JORDAN, Circuit Judge.
This appeal arises from a challenge to the approval by the Secretary of the United States Department of Health and Human Services ("the Secretary" or "HHS") of a 2008 amendment to Pennsylvania's state plan for administering its Medicaid program. Numerous private nursing facilities that provide services to Medicaid recipients argue that the state plan amendment, or "SPA," violates Title XIX of the Social Security Act, 42 U.S.C. §§ 1396 et seq. (the "Medicaid Act" or the "Act"). Specifically, they contend that the SPA adjusted Pennsylvania's method for determining Medicaid reimbursement rates to private nursing facilities for the 2008-09 fiscal year without considering quality of care, which they say violates 42 U.S.C. § 1396a(a)(30)(A) ("Section 30(A)"), and without satisfying the public process requirements of 42 U.S.C. § 1396a(a)(13)(A) ("Section 13(A)"). To remedy those alleged violations, Plaintiffs invoke the Administrative Procedure Act (the "APA") and the Supremacy Clause of the Constitution,
Medicaid is "a cooperative federal-state program that provides medical care to needy individuals." Douglas v. Indep. Living Ctr. of S. Cal., ___ U.S. ___, 132 S.Ct. 1204, 1208, 182 L.Ed.2d 101 (2012). States that choose to participate in the program are responsible for developing and implementing a state Medicaid plan and have considerable control over the plan's details and administration. Pa. Pharmacists Ass'n v. Houstoun, 283 F.3d 531, 533 (3d Cir.2002) (en banc) (citing Wilder v. Va. Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 110 L.Ed.2d 455 (1990)). In order to qualify for federal funding, however, a state plan must comply with the requirements of the Medicaid Act. 42 U.S.C. § 1396a (defining the requirements a state plan must satisfy for approval); id. § 1396b(a) (providing for federal payments "to each [s]tate which has a plan approved"). Those requirements include, among other things, the so-called "equal access provision" of Section 30(A), which mandates that a state plan provide "methods and procedures" to assure that the state pays participating nursing facilities and other Medicaid providers at rates that are consistent with efficiency, economy, quality of care, and adequate access to providers by Medicaid beneficiaries. 42 U.S.C. § 1396a(a)(30)(A); see Ark. Med. Soc'y, Inc. v. Reynolds, 6 F.3d 519, 522 (8th Cir.1993) (explaining that Section 30(A) "is typically called the equal access provision"). State plans must also satisfy Section 13(A) of the Act, which requires that rates of payment to hospitals and nursing facilities be determined using a public process similar to notice-and-comment rulemaking. 42 U.S.C. § 1396a(a)(13)(A).
CMS is the division of HHS tasked with ensuring that state plans comply with those and other requirements of the Medicaid Act. States must submit their proposed plans to CMS, and the agency must review each plan, "make a determination as to whether it conforms to the requirements for approval," 42 U.S.C. § 1316(a)(1), and "approve any plan which fulfills the conditions specified" in the Medicaid Act, 42 U.S.C. § 1396a(b). See also 42 C.F.R. § 430.12 (describing the submittal of state plans to CMS). A state may later amend an approved plan, but any amendments must also be submitted to CMS, and the agency must "determine whether the [amended] plan continues to meet the requirements for approval." 42 C.F.R. § 430.12(c)(2)(i). States are required to amend their plans "whenever necessary to reflect," among other things, "[m]aterial changes in State law, organization, or policy, or in the State's operation of the Medicaid program." Id.
Under that methodology, Pennsylvania's reimbursement rates to nursing facilities have risen steadily each year, and, beginning in 2000, the state grew concerned that the pace of that inflation was creating unsustainable costs. In June 2005, DPW announced that reimbursement rates had increased by 29.4% over the previous five years, and that, unless rates were somehow limited, there would be "insufficient funds available to make case-mix payments to [Medicaid] nursing facilities in accordance with the existing case-mix payment methodology." 35 Pa. Bull. 3267 (June 4, 2005). Therefore, after soliciting public comments and receiving input from Pennsylvania's Medical Assistance Advisory Committee,
As it has come to be used in Pennsylvania, a BAF is a fraction by which each provider's case-mix payment rate is multiplied, thereby reducing the reimbursement rate by a certain percentage. For example, if a case-mix rate of $100 was multiplied by a BAF of 0.900, the resulting reimbursement rate would be $90, or 10% less than what was called for by the case-mix calculation. Under the methodology proposed by DPW in 2005, the size of the BAF was to be dictated by the funds appropriated by the state legislature for payments to nursing facilities for the 2005-06 fiscal year. Application of the BAF would
Although DPW initially portrayed the BAF as "an interim measure, applicable only to the computation of payment rates for the 2005-2006 fiscal year," id., BAFs became a fixture of the state's rate-calculation methodology. For each year between 2005 and 2008, the Pennsylvania legislature authorized the use of a BAF, after which DPW submitted the BAF to CMS as a state plan amendment, and the agency approved the change. As a result, the case-mix rate calculated for each of those years was reduced by the amount defined in that year's BAF; the 2005-06 rates were reduced by 4.878%, the 2006-07 rates by 6.245%, and the 2007-08 rates by 6.806%, as compared to what the rates would have been without the application of the BAF.
