Cares Community Health v. United States Department of Health and Human Services

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

CARES COMMUNITY HEALTH,

Plaintiff, v. Civil Action No. 17-2774 (JEB) UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, et al.,

Defendants.

MEMORANDUM OPINION

Plaintiff Cares Community Health provides a variety of services to people in the

Sacramento, California, area regardless of their ability to pay. Cares also operates a pharmacy

there that offers prescription drugs under Medicare Part D, and a federal program enables Cares

to procure those drugs from manufacturers at a discount. Cares, however, does not necessarily

retain the benefit of that discount; rather, at least one insurance company has altered its contract

with Cares to reimburse it at a discounted rate. As a result, Cares has now sued the U.S.

Department of Health and Human Services and certain officials, contending that the Government

has ignored a statutory duty to regulate those contracts in order to require companies to pay

Cares the market rate for discounted drugs. Defendants now move to dismiss under Federal

Rules of Civil Procedure 12(b)(1), 12(b)(6), and 12(b)(7). Finding that Cares has standing but

has failed to state a claim, the Court will grant the Motion.

1 I. Background

The Court will provide some brief background on the Medicare Part D program and

Federally Qualified Health Centers (FQHCs) — of which Cares is an example — before delving

into the facts of this particular dispute.

A. Statutory Framework

Medicare Part D subsidizes prescription drugs for Medicare beneficiaries. See 42 U.S.C.

§ 1395w-101(a)(1). To administer Part D, the Centers for Medicare and Medicaid Services

(CMS) contracts with private entities known as Part D plan “Sponsors.” Id. § 1395w-115. The

Government contracts only with those Sponsors, and not directly with pharmacies, to deliver Part

D benefits. Id. § 1395w-27(a). Sponsors then enter into contracts with pharmacies to reimburse

them for providing prescription drugs to Part D beneficiaries. Id. § 1395w-104(b).

FQHCs receive grants from the Government to provide health-care services to

communities that HHS has designated “medically underserved.” See 42 U.S.C. §§ 254b,

1396d(l)(2)(B); 42 U.S.C. § 1395x(aa)(4)(A)(i). FQHCs can bill CMS for providing Medicare

or Medicaid services. Id. §§ 1395k(a)(2)(D)(ii), 1396a(bb)(2). In addition, they may purchase

prescription drugs from manufacturers at discounted prices pursuant to the Section 340B

program. See 42 U.S.C. § 256b(a)(4)(A).

At issue in this case is a statutory provision governing payment for FQHC services. To

summarize, it provides that FQHCs must be paid “not less than” non-FQHC entities for

Medicare services. See 42 U.S.C. § 1395w-27(e)(3)(A). CMS has implemented this FQHC

payment requirement by promulgating regulations providing that “[t]he contract between the

[Sponsor] organization and CMS must specify that . . . [t]he [Sponsor] organization must pay

a[n] [FQHC] a similar amount to what it pays other providers for similar services.” 42 C.F.R. §

2 422.527(a). The dispute centers on whether this provision also applies to Part D prescription

drugs.

B. Factual History

Cares is an FQHC located in Sacramento, California, providing “services to all persons

within [its] designated medically underserved area . . . regardless of whether those persons can

pay for the services they receive.” ECF No. 13 (Am. Compl.), ¶¶ 7–8. In 2009, it entered into a

Pharmacy Provider Agreement with Part D plan Sponsor Humana Health Plan, Inc. Id., ¶ 34.

The Agreement governed Humana’s payment to Cares for any “Retail Pharmacy Services”

provided to Humana’s enrollees and covered all plans Humana offered, including Part D. Id.

When, in December 2014, Humana proposed amending the contract to reduce the Part D

payment rates for “340B pharmacy services,” Cares objected. Id., ¶¶ 37–38. The parties went to

arbitration, but the arbitrator concluded that “the ultimate ‘legal question [of whether Humana

was required to pay Cares under the pay ‘not less than’ standard] require[d] the reconciliation of

conflicting policies’ — in other words, an interpretation of federal law had to be made, which

was something the Arbitrator found was not arbitratable.” Id., ¶ 39.

