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State v. United States Dep't of Health and Human Services

December 15, 2008


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge


This case involves the administration of the State Children's Health Insurance Program ("SCHIP"), a joint federal-state program which provides insurance to children from low-income families who exceed Medicaid income limitations, but nonetheless may be unable to afford health insurance. In providing coverage to these children, the statute requires that such coverage not "crowd out" private insurance that the children might have or otherwise obtain. On August 17, 2007, the Centers for Medicare and Medicaid Services ("CMS")-a branch of the U.S. Department of Health and Human Services ("HHS")-wrote to state health officers (the "SHO Letter"), enumerating certain standards by which CMS would review state SCHIP plan amendments when states seek to insure children from families whose income is higher than 200% of the Federal Poverty Level ("FPL"). The SHO Letter also stated that state plans in excess of that level had one year to come into compliance with the SHO Letter standards.

Plaintiffs seek declaratory and injunctive relief in response to the SHO Letter, which they claim unlawfully promulgated new requirements. New York, Illinois, Maryland, and Washington ("Plaintiffs") filed their original complaint on October 4, 2007 against HHS under Title XXI of the Social Security Act, 42 U.S.C. §§ 1397aa-jj, the Declaratory Judgment Act, 28 U.S.C. §§ 2201, 2202, and the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 500-706. Plaintiffs amended their complaint on March 13, 2008. The parties now cross move for relief.

Defendant moves to dismiss the case under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), claiming that this Court lacks subject matter jurisdiction because: (1) the case is unripe; (2) the SCHIP judicial review provisions authorize direct appellate review, rather than review by a district court; and (3) the SCHIP judicial review provisions preclude review under the Administrative Procedure Act. Additionally, Defendant argues that even if the Court finds that it has jurisdiction, Plaintiffs' case should be dismissed because the SHO Letter is a policy statement, not a legislative rule, and thus CMS did not have to promulgate the standards in the letter through the APA's notice-and-comment rulemaking procedures. See 5 U.S.C. § 553 (rulemaking procedures and exceptions for interpretive rules and general policy statements).

Plaintiffs move for partial summary judgment under Rule 56 of the Federal Rules of Civil Procedure on their claims that CMS improperly issued the SHO Letter without undertaking a required rulemaking procedure. Plaintiffs ask the Court to: (1) declare that the SHO Letter represents legislative rulemaking subject to the notice-and-comment requirements of 5 U.S.C. § 553; (2) find that CMS failed to follow the appropriate notice-and-comment requirements; (3) enjoin CMS from disapproving or giving effect to a disapproval of any state SCHIP plan or plan amendment using the criteria in the SHO Letter; and (4) direct CMS to review state SCHIP plan amendments using only properly promulgated regulations.

For the reasons that follow, the Court finds that the case is not ripe for review, that the SCHIP judicial review provisions preclude review of this matter in federal district court, and that Plaintiffs cannot sue under the APA because they have another adequate method of review in the appeals courts. The Court notes that dismissal at this stage does not in any way connote approval of the SHO Letter, its contents, or the method of its promulgation and implementation. The Court does not reach the merits of Plaintiffs' claims-that CMS improperly promulgated the standards in the SHO Letter-because Plaintiffs have not exhausted their administrative remedies and Plaintiffs suffer no hardship from the temporary withholding of judicial review.

Each state is free to challenge the SHO Letter, as well as the methodology of its promulgation and implementation, when CMS completes its review of any state plan submitted for CMS's approval, or when CMS attempts to revoke a state plan for non-compliance with the appropriate statutory and regulatory requirements. Further, the Court notes that granting the relief Plaintiffs seek does not vindicate any state rights, but rather only delays review of CMS's actions, including the SHO Letter. HHS would appeal a decision in favor of the states, and if the Circuit Court affirmed, the SHO Letter would be invalidated. But that would not result in the approval of any state plan because CMS would be able-even without regard to the SHO Letter-to reach a decision adverse to the states for not having in place reasonable anti-crowd-out provisions. It would be simpler, more efficient, and more economical for CMS to review each states' plan upon the time schedule statutorily mandated, and then for the states to seek the statutorily preferred appellate review, on a full administrative record, on precisely what CMS did and the reasons for its actions. Accordingly, Defendant's motion to dismiss is GRANTED and the Plaintiffs' motion for summary judgment is DENIED.


