Mary Hitchcock Mem. Hosp. v. Cohen, Secretary, Vermont Agency of Human Services, et al.

2014 DNH 080

• Court: District Court, D. New Hampshire
• Decided: May 2, 2016
• Docket: 15-cv-453-LM
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Mary Hitchcock Memorial Hospital d/b/a Dartmouth-Hitchcock

v. Civil No. 15-cv-453-LM Opinion No. 2014 DNH 080 Hal Cohen, Secretary, Vermont Agency of Human Services; Sylvia Mathews Burwell, Secretary, U.S. Department of Health and Human Services; Andrew Slavitt, Acting Administrator, Centers for Medicare and Medicaid Services, and Centers for Medicare and Medicaid Services

O R D E R

(“D-H”) brings suit against the Vermont Agency of Human

Services, the United States Department of Health and Human

Services (“HHS”), and the Centers for Medicare and Medicaid

Services (“CMS”), challenging the rate of reimbursement to D-H

for Medicaid covered services provided to Vermont patients and

the decision not to make other Medicaid payments to D-H.1 The

1 As provided in the caption, the complaint names as defendants the Secretary of the Vermont Agency of Human Services, the Secretary of the United States Department of Health and Human Services, and the Acting Administrator of the Centers for Medicare and Medicaid Services, along with the Centers for Medicare and Medicaid Services. Because the suit is brought against the public officials in their official capacities only, as the secretaries and administrator of government agencies, the defendants are deemed to be the government agencies rather than the named officials. Kentucky v. Graham, 473 U.S. 159, 165 (1985); Surprenant v. Rivas, 424 F.3d 5, 19 (1st Cir. 2005). Vermont Agency of Human Services (“Vermont”) moves to dismiss D-

H’s claims and moves for judicial notice of documents filed in

support of the motion. HHS and CMS, the federal defendants,

also move to dismiss the claims against them. D-H objects to

the motion for judicial notice and both motions to dismiss.

I. Motion for Judicial Notice

Vermont filed a motion asking the court to take judicial

notice, pursuant to Federal Rule of Evidence 201, of twenty-

seven exhibits it relied on to support its motion to dismiss.

In support, Vermont incorporates by reference a footnote in its

memorandum in support of its motion to dismiss that addresses

when extrinsic materials may be considered for purposes of

deciding a motion to dismiss. D-H objects to the motion for

judicial notice on the grounds that Vermont has not made the

showing necessary under Rule 201 and asserts that D-H cannot

adequately respond to the request. Vermont then filed a reply,

long after the deadline, responding to the deficiencies in its

motion with a general reference to its memorandum in support of

the motion to dismiss.

Rule 201 permits the court to take judicial notice of an

adjudicative fact if the fact “is generally known within the

trial court’s territorial jurisdiction; or [] can be accurately

and readily determined from sources whose accuracy cannot

2 reasonably be questioned.” Fed. R. Evid. 201(b). If a party

provides the court with necessary information, the court must

take judicial notice of the asserted fact. Fed. R. Evid.

201(c)(2).

In its motion, Vermont does not ask for judicial notice of

any adjudicative fact. Instead, Vermont appears to seek

judicial notice that the twenty-seven documents it appended to

the motion are official public records. Anticipating a positive

response, Vermont relied on the documents in support of its

motion to dismiss.

“On a motion to dismiss, a court ordinarily may only

consider facts alleged in the complaint and exhibits attached

thereto, or else convert the motion into one for summary

judgment.” Freeman v. Town of Hudson, 714 F.3d 29, 35-36 (1st

Cir. 2013) (internal citation omitted); see also Fed. R. Civ. P.

12(d). A narrow exception to that rule exists for “documents

the authenticity of which are not disputed by the parties;

official public records; documents central to plaintiffs’ claim;

and documents sufficiently referred to in the complaint.”

Freeman, 714 F.3d at 36 (alteration and internal quotation marks

omitted). Official public records must satisfy the requirements

of Rule 201 to be considered for purposes of a motion to

dismiss. Id.

3 Vermont does not explain in its motion how the twenty-seven

documents satisfy the requirements of Rule 201 or how they

qualify as official public records. In its reply, Vermont

suggests that D-H and the court review its memorandum in support

of the motion to dismiss to glean the information required by

Rule 201. As such, Vermont has not properly supported its

motion to show that the documents are official public records,

and the court declines to undertake that analysis based on

Vermont’s general reference to the motion to dismiss memorandum.

The motion is denied.

II. Motions to Dismiss

D-H brings claims under 42 U.S.C. § 1983 that Vermont is

violating both the dormant Commerce Clause and the Equal

Protection Clause by imposing, through amendments to the Vermont

Medicaid Plan, a reimbursement and payment scheme that favors

in-state hospitals and disadvantages out-of-state hospitals.2

D-H brings claims against the federal defendants that the

amendments must be set aside under the Administrative Procedures

Act (“APA”) 5 U.S.C. § 706(2)(A) and (B), because the federal

defendants allowed Vermont to violate the dormant Commerce

Clause, the Equal Protection Clause, and 42 C.F.R. § 431.52(b).

2 Section 1983 provides a cause of action against state actors who deprive a person of “of any rights, privileges, or immunities secured by the Constitution and laws.”

4 Vermont moves to dismiss the claims against it, and the federal

defendants move to dismiss the claims against them.

A. Standard of Review

In considering a motion to dismiss under Federal Rule of

Civil Procedure 12(b)(6), the court assumes the truth of the

properly pleaded facts and takes all reasonable inferences from

the facts that support the plaintiff’s claims. Mulero-Carrillo

v. Roman-Hernandez, 790 F.3d 99, 104 (1st Cir. 2015).