On June 28, 2008, two days before the prior legislative authorization for a BAF was set to expire, DPW issued a public notice and request for comment announcing the state's intent to "authorize the continued use of a budget adjustment factor" in calculating nursing facility payment rates. 38 Pa. Bull. 3561 (June 28, 2008) (the "June Notice"). The June Notice explained that the continued use of a BAF would ensure that "the aggregate increase in the Statewide day-weighted average payment rate ... does not exceed the percentage rate of increase permitted by the funds appropriated for nursing facility services." Id. It defined the formula for calculating the BAF, which, as in years 2005 to 2008, was determined by the amount the legislature allocated for nursing facility reimbursements. The June Notice also projected that for fiscal year 2008-09 the BAF would be 0.90551, meaning that the per diem rates under the case-mix method would be decreased by 9.449% from what they would have been without the application of the BAF. Id. That projection was based on the funds allocated for nursing facility services in the governor's proposed budget.
A week later, on July 4, 2008, the Pennsylvania legislature passed "Act 44," 62 Pa. Stat. Ann. § 443.1(7)(iii). As if the bureaucrats were not already painfully thick in this field, the Act directed DPW to apply what it called a "revenue adjustment neutrality factor," which is another term for a BAF, in each fiscal year between July 1, 2008 and June 30, 2011. 62 Pa. Stat. Ann. § 443.1(7)(iii)(A). Act 44 also codified the methodology announced in the June Notice, and provided that "the revenue adjustment neutrality factor shall limit the estimated aggregate increase in the [s]tatewide day-weighted average payment rate ... to the amount permitted by the
On September 30, 2008, DPW submitted a proposed BAF for 2008-09, designated as "SPA 08-007," to CMS for approval.
In November 2008, DPW published a public notice that included the information it had provided to CMS. 38 Pa. Bull. 6343 (Nov. 15, 2008) (the "November Notice"). The November Notice announced that, based on the amounts appropriated by the state legislature, the BAF for the 2008-09
Meanwhile, CMS was reviewing SPA 08-007. Keith Leuschner, the CMS employee responsible for reviewing Pennsylvania's SPAs, contacted DPW in November 2008 to clarify what effect the SPA would have on the federal dollars flowing to Pennsylvania. In particular, Leuschner was concerned because the form DPW submitted with its SPA showed negative numbers in the "federal budget impact" box for fiscal years 2008 and 2009, which suggested "that nonpublic nursing facilities would be paid less [under the amended plan] than if the state continued using the existing payment methodology." (J.A. at 180.) Leuschner asked DPW if that was the case, and the agency responded that the numbers on the form were actually incorrect, and "that nonpublic nursing homes were going to be paid more under the proposed rate methodology for state rate-setting year 2008-2009 than they would have been paid if the existing rate structure were not changed." (J.A. at 180.) To demonstrate that assertion, DPW provided a spreadsheet, which Leuschner understood to be comparing the rates for the 2008-09 fiscal year calculated "under Pennsylvania's proposed methodology" with those "calculated in accordance with the methodology Pennsylvania had in place under the existing and (at that time approved) rate-setting method."
In March 2009, DPW published a final public notice announcing the finalized annual per diem payment rates, after the application of the BAF, for private nursing facilities for 2008-09. 39 Pa. Bull. 1596 (Mar. 28, 2009). It then sent letters to all participating nursing facilities to notify them of their final individualized rates.
Following DPW's publication of the final payment rates, Plaintiffs filed timely state administrative appeals with DPW's Bureau of Hearings and Appeals (the "BHA") challenging those rates and asking that DPW "recalculate them consistent with [the] law." (Administrative Appeal, Doc. 20, Ex. A, at 14.) See 55 Pa.Code §§ 41.5 (giving BHA "exclusive jurisdiction over provider appeals") & 41.31 (allowing "[a] provider that is aggrieved by an agency action" to "appeal and obtain review of that action by the [BHA] by filing a request for hearing"). They claimed that DPW had violated the Medicaid Act and its own regulations by providing inadequate notice of and public process for the proposed rate changes, by retroactively setting the 2008-09 rates, and by failing to provide CMS with any information on which that agency of the federal government could base its conclusion that SPA 08-007 satisfied Section 30(A)'s requirements. In particular, Plaintiffs alleged that there was no evidence of any consideration of the SPA's effect on quality of care.
In October 2009, with those state administrative appeals pending, Plaintiffs filed the present action in the United States District Court for the Middle District of Pennsylvania, bringing claims for declaratory and injunctive relief against the Secretary of HHS, the Administrator of CMS, and the Secretary of DPW. Specifically, the complaint asserted a claim under the APA against the Federal Defendants, seeking to have HHS's approval of SPA 08-007 set aside as being contrary to law. The complaint also included a claim under the Supremacy Clause against the State Defendant, seeking to bar the application of SPA 08-007 in the determination of payment rates. Those claims were primarily based on the Federal and State Defendants' alleged violations of Section 30(A) and Section 13(A) in their development and approval of the 2008-09 state plan amendments.
Both the Federal and the State Defendants filed timely motions to dismiss Plaintiffs' claims. The Federal Defendants argued that the APA claim was barred by sovereign immunity, but the District Court disagreed, concluding that the claim fell within the scope of the waiver of federal sovereign immunity provided for in the APA.