I. The SCHIP Program

A. Procedures for State-Plan Approval

Congress enacted SCHIP in the Balanced Budget Act of 1997, Pub. L. 105-33, 111 Stat. 251, under Title XXI of the Social Security Act, 42 U.S.C. §§ 1397aa--1397jj. Its purpose is to "provide funds to States to enable them to initiate and expand the provision of child health assistance to uninsured, low-income children in an effective and efficient manner that is coordinated with other sources of health benefits coverage for children." 42 U.S.C. § 1397aa(a). The program, unlike Medicaid, is not an entitlement to individuals, but rather a block grant to the states. SCHIP has often been referred to as an "administrative experiment in federalism." See, e.g., Robert F. Rich, et al., The State Children's Health Insurance Program: An Administrative Experiment in Federalism, 2004 U. Ill. L. Rev. 107 (2004). SCHIP essentially creates a cooperative relationship between the federal and state governments; the federal government provides the basic policy framework and primary funding, while the states direct program administration.

Congress made clear that one of its concerns was that the SCHIP money not be used for children who already had coverage but might opt for a state plan because of reduced rates. See 42 C.F.R. § 457.805 ("The State plan must include a description of reasonable procedures to ensure that health benefits coverage provided under the State plan does not substitute for coverage provided under group health plans."). The program was designed to prevent "crowd out," and the chief targets of the plan were to be uninsured children from low-income families. Id. § 457.1. The SCHIP legislation requires the states to submit a state plan setting forth how the state intends to use the SCHIP funds. CMS approves or disapproves the plan. See 42 U.S.C. § 1397aa(b). States may challenge CMS's rejection of a plan in an appeal to the appropriate circuit court. See 42 U.S.C. § 1316(a)(3); see also Background Section B infra p. 6-7.

Among other information, the state plan must include a description of procedures the state intends to implement to ensure that the only children furnished assistance are those whose family income is either: (1) at or below 200% of the federal poverty level (FPL),*fn2 or (2) no more than 50 percentage points higher than that state's Medicaid eligibility threshold in 1997 (which varies among states but is generally below 200% of the FPL). Id. at §§ 1397bb(b)(3)(A), 1397jj(b)(1), 1397jj(c)(4). Specifically, SCHIP's implementing regulations require states to adopt "reasonable procedures" to prevent substitution, or crowd out, of private health plans. 42 C.F.R. § 457.805. States have adopted different procedures to prevent substitution, and CMS's authority to expand and require specific procedures is an issue in this case.

CMS allocates funds to states according to a statutory formula that takes into account the number of children in low-income households, the number of such children who are uninsured, and a geographic cost factor for health care wages. 42 U.S.C. § 1397dd. As of March 2008, Congress had provided nearly $40 billion for the program. SCHIP, however, is a jointly funded program: it requires states to provide some matching funds in order to receive federal dollars. Specifically, the federal matching rate varies among states from 65% to 83%. See 42 C.F.R. 457.622.

A state implements SCHIP by choosing one of three options: creating a separate, stand-alone health insurance program; expanding its existing Medicaid program; or a combination of the two options. 42 U.S.C. § 1397aa(a); 42 C.F.R. § 457.70. A state that expands its Medicaid program must provide SCHIP enrollees with the same benefits included in its Medicaid program. States that create stand-alone or combination programs have a variety of benefit-package options. 42 U.S.C. § 1397cc(a)--(d). States are also granted latitude, within certain prescribed federal guidelines that vary depending on family income levels, to set cost-sharing requirements and premium levels. Id. § 1397cc(e).

States are charged with setting their own eligibility standards, although there are broad federal eligibility guidelines. As previously stated, states must limit eligibility to children whose "family income" is either at or below 200% FPL or no more than 50 percentage points higher than that state's 1997 Medicaid eligibility threshold. But the term "family income" is loosely defined as "income as determined by the State for a family as defined by the State." 42 C.F.R. § 457.10 (emphasis added).