Conclusory statements in the complaint that merely provide the

elements of a claim or a legal standard are not credited for

purposes of a motion under Rule 12(b)(6). Lemelson v. U.S. Bank

Nat’l Ass’n, 721 F.3d 18, 21 (1st Cir. 2013). Based on the

properly pleaded facts, the court determines whether the

plaintiff has stated “a claim to relief that is plausible on its

face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

B. Background

In accord with the standard of review, the background

information is summarized from the complaint, with a brief

preliminary explanation of the Medicaid program.

1. Medicaid Program

“Congress created the Medicaid program in 1965 by adding

Title XIX to the Social Security Act.” Pharm. Research & Mfrs.

5 of Am. v. Walsh, 538 U.S. 644, 650 (2003). The Medicaid Act

establishes a cooperative federal and state program to provide

payment for medical services to the poor, elderly, and disabled.

42 U.S.C. § 1396, et. seq. A state that opts into the Medicaid

program is required to submit a Medicaid Plan for review and

approval. Wilder v. Virgina Hosp. Ass’n, 496 U.S. 498, 502

(1990).

Congress delegated the process of Medicaid Plan approval to

the Secretary of HHS. 42 U.S.C. § 1396a(b). CMS administers

the provisions of the Medicaid Act on behalf of HHS, including

reviewing Medicaid Plans. Mayhew v. Burwell, 772 F.3d 80, 82

(1st Cir. 2014). A Plan must include, among other things, “‘a

scheme for reimbursing health care providers for the medical

services provided to needy individuals.’” New Hampshire Hosp.

Ass’n v. Burwell, No. 15-cv-460, 2016 WL 1048023, *1 (D.N.H.

Mar. 11, 2016) (quoting Wilder, 496 U.S. at 502). A state may

later change the Plan by submitting an amendment to CMS for

approval. Mayhew, 772 F.3d at 82.

2. Factual Background

D-H is located in Lebanon, New Hampshire, less than ten

miles from the Vermont border. Because of its location, D-H

provides medical services to Vermont residents, including

Vermont Medicaid patients. D-H participates in Vermont’s

6 Medicaid program and is the second largest volume provider of

services to Vermont Medicaid patients, with the University of

Vermont Medical Center being first.

D-H operates an academic medical center, a children’s

hospital, and a cancer center. D-H includes a Level I Trauma

Center, serves as a tertiary care provider, and qualifies as a

“sole community hospital.” D-H provides the same or similar

levels of care and services to Vermont Medicaid and uninsured

patients as are provided by Vermont hospitals, including the

University of Vermont Medical Center.

Through its Department of Vermont Health Access (“DVHA”),

Vermont reimburses D-H for hospital services provided to Vermont

Medicaid patients. Since November of 2013, DVHA has reimbursed

the University of Vermont Medical Center for inpatient hospital

services at the base rate of $7,611.45. During the same period,

DVHA has reimbursed D-H at the base rate of $5,224.80. The low

base rate paid by DVHA for inpatient services has caused D-H a

yearly shortfall of approximately $7,000,000.00. Outpatient

treatment rates for out-of-state hospitals are also lower than

the rates for Vermont hospitals.

Vermont’s Medicaid Plan precludes certain other payments to

out-of-state hospitals. While DVHA makes Disproportionate Share

Hospital (“DSH”) payments to Vermont hospitals, it does not make

7 those payments to D-H. In addition, DVHA makes teaching

hospital payments to the University of Vermont Medical Center

but does not make those payments to D-H, although D-H is also a

teaching hospital.

CMS has approved the Vermont Medicaid Plan and amendments

that provide lower reimbursement rates and preclude certain

other payments to out-of-state hospitals.

C. Discussion

D-H’s claims against Vermont are brought under § 1983 and

allege that the amendments to Vermont’s Medicaid Plan that

impose the reimbursement and payment scheme violate the dormant

Commerce Clause and the Equal Protection Clause. D-H’s claims

against the federal defendants, HHS and CMS, are brought under

the APA and seek to set aside the approvals of the amendments

that impose the reimbursement and payment scheme.3 D-H alleges

that through approving the amendments, the federal defendants

have violated 5 U.S.C. § 706(2)(A) and (B) by allowing Vermont

to violate a Medicaid implementing regulation, 42 C.F.R. §

3 To the extent the federal defendants may have intended to challenge under the APA the viability of D-H’s claims that arise from Vermont’s alleged violation of the dormant Commerce Clause and Equal Protection Clause, such challenge has not been sufficiently developed to allow review here. See Higgins v. New Balance Athletic Shoe, 194 F.3d 252, 260 (1st Cir. 1999).

8 431.52(b), the dormant Commerce Clause, and the Equal Protection

Clause.4

The defendants acknowledge that Vermont’s reimbursement and

payment scheme pays less to out-of-state hospitals, including D-

H, than is paid to Vermont hospitals. Vermont moves to dismiss

D-H’s claims on the grounds that, although discriminatory, the

reimbursement and payment scheme does not violate the dormant

Commerce Clause or the Equal Protection Clause. The federal

defendants move to dismiss, arguing that their approval of the

amendments to Vermont’s Plan, which impose the discriminatory

scheme, did not allow Vermont to violate § 431.52(b), the

dormant Commerce Clause, or the Equal Protection Clause.

The defendants’ motions to dismiss both address D-H’s

claims that Vermont’s reimbursement and payment scheme violates

the dormant Commerce Clause and the Equal Protection Clause. To

avoid unnecessary repetition, those shared issues are addressed

4 Under § 706, a “reviewing court shall—(2) hold unlawful and set aside agency action, findings, and conclusions found to be— (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; [or] (B) contrary to constitutional right, power, privilege, or immunity.” In making that determination, the court must “decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning . . . of the terms of an agency action.” § 706.