The parties proceeded to discovery, and subsequently filed cross motions for summary judgment on the remaining claims. The District Court granted the Federal and State Defendants' motions on July 24, 2012,
On appeal, Plaintiffs ask that we reverse the District Court's orders and enter judgment in their favor on all counts. They repeat their contention that HHS's approval of SPA 08-007,
Plaintiffs argue that HHS's approval of SPA 08-007 was improper for two reasons.
The District Court rejected both lines of argument. According significant deference
"We apply de novo review to a district court's grant of summary judgment in a case brought under the APA, and in turn apply the applicable standard of review to the underlying agency decision." Pa. Dep't of Pub. Welfare v. Sebelius, 674 F.3d 139, 146 (3d Cir.2012) (internal quotation marks omitted). Section 706 of the APA governs our review of the agency action. CBS Corp. v. FCC, 663 F.3d 122, 137 (3d Cir.2011). It provides that we shall "hold unlawful and set aside agency action, findings, and conclusions" that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). Under that restricted standard of review, we must consider whether the agency "examine[d] the relevant data and articulate[d] a satisfactory explanation for its action," while being careful "not to substitute [our own] judgment for that of the agency." Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983); see also Prometheus Radio Project v. FCC, 373 F.3d 372, 389-90 (3d Cir.2004) ("[W]e must ensure that, in reaching its decision, the agency examined the relevant data and articulated a satisfactory explanation for its action, including a `rational connection between the facts found and the choice made.'" (quoting State Farm, 463 U.S. at 43, 103 S.Ct. 2856)). An agency action may be arbitrary and capricious "if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." State Farm, 463 U.S. at 43, 103 S.Ct. 2856.
In determining whether any of those circumstances exist, we are conscious of our responsibility to "uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned." Id. (quoting Bowman Transp. Inc. v. Ark.-Best Freight Sys., 419 U.S. 281, 286, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974) (internal quotation marks omitted)). Nevertheless, we should not "supply a reasoned basis for the agency's action that the agency itself has not given." Id. (internal quotation marks omitted). Our review must also be based on "the administrative record [that was] already in existence" before the agency, not "some new record made initially in the reviewing court" or "post-hoc rationalizations" made after the disputed action. Rite Aid of Pa., Inc. v. Houstoun, 171 F.3d 842, 851 (3d Cir.1999) (internal quotation marks omitted).
The agency action at issue here is HHS's approval of Pennsylvania's SPA 08-007, which Plaintiffs argue was arbitrary and capricious because there was insufficient evidence in the administrative record that, as required by Section 30(A), DPW had considered the SPA's impact on quality of care, or that it had followed the
Under the Supreme Court's decision in United States v. Mead Corp., "administrative implementation of a particular statutory provision qualifies for Chevron deference when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority." 533 U.S. 218, 226-27, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). As the United States Court of Appeals for the Ninth Circuit recently explained, the Supreme Court "[a]rguably... has already concluded that SPA approvals meet" that standard, and thus are entitled to Chevron deference. Managed Pharmacy Care v. Sebelius, 716 F.3d 1235, 1246 (9th Cir.2013). In Douglas v. Independent Living Center of Southern California, Inc., the Supreme Court said that "[t]he Medicaid Act commits to the federal agency the power to administer a federal program," and that, in approving a SPA, "the agency has acted under [that] grant of authority." ___ U.S. ___, 132 S.Ct. 1204, 1210, 182 L.Ed.2d 101 (2012). The Douglas Court noted that the agency's approval "carries weight," especially when "the language of the particular provision at issue ... is broad and general, suggesting that the agency's expertise is relevant in determining its application." Id. Although the Court stopped short of explicitly holding that the Chevron framework applies to SPA approvals, those statements in dicta strongly suggest as much, and we "do not view them lightly." Galli v. N.J. Meadowlands Comm'n, 490 F.3d 265, 274 (3d Cir. 2007) (alteration and internal quotation marks omitted); see also id. ("To ignore what we perceive as persuasive statements by the Supreme Court is to place our rulings ... in peril.").
In addition to that suggestion from the Supreme Court, some of our sister circuits have held that SPA approvals are the type of agency action entitled to Chevron deference under Mead, and no circuit court precedent holds to the contrary. In Managed Pharmacy Care, for example, the Ninth Circuit concluded that "Congress explicitly granted the Secretary authority to determine whether a State's Medicaid plan complies with federal law," and that "[i]t is well within the Secretary's mandate
We agree. The Medicaid Act expressly states that the Secretary must "approve any plan which fulfills the conditions specified" in the statute. 42 U.S.C. § 1396a(b). Through that provision, Congress delegated to the agency the responsibility to make interpretive decisions regarding which state plans satisfy the Act's requirements. Those decisions carry the force of law, as HHS is prohibited from making payments to states whose plans do not comply with the Act, 42 U.S.C. § 1396c,
With that in mind, we turn to HHS's approval of SPA 08-007, given the strictures of Section 30(A) and Section 13(A).
