Christ the King Manor, Inc. v. Secretary United States Department of Health & Human Services

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

Nos. 12-3401 and 12-3501

_____________

CHRIST THE KING MANOR, INC.; BALDOCK

ASSOCIATES, d/b/a Baldock Health Care Center;

BONHAM NURSING CENTER; BRIARLEAF NURSING

AND CONVALESCENT CENTER, INC.; BROOKMONT

HEALTH CARE CENTER, LLC; CATHEDRAL VILLAGE;

ELLEN MEMORIAL HEALTH CARE CENTER-

HONESDALE, INC.; GREENLEAF NURSING AND

CONVALESCENT CENTER, INC.; HUMBERT LANE

ASSSOCIATES, d/b/a Humbert Lane Nursing and

Rehabilitation Center; JEWISH HOME OF GREATER

HARRISBURG; KINKORA PYTHIAN HOME

CORPORATION; KUTZTOWN MANOR, INC.;

MISERICORDIA CONVALESCENT HOME; CPSR

ASSOCIATES, LLC, d/b/a Mon Valley Care Center;

PICKERING MANOR HOME; 4144 SCHAPER AVENUE

OPERATING COMPANY, LLC, d/b/a Presque Isle

Rehabilitation & Nursing Center; RHEEMS NURSING AND

REHABILITATION, LLC; RESIDENCE FOR RENTAL

CARE AT SHADYSIDE, LTD; PERINI

SERVICE/SOUTHHAMPTON MANOR LIMITED, d/b/a

Shippensburg Health Care Center; SIEMON NURSING

HOME, INC.; WINDSOR, IN.C, d/b/a Snyder Memorial

Health Care Center; SOUTHWESTERN GROUP, LTD, d/b/a

Southwestern Nursing Center; CARBON-SCHUYLKILL

COMMUNITY HOSPITAL, INC., d/b/a St. Luke's Miners

Memorial Geriatric Center; SUSQUEHANNA VALLEY

NURSING AND REHABILITATION CENTER, LLC; 890

WEATHERWOOD LANE OPERATING COMPANY, LLC,

d/b/a The Rehabilitation and Nursing Center at Greater

Pittsburgh; WESTWOOD OPERARTOR, L.P., d/b/a Village

at Pennwood; MISERICORDIA CONVALESCENT HOME

v.

SECRETARY UNITED STATES DEPARTMENT OF

HEALTH AND HUMAN SERVICES; CHARLENE

FRIZZERA, in her official capacity as Acting Administrator

of the Centers for Medicare & Medicaid Services (CMS);

HARRIET DICHTER, in her official capacity as Secretary of

Public Welfare for the Commonwealth of Pennsylvania,

Department of Public Welfare

CHRIST THE KING MANOR, INC.; BONHAM NURSING

CENTER; CATHEDRAL VILLAGE; ELLEN MEMORIAL

HEALTH CARE CENTER-HONESDALE, INC.;

SUSQUEHANNA VALLEY NURSING AND

REHABILITATION CENTER, LLC;

RHEEMS NURSING & REHABILITATION, LLC

SOUTHWESTERN GROUP, LTD. d/b/a Southwestern

Nursing Center; CPSR ASSOCIATES, LLC d/b/a Mon

Valley Care Center; KINKORA PYTHIAN HOME CORP.;

SIEMON NURSING HOME, INC. d/b/a Siemon's Lakeview

Manor Estate; 4114 SCHAPER AVENUE OPERATING

CO., LLC d/b/a Presque Isle Rehabilitation & Nursing

Center; 890 WEATHERWOOD LANE OPERATING

COMPANY, LLC d/b/a The Rehabilitation and Nursing

2

center at Greater Pittsburgh; BRIARLEAF NURSING &

CONVALESCENT CENTER, INC.; BROOKMOMT

HEALTH CARE CENTER; KUTZTOWN MANOR, INC.;

GREENLEAF NURSING AND COVALESCENT CENTER;

WINDOSR, INC. d/b/a Snyder memorial Health Care Center;

CARBON-SCHUYKILL COMMUNITY HOSPITAL, INC.