9 together. The federal defendants also raise additional grounds

in support of their motion, which are addressed separately.

1. Dormant Commerce Clause

The Constitution’s Commerce Clause gives Congress the power

to regulate commerce among the states. U.S. Const. art. I, § 8,

cl. 3. The Commerce Clause also includes “a further, negative

command, known as the dormant Commerce Clause.” Comptroller of

Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1794 (2015). “[T]he

dormant Commerce Clause precludes States from discriminating

between transactions on the basis of some interstate element.”

Id. (alteration and internal quotation marks omitted). “The

Dormant Commerce Clause does not, however, apply to state or

local regulations directly authorized by Congress.” United Egg

Producers v. Dep’t of Agric. of P.R., 77 F.3d 567, 570 (1st Cir.

1996). “Thus, state or local jurisdictions operating under

‘Congressional consent’ are free to enact laws burdening

interstate commerce.” Id.

The Medicaid Act does not expressly allow states to adopt

reimbursement and payment schemes that are less favorable to

out-of-state providers of Medicaid services. Vermont contends,

nevertheless, that Congress has consented to its Medicaid

hospital reimbursement and payment scheme by granting states

flexibility in developing reimbursement and payment rates and

10 through CMS’s approval of Vermont’s Plan and amendments. The

federal defendants also contend that the approval process shows

Congressional consent to Vermont’s scheme. D-H argues that

neither the legislative history Vermont cites nor the approval

process demonstrates the Congressional consent that is necessary

to avoid the dormant Commerce Clause.

Although states may enact laws that burden interstate

commerce and that would otherwise be barred by the dormant

Commerce Clause when Congress consents to interstate regulation

by the state, the standard for showing Congressional consent is

high. United Egg, 77 F.3d at 570. To avoid the dormant

Commerce Clause, a state must show that Congress “expressly

stated” its consent to the contested law or made its consent

“unmistakably clear.” Id.; see also Wyoming v. Oklahoma, 502

U.S. 437, 458 (1992).

a. Flexibility

Vermont argues, relying on Wilder, 496 U.S. at 505-06, that

Congress consented to unequal reimbursement and payment rates in

states’ Medicaid Plans by passing the Boren Amendment to the

Medicaid Act. The Boren Amendment was intended to provide

states with more flexibility “to develop methods and standards

for reimbursement” to control inflation in medical costs.

Wilder, 496 U.S. at 505. Vermont notes that in passing the

11 Boren Amendment Congress explained “that States would be free to

establish statewide or classwide rates.” Id. at 506. From that

statement, Vermont infers Congressional consent to Medicaid

rates that favor in-state hospitals.

As D-H points out, however, neither the Medicaid Act nor

the Boren Amendment, which was repealed in 1997,5 allows states

to impose Medicaid rates that favor in-state hospitals over out-

of-state hospitals. 42 U.S.C. § 1396a(a)(16) states:

[a] State [Medicaid] plan for medical assistance must-- . . . provide for inclusion, to the extent required by regulations prescribed by the Secretary, of provisions (conforming to such regulations) with respect to the furnishing of medical assistance under the plan to individuals who are residents of the State but are absent therefrom; . . . .”

The implementing regulation for § 1396a(a)(16) states: “A State

plan must provide that the State will pay for services furnished

in another State to the same extent that it would pay for

services furnished within its boundaries if the services are

furnished to a beneficiary who is a resident of the State, and

any of the following conditions is met . . . .” 42 C.F.R. §

431.52(b). The four conditions are that the out-of-state

medical services are needed because of an emergency, to avoid

5 “The Amendment was repealed in 1997, after substantial lobbying efforts by states seeking greater latitude in setting their rates.” Christ the King Manor, Inc. v Sec’y U.S. Dep’t of Health & Human Servs., 730 F.3d 291, 308 n.21 (3d Cir. 2013).

12 endangering the beneficiary’s health, because they are more

available out-of-state, or it is the “general practice” to use

out-of-state resources. Id. In addition, §§ 1396r-4(b) and (d)

define DSH for purposes of DSH payments without reference to a

hospital’s in-state or out-of-state location.

Other courts have found no expression of Congressional

support for unequal Medicaid rates in the Medicaid Act,

including the Boren Amendment. See Children’s Hosp. & Health

Ctr. v. Belshe, 188 F.3d 1090, 1096 (9th Cir. 1999)

(interpreting the Boren Amendment to show Congress’s intent not

to differentiate between in-state and out-of-state hospital

services); W. Va. Univ. Hosps., Inc. v. Casey, 885 F.2d 11, 28-

29 (3d Cir. 1989) (“Nothing in § 1396a(a) [governing state

plans] speaks in terms of a dichotomy in rate reimbursement

built on state boundary lines; it nowhere suggests that state

boundary lines act as points of demarcation in reimbursement for

the delivery of health care.”).

Vermont has not shown that the repealed Boren Amendment,

its legislative history, or any other part of the Medicaid Act

demonstrates Congressional authorization of Medicaid hospital

reimbursement and payment schemes that favor in-state hospitals

over out-of-state hospitals.

13 b. Approval by CMS

Alternatively, Vermont and the federal defendants argue

that because Vermont’s Medicaid Plan and amendments to the Plan,

which include the hospital reimbursement and payment scheme,

have been approved by CMS, Congress has consented to that

scheme. In support, the defendants rely on Merrion v. Jicarilla

Apache Tribe, 455 U.S. 130 (1982). D-H contends that Merrion is

inapplicable to the circumstances of this case.