Section 30(A) requires that a state Medicaid plan:
42 U.S.C. § 1396a(a)(30)(A) (emphasis added). Put more simply, it mandates that a state plan include "methods and procedures" that "assure that payments to providers produce four outcomes: (1) `efficiency,' (2) `economy,' (3) `quality of care,' and (4) adequate access to providers by Medicaid beneficiaries." Pa. Pharmacists Ass'n, 283 F.3d at 537 (quoting 42 U.S.C. § 1396a(a)(30)(A)). Section 30(A) is one of the statutory prerequisites a state plan must satisfy to receive federal approval, and thus federal funding. See 42 U.S.C. § 1396a(a) (defining the requirements that a state plan "must" satisfy); id. § 1396a(b) ("The Secretary shall approve any plan
We have considered Section 30(A)'s requirements on two previous occasions. In Rite Aid of Pennsylvania v. Houstoun, we held that it mandates "substantive compliance" with the four specified factors, but it "does not impose any particular method or process for getting to that result." 171 F.3d at 851. Rather, in contrast to an earlier and now-repealed provision of the Medicaid Act known as the "Boren Amendment," which "specifically requir[ed] that states take into account certain findings" and make particular assurances,
But while those prior interpretations help guide our analysis, they do not necessarily control the outcome here. Under Chevron, if HHS applied a different but nonetheless permissible interpretation of Section 30(A), then we must defer to that interpretation, even if it conflicts with our precedent. As the Supreme Court has made clear, a judicial precedent cannot displace a conflicting agency construction unless the statute "unambiguously forecloses the agency's interpretation." See Brand X, 545 U.S. at 982-83, 125 S.Ct. 2688. The question before us is therefore whether HHS's approval of SPA 08-007 was based on a permissible construction of Section 30(A), not whether the SPA satisfies our prior interpretation of the statute. Cf. Managed Pharmacy Care, 716 F.3d at
To answer that question, we must consider the basis HHS had for concluding that Section 30(A) is satisfied, which requires that we examine the record it had before it during the SPA approval process. Rite Aid, 171 F.3d at 851 ("[I]n reviewing section 30(A) issues a court must confine itself to the agency's administrative record...."). That record is remarkably thin, especially when compared to the administrative records developed in other Section 30(A) challenges. In Rite Aid, for example, the state amended reimbursement rates to pharmacies after conducting cost studies of pharmacy pricing data, considering input from interested parties, seeking additional data on the reimbursement rates of third-party payors, and comparing Pennsylvania's rates to the rates in neighboring states. Id. at 848; see also, e.g., Long Term Care Pharmacy Alliance v. Ferguson, 362 F.3d 50, 52 (1st Cir.2004) (noting that the state agency revised rates after it "held hearings ... and sought data from Massachusetts pharmacies as to their costs of acquisition of individual drugs"). Here, on the other hand, there is no indication in the record as to how Pennsylvania settled on the particular rate-calculation methodology proposed in SPA 08-007. Although DPW explained that the 2008-09 BAF was intended to limit payments to the amount appropriated by the state legislature, that explanation is the same as the one offered for BAFs overall. It reveals nothing about how the particular BAF proposed in SPA 08-007 — which differed from the ones imposed in years past and required independent approval — was selected, other than that it was based on legislative appropriations for that fiscal year. Absent information on how the appropriated amount was determined, or a reasoned explanation for why that amount allows for rates that are "consistent with" efficiency, economy, quality of care, and adequate access, DPW's description of the BAF methodology provides no insight into whether the SPA complies with Section 30(A). The state gave no such information, and HHS did not request any. There are no studies or analyses of any kind in the record, and the only "data" DPW provided was a spreadsheet comparing rates under the proposed SPA with those paid the previous year. HHS therefore had to base its approval decision solely on the proposed methodology itself, a comparison to the previous year's rates, and DPW's unsupported assertion that the new BAF would permit "payment rate increases sufficient to assure that consumers will continue to have access to medically necessary nursing facility services." (J.A. at 191.)
Notwithstanding the sparseness of the administrative record, the Federal Defendants argue that it supports the Secretary's approval of SPA 08-007. Specifically, they say that HHS could properly conclude that the SPA satisfies Section 30(A) for three reasons: first, payments to nursing facilities increased slightly from the previous fiscal year under the proposed SPA, second, Pennsylvania had previously employed BAFs without harming quality of care, and, third, other statutory provisions independently assure that Medicaid recipients will receive quality care. The Federal Defendants focus particularly on the overall increase in payments, emphasizing that "the budget adjustment factor did not cut payment rates in absolute terms, but rather served to moderate the rate of increase in provider payments under the case-mix system and thereby avoid an unsustainable pace of inflation." (U.S. Br. at 19.)
But while that assertion is undisputed, and reducing unsustainable inflation is certainly a laudable and entirely legitimate
The case-mix method sets per diem rates for each nursing facility by considering, among other things, the projected acuity level of Medicaid recipients and the costs "which are necessary and reasonable for an efficiently and economically operated nursing facility to provide services" to those patients. 55 Pa.Code § 1187.2. In other words, it determines payments by considering the costs of providing care to Medicaid recipients, which means that the increase in payment rates is due, at least in part, to increasing costs. The contested SPA does not change that aspect of the rate calculation methodology; it just adds one last step: using a BAF to reduce the final per diem rates. The overall increase in payments therefore tells us nothing about the SPA's effect on quality of care; it just shows that the cost of caring for Medicaid recipients — as determined under the case-mix methodology — continues to go up.
