On January 16, 2009, a group of California pharmacies participating in the Medi-Cal fee-for-service program filed suit in the U.S. District Court for the Central District of California, against the California Department of Health Care Services. The plaintiffs, represented by private counsel, asked the court for preliminary injunctive relief, attorneys' fees, and costs claiming that Assembly Bill 1183 ("AB 1183") was preempted by § 30(A) of the Medicaid Act (hereinafter referred to as "§ 30(A)"). Specifically, the plaintiffs alleged that the 5% reduction in Medi-Cal fee-for-service payments to pharmacies would cause the denial of services to Medi-Cal patients, or result in a reduction in services to Medi-Cal patients, or the closure of pharmacies serving Medi-Cal patients in violation of the quality and equal access clauses of § 30(A).

The complaint explained that on September 15, 2008, the California Legislature amended AB 1883, originally a hazardous material bill, to include measures designed to reduce government expenditures in line with the provisions of the earlier 2008-2009 Budget Bill. There were no committee hearings on the amended portions of the bill and the Legislature passed the bill within twenty-four hours, even though, according to the plaintiffs, it contained changes to hundreds of health-care related subjects. The plaintiffs therefore alleged that the California Legislature did not have time to consider whether a 5% rate reduction was consistent with providing quality services and maintaining equal access to services as required under § 30(A), or time to evaluate the costs to providers of performing services and procedures as also required under § 30(A). The 5% rate reduction was therefore preempted by § 30(A), they argued.

On February 27, 2009, the District Court (Judge Christina A. Snyder) granted plaintiffs' motion for preliminary injunction and ordered the State to refrain from implementing the 5% payment reduction to pharmacies for prescription drugs provided under the Medi-Cal fee-for-service program. Managed Pharmacy Care v. Maxwell-Jolly, 603 F. Supp. 2d 1230 (C.D. Cal. 2009). Shortly after, on March 13, 2009, the State filed a motion to alter or amend and clarify the preliminary injunctive ruling that the District Court denied on April 3, 2009. Managed Pharmacy Care v. Maxwell-Jolly, No. CV 09-382 CAS (C.D. Cal. Apr. 3, 2009).

The State appealed the ruling to the Ninth Circuit Court of Appeals, and on March 25, 2010, the Ninth Circuit upheld the decision of the District Court. Independent Living Center v. Maxwell-Jolly, 374 Fed. Appx. 690 (9th Cir. Mar. 25, 2010). The Ninth Circuit affirmed the lower court's ruling that the California Legislature was required to study the impact of the five percent rate reduction on the statutory factors of efficiency, economy, quality, and access to care, prior to enacting AB 1183, and that the legislature had not adequately done so. It also upheld the lower court's finding of irreparable harm, noting that many brand name and generic drugs would be reimbursed at a level below costs, thereby limiting access to Medi-Cal patients.

The State appealed the Ninth Circuit ruling to the Supreme Court, and on January 18, 2011, the Supreme Court granted certiorari review in this case and two related cases. Maxwell-Jolly v. Cal. Pharmacists Assoc., 131 S.Ct. 992 (2011). Oral argument took place on October 3, 2011. While the cases were pending in the Supreme Court, the HHS Centers for Medicare and Medicaid Services (CMS) determined that the rate reductions complied with the Medicaid statute and approved a limited retroactive implementation of the rate reductions. Consequently, the Supreme Court (Justice Stephen Breyer) found that the posture of the case had changed from the Supremacy Clause to the Administrative Procedure Act, introducing a new issue not briefed to the Court or in earlier proceedings, and therefore it vacated the decision of the Ninth Circuit and remanded for reconsideration. 132 S.Ct. 1204 (2012).

On remand, the parties agreed to enter settlement mediation overseen by the Ninth Circuit. A settlement agreement was executed in April 2014 and submitted to the district court for approval on August 19, 2014. In the agreement the parties dismissed their appeals from the preliminary injunctions issued in the cases, and the plaintiffs agreed to dismiss the pending actions with prejudice, subject to the Court retaining continuing jurisdiction to determine (1) motions for attorneys’ fees by counsel for Plaintiffs, and (2) motions or proceedings by Plaintiffs to enforce the Agreement through January 1, 2016. In return, under the settlement, the defendant agreed – either by release or by agreement – to forgo recoupment of any amounts paid out by the Department to Medi-Cal providers, pursuant to the preliminary injunctions previously issued by the Court, except with respect to “opt-out providers.” In other words, when the settlement became effective, Plaintiffs gave up their right to seek any further relief, and the defendant gave up its right to seek recoupment of funds that have already been paid pursuant to the preliminary injunctions. The plaintiffs reserved the right to submit a claim for attorney’s fees.

In order to acquire attorneys’ fees from the defendants, on July 24 and 28th, 2015 the plaintiffs and intervenors filed additional appeals in the Ninth Circuit to Judge Snyder's order denying fees. However, during a settlement conference on November 16, 2015, the motion for attorneys’ fees was settled, though the terms are not available.

Nick Kabat - 09/17/2014
Mary Kate Sickel - 03/25/2018


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