In Merrion, non-members of the Jicarilla Apache Tribe, who

leased land on the Jicarilla reservation, challenged a tribal

ordinance that imposed a severance tax on the oil and gas they

were removing from tribal lands. Id. at 133. The Supreme Court

held that the tribe had inherent power to impose the tax on non-

members of the tribe. Id. at 149. The Court also held that the

dormant Commerce Clause did not bar the tax because “Congress

has affirmatively acted by providing a series of federal

checkpoints that must be cleared before a tribal tax can take

effect” and the tribal tax at issue in the case had been

“enacted in accordance with this congressional scheme.” Id. at

155. The Court further explained that “Congress is well aware

that Indian tribes impose mineral severance taxes such as the

one challenged by [the] petitioners . . . [and Congress] retains

plenary power to limit tribal taxing authority or to alter the

14 current scheme under which the tribes may impose taxes.” Id. at

156.

The defendants argue that the approval process required by

the Medicaid Act provides federal checkpoints, as in Merrion,

and that CMS has approved Vermont’s hospital reimbursement and

payment scheme through those checkpoints. In support, Vermont

states that CMS has “frequently and explicitly acknowledged

Vermont’s practice of targeting higher reimbursement levels to

in-state hospitals and found this consistent with the intended

meaning and scope of the Medicaid Act.”6 As a result, the

defendants assert, the dormant Commerce Clause does not apply to

the reimbursement and payment scheme.

D-H responds that the Medicaid review and approval process

does not provide the series of federal checkpoints that were

considered and approved in Merrion. D-H also argues that in the

absence of an unmistakably clear expression of Congressional

intent to allow Vermont’s reimbursement and payment scheme, the

6 Although Vermont cites no evidence to support that statement, it likely refers to letters from CMS to the Vermont Agency of Human Services approving certain amendments to Vermont’s Medicaid Plan that are discussed in the factual background section of Vermont’s memorandum. Because the court has denied Vermont’s motion for judicial, the letters are not before the court for purposes of the motion to dismiss.

15 discrimination against out-of-state hospitals violates the

dormant Commerce Clause.

The Medicaid review and approval process operates as

follows:

To qualify for federal funds, States must submit to a federal agency (CMS, a division of the Department of Health and Human Services) a state Medicaid plan that details the nature and scope of the State’s Medicaid program. It must also submit any amendments to the plan that it may make from time to time. And it must receive the agency’s approval of the plan and any amendments. Before granting approval, the agency reviews the State’s plan and amendments to determine whether they comply with the statutory and regulatory requirements governing the Medicaid program.

Douglas v. Indep. Living Ctr. of S. California, Inc., 132 S. Ct.

1204, 1208 (2012). 42 U.S.C. § 1396a(a) provides a long list of

requirements, along with “an extensive body of regulations”

implementing the requirements, that must be met by a state

Medicaid Plan. Alaska Dep’t of Health & Soc. Servs. v. Ctrs.

for Medicare & Medicaid Servs., 424 F.3d 931, 935 (9th Cir.

2005).

The eighty-one requirements listed in § 1396a(a) begin with

the geographic scope of a state plan, the minimum amount of

state participation in the plan, and certain administrative

process and procedures for the plan. The statute also includes,

among other things, requirements and standards for program

eligibility, access to coverage, determining legal liability of

16 third parties for health care costs, institutions providing care

under the plan, claims procedures, providing information about

services to eligible persons in the state, and measures to deal

with fraud and false claims. Section 1396a(b) prohibits age

requirements of more than sixty-five years, exclusion of state

residents, and exclusion of any citizen of the United States.

A state’s Medicaid Plan must be approved if it satisfies

the requirements listed in § 1396a(a). § 1396a(b); see also

Alaska Dep’t, 424 F.3d at 935. The parties have not pointed to

either a requirement listed in § 1396a(a)or a prohibited

condition in § 1396a(b) that addresses rates of reimbursements

and payments to out-of-state hospitals.

There is no dispute that Vermont’s Plan and the amendments

met the requirements listed in § 1396a(a) and did not impose a

prohibited condition. Therefore, under § 1396a(b), it appears

that CMS was mandated to approve the Plan and its amendments

without considering whether the reimbursement and payment scheme

for out-of-state hospitals was discriminatory. The focused and

circumscribed nature of CMS’s review under § 1396a(a) and (b),

does not support the defendants’ argument that the Medicaid

review and approval process indicates Congress’s consent to

having states impose discriminatory rates and payments.

17 In contrast, the review process under the Indian

Reorganization Act in Merrion required the agency to consider

the tribe’s imposition of taxes. “Under the Indian

Reorganization Act, 25 U.S.C. § 476, 477, a tribe must obtain

approval from the Secretary [of the Interior] before it adopts

or revises its constitution to announce its intention to tax

nonmembers.” Merrion, 455 U.S. at 155. Further, taxation of

mineral resources was a power Congress expected the tribe to

exercise. Id. at 156. As a result, the review process in

Merrion, as explained by the Supreme Court, represented

Congress’s direct action and consent to allow the tribe to tax

nonmembers.

In a recent case, a federal district court confronted the

same argument that the defendants assert here regarding the

application of Merrion to a state’s discriminatory reimbursement

and payment scheme for out-of-state hospitals. See Asante v.

Cal. Dep’t of Health Care Servs., No. 14-cv-032226-EMC, 2015 WL

9269666 (N.D. Cal. Dec. 21, 2015). In Asante, the California

Medicaid Plan provided lower rates for in-patient care provided

by out-of-state hospitals than were paid to in-state hospitals

and did not provide for DSH payments to out-of-state hospitals.

Id. *3-*5. The court distinguished Merrion on the grounds that

the inherent power of an Indian tribe to tax presented a

18 different issue than discriminatory Medicaid rates and that the

CMS review and approval process was insufficient to show “that

Congress expected or authorized states to discriminate in rate

setting.” Id. at *16. The court in Asante also discussed and

relied on Envtl. Tech. Council v. Sierra Club, 98 F.3d 774 (4th

Cir. 1996).