d/b/a St. Luke's Miner's Memorial Geriatric Center;

PICKERING MANOR HOME,

Appellants in 12-3401

BALDOCK ASSOCIATES, d/b/a Baldock Health Care

Center; HUMBERT LANE ASSOCIATES, d/b/a Humbert

Lane Nursing and Rehabilitation Center,

Appellants in 12-3501

_______________

On Appeal from the United States District Court

for the Middle District of Pennsylvania

(D.C. No. 09-cv-02007)

District Judge: Hon. John E. Jones, III

_______________

Argued: May 31, 2013

Before: JORDAN and VANASKIE, Circuit Judges, and

RAKOFF*, Senior District Judge.

_______________

* Honorable Jed S. Rakoff, United States District

Court Senior Judge for the Southern District of New York,

sitting by designation.

3

(Filed: September 19, 2013)

_______________

Daniel K. Katirboff [ARGUED]

Capozzi & Associates

P.O. Box 5866

Harrisburg, PA 17110

Counsel for Appellants

Sheila Lieber

United States Dep’t of Justice

Federal Programs Branch

901 E Street, NW

Washington, DC 20004

Jeffrey E. Sandberg [ARGUED]

United States Dep’t of Justice

Appellate Section

950 Pennsylvania Avenue, NW

Washington, DC 20530

Counsel for Appellees

Patrick S. Crawley

Sean A. Kirkpatrick [ARGUED]

Office of Attorney General of Pennsylvania

Strawberry Square – 15th Fl.

Harrisburg, PA 17120

Counsel for Appellee Harriet Dichter

_______________

OPINION OF THE COURT

_______________

4

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, and seek declaratory and injunctive relief

against the Secretary, the Administrator of the Centers for

Medicare and Medicaid Services (“CMS”) (collectively, the

“Federal Defendants”), and the Secretary of Pennsylvania’s

Department of Public Welfare (“DPW” or the “State

Defendant”).1 The District Court granted in part the

1

When the nursing facilities first brought suit, the

Secretary of DPW was Estelle B. Richman, and the

Administrator of CMS was Charlene Frizzera. Since then,

others have served in both positions. The current Secretary of

DPW is Gary D. Alexander, and the current Administrator of

CMS is Marilyn Tavenner. Kathleen Sebelius has been the

Secretary of HHS since the complaint was filed.

5

Defendants’ motions to dismiss, and then entered summary

judgment in their favor on the remaining claims. For the

reasons that follow, we will affirm those rulings in part and

reverse them in part.

I. Background

A. Factual and Statutory Background

Medicaid is “a cooperative federal-state program that

provides medical care to needy individuals.” Douglas v.

Indep. Living Ctr. of S. Cal., 132 S. Ct. 1204, 1208 (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 (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

6

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.

Pennsylvania has elected to participate in the Medicaid

program, and it has designated DPW as the “single [s]tate

agency” responsible for creating and administering the state’s

Medicaid plan.2 See 42 U.S.C. § 1396a(a)(5) (requiring states

to establish or designate “a single [s]tate agency to administer

… the plan”). Since 1996, Pennsylvania, in accordance with

2

Recognizing that Pennsylvania is typically referred to

as a “Commonwealth,” we nonetheless use the term “state,”

for ease of reference.

7

an approved state plan, has paid participating nursing

facilities for Medicaid-related services using an “annual

prospective payment rate” often referred to as the “case-mix

rate.”3 See 55 Pa. Code § 1187.95 (“Prices will be set

prospectively on an annual basis … .”); Christ the King

Manor v. Pennsylvania, 911 A.2d 624, 630 (Pa. Commw. Ct.

2006) (“Since July 1996, DPW compensated both public and

private nursing facilities through its [Medicaid] program

under what is known as the case-mix payment system.”).

DPW calculates the “case-mix rate” using a complex formula

that produces an individualized per diem reimbursement rate

for each facility based on the “allowable costs” incurred by

facilities,4 the acuity level of residents,5 and other factors.