To demonstrate that point, we need only look to DPW's proposed rate revisions for 2005. The BAF initially proposed for the 2005-06 fiscal year would have allowed rates to increase two percent from the previous year — twice the increase allowed by the 2008-09 BAF. After interested parties raised numerous criticisms about the proposed change, the legislature appropriated additional funds and the BAF was revised to allow for a 2.8% increase in rates. 35 Pa. Bull. 6233 (Nov. 12, 2005). DPW explained that the adjustment in the cap addressed quality of care concerns, and thus DPW effectively acknowledged that rates can increase in absolute terms while still being inadequate to meet recipients' needs. Id. at 6233-34.
In reviewing SPA 08-007, however, HHS not only treated the absolute increase as sufficient assurance of quality of care; it also seemed to misunderstand the SPA's effect on Pennsylvania's rate calculation methodology. Based on a spreadsheet showing the one percent increase in payments from the previous year, the CMS employee responsible for reviewing the SPA concluded that rates would be higher under the SPA than they would have been "if the existing rate structure were not changed," in effect concluding that the SPA was responsible for the rate increase. (J.A. at 180.) But that cannot be the case, as the only change proposed in the SPA was the use of a BAF that more substantially reduced the case-mix rates than in any previous year. See supra note 12. Moreover, under the previously approved state plan, BAFs were authorized only through 2008, meaning that the approved rate-calculation method did not involve the use of any BAF for the 2008-09 fiscal year. Rates were therefore projected to increase in 2008-09 despite the proposed SPA, not because of it.
Pennsylvania's previous use of BAFs also provides no assurance that payments under SPA 08-007 would be consistent
The obvious flaw in that argument is that earlier adjustments do not reveal how a later and different adjustment may change a system already affected by the earlier adjustments. The fifth blow to a boxer's chin may be no more forceful than the previous four, but still be forceful enough to shatter a weakened jaw. And if the fifth blow is more forceful, a "no worries" mindset is even less warranted. The 2008-09 fiscal year's adjustment of 9.109% is not necessarily the same in its impact as the 6.806% adjustment that was proposed for 2007-08.
The Federal Defendants portray the continued use of BAFs generally as the key change proposed by SPA 08-007, and they treat BAFs as simply another variable in the case-mix methodology. Just as provider costs and resident acuity vary year to year under the approved rate-calculation formula, so too does the BAF, they imply. But a BAF is not simply a variable in an approved formula; each new BAF effectively establishes a new formula by which final rates are calculated, and hence is a "[m]aterial change[]" to the state's plan that requires its own approval. See 42 C.F.R. § 430.12(c)(1)(ii) (requiring a state to amend its plan when necessary to reflect "[m]aterial changes ... in the State's operation of the Medicaid program"). Depending on what the state legislature decides, a BAF could cut per diem rates by less than five percent, as it did in 2005, or by nine percent, as SPA 08-007 proposed, or potentially by even more. Yet under the Federal Defendants' reasoning, the use of any BAF, regardless of its size, could be justified by the fact that a previous, smaller adjustment to the cost-based rate proved acceptable. That conclusion is unsupported and unsupportable. A BAF is — at base — simply a budget-based cut to provider payments, and the size of that cut matters to Medicaid recipients and providers. Although it may be possible to decrease payments by nine percent, as SPA 08-007 does, and not affect quality of care, it is also very possible that care will be significantly and negatively affected, and the success of earlier cuts does not suggest otherwise. It is simply not reasonable to conclude that, because prior cuts did not seem too painful, a deeper cut would not hurt.
That leaves "independent statutory assurances" as the only basis, beyond DPW's bare assertion that consumers will still have access to Medicaid services, upon which HHS could conclude that the rate-calculation methodology of SPA 08-007 will produce payments that are consistent with quality of care. It is true, as the Federal Defendants note, that we have previously considered it reasonable for a state "to rely upon laws or regulations which independently ensure quality care" when setting payment rates under Section
Those assurances cannot be the sole basis for a rate revision, however, or Section 30(A)'s quality of care component — and HHS's review of that component — would be rendered meaningless. In Rite Aid, independent statutory assurances were but one feature of an ample record. See 171 F.3d at 848 (describing the studies conducted). We never suggested that, as long as states declare their insistence on quality care under other statutory provisions, reimbursement rates will be deemed to satisfy Section 30(A). Such an interpretation of Section 30(A) not only defies its plain language and nullifies HHS's review process under that provision, see Erie Cnty. Geriatric Ctr. v. Sullivan, 952 F.2d 71, 78 (3d Cir.1991) (declining to interpret the Medicaid Act in a manner that renders HHS review "hardly more than ministerial"), it also ignores fiscal realities by implying that a state can continue to assure quality of care by holding nursing homes to high standards while simultaneously underfunding them. In short, simply passing a statute saying that nursing homes will provide quality care does not make it so. Section 30(A) cannot reasonably be interpreted to mean that once a state has declared its commitment to quality of care, it need not consider that factor in setting its reimbursement rates.
