Federal appeals court halts some California Medicaid pay cuts

A recent federal appeals court ruling could dissuade budget-strapped states from looking to cut Medicaid payment rates as an answer to their fiscal woes.

A panel of the 9th U.S. Circuit Court of Appeals unanimously found that California state officials in 2008 illegally instituted a 10% across-the-board cut in Medicaid rates for physicians, pharmacists and other health care entities. The ruling is a setback for the state's efforts to impose further Medicaid payment reductions to help plug a $26 billion deficit.

"We do not doubt the severity of the fiscal challenges facing the state of California," Judge Milan D. Smith Jr., wrote in the July 9 opinion. But "a budget crisis does not excuse ongoing violations of federal law. ... In contrast, there is a robust public interest in safeguarding access to health care."

The court found that the state violated federal laws requiring Medicaid payments to be sufficient to enlist enough physicians and other health care professionals to ensure access to care. Judges said California's Dept. of Health Care Services failed to study adequately the impact the cuts would have on the efficiency, economy and quality of health care services before adjusting the Medicaid rates, as required by federal law. Nor did the state conduct any reliable cost studies of the various services affected.

The appeals court also broadened an Aug. 18, 2008, trial court injunction by requiring the state to reimburse physicians and others retroactively for fees withheld during the roughly seven weeks after the 10% cuts took effect July 1, 2008. The state has estimated total compensation to be about $56 million, though lawyers close to the case say it could exceed $60 million if interest is added. The figures do not account for federal matching dollars.

"This just shows you the impact this would have had, had this continued," said Craig J. Cannizzo, an attorney representing various health care organizations involved, including the California Medical Assn. States "can't just make an across-the-board rate reduction and expect it to hold up if you're not going to go through a bona fide analysis, because you can't possibly explain how that applies to every provider group, in every setting, in exactly the same way. It defies any credibility you did any real fact-finding."

The state is asking the full appeals court to reconsider the ruling and maintained in court documents that its analysis was sufficient. The Dept. of Health Care Services acknowledged in a statement that the ruling, as it stands, would prevent the state from implementing the 10% rate cut, but officials did not comment further.

The decision follows a refusal by the U.S. Supreme Court in June to disturb an earlier 9th Circuit ruling affirming the rights of doctors and others to challenge the rate reductions.

Together, the rulings pave the way for health care professionals and patients to pursue similar injunctive relief in other states, said Stanley L. Friedman, a lawyer with the Medicaid Defense Fund, which helped file the recent action. He noted similar cases pending in Washington and Idaho.

"This is good news for citizens but bad news for attorneys general, because there could be more lawsuits like this," Friedman said.

Cannizzo added that the decisions also bode well for a second wave of legal challenges brought by the CMA and a coalition of hospitals and other health care professionals. Those suits, pending before the same 9th Circuit panel, were prompted by another round of cuts ranging from 1% to 5% that the state instituted in March. Oral arguments have not been scheduled. A February trial court order halted most of those reductions until the case is resolved.

Gov. Arnold Schwarzenegger and lawmakers, at this article's deadline, had struck a tentative budget deal that includes a reduction in Medicaid funding, though the cuts do not appear to affect physician pay. While legislators successfully rejected Schwarzenegger's proposal to terminate the state's Children's Health Insurance Program, known as Healthy Families, the program would also see a funding cut under the proposal.

Despite the lack of pay cuts, the CMA said the Medicaid and CHIP reductions in the tentative deal were unacceptable.

"This plan takes dead aim at California's most vulnerable residents -- children, the elderly and the poor -- at the time of their greatest need," said Dev A. GnanaDev, MD, CMA president. "As a trauma surgeon at a public hospital, I know exactly what this means: A huge increase in the number of people visiting overcrowded and expensive emergency rooms for care."