In 2008 and 2009, the California Legislature passed three statutes modifying the State's Medicaid plan. Under the Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., such modifications must be approved by the Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”) prior to being implemented. In September and December 2008, California submitted amendment proposals to CMS that incorporated most of the rate reductions the Legislature had already included in these statutes. Before CMS had completed its review of the amendments, this suit and several others seeking injunctions to prevent the rate reductions were filed.

The plaintiffs in this case were a group of several associations of California medical professionals, pharmacies, and hospitals. On January 29, 2009, the plaintiffs filed a complaint in the Central District of California against the Director of the Department of Health Care Services of the State of California. Private counsel represented the plaintiffs in this action and the Attorney General of California represented the defendant. The group of plaintiffs sought an injunction to invalidate the cutbacks to California's Medicaid program ("Medi-Cal") mandated by the State Legislature.

On September 18, 2008, Governor Schwarzenegger had signed into law AB 1183, which included a five percent rate reduction for payments to certain intermediate care facilities under the Medi-Cal fee-for-service program, a five percent rate reduction to payments to pharmacies and adult day health care, and a one percent rate reduction for all other Medi-Cal fee-for-service benefits. This amended an earlier law, which had a higher, 10 percent rate reduction and had been struck down by the U.S. District Court for the Central District of California in Independent Living Center of Southern California v. Shewry. (see related case PB-CA-0016)

The plaintiffs in the instant case alleged that AB 1183 violated Title XIX, because they had not been approved by CMS and because the State had failed to study the potential effects of the rate reductions on the quality of and level of access to care available to Medi-Cal recipients. Plaintiffs argued that California had not shown that, were the rate reductions to go into effect, the State would be able to enlist enough providers as to make Medi-Cal services sufficiently available to benefit recipients, as required by 42 U. S. C. §1396a(a)(30)(A). The plaintiffs alleged that because these rate reductions violated federal Medicaid law they were therefore preempted by the Supremacy Clause. The plaintiffs sought declaratory and injunctive relief, asking the court to find that AB 1183 was in violation of federal law and to prevent its enforcement.

On February 11, 2009, the plaintiffs filed a motion for preliminary injunction to prevent the implementation of rate reductions for pharmacies and adult day health care centers. A second motion for preliminary injunction followed on February 13, 2009 regarding the rate reductions for hospital services. On March 9, 2009, Judge Christina Snyder issued orders on these motions for preliminary injunction granting the motion as to adult health care centers and denying the motion as to hospitals. For the motion relating to hospitals, Judge Snyder found that the plaintiffs had demonstrated a likelihood of success on the merits but had not shown a likelihood of irreparable harm. Cal. Pharmacists Assoc. v. Maxwell-Jolly, 630 F.Supp.2d 1144 (C.D. Cal. 2009). The defendants and plaintiffs then appealed the orders granting preliminary injunction and denying preliminary injunction, respectively, to the Ninth Circuit. On April 6, 2009, the Ninth Circuit found that the district court had abused its discretion in not granting the preliminary injunction as to hospitals and granted the plaintiff's motion for stay pending appeal. On March 3, 2010, the Ninth Circuit found that in implementing the rate reductions the State had not relied on responsible costs studies or studied the impact of the contemplated rate changes prior to setting the rates, and was therefore in violation of 42 U. S. C. §1396a(a)(30)(A). The Ninth Circuit, therefore, affirmed the district court's order granting the plaintiffs' motion for a preliminary injunction. Cal. Pharmacists Assoc. v. Maxwell-Jolly, 563 F.3d 847 (9th Cir. 2009). In light of this, on April 16, 2010, Judge Snyder issued an order vacating her March 9, 2009 order and granting the plaintiffs' motion for preliminary injunction with regard to hospitals.

On March 24, 2010, the defendants petitioned the United States Supreme Court to review the decision of the Ninth Circuit holding that the Supremacy Clause of the U.S. Constitution could serve as a basis for a cause of action in this case. The Supreme Court granted certiorari review on January 18, 2011, consolidating this case with four others that raised the same issue, 131 S.Ct. 992 (2011). These four cases were Independent Living Center of Southern California, Inc. v. Shewry (Clearinghouse case code PB-CA-0016), Managed Pharmacy Care v. Maxwell-Jolly (PB-CA-0019), Dominguez v. Schwarzenegger (DR-CA-0031), and Santa Rosa Memorial Hospital v. Shewry (Docket #: 3:08-cv-05173-SC). On June 1, 2011, Judge Snyder issued an order removing this action from the list of active District Court cases pending the decision of the Supreme Court.

Oral argument before the Supreme Court took place on October 3, 2011. After oral argument, while the cases were pending in the Supreme Court, CMS approved California's amendments to its Medicaid plan. In light of this change, the Supreme Court declined to issue a ruling on whether the Supremacy Clause could serve as a basis for a private suit to enforce Title XIX against a state. Instead, on February 22, 2012, the Supreme Court vacated the Ninth Circuit Court's decision and remanded the case to the Ninth Circuit for reconsideration, with instructions to take into account CMS's approval of the amendments. Douglas v. Independent Living Center of Southern California, 132 S. Ct. 1204 (U.S. 2012).

Back in the Ninth Circuit, on May 22, 2012, the plaintiffs, joined by parties in other Ninth Circuit cases, filed a unanimous joint motion to refer parties to mediation. That motion was granted on the same day, and parties began mediation on May 25, 2012.

On September 16, 2013, the caption of the case was changed to reflect that Toby Douglas was the Director of the Department of Health Care Services, and David Maxwell-Jolly’s name was omitted.

After a span of two years of mediation, the parties negotiated a settlement. On May 27, 2014 the plaintiffs, joined by parties in other Ninth Circuit cases, filed a joint motion to dismiss each of the cases voluntarily, with each side bearing its own costs and fees on appeal. The motion was granted and the appeals dismissed on May 28, 2014.

The settlement itself was executed in April 2014, and was submitted to the district court for approval on August 19, 2014. Judge Snyder granted the motion, approving the settlement agreement on September 22, 2014, and dismissed the case with prejudice on April 23, 2015.

Under the settlement agreement, the Department of Health Care Services and its Director (collectively, “the Department”) agreed to forgo recoupment claims against Medi-Cal providers arising out of the preliminary injunctions in these cases, except with respect to Medi-Cal providers who are not represented here and choose to opt out of the settlement agreement, the plaintiff hospitals in Santa Rosa Memorial Hospital v. Maxwell-Jolly (Docket No. 08-CV-5173-SC), Santa Rosa Memorial Hospital v. Douglas (Docket No. CPF-09-509658), and North Bay Healthcare Group v. Douglas (Docket No. CGC-11-512059), and any providers who institute a new suit or fail to dismiss a pending suit or administrative action under AB 5 or AB 1183 rate reductions.

The plaintiffs agreed to release state and federal entities from liability relating to the rate reductions, excluding claims about the Department’s accuracy in calculating reimbursement. The Department released the plaintiffs from liability relating to any payments not made while the rate reductions were enjoined, but where federal approval from CMS was ultimately obtained or where the Department withdrew its requests for approval regarding proposed amendments from CMS. The district court retained jurisdiction over the enforcement of this order until January 1, 2016.

David Priddy - 10/30/2011
Alex Colbert-Taylor - 07/17/2013
Caitlin Hatakeyama - 11/25/2018


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