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Legacy Community Health Services, Inc. v. Smith

United States Court of Appeals, Fifth Circuit

January 31, 2018

CHARLES SMITH, in His Official Capacity as Executive Commissioner of Health and Human Services Commission, Defendant-Appellant.

         Appeal from the United States District Court for the Southern District of Texas

          Before JONES, SMITH, and PRADO, Circuit Judges.

          JERRY E. SMITH, Circuit Judge.

         Legacy Community Health Services ("Legacy")-a Federally Qualified Health Center ("FQHC")-sued the Texas Health and Human Services Commission (the "Commission"), through its Executive Commissioner, alleging that Texas's reimbursement scheme violated the Medicaid Act (1) by requiring Managed Care Organizations ("MCOs") fully to reimburse FQHCs, (2) by failing to ensure that Texas itself would reimburse an FQHC if an MCO does not reimburse the FQHC in the first place, and (3) by withholding payments for certain non-emergency services that Legacy has been providing to the enrollees of an MCO with which Legacy has no contract. The district court granted Legacy summary judgment on all of its claims. We reverse and remand, concluding that (1) the Commission's requirement that MCOs fully reimburse FQHCs does not violate the Medicaid Act; (2) Legacy lacks standing to challenge the Commission's lack of a policy that the state directly reimburse an FQHC if it is not fully reimbursed by the MCO; and (3) Legacy is not entitled to reimbursement for the non-emergency, out-of-network services about which it complains.



         FQHCs are designed to provide care to medically underserved populations. 42 U.S.C. § 254b(a), (e), (k). FQHCs have two sources of compensation: federal grants under § 330 of the Public Health Service Act ("PHSA"), 42 U.S.C. § 254b, for medically underserved communities and state reimbursements for Medicaid services, id. § 1396a(bb). MCOs are private organizations that arrange for the delivery of healthcare services to individuals who enroll with them. See id. §§ 1396u-2(a)(1)(A), 1396b(m). As relevant here, they act as intermediaries between the state and FQHCs. The state disburses funds to an MCO, which then contracts with FQHCs and reimburses them for the services they provide to the MCO's enrollees. See id. § 1396b(m)(2)(A)(ix); 42 C.F.R. § 438.2. The Medicaid Act is managed by the Centers for Medicare and Medicaid Services ("CMS").

         States are required to reimburse FQHCs for their covered Medicaid services. 42 U.S.C. § 1396a(bb). They may either reimburse the FQHCs directly or use MCOs to reimburse the FQHCs. Id. § 1396u-2(a). Before 1997, the law allowed either the state or the MCO fully to assume this reimbursement requirement. The Balanced Budget Act of 1997, however, changed that and provided the statutory provisions relevant here: 42 U.S.C. §§ 1396a(bb) and 1396b(m).

         Section 1396a(bb) provides that the state is obligated to ensure that FQHCs are reimbursed for covered Medicaid services. It generally requires that "the State plan shall provide for payment for services described in section 1396d(a)(2)(C) . . . furnished by [FQHCs]." § 1396a(bb)(1). That section also sets forth the framework for assessing reimbursement amounts: the Prospective Payment System ("PPS"). § 1396a(bb)(1)-(4).

         Section 1396b(m) contains the requirements for contracts between states and MCOs. If the state elects to use MCOs to pay the FQHCs, then the Medi-caid Act mostly leaves the MCOs free to negotiate and contract with FQHCs. But § 1396b(m) requires the MCO to "provide payment that is not less than the level and amount of payment which the [FQHC] would make" if it were not an FQHC-i.e., the MCO must pay the FQHC at least competitive market rates. § 1396b(m)(2)(A)(ix).[1]

         This can lead to shortfalls for the FQHC, which may be entitled under § 1396a(bb) to a PPS amount greater than what the MCO pays. In that event, § 1396a(bb) requires the state to "provide for payment to the [FQHC] by the State of a supplemental payment equal to the amount (if any)" of the difference between the MCO's payment and the required PPS amount. § 1396a(bb)(5)(A). These are sometimes called "wraparound" payments. The parties dispute, however, whether a state can require the MCO to pay the full PPS amount in the first instance, thereby obviating the need for such supplemental "wraparound" payments.

         Furthermore, § 1396a(bb) provides for "[a]lternative payment methodologies" ("APM"). Id. § 1396a(bb)(6). Under these APMs, a state may "provide for payment" under any kind of mechanism that is both "agreed to by the State and [FQHC and] . . . results in payment to the [FQHC] of an amount" at least equal to the PPS. Id.