See 55 Pa. Code § 1187.96 (describing the “[p]rice and rate-

setting computations”). (See also J.A. at 232-242

(Pennsylvania’s State Plan).) The rate is effective for one

year, from July 1 through the following June 30, and it is

adjusted quarterly, based on resident acuity. 55 Pa. Code §

1187.95(a).

3

Pennsylvania uses the term “rate” in this context to

mean payment level, and we adopt that usage, even though

“rate” is often used to refer to “the proportion by which

quantity or value is adjusted.” See Black’s Law Dictionary

1289 (8th ed. 2004).

4

Pennsylvania defines “allowable costs” as costs

“which are necessary and reasonable for an efficiently and

economically operated nursing facility to provide services to

[Medicaid] residents.” 55 Pa. Code Ann. § 1187.2.

5

“Acuity” refers to the severity of illness a patient

experiences. See Stedman’s Medical Dictionary (28th ed.), at

22.

8

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,6 DPW proposed using a budget

adjustment factor, or “BAF,” to slow the increasing rates.

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 therefore “cap”

payments to providers based on budget allocation decisions

by the Pennsylvania legislature. 35 Pa. Bull. 6232 (Nov. 12,

6

States are required to “provide for a medical care

advisory committee … to advise the Medicaid agency

director about health and medical care services.” 42 C.F.R.

431.12(b).

9

2005). For the 2005-06 fiscal year, the BAF rate cap allowed

payments to increase by 2.8% from the previous year.

Although the BAF reduces the case-mix rate for a given year,

that does not necessarily mean that the adjusted rate will be

less than it was the previous year. As described above, rates

calculated using the case-mix methodology have steadily

increased each year. If an annual increase is larger than the

reduction imposed by the BAF in that year, then rates can still

increase in absolute terms. For example, if rates increased

under the case-mix methodology by five percent from one

year to the next, and then the BAF reduced rates by three

percent, there would still be an overall increase in rates from

the previous year.

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.7

7

The BAFs for those years were 0.95122, 0.93755,

and 0.93194, respectively. Because the annual case-mix rate

is multiplied by the BAF, it is reduced by a certain

percentage. For example, if you multiply a case-mix rate by

0.95122, you arrive at a figure that is 95.122% of the original

10

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 bureaucratese 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

rate. That decrease amounts to the 4.878% reduction

described above.

11

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 funds appropriated by the General Appropriations Act for

those fiscal years.” Id. Translation: the BAF would continue

to cap annual rates at the amount Pennsylvania decided it

could afford to pay. On the same day, the legislature enacted

the General Appropriations Act for fiscal year 2008-09,

which appropriated slightly more funds for nursing facility

services than had been called for in the governor’s proposed

budget. Soon after those enactments, DPW published another

notice and request for comment regarding provider rates. 38

Pa. Bull. 3943 (July 19, 2008) (the “July Notice”). The July

Notice announced that DPW had calculated proposed annual

per diem rates for 2008-09, and that, “[c]ontingent on CMS

approval,” it would apply a BAF to those rates. Id.

On September 30, 2008, DPW submitted a proposed

BAF for 2008-09, designated as “SPA 08-007,” to CMS for

approval.8 In a brief cover letter accompanying the SPA,

8

DPW actually submitted two SPAs, one regarding

the rate-calculation methodology for private nursing facilities

(SPA 08-007) and one regarding the calculation for public

nursing facilities (SPA 08-008). In their complaint, Plaintiffs

challenge both SPAs, but they raised no specific objection to

SPA 08-008 in the District Court or in this appeal, and they

have therefore waived any argument against it. See McCray

v. Fidelity Nat’l Title Ins. Co., 682 F.3d 229, 241 (3d Cir.

2012) (“[A]n appellant waives an argument in support of

reversal if he does not raise that argument in his opening brief

… .” (alteration and internal quotation marks omitted));

United States v. Dupree, 617 F.3d 724, 727 (3d Cir. 2010)

12

DPW explained that its purpose was “to authorize the

continued use of the budget adjustment factor (BAF) for non-

public nursing facility payment rates for the 2008-2009 rate

year.” (J.A. at 191.) The letter described the formula for

calculating the BAF, and said that “the non-public BAF

produced by this formula [for rate year 2008-09] is .90891.”

