State of Washington Health Care Authority v. Azar

• Court: District Court, W.D. Washington
• Decided: October 29, 2020
• Docket: 3:19-cv-06137
• Status: Unknown

Opinion

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5 UNITED STATES DISTRICT COURT 6 WESTERN DISTRICT OF WASHINGTON AT TACOMA 7 STATE OF WASHINGTON HEALTH CASE NO. 3:19-CV-06137-BHS 8 CARE AUTHORITY, ORDER ADOPTING REPORT 9 Plaintiff, AND RECOMMENDATION AND v. GRANTING PLAINTIFF LEAVE 10 TO AMEND ALEX M. AZAR II, et al. 11 Defendants. 12

13 This matter comes before the Court on the Report and Recommendation (“R&R”) 14 of the Honorable Theresa L. Fricke, United States Magistrate Judge, Dkt. 46, Plaintiff 15 State of Washington Health Care Authority’s (“State”) partial objections, Dkt. 47, and 16 Defendants Alex Azar II, Seema Verma, and the Centers for Medicare and Medicaid 17 Services’ (collectively “Federal Defendants”) objections to the R&R, Dkt. 48. 18 I. BACKGROUND AND PROCEDURAL HISTORY 19 The State seeks a declaratory judgment regarding the payment formula applied by 20 a federal Medicaid program, administered by the State, for incentive payments to local 21 hospitals to promote the use of electronic health record (“E.H.R.”) systems. Dkt. 1 at 22 ¶¶ 2, 14–15. The State seeks declarations arising out of the Federal Defendants’ assertion 1 that they overpaid approximately $11 million to the State for E.H.R. payments to the 2 “Hospital Defendants.”1 Id. at ¶¶ 30, 44. According to the State’s complaint, the Federal 3 Defendants’ calculation of the putative overpayment is based upon an interpretation of

4 the governing statute and regulations that excludes from the payment formula Medicaid 5 patient bed days that were not paid by Medicaid (“unpaid bed days”). Id. at ¶ 4. The 6 complaint states that the Federal Defendants sent a letter demanding repayment of the 7 alleged overpayment and “threatened to proceed” with a disallowance action if the State 8 did not timely respond. Id at ¶ 30. The State alleges that it then conducted its own audit

9 using the Federal Defendants’ calculation methodology and sent notices of the 10 overpayment to the Hospital Defendants. Id. at ¶ 31. The complaint alleges that the 11 Hospital Defendants are contesting the State’s notices in ongoing state administrative 12 hearings. Id. at ¶ 32. The State asserts that the Hospital Defendants have raised 13 arguments in the pending administrative proceedings contesting the appropriateness and

14 legitimacy of the exclusion of unpaid bed days. Id. at ¶¶ 41, 42. The State seeks 15 declaratory judgment on these issues, requesting that the Court declare (1) whether 16 unpaid Medicaid bed days must be excluded from the E.H.R. payments and (2) whether 17 the Federal Defendants’ reliance upon sub-regulatory guidance regarding unpaid bed 18

19 1 The Hospital Defendants are Kadlec Regional Medical Center, King County Public Hospital District No. 2, Providence Centralia Hospital, Providence Holy Family Hospital, 20 Providence Mount Carmel Hospital, Providence Regional Medical Center Everett, Providence Sacred Heart Medical Center, Providence St. Mary Medical Center, Providence St. Peter 21 Hospital, Snohomish County Public Hospital District No. 1, Swedish Medical Center Cherry Hill, Swedish Medical Center Edmonds, Swedish Medical Center First Hill/Ballard, Swedish 22 Medical Center Issaquah, and Seattle Children’s Hospital. 1 days violates the Administrative Procedures Act, 5 U.S.C. §§ 553, 701–06. Id. at ¶¶ 50, 2 55. 3 The Federal Defendants moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) for

4 lack of subject matter jurisdiction,2 arguing that (1) the Declaratory Judgment Act does 5 not itself supply subject matter jurisdiction and the State failed to allege an adequate 6 independent source of jurisdiction in the absence of final agency action; (2) the State 7 failed to identify a waiver of sovereign immunity; (3) the State lacks standing and its 8 claim is not ripe; and (4) the State failed to exhaust its administrative remedies. Dkt. 23.