Cares then filed this suit against HHS, its Secretary, and the CMS Administrator,

claiming that they had “unlawfully withheld” agency action in violation of the APA, see 5

U.S.C. § 706(1), because they failed to “carry out [their] mandatory duty to include the [FQHC

payment] requirement in contracts” with Part D plan Sponsors. See ECF No. 1 (Complaint), ¶

58. After Defendants moved to dismiss that Complaint, contending that the § 706(1) claim was

deficient because the FQHC payment requirement does not apply to Part D contracts, see ECF

No. 9 (Def. First MTD) at 16–18, Cares filed the Amended Complaint. Although the Amended

Complaint contains only one count, it appears to assert two distinct but related claims under the

3 APA — one for unlawfully withheld agency action under § 706(1) and, alternatively, one for

arbitrary and capricious agency action under § 706(2)(A). See Am. Compl., ¶¶ 44–50.

Cares seeks an order: (1) declaring that the FQHC payment requirement applies to Part D

drugs; (2) declaring “that [D]efendants have failed to exercise their nondiscretionary duty to

include the FQHC pay ‘not less than’ term in the Part D contracts it has entered into with

[Sponsors]”; (3) enjoining “[D]efendants from entering into future Part D contracts . . . that do

not include” the FQHC payment requirement; and (4) requiring, “[r]egarding existing Part D

contracts, . . . [that] [D]efendants . . . take such actions as may be necessary to ensure that the . . .

recipients of those contracts provide for payment to FQHCs with which they have contracts at a

level and amount that is not less than what they would pay other (non-FQHC) providers for

similar services.” Id. at 21. Defendants now move to dismiss the Amended Complaint pursuant

to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 12(b)(7). See ECF No. 14 (Def.

MTD).

II. Legal Standard

In evaluating Defendants’ Motion to Dismiss, the Court must “treat the complaint’s

factual allegations as true . . . and must grant [P]laintiff ‘the benefit of all inferences that can be

derived from the facts alleged.’” Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C.

Cir. 2000) (quoting Schuler v. United States, 617 F.2d 605, 608 (D.C. Cir. 1979)) (citation

omitted); see also Jerome Stevens Pharm., Inc. v. FDA, 402 F.3d 1249, 1250 (D.C. Cir. 2005).

The pleading rules are “not meant to impose a great burden upon a plaintiff,” Dura Pharm., Inc.

4 v. Broudo, 544 U.S. 336, 347 (2005), and it must thus be given every favorable inference that

may be drawn from the allegations of fact. Sparrow, 216 F.3d at 1113.

Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of an action where a

complaint fails “to state a claim upon which relief can be granted.” Although “detailed factual

allegations” are not necessary to withstand a Rule 12(b)(6) motion, “a complaint must contain

sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). The Court need not accept as

true, then, “a legal conclusion couched as a factual allegation,” nor an inference unsupported by

the facts set forth in the Complaint. Trudeau v. Fed. Trade Comm’n, 456 F.3d 178, 193 (D.C.

Cir. 2006) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)) (internal quotation marks

omitted). For a plaintiff to survive a 12(b)(6) motion, the facts alleged in the complaint “must be

enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550

U.S. 544, 555–56 (2007) (citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).

Under Rule 12(b)(1), Plaintiff bears the burden of proving that the Court has subject-

matter jurisdiction to hear its claims. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561

(1992). A court also has an “affirmative obligation to ensure that it is acting within the scope of

its jurisdictional authority.” Grand Lodge of Fraternal Order of Police v. Ashcroft, 185 F. Supp.

2d 9, 13 (D.D.C. 2001). For this reason, “‘the [p]laintiff’s factual allegations in the

complaint . . . will bear closer scrutiny in resolving a 12(b)(1) motion’ than in resolving a

12(b)(6) motion for failure to state a claim.” Id. at 13–14 (quoting 5A Charles A. Wright &

Arthur R. Miller, Federal Practice and Procedure § 1350 (2d ed. 1987) (alteration in original)).

As this Court does not reach the Rule 12(b)(7) argument, it need not lay out that standard.

5 III. Analysis

Defendants seek dismissal of Cares’s Amended Complaint on three grounds: first,

Plaintiff lacks standing; second, it has not stated a claim for unlawfully withheld agency action

or for arbitrary and capricious agency action; and third, it has failed to join necessary parties.

The standing requirement is a matter of Article III jurisdiction, and so the Court will begin with

that question before moving to the merits. See Steel Co. v. Citizens for a Better Env’t, 523 U.S.

83, 94–101 (1998). Concluding that Cares has standing but has not sufficiently stated a claim,

the Court will dismiss the case without addressing the joinder issue.