Nor is a state's unsupported assertion that its plan meets Section 30(A)'s requirements, without any accompanying explanation or evidence, a sufficient basis to support HHS approval. In approving a state plan, HHS must be able to conclude that the plan "provide[s] such methods and procedures ... as may be necessary ... to assure that payments are consistent with efficiency, economy, and quality of care." 42 U.S.C. § 1396a(a)(30)(A). It is true that Section 30(A) grants states considerable latitude in selecting a method for calculating reimbursement rates, and that it "does not impose any particular method or process" for meeting its substantive requirements. Rite Aid, 171 F.3d at 851. But that latitude is not limitless. The reimbursement rates that states select affect the funding they are entitled to receive from the federal government, and material changes to those rates are thus subject to federal approval. Section 30(A) gives teeth to the approval process, allowing HHS to reject state plans that provide inadequate assurance that payments will be consistent with efficiency, economy, quality of care, and adequate access. See 42 C.F.R. § 430.15(c)(1) (providing that CMS, with HHS's approval, "retains authority for determining that proposed plan material is not approvable or that previously approved material no longer meets the requirements for approval"). And HHS has done so before, denying approval to state plan amendments when states "provide[] no ... data to substantiate [their] proposed rates," Alaska Dep't of Health & Soc. Servs. v. Ctrs. for Medicare & Medicaid Servs., 424 F.3d 931, 937 (9th Cir.2005), or when they provide "unsupported assertions" of compliance with Section
If we were to hold that DPW's bare assertion is sufficient to satisfy Section 30(A), we would make that provision a dead letter. The Medicaid Act requires that HHS "approve any plan which fulfills the conditions" imposed on state plans. 42 U.S.C. § 1396a(b). Therefore, in order for HHS to deny approval on Section 30(A) grounds, a plan must fail to fulfill its conditions. If a state could satisfy those conditions simply by asserting that it has done so, then HHS would lack the authority to disapprove a plan due to a state's lack of data or its "unsupported assertions." No court has countenanced such an impotence-inducing interpretation of Section 30(A). On the contrary, in holding that Section 30(A) confers no private right of action against the state under 42 U.S.C. § 1983, courts have repeatedly assured Medicaid providers and recipients that the quality of care and access requirements will not "go unenforced" because "HHS [is] responsible for ensuring that state plans are administered in accordance with these requirements." Pa. Pharmacists Ass'n, 283 F.3d at 543-44; see also Long Term Care Pharm. Alliance v. Ferguson, 362 F.3d 50, 56 (1st Cir.2004) ("Of course, the Secretary of HHS ... can enforce compliance with [Section 30(A)] and implementing regulations ... by disapproving a state plan...."). There is no suggestion in the text, its accompanying regulations, or the legislative history that HHS's oversight role in enforcing Section 30(A)'s requirements involves simply accepting a state's assertions at face value. See 42 U.S.C. § 1396a(b) (requiring the Secretary to approve plans that "fulfill[] the conditions specified in subsection (a)," which include Section 30(A)); 42 C.F.R. § 430.12(c) (requiring "[p]rompt submittal of amendments ... [s]o that CMS can determine whether the plan continues to meet the requirements for approval"); 146 Cong. Rec. H11682-02 (explaining that, even with the repeal of the Boren Amendment, the Medicaid Act ensures through Section 30(A) that states "provide adequate reimbursement"). Therefore, to the extent that HHS's approval of a SPA rests on such an interpretation, it is not a "permissible construction of the statute" entitled to deference under Chevron. 467 U.S. at 842-43, 104 S.Ct. 2778.
Of course, as the Federal Defendants rightly note, there is a bit more in the
In so holding, we do not imply that the payments Pennsylvania made to providers during the 2008-09 fiscal year were in fact inconsistent with any of Section 30(A)'s requirements. It is possible that the state was able to adjust the per diem rates by nine percent while maintaining quality care and ensuring adequate access to providers. But it is also possible that the state's nine percent adjustment threatened to harm care to Medicaid recipients in ways that previous, smaller adjustments had not. The problem here is that, at least so far as the record shows, HHS did not actually determine which scenario it confronted, and thus we are obligated to set its approval decision aside. 5 U.S.C. § 706(2) (requiring courts to "hold unlawful and set aside agency action ... found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law").
Plaintiffs also contend that HHS's approval of SPA 08-007 was arbitrary and capricious because the state failed to comply with the public process requirements of Section 13(A) and its accompanying regulations. They say that, although DPW provided numerous public notices of its proposed changes, only the June Notice was published before the SPA's effective date, and it inadequately described the new rate methodology and did not include certain details required by federal regulations. Specifically, they complain that the Notice was published only two days before the SPA's proposed effective date, did not include the specific BAF ultimately adopted, failed to provide an estimate of the expected increase or decrease in aggregate expenditures, and did not identify any local agencies where copies of the proposed changes would be available for public review. Because of those alleged deficiencies, they argue that HHS could not have lawfully accepted DPW's assurance that Pennsylvania had "provided advance notice of its intent to amend its State Plan." (J.A. at 192.)