9 The Hospital Defendants filed a “response” urging that if the claims against the Federal 10 Defendants are dismissed, the claims against the Hospital Defendants should also be 11 dismissed. Dkt. 32. The State responded to the Federal Defendants’ motion, Dkt. 31, 12 and opposed the Hospital Defendants’ “response,” Dkt. 41. The Federal Defendants and 13 Hospital Defendants replied. Dkts. 35, 42. The State filed a surreply, objecting to the

14 Federal Defendants’ submission of a Declaration on reply. Dkt. 38. 15 On July 27, 2020, Judge Fricke issued the R&R recommending dismissal of this 16 case against all Defendants for lack of subject matter jurisdiction because the State’s 17 claims are based upon an anticipated administrative action that is not yet final. Dkt. 46 at 18 19–25. The R&R recommended rejecting the Federal Defendants’ additional arguments

19 for dismissal. Id. at 10–19, 25–27. 20 2 The Federal Defendants argued in the alternative for dismissal for failure to state a 21 claim upon which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6). The R&R found, and this Court agrees, that there is a lack of subject matter jurisdiction; therefore, the Court does 22 not consider whether the State has stated a claim under Fed. R. Civ. P. 12(b)(6). 1 On August 10, 2020, the State filed a partial objection to the R&R: the State does 2 not object to the R&R’s recommended dismissal of its claims against the Federal 3 Defendants for lack of subject matter jurisdiction but objects to the dismissal of its claims

4 against the Hospital Defendants. Dkt. 47. On the same date, the Federal Defendants 5 filed objections to the R&R’s rejection of its additional arguments for dismissal. Dkt. 48. 6 On August 27, 2020, the Hospital Defendants responded to the State’s partial objection, 7 urging the adoption of the R&R’s recommendation of their dismissal because a claim 8 against the Hospital Defendants alone would not meet standing requirements and because

9 there are compelling reasons for the Court to decline to exercise its discretionary 10 jurisdiction. Dkt. 51. On August 24, 2020, the Federal Defendants responded to the 11 State’s partial objection. Dkt. 49. On August 26, 2020, the State responded to the 12 Federal Defendants’ objections. Dkt. 50. 13 II. DISCUSSION

14 The district judge must determine de novo any part of the magistrate judge’s 15 disposition that has been properly objected to. The district judge may accept, reject, or 16 modify the recommended disposition; receive further evidence; or return the matter to the 17 magistrate judge with instructions. Fed. R. Civ. P. 72(b)(3). 18 A. State’s Motion to Strike

19 The State filed a surreply requesting that the Court strike the Declaration of Janet 20 Freeman, Dkt. 36, which the Federal Defendants submitted in reply to the State’s 21 response to their motion to dismiss. Dkt. 38. The State does not object to the R&R’s 22 1 recommendation that the motion be denied. The Court therefore adopts the R&R and 2 denies the motion to strike. 3 B. Federal Defendants’ Objections

4 The State does not object to the R&R’s determination that the Court lacks subject 5 matter jurisdiction over the Federal Defendants because the claims are based upon an 6 anticipated administrative action that is not yet final. Dkt. 46 at 24. The claims against 7 the Federal Defendants will therefore be dismissed. Accordingly, the Court does not 8 reach the Federal Government’s arguments that the State’s claims should also be

9 dismissed for the additional reasons of lack of standing and ripeness, lack of a waiver of 10 sovereign immunity, and failure to exhaust administrative remedies. 11 C. State’s Partial Objection 12 1. Parties’ Arguments The State argues that, notwithstanding the dismissal of all claims against the 13 Federal Defendants, the claims against the Hospital Defendants should remain. Dkt. 47. 14 While it is not clear from the face of the Complaint or the briefing before Judge Fricke, 15 the State’s now argues in its partial objection that Count 1 of the complaint, which seeks 16 declaratory judgment regarding the inclusion of unpaid bed days, was asserted only 17 against the Hospital Defendants. Id. at 3. The State argues that this count does not suffer 18 from the same infirmity as its claim against the Federal Defendants because the test for 19 jurisdiction over a declaratory judgment action—whether there would be jurisdiction over 20 a coercive action by the party against whom the declaration is sought—is met with 21 respect to the Hospital Defendants. Id. at 7. The State argues that the potential coercive 22 1 action by the Hospital Defendants is an action under 42 U.S.C. § 1983 for deprivation of 2 rights conferred by the Medicaid Act, 42 U.S.C. § 1396b(t). Dkt. 47 at 8. Finally, the 3 State argues that, due to the procedural posture in which the Hospital Defendants’ request