A. Standing

Not every disagreement merits a lawsuit. Federal courts decide only “cases or

controversies,” a phrase given meaning by the doctrine of “standing.” See Whitmore v.

Arkansas, 495 U.S. 149, 154–55 (1990); U.S. Const. art. III. To have standing to bring an

action in federal court, the plaintiff must establish that: (1) he has suffered a concrete and

particularized injury that is actual or imminent, not conjectural or hypothetical; (2) there is a

causal relationship between his injury and the defendant’s conduct; and (3) it is likely that a

victory in court will redress his injury. Lujan, 504 U.S. at 560–61. The Court considers the first

separately and the other two together.

1. Injury-in-Fact

Cares has alleged that it is losing thousands of dollars a day from the non-enforcement of

the statutory payment requirement, see Am. Compl., ¶ 41, an economic injury that easily clears

the injury-in-fact hurdle. See Clinton v. City of New York, 524 U.S. 417, 432–33 (1998). Cares

also elaborates that this particular experience with Humana is illustrative of its larger and

ongoing economic quandary. See Am. Compl., ¶ 40. The Government briefly rejoins that Cares

6 lacks standing with respect to any contract to which it is not a party, since injury-in-fact

contemplates not injury to third parties but personal injury. See Def. MTD at 17. Defendant is

correct that “a party ‘generally must assert his own legal rights and interests, and cannot rest his

claim to relief on the legal rights or interests of third parties.’” Kowalski v. Tesmer, 543 U.S.

125, 129 (2004) (quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)). Plaintiff, however,

describes only its own monetary losses. See Am. Compl., ¶¶ 40–42. To the extent the

Government’s argument here addresses an implication in Cares’s pleading that non-parties’

injuries ought also to be redressed in this suit, the Court will consider that issue in the following

section.

2. Causation and Redressability

Defendants maintain at greater length that Cares cannot show the existence of the second

two requirements here — namely, causation and redressability. In doing so, the Government

makes four principal arguments: first, any economic injury is traceable to a third party’s conduct,

not to the Government’s; second, any declaration by the Court that CMS has failed to act on a

non-discretionary duty would not redress Cares’s economic injury; third, the Court cannot enjoin

the Government from entering into future contracts without the payment requirement because

Cares has not established the harm will recur; and finally, Cares’s injury is not redressable

because, to the extent it seeks modification of all contracts between CMS and Part D plan

Sponsors, the Court cannot alter contractual obligations of non-parties. See Def. MTD at 11–12

& n.6, 14–16. The Court will address these arguments in order.

As to the first, the Court finds that Cares’s injury is sufficiently caused by government

action for the purposes of standing. Defendant is correct that the injury Plaintiff alleges —

namely, losing several thousand dollars per working day, see Am. Compl., ¶ 41 — is a result of

7 Humana’s decision to modify the contract. The core of the Complaint, nevertheless, is that

Humana’s modification would be unlawful if CMS had complied with a mandatory duty to

require a higher rate. Id., ¶¶ 17, 33, 39. Although it is well established that a heightened

showing is necessary when “a plaintiff’s asserted injury arises from the [G]overnment’s

allegedly unlawful regulation (or lack of regulation) of someone else,” Lujan, 504 U.S. at 562,

that standard has been met here. “[A] party has standing to challenge government action that

permits or authorizes third-party conduct that would otherwise be illegal in the absence of the

Government’s action.” Nat’l Wrestling Coaches Ass’n v. Dep’t of Educ., 366 F.3d 930, 940

(D.C. Cir. 2004), abrogated on other grounds by Perry Capital LLC v. Mnuchin, 864 F.3d 591

(D.C. Cir. 2017). The converse is also true. In other words, had Defendants taken the action that

Cares alleges is legally required, Humana’s downward modification of the contract rates would

be illegal.

The Government insists that “it is entirely plausible that Humana is paying Cares lower

Part D rates not because” CMS failed to require Humana to pay higher rates, “but rather because

Humana understands that Part D drugs do not qualify as ‘FQHC services’ to which the FQHC

payment requirement even applies.” Def. MTD at 12. This argument holds little water because

it presumes the Government’s success on the merits where, in evaluating standing, the Court

must presume Cares will prevail. See City of Waukesha v. EPA, 320 F.3d 228, 235 (D.C. Cir.