In Sierra, the Fourth Circuit considered a dormant Commerce

Clause challenge to South Carolina’s regulatory scheme for

hazardous waste disposal, which restricted the amount of waste

entering South Carolina from out of state. Id. at 780. “South

Carolina argue[d] that through delegating the authorization of

state programs to the EPA [Environmental Protection Agency]

under RCRA [Resource Conservation and Recovery Act] and CERCLA

[Comprehensive Environmental Response, Compensation, and

Liability Act of 1980], Congress created a system of checkpoints

for a state’s hazardous waste program.” Id. at 782. Relying on

Merrion, South Carolina contended that “by providing the

checkpoints, Congress has ‘affirmatively’ authorized the state

laws because they are contained in an EPA-approved RCRA program

and CAP [Capacity Assurance Plan].” Id. at 782-83.

The Fourth Circuit rejected South Carolina’s theory of

Congressional authorization. Id. at 783. The court concluded

that Merrion was distinguishable because of the tribal taxation

19 power, because Congress was aware that the tribe taxed non-

members, and because “the tax had been expressly approved by the

Secretary through the checkpoints established for such taxes.”

Id. at 784. “In contrast, here, [the Fourth Circuit stated] one

cannot say that Congress expressly contemplated or authorized

violations of the dormant Commerce Clause by states limiting

access to their hazardous waste facilities when it enacted RCRA,

CERCLA, and SARA [Superfund Amendments and Reauthorization Act

of 1986].” Id. As a result, “no congressionally established

‘checkpoints’ expressly anticipate or authorize [South

Carolina’s] laws,” and “the EPA has not expressly approved any

of the contested South Carolina laws.” Id.

The reasoning in Asante and Sierra is persuasive and

supports the court’s view, for purposes of the motion to

dismiss, that the CMS review and approval process does not

demonstrate Congressional consent to Vermont’s discriminatory

hospital reimbursement and payment scheme. Importantly,

however, issues pertaining to the CMS review and approval

process might be addressed more comprehensively in the context

of summary judgment. For purposes of the motion to dismiss, the

defendants have not shown that D-H fails to state a claim that

Vermont’s hospital reimbursement and payment scheme violates the

20 2. Equal Protection Clause

“The Fourteenth Amendment’s Equal Protection Clause

prohibits a state from treating similarly situated persons

differently because of their classification in a particular

group.” Mulero-Carillo, 790 F.3d at 105-06. When a plaintiff

does not claim that selective treatment has violated a

fundamental right or that it belongs to a protected group,

selective treatment is reviewed under the rational basis test.

Id. at 106. “Under rational basis scrutiny, a classification

will withstand a constitutional challenge as long as it is

rationally related to a legitimate state interest and is neither

arbitrary, unreasonable nor irrational.” D’Angelo v. N.H.

Supreme Court, 740 F.3d 802, 806 (1st Cir. 2014) (internal

quotation marks omitted).

D-H alleges that Vermont’s reimbursement and payment scheme

is intentionally discriminatory against out-of-state hospitals,

including D-H, in violation of the Equal Protection Clause of

the Fourteenth Amendment. D-H also alleges that the approvals

by CMS of Plan amendments that permit the discriminatory scheme

require the court to set them aside under § 706(2)(A) and (B).

The parties agree that the rational basis standard controls the

claims in this case.

21 a. Vermont’s Motion

In support of its motion to dismiss, Vermont argues that

D-H is not similarly situated to Vermont hospitals and that

Vermont’s reimbursement and payment scheme is rationally related

to the state’s interest in controlling health care inflation.

For those reasons, Vermont asserts that its hospital

reimbursement and payment scheme does not violate the Equal

Protection Clause. D-H asserts that it is similarly situated to

University of Vermont Medical Center and other Vermont hospitals

that receive Medicaid reimbursements and payments and disputes

that Vermont’s discriminatory scheme is rationally related to

Vermont’s legitimate interest to control health care costs.

Vermont’s arguments that D-H is not similarly situated to

Vermont hospitals and that the reimbursement and payment scheme

is rationally related to its legitimate interest in controlling

health care costs are based on facts taken from materials

extrinsic to the complaint. The arguments also raise issues of

Vermont health care policy and legislation that require further

amplification. Therefore, Vermont’s challenge to D-H’s equal

protection claim would be better addressed in the context of

summary judgment.

22 b. The Federal Defendants’ Motion

The federal defendants argue that Vermont’s reimbursement

and payment scheme is rationally related to Vermont’s legitimate

interest in using its tax dollars to benefit its own citizens by

paying higher rates and making other payments only to Vermont

hospitals.7 Specifically, the federal defendants argue that

Vermont hospitals are more likely than out-of-state hospitals to

employ Vermont residents, foster close ties with the community,

and contribute to Vermont tax revenues. They also argue that D-

H is not within the jurisdiction of Vermont for purposes of the

Equal Protection Clause.

In response, D-H contends that a state cannot impose

discriminatory schemes to benefit its own citizens at the

expense of out-of-state businesses and that the Vermont scheme

is not rationally related to the stated goal. Further, D-H

contends that the stated purpose is irrational because D-H

serves more Vermont Medicaid beneficiaries than any Vermont

hospital except University of Vermont Medical Center. D-H also

asserts that it is within the jurisdiction of Vermont for

purposes of the Equal Protection Clause.

7 In their reply, the federal defendants explain that they do not accept that D-H is similarly situated to Vermont hospitals and instead argue that because D-H is located outside of Vermont, and therefore not similar to Vermont hospitals, Vermont has a legitimate reason to treat D-H differently.