Section 13(A) of the Medicaid Act requires that states seeking to change their rate-setting methodologies provide a public process under which:
42 U.S.C. § 1396a(a)(13)(A). In other words, a state must provide notice of "proposed rates together with the methodologies and justifications used to establish those rates," and give "concerned state residents ... a reasonable opportunity" to review and comment on them. Children's Seashore House v. Waldman, 197 F.3d 654, 659 (3d Cir.1999). Federal regulations provide further guidance on the substantive requirements of that notice. Under 42 C.F.R. § 447.205, notice of a "significant proposed change" in a state's rate-setting methodology must "[d]escribe the proposed change in methods and standards," "[g]ive an estimate of any expected increase or decrease in annual aggregate expenditures," "[e]xplain why the agency is changing its methods and standards," and "[i]dentify a local agency ... where copies of the proposed changes are available for public review." 42 C.F.R. § 447.205(a), (c). Section 447.205 also provides that the notice must "[b]e published before the proposed effective date of the change." Id. § 447.205(d)(1). Those notice requirements must be satisfied in order for a state plan amendment to receive approval. Id. § 447.253(h).
Our review of the state's compliance with Section 13(A) is circumscribed by HHS's decision to approve the SPA. As the Ninth Circuit has explained, "[o]ur duty is not to determine for ourselves whether the State's notice sufficiently complied with the statute and regulations;
Under that standard, we cannot say that it was arbitrary or capricious for HHS to accept DPW's assurance that it had provided adequate notice of the proposed changes to its rate-calculation methodology. Section 13(A) speaks very generally, requiring simply that the state provide notice and a "reasonable opportunity" for comment on proposed rate revisions. 42 U.S.C. § 1396a(a)(13)(A). The June Notice did so, as it put providers and beneficiaries on notice of the estimated BAF for 2008-09, informed them as to how and why the BAF would be determined, and provided thirty days for submission of comments. See Evergreen Presbyterian Ministries, Inc. v. Hood, 235 F.3d 908, 920 (5th Cir.2000) (holding that a state satisfied Section 13(A)'s notice requirements because its notices "outlined the substance of the plan in sufficient detail to allow interested parties to decide how and whether to seek more information on the plan's particular aspects" (internal quotation marks omitted)), abrogation on other grounds recognized by Equal Access for El Paso, Inc. v. Hawkins, 509 F.3d 697, 704 (5th Cir.2007). Although the Notice was published just days before the SPA's requested effective date of July 1, 2008, the new rates were not actually implemented on that date; rather the SPA was made retroactively effective when it was approved in December 2008. Interested parties therefore had ample opportunity to review and comment on the proposed changes before they were finalized.
That DPW may have failed to literally comply with federal regulations regarding public notice does not make HHS's acceptance of its assurances arbitrary or capricious. According to Plaintiffs, the June Notice violated 42 C.F.R. § 447.205(c) by not providing a numeric estimate of the "expected increase or decrease in annual aggregate expenditures," and by not identifying any county offices where copies of the Notice would be available for public review. (Appellants' Opening Br. at 59.) Plaintiffs do not dispute, however, that the estimated BAF included in the Notice revealed the percentage by which rates would be adjusted, which HHS could reasonably have found to be an acceptable substitute to a dollar estimate of the state's aggregate expenditures. See Evergreen, 235 F.3d at 921 (permitting "the use of a percentage, rather than a dollar figure" in a state's notice of a proposed amendment).
We therefore agree with the District Court that HHS was neither arbitrary nor capricious in accepting DPW's assurance that the state had satisfied Section 13(A)'s public process requirements. That does not mean that Plaintiffs' dissatisfaction with the process at issue here is unreasonable. Their fundamental complaint — that DPW published an incomplete notice two days before the proposed effective date of a major change to the administration of its Medicaid program — is an accurate description of the state's actions. But HHS accepted those actions as being sufficiently compliant with federal law, and, particularly in light of the actual time the public had to consider the proposed change, we cannot say that the agency's conclusion was arbitrary or capricious on this record.
In addition to their claim against the Federal Defendants, Plaintiffs also seek declaratory and injunctive relief against the Secretary of DPW. The underlying substance of that claim is virtually identical to Plaintiffs' complaint against the Federal Defendants — they say that the rate revisions adopted by SPA 08-007 violate Section 30(A) and Section 13(A) of the Medicaid Act, and are thus preempted by federal law. Plaintiffs ask that we therefore enjoin the "continuing application" of the SPA (J.A. at 111), and that we require DPW to pay nursing facilities "using rates determined in accordance with the methods and standards specified in the [state plan] in effect prior to changes contained in the vacated amendments" (J.A. at 140).
The District Court rejected Plaintiffs' claim for several reasons. First, invoking Younger v. Harris, 401 U.S. 37,
The Eleventh Amendment to the Constitution provides that:
U.S. Const. amend. XI. The Supreme Court has made clear that, under that Amendment, "an unconsenting State is immune from suits brought in federal courts by her own citizens as well as by citizens of another State." Edelman v. Jordan, 415 U.S. 651, 663, 94 S.Ct. 1347, 39 L.Ed.2d 662 (1974) (citing Hans v. Louisiana, 134 U.S. 1, 10, 10 S.Ct. 504, 33 L.Ed. 842 (1890)). Therefore, unless Congress has "specifically abrogated" the states' sovereign immunity or a state has unequivocally consented to suit in federal court, we lack jurisdiction to grant relief in such cases. Blanciak v. Allegheny Ludlum Corp., 77 F.3d 690, 694 (3d Cir.1996); id. at 694 n. 2 ("[T]he Eleventh Amendment is a jurisdictional bar which deprives federal courts of subject matter jurisdiction.").