         Finally, § 1396b(m) addresses situations in which a patient, enrolled with a certain MCO, goes to an FQHC that has not contracted with that MCO. These "out-of-network" claims are treated slightly differently from "in-network" claims (i.e., where the MCO has a contract with the FQHC). Generally, the MCO has no reimbursement obligations to the FQHC for out-of-network claims. But § 1396b(m)(2)(A)(vii) requires that all state-MCO contracts address out-of-network services that "were immediately required due to an unforeseen illness, injury, or condition." The state-MCO contract must designate whether the state or the MCO will reimburse the FQHC for such out-of-network emergency services. Id. The parties also dispute whether the state must independently reimburse the FQHC for other, non-emergency out-of-network services, not covered by § 1396b(m)(2)(A)(vii). See also id. § 1396a(bb).


         The Commission manages Texas's Medicaid program ("the program"), Tex. Gov't Code § 531.021(a), and has elected to contract with MCOs to provide Medicaid services, id. § 533.002. One such MCO is the Texas Children's Health Plan ("TCHP"). Legacy-designated an FQHC for purposes of Medicaid reimbursement and Section 330 grants-formed a contract with TCHP in 2009 that specified that Legacy would provide medical care to TCHP's members and that TCHP would pay Legacy $67 per-patient visit, below Legacy's PPS rate.

         In 2011, the Commission amended its contract with TCHP, requiring TCHP to pay FQHCs their full PPS rate instead of the rates that TCHP had negotiated with its FQHCs. Legacy and TCHP amended their contract to mirror that change: TCHP would pay Legacy its full PPS rate of about $270 per visit. Furthermore, the Commission gave FQHCs the option to keep the traditional PPS or calculate its rates using an alternative PPS ("APPS"); Legacy elected to use the APPS. At that time, Texas still provided that it would make supplemental payments if the MCO's payment was less than the required PPS amount. Cf. § 1396a(bb).

         From 2011 to 2014, Legacy's Medicaid encounters and costs skyrocketed. For instance, its Medicaid encounters increased by 246%, and its claims expenses per month increased by 283%. For the 2014 fiscal year, TCHP paid about $20 million to all FQHCs with which it had contracted. Of that amount, it paid Legacy over $12 million, even though only 2.7% of TCHP's office visits occurred at Legacy, and less than 2% of TCHP's Medicaid enrollees selected Legacy as their primary care provider. Though TCHP maintained contracts with numerous other FQHCs and accused Legacy of effectively gaming the Medicaid system, TCHP indicated to Legacy that it wanted the state to reinitiate supplemental "wraparound" payments to allow TCHP to give lower initial reimbursements. But because Legacy's utilization trend exceeded the Medicaid premium trend and other FQHC trends, TCHP ultimately terminated its contract with Legacy effective February 2015.

         Since Legacy's contract was terminated with TCHP, Legacy has continued to provide services to patients who have TCHP as their provider. Accordingly, Legacy submitted approximately 6, 000 "out-of-network" claims to TCHP between February and August 2015. TCHP denied nearly half of those claims as (1) lacking prior authorization and (2) not relating to emergency services. Legacy appealed those denials to the Commission, but Texas has similarly refused to reimburse Legacy for those claims, contending that the Medicaid Act does not entitle Legacy to receive payment for such out-of-network services.

         After Legacy filed this suit, Texas changed its Medicaid policies. In January 2016, the Commission submitted to the CMS a state plan amendment ("SPA 16-02") that eliminates the requirement that Texas make supplemental "wraparound" payments to FQHCs in the event that the MCOs fail fully to reimburse the FQHCs at their PPS rate. Furthermore, SPA 16-02 specified that MCOs would fully reimburse FQHCs. CMS approved the amendment.


         In January 2015, Legacy sued the Commission under 42 U.S.C. § 1983, alleging that it had violated its rights under 42 U.S.C. § 1396a(bb). Legacy offered two theories.

         First, Legacy contended that the Commission had unlawfully delegated its FQHC reimbursement obligations to MCOs by requiring them to reimburse FQHCs fully. Legacy's underlying theory is that the purpose of §§ 1396a(bb) and 1396b(m)(2)(A) is to allow FQHCs to negotiate freely with MCOs for above-market, but below-PPS, rates and thereby encourage FQHC-MCO contracts. The Commission countered that nothing in the text of either § 1396a(bb) or § 1396b(m)(2)(A) prevented the state from requiring MCOs to reimburse FQHCs fully.

