pricing data to establish AAC will not be eligible to participate in the Medicaid program. A dispensing fee structure has been set at $7.25/prescription and $8.00/prescription for SNFs/ICFs.

In November, the California Pharmacists Association (CPhA) warned CMS Administrator Don Berwick that the $1.5 billion in proposed state Medicaid cuts would prompt 72 percent of its members to drop out of the Medicaid program. The cuts include reducing reimbursement by 10% for doctors, pharmacies, home health agencies, and others and limiting enrollees to six prescriptions per month except for lifesaving drugs. In a recent letter to Berwick, CPhA said the proposed 15 percent reduction in reimbursement would force 43 percent of its members to close their pharmacies. Even a 5 percent cut would result in below-cost reimbursement for 99 percent of the program's most consumed drugs.

(*) Douglas v. Independent Living Center, 09-958, Douglas v. California Pharmacists Association, No. 09-1158 and Douglas v.  Santa Rosa Memorial Hospital, No. 10-283.