501 F.Supp.3d 830
N.D. Cal.2020Background
- Medicaid’s anti-reassignment provision (42 U.S.C. § 1396a(a)(32)) was enacted to curb “factoring” and related arrangements where third parties submit and collect Medicaid claims. 1977 amendments added “under an assignment or power of attorney or otherwise.”
- Many states (including California) long used payroll systems in home‑care programs that deduct voluntary withholdings (e.g., health insurance, union dues, taxes) from workers’ Medicaid reimbursements before issuing paychecks. CMS approved such practices in regulation in 2014.
- In 2018 CMS repealed the 2014 regulatory exception, concluding the statute unambiguously forbids states from processing those deductions and directing payments to third parties.
- California and other states sued under the Administrative Procedure Act; home‑care workers and unions intervened and asserted additional constitutional claims (equal protection, First Amendment). CMS moved to dismiss for lack of standing among other things.
- The district court held CMS’s statutory reading was legally erroneous or at best ambiguous, concluded CMS lacked a clear statutory mandate to ban the payroll practices, vacated the 2018 repeal, and remanded the question to CMS for reconsideration. The court denied CMS’s standing challenge and treated motions about intervenors’ constitutional claims as moot.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §1396a(a)(32) unambiguously bars state payroll deductions that remit voluntary withholdings to third parties | §1396a(a)(32) does not clearly cover payroll deductions; “or otherwise” should be read to target assignment‑type arrangements | The provision forbids any payment under the plan to anyone other than the patient or provider; “or otherwise” captures all non‑covered third‑party payments | Court: Text is at least ambiguous; legislative history and context support plaintiffs’ narrower reading; CMS’s assertion of clear statutory compulsion was erroneous |
| Whether CMS’s 2018 repeal violated the APA because it rested on a legally incorrect premise | CMS acted under a mistaken belief it was required by statute; action therefore arbitrary and must be set aside | CMS contends it lacked statutory authority to authorize the payroll practice | Court: Grant summary judgment to plaintiffs on APA claim; agency action not in accordance with law and vacated |
| Proper remedy and scope (vacatur vs. remand-only; nationwide vs. party‑limited relief) | Vacatur of the 2018 rule and remand to CMS for reconsideration; relief should restore long‑standing status quo | CMS urged limited vacatur or remand without vacatur | Court: Vacated the rule and remanded for agency reconsideration; nationwide vacatur appropriate here |
| Standing and procedural posture of intervenors’ constitutional claims | States and intervenors have Article III standing; constitutional claims raise plausible motivations (anti‑union) but agency should address statutory interpretation first | CMS moved to dismiss for lack of standing; sought dismissal of constitutional claims | Court: Denied CMS motion to dismiss for lack of standing; constitutional claims treated as moot given remand (motion to dismiss denied as moot) |
Key Cases Cited
- NLRB v. Brown, 380 U.S. 278 (1965) (agency decisions resting on erroneous legal foundations must be set aside)
- SEC v. Chenery Corp., 318 U.S. 80 (1943) (courts should remand to agencies to allow the agency to apply its expertise and justify policy choices)
- United States v. Johnson, 529 U.S. 53 (2000) (canon: listed exceptions inform the scope of a prohibition)
- Washington State Dept. of Social & Health Services v. Guardianship Estate of Keffeler, 537 U.S. 371 (2003) (interpretive principle on textual linkage such as “or otherwise”)
- Food Marketing Institute v. Argus Leader Media, 139 S. Ct. 2356 (2019) (textual clarity limits reliance on legislative history)
- Safe Air for Everyone v. EPA, 488 F.3d 1088 (9th Cir. 2007) (agency interpretations under APA and remand principles)
- Bostock v. Clayton County, 140 S. Ct. 1731 (2020) (discussion of plain‑meaning rules in statutory interpretation)