(J.A. at 192.) It further explained that the BAF served “to

moderate the growth of nursing facility payment rates

consistent with the fiscal resources of the Commonwealth,

while still providing payment rate increases sufficient to

assure that consumers will continue to have access to

medically necessary nursing facility services.” (J.A. at 191.)

Finally, the letter assured CMS that Pennsylvania had

“provided advance notice of its intent to amend its State Plan”

by publishing public notices in the Pennsylvania Bulletin.

(J.A. at 192.) With the cover letter, DPW submitted to CMS

a SPA submittal form, a chart showing that the total cost of

the state’s Medicaid program was within the regulatory

limits,9 copies of the June and July Notices, and a description

of the methods and standards used to calculate the per diem

payment rates. That description did not explain the basis for

the particular BAF proposed for 2008-09 but rather referred

(noting the “well-established proposition that arguments not

raised in the district courts are waived on appeal”). In any

event, Plaintiffs are all private nursing facilities and so were

unaffected by the changes proposed in SPA 08-008.

9

Federal regulations require that Medicaid payments

not exceed an “upper payment limit” that is defined as “a

reasonable estimate of the amount that would be paid for the

services furnished” under the payment principles defined in

the Act. 42 C.F.R. 447.272(b).

13

to Pennsylvania’s statutory provisions defining the case-mix

method and explained the use of BAFs generally. No other

information regarding the reasons behind the new BAF, or its

anticipated effect on care, was included in DPW’s initial

submission.

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

fiscal year would be 0.90891. Id. That BAF was the same as

stated in the SPA, but it differed from the estimate included in

the June Notice because of the disparity between the

governor’s proposed budget and the one the legislature

actually passed, which increased appropriations to nursing

facilities slightly. Still, the proposed BAF represented the

largest downward adjustment to the case-mix rate calculation

since Pennsylvania had introduced BAFs, reducing each

nursing facility’s proposed per diem rate by 9.109%.10

Application of the BAF to the 2008-09 case-mix rates meant

that, on average, provider payments would be one percent

higher in fiscal year 2008-09 than they had been in fiscal year

10

As described above, see supra note 7 and

accompanying text, per diem rates calculated using the case-

mix methodology are multiplied by the BAF. A case-mix rate

multiplied by 0.90891 (the BAF for the 2008-09 fiscal year)

will be 90.891% of its original value. In other words,

application of the proposed BAF reduces the case-mix rate by

9.109%. Plaintiffs incorrectly state in their opening brief that

the 2008-09 BAF “results in a reduction of 9.0891%.”

(Appellants’ Opening Br. at 26.)

14

2007-08, due to the continuing increase in per diem rates

under the case-mix methodology.11

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

11

As discussed above, rates can still increase in

absolute terms from year to year, even with the application of

a BAF, because of the continuing use of the case-mix

methodology. The specific basis for the one percent increase

in 2008-09 is not entirely clear, as the case-mix rates for the

2007-08 fiscal year are not in the record. What we do know

is that: (1) the 2007-08 rates were calculated using the case-

mix methodology, and were then reduced by 6.806% (using

the 2007-08 BAF); (2) the 2008-09 rates were calculated

using the case-mix methodology, and were then reduced by

9.109% (using the 2008-09 BAF); and (3) the 2008-09 rates

resulted in payments that, overall, were one percent higher

than in the previous year. The increase therefore must have

been due to some component of the case-mix formula, as the

change in the BAF served only to reduce the case-mix rates

by a larger amount.

15

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.”12 (J.A. at

181.) Leuschner “concluded that the total payments to

private nursing homes were estimated to increase slightly

during federal fiscal years 2008 and 2009 under the proposed

SPAs,” and so “recommended proceeding with approval.”