As of March 2008, at least 17 states had taken advantage of this broad language to widen their eligibility standards by disregarding substantial portions of a family's earnings, thereby opening up their SCHIP programs to higher-income families. (See Memorandum of Law in Support of Defendant's Motion to Dismiss ("HHS Mem.") at 4.) This is the subject of Defendant's main objection. As HHS notes, "plaintiff New York . . . is presently seeking to expand coverage to children with effective family incomes of up to 400 percent of the FPL . . . by amending its definition of 'family income' to exclude income up to 200 percent of the FPL." Id.

B. Administrative Review and Appeal Procedures

The SCHIP statute incorporates by reference the administrative and judicial review provisions available to Medicaid under 42 U.S.C. § 1316. See 42 U.S.C. § 1397gg(e)(2). CMS has 90 days to disapprove a state plan after submission. 42 C.F.R. § 457.160. A state plan is considered approved after 90 days unless CMS sends notice of disapproval or notice that it needs additional information from the state.*fn3 Id. Where CMS disapproves a state's SCHIP plan, the state may request reconsideration within 60 days after the disapproval. 42 U.S.C. § 1316(a)(2); 42 C.F.R. § 457.203(a). Following reconsideration, the state may challenge the agency's decision in a full hearing on the record. 42 C.F.R. § 457.203(b)-(c). If the CMS Administrator determines that the disapproval was incorrect, CMS will pay the incorrectly denied funds in a lump sum. Id. § 457.203(d).

CMS also has the authority to initiate non-compliance proceedings against states when the Administrator determines that a state plan no longer meets CMS requirements. See 42 C.F.R. § 457.204 Before CMS may withhold funds, however, a state is entitled to a hearing. 42 U.S.C. §§ 1397ff(c), (d); 42 C.F.R. §§ 457.203, 457.204. CMS generally does not hold a hearing until attempting to resolve the issue through informal negotiations. 42 C.F.R. § 457.204(a)(2). If a hearing is necessary and the Administrator finds that the state plan is in substantial non-compliance, CMS may withhold future payments. Id. § 457.204(d).

Appeals of the Administrator's final determination of a state plan are taken directly to "the United States court of appeals for the circuit in which such State is located." 42 U.S.C. § 1316(a)(3).

II. The State Health Official (SHO) Letter of August 17, 2007

The dispute in this case flows from CMS's letter to state health officials on August 17, 2007, which "clarifie[d]" how CMS would apply the regulatory requirements when reviewing state requests to extend SCHIP coverage to children in families earning 250% or higher of FPL. (See Plaintiffs' Amended Complaint ("Am. Compl.") Ex. B at 1.) The letter, signed by CMS Director Dennis G. Smith, noted that existing regulations at 42 C.F.R. § 457.805 provide that states must have "reasonable procedures" to prevent substitution of SCHIP coverage for private health coverage.

The SHO Letter specified five types of crowd-out strategies that states have adopted: (1) imposing waiting periods between dropping private coverage and SCHIP enrollment; (2) imposing cost-sharing at approximate amounts to the cost of private coverage; (3) monitoring health insurance status at the time of application; (4) verifying family insurance status through databases; and (5) preventing employers from changing dependent coverage policies that would favor a shift to public coverage. (Id.) The SHO Letter did not specify whether any state had adopted all five strategies. Nonetheless, CMS's letter stated that the agency was:

[C]larifying that the reasonable procedures adopted by States to prevent crowd-out pursuant to 42 C.F.R. 457.805 should include the above five general crowd-out strategies with certain important components. As a result, we will expect that, for States that expand eligibility above an effective level of 250 percent of the FPL, the specific crowd-out strategies identified in the State child health plan to include all five of the above crowd-out strategies, which incorporate the following components as part of those strategies: (Id. at 1-2.)

The three components listed were: (1) the level of cost-sharing imposed on SCHIP beneficiaries "must" not be more favorable than the cost-sharing under the private plan by more than 1% of family income, unless the plan's cost was set at the 5% family cap; (2) the state "must" establish a minimum one-year period of uninsurance, with no exceptions listed; (3) monitoring and verification "must" include information about the availability of coverage from non-custodial parents. (Id. at 2.)

Additionally, the SHO Letter noted that CMS would "ask" states that were applying to expand SCHIP programs to "higher income populations" to make the following assurances: (1) that the state has enrolled at least 95% of the children in households earning below 200% of FPL who are eligible for either SCHIP of Medicaid; (2) that the number of children in the target population insured through private employers has not dropped by more than 2% over the prior 5 years; ...

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