23 (1) Rational Basis Review

Rational basis review is satisfied if “there is any

reasonably conceivable state of facts that could provide a

rational basis for the classification.”8 F.C.C. v. Beach

Commc’ns, Inc., 508 U.S. 307, 313 (1993). A classification

“bear[s] a strong presumption of validity” and “may be based on

rational speculation unsupported by evidence or empirical data.”

Id. at 314-15. Nevertheless, “[t]he State may not rely on a

classification whose relationship to an asserted goal is so

attenuated as to render the distinction arbitrary or

irrational.” City of Cleburne v. Cleburne Living Ctr., 473 U.S.

432, 446 (1985).

In summary,

“[T]he Equal Protection Clause is satisfied so long as there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decisionmaker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.”

Fitzgerald v. Racing Ass’n of Central Iowa, 539 U.S. 103, 107

(2003) (quoting Nordlinger v. Hahn, 505 U.S. 1, 11-12 (1992)).

A party challenging the constitutionality of the classification

8 For this reason, it is permissible for Vermont and the federal defendants to advance different bases for Vermont’s discriminatory scheme.

24 bears the burden of refuting the bases for it. Heller v. Doe by

Doe, 509 U.S. 312, 320 (1993).

i. Legitimate State Interest

In arguing that a scheme intended to benefit a state’s

economy at the expense of out-out-state businesses is not a

legitimate state interest, D-H relies on Metropolitan Life Ins.

Co. v. Ward, 470 U.S. 869 (1985) (“MetLife”), where insurance

companies located outside of Alabama challenged a state tax on

insurance premiums that favored Alabama companies. Alabama

argued that the discriminatory tax did not violate equal

protection because it promoted the domestic insurance industry.

Id. at 876. The Supreme Court rejected that justification:

In whatever light the State’s position is cast, acceptance of its contention that promotion of domestic industry is always a legitimate state purpose under equal protection analysis would eviscerate the Equal Protection Clause in this context. A State’s natural inclination frequently would be to prefer domestic business over foreign. If we accept the State’s view here, then any discriminatory tax would be valid if the State could show it reasonably was intended to benefit domestic business. A discriminatory tax would stand or fall depending primarily on how a State framed its purpose—as benefitting one group or as harming another. This is a distinction without a difference, . . . . We hold that under the circumstances of this case, promotion of domestic business by discriminating against nonresident competitors is not a legitimate state purpose.

25 Id. at 883 (footnote omitted).9 Based on that analysis, D-H

contends that Vermont cannot discriminate against it in order to

benefit its own hospitals.

The federal defendants rely on Reeves, Inc. v. Stake, 447

U.S. 429 (1980), and Smith Setzer & Sons, Inc. v. S.C.

Procurement Review Panel, 20 F.3d 1311, 1323 (4th Cir. 1994), to

show that when a state is conferring benefits, as opposed to

extracting taxes, it may favor in-state entities at the expense

of out-of-state entities. In Reeves, the court considered

whether a cement plant owned by South Dakota could limit its

sales to South Dakota businesses without violating the Commerce

Clause. 447 U.S. at 433. The Court rejected arguments of

protectionism in holding that the South Dakota scheme did not

violate the Commerce Clause. Id. at 442-46.

The federal defendants do not explain how the analysis of

South Dakota’s limit on cement sales under the Commerce Clause

applies to an analysis of Vermont’s discriminatory reimbursement

9 In Trojan Techs., Inc. v. Com. of Pa., 916 F.2d 903, 915 (3d Cir. 1990), the Third Circuit stated that the Supreme Court limited MetLife to its facts in Northeast Bancorp, Inc. v. Bd. of Governors of Fed. Reserve Sys., 472 U.S. 159 (1985). To the contrary, the Court explained in Northeast Bancorp that the states there were not favoring local corporations, as in MetLife, and that the banking issues raised in Northeast Bancorp “are of profound local concern.” Id. at 177. Therefore, the Court appeared to limit Northeast Bancorp to its banking context.

26 and payment scheme under the Equal Protection Clause. Instead,

they rely on a statement in Reeves that South Dakota’s limit on

sales to in-state businesses, along with other state programs

that are limited to residents, “reflect the essential and

patently unobjectionable purpose of state government – to serve

the citizens of the State.” Reeves, 447 U.S. at 442. Nothing

in Reeves, however, holds that a state may discriminate against

out-of-state businesses to benefit their own economies or

citizens without violating the Equal Protection Clause.

In Smith Setzer, a North Carolina company challenged a

South Carolina statute that provided preferences for South

Carolina products in procurement bidding. 20 F.3d at 1315. The

Fourth Circuit noted that state discrimination based on state

boundaries “sharpens our concern into the legitimacy of the

line-drawing enterprise.” Id. at 1323. The court concluded,

nevertheless, that the bidding preferences were motivated by a

legitimate state purpose to use funds from the treasury of South

Carolina, which were derived from taxes, to benefit local

producers and vendors. Id.

The Fourth Circuit stated that it did not accept an

interpretation of MetLife that prohibits states from

articulating a legitimate state purpose in providing benefits to

its citizens while excluding citizens from other states. Smith

27 Setzer, 20 F.3d at 1321. The court explained that such a rule

“would raise serious questions regarding the ability of a state

to limit to its own residents the receipt of various benefits

that are presently considered to be at the core of state-

government responsibility.” Id. (relying on the Commerce Clause

analysis in Reeves).

The federal defendants contend that the reasoning in Smith

Setzer applies here because the preferential procurement process

at issue in Smith Setzer conferred a benefit on in-state

businesses analogous to the higher reimbursement rates and

additional payments made to Vermont hospitals under the Medicaid

Plan. They argue that the rule in MetLife applies only when a

state imposes the burden of a tax on out-of-state businesses.