(J.A. at 182.) CMS made a few “pen and ink” changes to the

transmittal form to correct the federal budget impact numbers

(J.A. at 221), and, on December 12, 2008, it approved the

SPA. In doing so, it specifically certified that the SPA

conformed with the requirements of Section 13(A) and

Section 30(A), and retroactively made the SPA’s effective

date July 1, 2008.13

12

As discussed infra, Leuschner’s understanding does

not appear to have been accurate, as he implies that the 2008-

09 rates would have been lower if the SPA were not

approved. That is incorrect, because if CMS did not

authorize the use of a BAF for the 2008-09 fiscal year, as

requested by SPA 08-007, then the per diem rates would not

have been adjusted at all. Leuschner was correct, however,

that reimbursement rates would increase in absolute terms

from 2007-08 to 2008-09.

13

Regulations permit CMS in some situations to make

a plan amendment retroactively effective. See 42 C.F.R.

16

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.

B. Procedural History

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

§§ 430.20(b)(2) & 447.256(c) (permitting a state plan

amendment that changes the state’s payment methods and

standards to become effective as early as “the first day of the

calendar quarter in which an approvable amendment is

submitted”).

17

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.14 It

14

The APA provides a waiver of federal sovereign

immunity to people “adversely affected or aggrieved by

agency action within the meaning of the relevant statute,” 5

U.S.C. § 702, when the agency action is made reviewable by

statute or there is a final agency action “for which there is no

18

therefore denied the Federal Defendants’ motion to dismiss.

The State Defendant’s motion raised three independent bases

for dismissal: the abstention doctrine described in Younger v.

Harris, 401 U.S. 37 (1971), mootness, and Eleventh

Amendment sovereign immunity. The District Court granted

the motion in part. It abstained from deciding the Supremacy

Clause claim insofar as it related to “conduct occurring prior

to CMS approval of the proposed amendments[,]” as those

issues could be adequately addressed in the ongoing state

administrative proceeding. Christ the King Manor, Inc. v.

Sebelius, No. 1:09-cv-2007, at 19 (M.D. Pa. June 29, 2010)

(slip op.). It also dismissed the request for declaratory relief

on immunity grounds, explaining that, if it “were to issue a

declaratory decree to the effect that State Defendant’s

implementation of the [SPA] violated federal law,” the decree

could have res judicata effect in the state administrative

appeals process, which “would leave to the state system ‘only

a form of accounting proceeding whereby damages or

restitution would be computed.’” Id. at 25 (quoting Green v.

Mansour, 474 U.S. 64, 73 (1985)).) The District Court held

that the case was not moot, however, and it did not dismiss

Plaintiffs’ claim for injunctive relief regarding the continuing

application of the amended state plan.

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, 2012,15 holding that,

other adequate remedy,” id. § 704. On appeal, the Federal

Defendants do not contest that the waiver applies here.

15

The case was stayed from March 2011 until March

2012 while the Supreme Court decided Douglas v.

19

“[g]iven [the] regulatory framework … and the deference

afforded agency decision-making, … there is substantial

evidence in the [administrative record] to support the

Secretary’s approval of the SPAs under [S]ection 30(A).”

Christ the King Manor, Inc. v. Sebelius, No. 1:09-cv-2007,

2012 WL 3027543, at *8 (M.D. Pa. July 24, 2012). It further

held that CMS could properly conclude that DPW had

substantially complied with the public process requirements

of Section 13(A). Id. at *15. The Court therefore found that

HHS’s approval of SPA 08-007 was not arbitrary or

capricious, and that the State Defendant’s implementation of

the SPA was proper. Id. at *16-*17. Accordingly, it denied

Plaintiffs’ motion and entered judgment for the Defendants.

Id. at *17. This timely appeal followed, in which Plaintiffs

appeal both the grant of summary judgment and the earlier

partial dismissal of Plaintiffs’ claim against the State

Defendant.

II. Discussion16

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-

Independent Living Center of Southern California, 132 S. Ct.

1204 (2012), a case discussed infra that arose from

California’s cuts to Medicaid reimbursement rates.

16

The District Court had jurisdiction pursuant to 28

U.S.C. § 1331 and 5 U.S.C. §§ 701-706. We have

jurisdiction pursuant to 28 U.S.C. § 1291.