2003). HHS also urges that “the Amended Complaint is devoid of any facts . . . supporting an

inference that Humana would change its behavior and pay Cares higher Part D rates if CMS took

the . . . action that Cares demands.” Def. MTD at 11–12. Yet Plaintiff is entitled to assume

Humana would not take “the extraordinary measure of continuing [its] injurious conduct in

violation of the law.” Renal Physicians Ass’n v. U.S. Dep’t of Health & Human Servs., 489 F.3d

8 1267, 1275 (D.C. Cir. 2007) (internal quotations and citation omitted). For the same reason,

Defendants’ second contention — namely, that an order from the Court finding that CMS had

unlawfully failed to act would not redress Cares’s economic injury — is unconvincing.

HHS’s third argument — i.e., that Cares has not adequately pled future injury to support

an injunction as to future contracts — fares little better. As an initial matter, should Cares

prevail on its statutory claim and obtain an order declaring CMS has a legal obligation to enforce

the payment requirement as to Part D, such an injunction would seem unnecessary. To the extent

that Cares’s pleading of ongoing injury may be relevant to its ability to get any form of relief, the

Court finds its allegations adequate. Plaintiff identifies a quandary, explaining that its

“experience with Humana is an apt demonstration of the result of CMS’s interpretation that the

FQHC payment requirement is not applicable to Part D.” Am. Compl., ¶ 40. Given that it

follows from the Amended Complaint that Cares will continue to enter into contracts of this type,

additional specificity on its part is not required for the Court to conclude that Plaintiff’s injury

will not cease with the expiry of this particular contract.

The Government’s final argument, however, is more persuasive. It contends that the

Court does not have the power to “take such actions as may be necessary” to enforce the

payment requirement as to existing contracts, as Cares requests. See Def. MTD at 14–15. At the

very least, it is not clear to the Court what actions it might take to revise every existing contract,

including those binding exclusively non-parties. Cares must demonstrate standing for each form

of relief it seeks, see Friends of the Earth, Inc. v. Laidlaw Env’l Servs., 528 U.S. 167, 185

(2000), and it has not done so here.

* * *

9 To sum up, then, Cares has adequately demonstrated the three requirements to support

standing for each form of relief it seeks, except as to its requested modification of existing

contracts. The Court now turns to the merits.

B. APA Claim

Cares contends that CMS has breached a clear and discrete statutory duty to include the

payment requirement and has therefore either unlawfully withheld agency action or,

alternatively, acted arbitrarily and capriciously by entering into Part D contracts without the

payment requirement. See ECF No. 16 (Pl. Opp.) at 20. Defendants respond that Cares has not

identified any non-discretionary duty CMS has breached because the proposition that the FQHC

payment requirement must be included in Part D contracts or that the payment requirement

applies to Part D drugs is “wrong as a matter of law.” Def. MTD at 22. Having examined the

statutory scheme, the Court agrees with the Government.

First and foremost, the text of the payment requirement does not contemplate prescription

drugs:

A contract under this section with [a Sponsor] organization shall require the organization to provide, in any written agreement described in section 1395w-23(a)(4) of this title between the organization and a [FQHC], for a level and amount of payment to the [FQHC] for services provided by such health center that is not less than the level and amount of payment that the plan would make for such services if the services had been furnished by a[n] entity providing similar services that was not a [FQHC].

42 U.S.C. § 1395w-27(e)(3)(A) (emphasis added). The provision thus makes clear that an

FQHC must be paid “for services provided by such health center . . . not less than the level and

amount of payment” that would be rendered for similar services provided by a non-FQHC entity.

See 42 U.S.C. § 1395w-27(e)(3)(A). In other words, reimbursement cannot be made at a

discounted rate. The statute defines “[FQHC] services” as “preventative primary health

10 services”; “physicians’ services and such services and supplies . . . if furnished as an incident to a

physician’s professional service”; and “services furnished by a physician assistant,” nurse

practitioner, clinical psychologist, or a clinical social worker and “such services and supplies

furnished as an incident to his service.” 42 U.S.C. § 1395x(aa)(1)(A)-(C), (3). As “incident to

his service,” the statute means “services and supplies (including drugs and biologicals which are

not usually self-administered by the patient) furnished as an incident to a physician's professional

service, of kinds which are commonly furnished in physicians’ offices and are commonly either

rendered without charge or included in the physicians’ bills.” Id. § 1395x(s)(2)(A). This

definition of services excludes prescription drugs.