         Second, Legacy asserted that the Commission had failed to ensure payment for certain out-of-network services, in violation of 42 U.S.C. § 1396b-(m)(2)(A)(vii). Texas replied that the Commission had ensured reimbursement for the kind of emergency out-of-network services contemplated by § 1396b(m)-(2)(A)(vii) and that the Medicaid Act did not require reimbursement for any other out-of-network services.

         Texas moved to dismiss, averring that Legacy lacked standing and a cause of action under § 1983. The district court denied the motion. Legacy and Texas then cross-moved for summary judgment. After those motions were filed, SPA 16-02 was enacted and approved. The court ordered supplemental briefing on the effect of CMS's approval of SPA 16-02 on the pending litigation; Legacy's brief and Texas's reply were framed in terms of whether Chevron deference should be accorded to that approval.

         The district court then issued two opinions on the cross-motions for summary judgment. In the first, the court held that the Commission's policy violated § 1396a(bb) (1) by eliminating its requirement to make supplemental "wraparound" payments, thereby failing to ensure reimbursement of FQHCs and (2) by requiring MCOs to fully reimburse FQHCs.

         CMS then issued a "statement of interest, " clarifying its position on § 1396a(bb) as follows: (1) States may not "simply do away with their obligation to make supplemental payments"; (2) the state may eliminate the need for supplemental payments through an APM under § 1396a(bb)(6); (3) CMS approved SPA 16-02 as an APM but had not determined whether the FQHCs had given the requisite consent to make SPA 16-02 a valid APM, so SPA 16-02 would be valid only if there were proper FQHC consent; and (4) the state is similarly obligated to ensure that FQHCs are fully reimbursed for out-of-network emergency services.

         Reviewing that statement, the district court issued its second opinion, holding that the Commission's out-of-network policy violated § 1396a(bb) because it failed to reimburse Legacy for non-emergency out-of-network services.

         The court then enjoined the Commission.


         We first decide whether the district court had Article III jurisdiction. Federal courts have jurisdiction only over a "case" or "controversy." See U.S. Const. Art. III, § 2, cl. 1. To establish a "case or controversy, " a plaintiff must establish that it has standing. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992). Accordingly, Legacy must demonstrate that (1) it has suffered an "injury in fact, " which is "an invasion of a legally protected interest" that is "concrete and particularized" and "actual and imminent" rather than "conjectural or hypothetical, " (2) there is a "causal connection between the injury and the conduct complained of" such that the injury is "fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court, " and (3) the injury will likely "be redressed by a favorable decision." Id. (internal quotations, brackets, ellipses, and citations omitted).

         If, as here, a plaintiff seeks injunctive relief, it must also show that "there is a real and immediate threat of repeated injury." City of Los Angeles v. Lyons, 461 U.S. 95, 102 (1983) (citation omitted).[2] Past injury alone is insufficient; the plaintiff must show a "real or immediate threat that the plaintiff will be wronged again." Id. at 111. Moreover, "each element of Article III standing 'must be supported in the same way as any other matter on which the plaintiff bears the burden of proof, '" with the same evidentiary requirements of that stage of litigation. Bennett v. Spear, 520 U.S. 154, 167-68 (1997) (quoting Lujan, 504 U.S. at 561). Thus, at the summary judgment stage, Legacy must "'set forth' by affidavit or other evidence 'specific facts' to survive a motion for summary judgment." Id. at 168 (quoting Fed.R.Civ.P. 56(c)).

         "[S]tanding is not dispensed in gross"; a party must have standing to challenge each "particular inadequacy in government administration." Lewis v. Casey, 518 U.S. 343, 357-58 & n.6 (1996). Thus, Legacy must show standing to challenge each alleged deficiency in Texas's remedial scheme. As we explain below, Legacy has established standing to challenge both Texas's requirement that MCOs fully reimburse FQHCs and the state's refusal to reimburse Legacy for non-emergency out-of-network services. But Legacy has not established standing to challenge SPA 16-02's lack of a requirement that Texas provide supplemental "wraparound" payments.


         Legacy has standing to challenge the Commission's in-network policy of requiring MCOs fully to reimburse FQHCs. It has shown injury in fact, causation, and ...

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