20

007,17 as well as DPW’s implementation of it, violates federal

law, specifically Sections 30(A) and 13(A) of the Medicaid

Act. They also argue that their claim against the State

Defendant can be addressed in this proceeding and should be

resolved in their favor. This appeal therefore presents two

distinct issues: first, whether the Federal Defendants’

approval of SPA 08-007 was proper under the APA, and,

second, what relief, if any, Plaintiffs can obtain from the State

Defendant in this suit.

A. APA Claim Against the Federal Defendants

Plaintiffs argue that HHS’s approval of SPA 08-007

was improper for two reasons.18 First, they say that there was

17

For simplicity, we will generally refer to “HHS” or

“the Secretary” when discussing the SPA approval process.

We recognize that CMS conducted the approval process and

exercised delegated authority in approving SPA 08-007.

18

Although SPA 08-007 only defined nursing

facilities’ reimbursement rates for the 2008-09 fiscal year, no

party contends that Plaintiffs’ challenge to HHS’s approval

decision is moot. Nonetheless, we have an independent

obligation to determine whether Plaintiffs’ claim presents a

justiciable case or controversy. Rendell v. Rumsfeld, 484 F.3d

236, 240 (3d Cir. 2007). “[A] case will be considered moot,

and therefore nonjusticiable as involving no case or

controversy, if the issues presented are no longer ‘live’ or the

parties lack a legally cognizable interest in the outcome.” In

re Surrick, 338 F.3d 224, 229 (3d Cir. 2003) (quoting In re

Kulp Foundry, Inc., 691 F.2d 1125, 1128 (3d Cir. 1982))

(internal quotation marks omitted). We conclude that

Plaintiffs’ claim against the Federal Defendants is not moot.

21

insufficient evidence in the administrative record to support

any conclusion that the SPA satisfies Section 30(A) of the

Medicaid Act. Discussed in more depth below, that provision

requires that a state plan provide “methods and procedures”

necessary to “assure” that payments to providers are

“consistent with” efficiency, economy, quality of care, and

adequate access to providers. 42 U.S.C. § 1396a(a)(30)(A).

Plaintiffs note that SPA 08-007 categorically reduced – by

more than nine percent – the per diem payments which are

called for by the state’s own case-mix calculation, and which

Although SPA 08-007 will not define their reimbursement

rates in the future, nursing facilities continue to believe that

the HHS’s decision to approve the SPA violated federal law,

and that they are entitled to reimbursement rates for 2008-09

that are calculated in accordance with a properly approved

state plan. This appeal provides an opportunity for them to

obtain some measure of relief, since, if the agency’s action

was arbitrary or capricious under the APA, we must set that

action aside and require the agency to conform its action to

federal law. 5 U.S.C. § 706(2)(A) (“The reviewing court

shall … hold unlawful and set aside agency action … found

to be … arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law … .”); see also Fla.

Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985)

(explaining that, “[i]f the record before the agency does not

support the agency action, … the proper course, except in rare

circumstances, is to remand to the agency for additional

investigation or explanation”). Plaintiffs therefore have an

interest in the outcome of this appeal “that is real and not

hypothetical,” and their claim against the Federal Defendants

provides an “occasion for meaningful relief.” Rendell, 484

F.3d at 240 (internal quotation marks omitted).

22

are represented by the state as reflecting what is “necessary

and reasonable for an efficiently and economically operated

nursing facility to provide services to [Medicaid] residents.”

55 Pa. Code § 1187.2. They say that the arbitrary reduction

imposed by the SPA threatens the quality of care provided to

Medicaid recipients, yet the administrative record is “silent”

as to the Defendants’ “consideration of the quality of care

factor.” (Appellants’ Opening Br. at 45.) Therefore, they

contend, HHS improperly concluded that the amended state

plan satisfies Section 30(A). Plaintiffs’ second contention is

that HHS erred in concluding that DPW had satisfied the

public process requirements of Section 13(A). More

particularly, they say that the only public notice published

before the SPA’s effective date failed to comply with federal

regulations regarding the content of such notices.

The District Court rejected both lines of argument.

According significant deference to HHS’s interpretations of

the Medicaid Act, the Court held that the record was

sufficient to support the Secretary’s approval of the SPA.