Plaintiff rejoins that the definition of services in 42 U.S.C. § 1395x should not be

controlling because the payment requirement quoted above from § 1395w does not explicitly

refer to “[FQHC] services,” but rather to “services provided by [an FQHC],” a different

formulation that it believes is broader and more general. See Pl. Opp. at 11–12. Although

Plaintiff is correct that the § 1395x definition is specifically of “FQHC services” and that the

statute in other places does use that specific phrase rather than the iteration used in the payment

requirement, see, e.g., 42 U.S.C. § 1395y(a)(2), the Court concludes that the slight variation in

phrasing cannot bear the weight of Plaintiff’s argument. The statute does not separately define

services; rather, it lists categories of them. See, e.g., 42 U.S.C. § 1395x(b),(h),(m),(s). In other

words, there is no more general statutory definition of “services” on which Plaintiff can rely. It

is logical, given that structure, to apply the statutory definition of “FQHC services” to the

linguistic synonym “services provided by an FQHC.”

Cares’s strongest argument is based on 42 U.S.C. § 1395w-112(b)(3)(D) — the statutory

provision that applies the FQHC payment requirement, along with the other elements of

11 § 1395w-27(e), to Part D contracts. See Pl. Opp. at 16–17. It elaborates that § 1395w-

112(b)(3)(D) modifies some of the § 1395w-27(e) provisions in their application to Part D, but

does not modify the payment requirement, indicating the Congress intended the payment

requirement to apply to Part D unchanged. Id. The problem for Plaintiff is that § 1395w-112(b)

does not alter the statutory definition of services, which excludes Part D drugs. Cares replies that

so interpreting the incorporation provision would create a superfluity problem insofar as the

incorporation of § 1395w-27(e)(3)(A) to Part D would have no practical effect. Id. at 17. Of

course, Plaintiff does not dispute that there are many contractual terms enumerated in § 1395w-

27(e) besides the subsection at issue that do apply to Part D. To the extent Cares is correct that

the incorporation of the payment-requirement provision specifically would have no effect,

however, the possibility of some amount of surplusage is not enough to defeat the plain text of

the provision, which limits its applicability only to services. See Marx v. Gen. Revenue Corp.,

568 U.S. 371, 385 (2013). “Particular[ly]” here, “where the surplus words consist simply of a

numerical cross-reference,” it is not appropriate to allow a general rule against surplusage to

defeat the clear reading. See Chickasaw Nation v. United States, 534 U.S. 84, 94 (2001).

The Court need not discuss at great length Plaintiff’s next argument, which concerns

statutory purpose. Cares contends that Congress intended FQHCs, not Plan D Sponsors, to

internalize the benefit of discounted prescription drugs. See Pl. Opp at 13. While that argument

may be intuitive enough, nowhere does a hook for it appear in the statute. Congress could easily

have implemented some provision to ensure that FQHCs retained the discount in the Part D

context. That much is clear because Congress did something similar for Part C by providing for

a so-called “wrap-around” payment. Medicare must reimburse FQHCs for the services they

provide. See 42 U.S.C. § 1395l(a)(3)(A). To the extent that FQHCs may be paid less by an

12 insurance company administering Part C than it would be paid under Parts A and B, HHS pays

FQHCs a wrap-around payment to make up the difference. See 42 U.S.C. §§ 1395l(a)(3)(B),

1395w-23(a)(4). No similar payment exists for Part D.

To the extent Plaintiff offers a textual basis for its purpose argument, it relies on a

different statute: the 340B discounted-prescription-drug program. Cares contends that, as a

condition of its participation in the 340B program, it may not transfer to an insurer the benefits it

receives, nor may it apply any discounts when collecting fees so as not to subsidize other health-

care payors. See Pl. Opp. at 15–16. The provisions on which Cares relies, however, do not

sweep so broadly. Participants in the program may not resell the drugs they receive, but the

statute does not broadly proscribe transferring a benefit. See 42 U.S.C. § 256b(a)(5)(B). And

the latter provision is simply an application criterion for the program. See 42 U.S.C.

§ 254b(k)(3)(G)(ii)(II). These scattered references in a separate statute are insufficient to salvage

Plaintiff’s reading of the FQHC payment requirement.

IV. Conclusion

For the foregoing reasons, the Court will grant Defendant’s Motion and dismiss

Plaintiff’s Complaint for failure to state a claim pursuant to Rule 12(b)(6). A separate Order

consistent with this Opinion will issue this day.

/s/ James E. Boasberg JAMES E. BOASBERG United States District Judge Date: September 28, 2018