Whether the equal protection analysis is different for

extracting taxes from outsiders versus providing benefits to

residents, the circumstances here are not analogous to those in

Smith Setzer. Smith Setzer involved South Carolina’s decision

to buy South Carolina goods from South Carolina vendors. 20

F.3d at 1314. Under the Medicaid Act, Vermont is required by

federal law to pay out-of-state hospitals for services provided

to Vermont Medicaid beneficiaries. 42 U.S.C. § 1396a(a)(16).

The issue presented here is whether Vermont can pay less to out-

of-state hospitals than it pays to Vermont hospitals for

28 Medicaid services based on a stated goal of benefitting its own

citizens.

In addition, the funds used to buy South Carolina goods in

Smith Setzer were South Carolina tax dollars. Importantly, the

funds used to pay for services provided to Vermont Medicaid

beneficiaries are from both Vermont tax revenues and federal tax

revenues. Therefore, Vermont’s reimbursement and payment scheme

does not just preserve Vermont tax dollars for Vermonters but

also provides more federal funds to Vermonters. See W. Va.

Hosps., 885 F.2d at 28 (“The State is not merely exercising

discretion in how to spend its own money; medicaid funds derive

in large part from the federal government. Nothing in [the

Medicaid Act] remotely suggests that a state may use federal

funds to give its own hospitals preferential treatment and, at

the same time, disadvantage out-of-state hospitals.”).

As the Supreme Court explained in MetLife, if providing a

benefit to a state’s own businesses is always a legitimate state

interest, any discrimination under the rational basis test

“could be justified simply on the ground that it favored one

group at the expense of another.” 470 U.S. at 882, n.10.

Therefore, based on MetLife, D-H has sufficiently shown, for

purposes of surviving the motion to dismiss, that Vermont’s goal

of using its own resources to benefit its citizens by paying

29 less to out-of-state hospitals and more to in-state hospitals is

not a legitimate state interest.

ii. Rational Relationship

In addition, D-H challenges the rationality of the link

between the discriminatory reimbursement and payment scheme and

Vermont’s goal to use Vermont tax money to benefit Vermonters.

As is noted above, because the Vermont Medicaid program is

funded by both the federal government and Vermont, the

relationship between Vermont tax dollars and the payments made

to hospitals that provide Medicaid services is more complex than

South Carolina’s preferential procurement plan in Smith Setzer.

In addition, D-H provides services to a significant number of

Vermont Medicaid beneficiaries, so that payments to D-H arguably

benefit Vermont residents. See W. Va. Univ. Hosps., Inc. v.

Rendell, No. 1:CV-06-0082, 2007 WL 3274409, at *7 (M.D. Pa. Nov.

5, 2007). Further, given its location close to Vermont, D-H

also likely employs Vermont residents, who pay Vermont taxes.

Based on the information available at this early stage,

even if a state has a legitimate interest in benefitting its own

citizens with preferential Medicaid reimbursements and payments

to in-state hospitals, Vermont’s discriminatory scheme does not

appear to be rationally related to that interest. Therefore,

for purposes of the motion to dismiss, D-H sufficiently alleges

30 that Vermont’s reimbursement and payment scheme violates equal

protection.

(2) Within the Jurisdiction of Vermont

The federal defendants also contend that D-H does not come

within the jurisdiction of Vermont for purposes of equal

protection. The Equal Protection Clause of the Fourteenth

Amendment prohibits a state from “deny[ing] any person within

its jurisdiction the equal protection of the laws.” U.S. Const.

amend. XIV, § 1. They argue that because D-H is not a Vermont

hospital and did not allege that it is subject to the

jurisdiction of Vermont, D-H’s claim fails.

The federal defendants rely on Blake v. McClung, 172 U.S.

239 (1898), to show that D-H is not within the jurisdiction of

Vermont. In Blake, the Supreme Court held that a Virginia

company was not within the jurisdiction of Tennessee for

purposes of the Equal Protection Clause when the “corporation

[was] not created by Tennessee, nor doing business there under

conditions that subjected it to process issuing from the courts

of Tennessee at the instance of suitors.” Id. at 261.

D-H responds that it is within the jurisdiction of Vermont

because it participates in Vermont’s Medicaid program and

because it is subject to the jurisdiction of Vermont’s courts

under Vermont’s long-arm statute. In support, D-H cites Hughes

31 v. Alexandria Scrap Corp., 426 U.S. 794 (1976), where a Virginia

corporation which participated in a Maryland licensing, penalty,

and bounty program to rid the state of abandoned automobiles

charged that an amendment to the program favored Maryland scrap

processors in violation of the Commerce Clause and the Equal

Protection Clause. For purposes of the Equal Protection Clause

claim, the Court found that Alexandria Scrap was within the

jurisdiction of Maryland because it was licensed in Maryland,

maintained an office there as required by the bounty program,

and was subject to the jurisdiction of Maryland courts under the

long-arm statute. Id. at 810 n.21.

Although D-H is located in New Hampshire and does not

maintain an office in Vermont, it is subject to the regulations

and requirements of Vermont’s Medicaid Plan and is also subject

to the jurisdiction of Vermont courts. Under these

circumstances, D-H has shown that it is subject to the

jurisdiction of Vermont for purposes of the Equal Protection

Clause.

(3) 42 C.F.R. § 431.52

D-H alleges that a Medicaid implementing regulation,

§ 431.52(b), requires state Medicaid Plans to pay for services

provided by out-of-state hospitals to that state’s Medicaid

beneficiaries at the same rates as paid to in-state hospitals.

32 Because Vermont’s Plan, as amended, provides lower reimbursement

rates to out-of-state hospitals for services to Vermont Medicaid

beneficiaries, D-H contends that the Plan does not comply with

§ 431.52(b). For that reason, D-H argues that the approvals by

CMS of the amendments to the Vermont Plan, which establish the

lower out-of-state reimbursement rates, are unlawful, and must

be set aside under the APA, 5 U.S.C. § 706(2)(A).