Suits against state officials are a different matter, however. Based on its landmark holding in Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908), the Supreme Court has permitted suits against state officials that seek prospective relief to end an ongoing violation of federal law. Pa. Fed'n of Sportsmen's Clubs, Inc. v. Hess, 297 F.3d 310, 323 (3d Cir.2002). The theory behind Young is that a state officer lacks the authority to enforce an unconstitutional state enactment, and thus the officer is "stripped of his official or representative character and becomes subject to the consequences of his individual conduct." Id. (quoting MCI Telecomm. Corp v. Bell Atl. Pa., 271 F.3d 491, 506 (3d Cir.2001)) (internal quotation marks omitted). Plaintiffs can therefore bring suit against state officers, but their remedies are limited to those that are "designed to end a continuing violation of federal law." Green v. Mansour, 474 U.S. 64, 68, 106 S.Ct. 423, 88 L.Ed.2d 371 (1985). Plaintiffs may not be awarded damages or other forms of retroactive relief. Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89, 103, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984).
Under that standard, the remedies Plaintiffs seek against the State Defendant cannot properly be characterized as claims for prospective relief "designed to end a continuing violation of federal law." Green, 474 U.S. at 68, 106 S.Ct. 423. Plaintiffs challenge the Secretary of DPW's development and application of SPA 08-007, which, as already extensively discussed, used a BAF to adjust reimbursement rates for the 2008-09 fiscal year.
A closer look at the requested remedy exposes the problem. Plaintiffs ask for an injunction that "requires" the Secretary of DPW "to assure" that the state "pays for nursing facility provider services" using the pre-SPA rates, and that "precludes" DPW "from any further reliance" on SPA
Plaintiffs' arguments to the contrary are unavailing. They make no attempt to argue that there is an ongoing violation of federal law; rather, they contend that, notwithstanding the Eleventh Amendment, they are entitled to "complete retroactive relief" against the State Defendant. (Appellants' Opening Br. at 68.) First, they suggest that Pennsylvania consented to suit in federal court by participating in Medicaid. That argument clearly fails, as the Supreme Court has previously held that a state's participation in Medicaid is not "sufficient to waive the protection of the Eleventh Amendment." Fla. Dep't of Health & Rehab. Servs. v. Fla. Nursing Home Ass'n, 450 U.S. 147, 150, 101 S.Ct. 1032, 67 L.Ed.2d 132 (1981).
Plaintiffs' second contention is that their claim under the APA can somehow include relief against the State Defendant. They say that, when a plaintiff's Supremacy Clause claims "are inextricably intertwined" with an APA claim, "the APA claim must be deemed to provide for and permit the related resolution" of the Supremacy Clause claims. (Appellants' Opening Br. at 69.) But the only support Plaintiffs provide for that truly novel proposition is the Supreme Court's recent decision Douglas v. Independent Living Center, which held nothing of the sort. Indeed, Douglas strongly suggested that once an APA claim arises due to a SPA approval, a Supremacy Clause claim challenging the SPA is unsustainable, because allowing "a Supremacy Clause action to proceed once the agency has reached a decision threatens potential inconsistency or confusion." 132 S.Ct. at 1210. In any event, Douglas certainly did not hold that the presence of a cause of action against a federal agency under the APA abrogates a
Finally, Plaintiffs say that "the State Defendant is an indispensable party" under Rule 19 of the Federal Rules of Civil Procedure. (Appellants' Opening Br. at 70.) Even if that were the case (and we express no opinion on the issue), being an indispensable party does not affect a state's sovereign immunity. Under the Eleventh Amendment, an unconsenting state cannot be sued in federal court by one of its citizens, regardless of whether the state is an essential party to the controversy.
Therefore, as Plaintiffs do not contend that there is an ongoing violation of federal law, we conclude that their claim against the State Defendant is barred by Eleventh Amendment sovereign immunity. Accordingly, since we can affirm on any basis supported by the record, Travelers Indem. Corp. v. Dammann & Co., Inc., 594 F.3d 238, 256 n. 12 (3d Cir.2010), we will affirm the District Court's grant of summary judgment to the State Defendant.
In sum, we will affirm in part and reverse in part the District Court's orders. Because the State Defendant is immune from Plaintiffs' requested relief under the Eleventh Amendment, we will affirm the District Court's orders entering judgment in favor of that defendant. The District Court erred, however, in granting summary judgment to the Federal Defendants. By approving SPA 08-007 without any assurance that the amended plan would produce payments that are consistent with quality of care, the Secretary of HHS acted arbitrarily and capriciously, and the APA requires that we set that approval aside. Accordingly, we will reverse the District Court's grant of summary judgment to the Federal Defendants and will remand the case with instructions to enter a declaratory judgment in favor of Plaintiffs on their claim that HHS's approval of SPA 08-007 was arbitrary and capricious under the APA.