Christ the King Manor, 2012 WL 3027543, at *8-*9. For the

reasons elaborated herein, we disagree in part. Although we

agree with the District Court that we must defer to HHS’s

reasonable interpretations of the Medicaid Act, and that DPW

satisfied the public process requirements of Section 13(A), we

part ways when it comes to the District Court’s decision that

HHS could properly conclude on the evidence before it that

SPA 08-007 complies with Section 30(A). Our conclusion is,

to the contrary, that HHS’s approval of the SPA was arbitrary

and capricious, and must be set aside.

23

1. Standard of Review

“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 (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 F.3d at 43)). 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.

24

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 (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 public process

requirements of Section 13(A). In so arguing, Plaintiffs

implicitly take issue with HHS’s interpretation of the

Medicaid Act. By approving SPA 08-007, HHS evidently

concluded that Pennsylvania’s amended state plan satisfies

the requirements of Sections 30(A) and 13(A) of the Act. See

42 U.S.C. § 1316(a)(1) (requiring the Secretary to “make a

determination as to whether [the submitted plan] conforms to

the requirements for approval”). To reach that conclusion,

the agency had to determine what those requirements entail,

which involves interpreting the relevant provisions.

Therefore, we must establish at the outset whether to accord

Chevron deference to agency interpretations of the Medicaid

25

Act inherent in HHS approval of a state plan amendment.19

See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,

467 U.S. 837, 842-44 (1984) (barring a court from

“substitut[ing] its own construction of a statutory provision

for a reasonable interpretation made by the administrator of

an agency”).

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 (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

19

We have previously held that Chevron deference

applies to HHS’s interpretations of the Medicaid Act in the

context of a challenge to a state plan amendment, but only in

a case that was decided before the Supreme Court’s decision

in United States v. Mead Corp., 533 U.S. 218 (2001), which

limited that deference to certain types of agency action. See

Erie Cnty. Geriatric Ctr. v. Sullivan, 952 F.2d 71, 77 (3d Cir.

1991) (granting “substantial deference” to the Secretary’s

interpretations of the Act).

26

has acted under [that] grant of authority.” 132 S. Ct. 1204,

1210 (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 to interpret the statute via case-by-case

SPA adjudication.” 716 F.3d at 1249. Similarly, the D.C.

Circuit has held that, through express delegation of

interpretive authority, “Congress manifested its intent that the

Secretary’s determinations, based on interpretation of the

relevant statutory provisions, should have the force of law.”

Pharm. Research & Mfrs. of Am. v. Thompson, 362 F.3d 817,

822 (D.C. Cir. 2004). In short, the reasoning goes, the

Chevron framework applies to SPA approvals. Id. at 821; see

also Managed Pharmacy Care, 716 F.3d at 1248 (“Chevron

applies to SPA approvals … .”); Harris v. Olszewski, 442

27

F.3d 456, 467 (6th Cir. 2006) (“[T]he agency’s approval of

the state plan amendment is entitled to Chevron deference.”).

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,20 and the state must pay for Medicaid

services “using rates determined in accordance with methods

and standards specified in an approved State plan,” 42 C.F.R.

447.253(i). See Nat’l Cable & Telecomms. Ass’n v. Brand X

Internet Servs., 545 U.S. 967, 980-81 (2005) (applying the

Chevron framework because a statute gave an agency “the

authority to promulgate binding legal rules” (citing Mead,

533 U.S. at 231-34)). SPA approvals are therefore the type of

agency action that warrants Chevron deference under Mead.

20

Section 1396c was held unconstitutional in certain

respects, not applicable here, in National Federation of

Independent Businesses v. Sebelius. 132 S. Ct. 2566, 2607

(2012) (holding that HHS “cannot apply § 1396c to withdraw

existing Medicaid funds for failure to comply with the

requirements set out in the [Medicaid] expansion” provided

for in the Patient Protection and Affordable Care Act, 124

Stat. 119).

28

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).