4 for dismissal was presented before Judge Fricke, this Court should re-refer this issue for a 5 more complete determination; alternatively, the State seeks leave to amend its complaint. 6 Id. at 9–11. 7 The Hospital Defendants respond that, in light of the dismissal of the Federal 8 Defendants, the State lacks standing because (1) the declaration it seeks would not bind

9 the Federal Defendants and would therefore not redress the State’s injuries; (2) the 10 potential coercive action the State now argues as a ground for subject matter jurisdiction 11 is speculative; and (3) the State has never taken a concrete position on the unpaid bed 12 days issue and thus there is no actual controversy. Dkt. 51 at 6–9. Finally, the Hospital 13 Defendants urge that even if subject matter jurisdiction exists, exercise of jurisdiction

14 under the Declaratory Judgment Act is discretionary and there are compelling reasons to 15 deny it here. Id. at 9–12. 16 2. Analysis 17 The R&R (as well as the parties’ briefing to Judge Fricke) analyzed count 1 of the 18 complaint as applying to all parties. Dkt. 46 at 6; Dkt. 23 at 17; Dkt. 31 at 10. The R&R

19 recommends dismissal of all parties because the State’s claims were premised upon 20 alleged coercive action by the Federal Defendants that was not yet final. Dkt. 46 at 28. 21 The Court agrees with the R&R that dismissal of the Federal Defendants removes the 22 1 coercive action alleged in the complaint as the foundation for subject matter jurisdiction 2 and requires dismissal of the complaint against all parties. 3 The State urges a reinterpretation of its complaint to assert a standalone claim

4 against the Hospital Defendants that is neither evident from the face of the complaint nor 5 argued in the parties’ briefing to Judge Fricke. The Hospital Defendants have, in 6 response, asserted potentially dispositive new arguments (in addition to arguments 7 previously presented to Judge Fricke) that dispute the State’s standing to bring such 8 claims. It is not proper for this Court to consider arguments and theories not presented to

9 the magistrate judge. Greenhow v. Sec’y of Health & Human Servs., 863 F.2d 633, 638 10 (9th Cir. 1988), overruled on other grounds, United States v. Hardesty, 977 F.2d 1347 11 (9th Cir. 1992). Instead, the State’s new theory, and the Hospital Defendants’ defenses, 12 should be addressed in an amended complaint and responsive motion practice before 13 Judge Fricke.

14 Leave to amend the complaint “should [be] freely give[n]” and should be allowed 15 unless the complaint cannot state a claim under any conceivable set of facts. Fed. R. Civ. 16 P. 15; Breier v. Northern Cal. Bowling Proprietors’ Ass’n, 316 F.2d 787, 790 (9th Cir. 17 1963). The R&R correctly found that, in light of the lack of final agency action, no 18 amendment could cure the lack of subject matter jurisdiction with respect to the Federal

19 Defendants. Dkt. 46 at 27. However, this finding of futility does not apply to the claims 20 against the Hospital Defendants; in light of the liberal standard governing amendment, 21 the Court grants the State’s request for leave to amend with respect to the Hospital 22 Defendants. 1 III. ORDER 2 The Court having considered the R&R, the parties’ objections and responses, and 3 the remaining record, does hereby find and order as follows:

4 (1) The R&R is ADOPTED; 5 (2) The State’s motion to strike the Declaration of Janet Freemen, Dkt. 38, is 6 DENIED; 7 (3) The Federal Defendants’ motion to dismiss, Dkt. 23, is GRANTED; 8 (4) The claims against the Federal Defendants are DISMISSED for lack of

9 subject matter jurisdiction without leave to amend; 10 (5) The State’s claims against the Hospital Defendants are DISMISSED for 11 lack of subject matter jurisdiction with leave to amend; and 12 (6) This matter is re-referred to Judge Fricke; the Court defers to Judge Fricke 13 to set a deadline to file the amended complaint.

14 Dated this 29th day of October, 2020. A 15 16 BENJAMIN H. SETTLE 17 United States District Judge

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