The federal defendants move to dismiss the claim, arguing

that D-H misunderstands § 431.52(b). They contend that,

properly understood, § 431.52(b) guarantees a Medicaid

beneficiary’s right to services from out-of-state providers but

does not require a specific rate of payment to out-of-state

providers. In other words, the federal defendants interpret

§ 431.52(b) as addressing coverage for Medicaid beneficiaries

seeking services in other states rather than the rate of payment

to a provider for those services.

As part of the Medicaid program, states are required to

provide services to eligible residents when they are outside of

the state. 42 U.S.C. § 1396a(a)(16). Section 431.52

establishes “[t]he conditions under which payment for services

is provided to out-of-State residents.” 42 C.F.R. § 435.403(a).

Specifically, § 431.52(b) requires:

A State plan must provide that the State will pay for services furnished in another State to the same extent that

33 it would pay for services furnished within its boundaries if the services are furnished to a beneficiary who is a resident of the State, and any of the following conditions is met:

(1) Medical services are needed because of a medical emergency; (2) Medical services are needed and the beneficiary’s health would be endangered if he were required to travel to his State of residence; (3) The State determines, on the basis of medical advice, that the needed medical services, or necessary supplementary resources, are more readily available in the other State; (4) It is general practice for beneficiaries in a particular locality to use medical resources in another State.

“When an agency interprets its own regulation, the Court,

as a general rule, defers to it unless that interpretation is

plainly erroneous or inconsistent with the regulation.” Decker

v. Northwest Envtl. Defense Ctr., 133 S. Ct. 1326, 1337 (2013)

(internal quotation marks omitted). The agency’s interpretation

need only be permissible and “need not be the only possible

reading of a regulation—or even the best one—to prevail.” Id.

The agency’s interpretation is strengthened when “there is no

indication that [the agency’s] current view is a change from

prior practice or a post hoc justification adopted in response

to litigation.” Id. On the other hand, the court will not

defer to the agency’s interpretation if “an alternative reading

is compelled by the regulation’s plain language or by other

indications of the Secretary’s intent at the time of the

34 regulation’s promulgation.” Thomas Jefferson Univ. v. Shalala,

512 U.S. 504, 512 (1994) (internal quotation marks omitted).

The dispute over the meaning of § 431.52(b) boils down to

its purpose: whether the regulation governs the rate of payment

or the provision of services. D-H asserts that the regulation

requires Vermont to pay for services provided by D-H “to the

same extent” that Vermont would pay for services provided by

hospitals in Vermont. D-H further interprets “to the same

extent” to mean “at the same rate.”

D-H further notes that § 1396a(a)(16) refers to a “State

plan for medical assistance” and that “medical assistance” is

defined by § 1396d(a) to mean payment of the cost of care and

services. D-H reasons that § 1396a(a)(16), therefore, requires

payment of the costs of care and services for beneficiaries who

are outside the state. Based on that requirement and the

purpose of Part 431 which includes payment for out-of-state

services, D-H interprets § 1396a(a)(16) and its implementing

regulation, § 431.52(b), to pertain to payment for services

rather than to provision of services.

The federal defendants assert that § 1396a(a)(16) and §

431.52(b) focus on Medicaid beneficiaries and ensure that

certain services will be provided to beneficiaries when they are

in another state. They interpret § 431.52(b) to govern what

35 services are covered for beneficiaries in another state; that

is, what services will be paid for by Medicaid. As such, they

read the phrase “that the State will pay for services furnished

services furnished within its boundaries” to mean that a

beneficiary will be entitled to the same Medicaid services when

he or she is in another state, as long as the listed conditions

are met.

Both interpretations of § 431.52(b) are plausible. D-H has

not shown, however, that its interpretation of § 431.52(b) is

compelled by the language of the regulation or by any history

pertaining to promulgation of the regulation. In contrast, the

explanation provided by the federal defendants persuasively

shows that § 431.52(b) governs what services are covered for

Medicaid beneficiaries when they are outside the state, not what

rates of payment will be made for those services. Further, the

federal defendants point out that § 431.52(b) has been

interpreted consistently not to require state Plans to provide

equal payments to in-state and out-of-state providers.10

Therefore, applying the deference required for HHS’s

interpretation, the court concludes that § 431.52(b) governs

10 The federal defendants represent that other states’ Medicaid Plans, which have been approved by CMS, also include the same rate provisions that Vermont’s Plan provides.

36 coverage and does not require specific rates for payments to

out-of-state providers.

(4) 5 U.S.C. § 706(2)(A)

D-H alleges that the approvals of amendments to the Vermont

Plan by HHS and CMS must be set aside under § 706(2)(A) because

they are arbitrary, capricious, and in violation of § 431.52(b).

Based on the court’s interpretation of § 431.52(b), the actions

of HHS and CMS are not arbitrary, capricious, or contrary to

law. Therefore, the court does not find that the approvals of

the amendments to Vermont’s Plan must be set aside based on a

violation of § 431.52(b). The claim in Count V is dismissed.

Conclusion

For the foregoing reasons, Vermont’s motion for judicial

notice (document no. 18) is denied. The federal defendants’

motion to dismiss (document no. 15) is granted on Count V and is

otherwise denied. Vermont’s motion to dismiss (document no. 17)

is denied.

SO ORDERED.

__________________________ Landya McCafferty United States District Judge

May 2, 2016

cc: Jon T. Alexander, Esq. Gerard J. Cedrone, Esq.

37 Kristin L. Clouser, Esq. Anthony J. Galdieri, Esq. John Paul Kacavas, Esq. Gordon J. MacDonald, Esq. Katherine Amestoy Martin, Esq.