2. Compliance with Section 30(A)

Section 30(A) requires that a state Medicaid plan:

provide such methods and procedures relating

to the utilization of, and the payment for, care

and services available under the plan … as may

be necessary to safeguard against unnecessary

utilization of such care and services and to

assure that payments are consistent with

efficiency, economy, and quality of care and are

sufficient to enlist enough providers so that care

and services are available under the plan at

least to the extent that such care and services

are available to the general population in the

geographic area.

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

29

any plan which fulfills the conditions specified in subsection

(a) of this section … .”).

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,21 Section 30(A) leaves it “up to a state how it will

21

The Boren Amendment required that a state pay

providers using rates that “the State finds, and makes

assurances satisfactory to the Secretary, are reasonable and

adequate to meet the costs which must be incurred by

efficiently and economically operated facilities in order to

provide care and services in conformity with applicable State

and Federal laws, regulations, and quality and safety

standards … .” 42 U.S.C. § 1396a(a)(13)(A) (1994). The

Boren Amendment was interpreted to impose both procedural

and substantive requirements on states in setting

reimbursement rates, and to be enforceable in a private right

of action under 42 U.S.C. § 1983. See Wilder v. Va. Hosp.

Ass’n, 496 U.S. 498, 524 (1990) (“The Boren Amendment …

creates a right, enforceable in a private cause of action

pursuant to § 1983, to have the State adopt rates that it finds

are reasonable and adequate rates to meet the costs of an

efficient and economical health care provider.”). The

Amendment was repealed in 1997, after substantial lobbying

30

‘assure’ the [required] outcomes.” Id. at 852. Nonetheless,

we said that the state’s “process of decision-making” in

setting a rate methodology must be “reasonable and sound,”

id. at 853, and “budgetary considerations may not be the sole

basis for a rate revision,” id. at 856. In Pennsylvania

Pharmacists Association v. Houstoun, we again interpreted

Section 30(A), this time for the purpose of determining

whether it granted Medicaid providers a cause of action under

42 U.S.C. § 1983. 283 F.3d at 534-35. In holding that it does

not, we explained that “Section 30(A), unlike the Boren

Amendment, does not demand that payments be set at levels

that are sufficient to cover provider costs,” but instead

requires that they be “sufficient to meet recipients’ needs.”22

Id. at 538. Therefore, under this Court’s existing

jurisprudence, Section 30(A) allows states to set a rate

methodology using any process that is reasonable, considers

more than simply budgetary factors, and results in payments

that are sufficient to meet recipients’ needs.

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

efforts by states seeking greater latitude in setting their rates.

Pa. Pharmacists Ass’n, 283 F.3d at 536, 539 & n.12.

22

Of course, the law of supply and demand does not

disappear, no matter how much one might wish it would, so a

focus on recipients that gives no thought to provider costs

will soon leave ample demand from needy recipients and no

providers to supply services. Setting payment levels to meet

recipients’ needs must therefore inevitably take into account

provider costs.

31

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. 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 1246-50 (deferring to HHS’s interpretation of

Section 30(A) instead of applying the court’s prior

interpretation of that provision).

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

32

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

33

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 state objective, the small absolute increase in

payments from 2007 to 2008 reveals practically nothing about

SPA 08-007’s compliance with Section 30(A). As the

Federal Defendants acknowledge, that increase is due to the

application of the case-mix methodology, which has been in

place since 1996. An essential premise of their argument

seems to be that the case-mix method results in payments that

are unduly high, and that do not in fact reflect the “necessary”

costs of providing care to Medicaid recipients. That may be

the case, but there is no evidence of it anywhere in the record,

and DPW never suggests that the state’s underlying

methodology is flawed. Rather, the state repeatedly explains

that it must reduce the case-mix rates for budgetary reasons,

not because they are based on a rate-calculation methodology

that overcompensates providers.

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

34

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

35

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 with quality of care. According to the Federal

Defendants, because Pennsylvania had “already employed a

budget adjustment factor in three previous fiscal years” (U.S.

Br. at 19) without causing “any apparent issues with quality

of care or beneficiary access to services” (id. at 20), HHS

could reasonably conclude that SPA 08-007 “was likewise

compliant with Section 30(A)” (id.). They emphasize that,

even with ongoing monitoring activities, HHS had not been

made “aware of any complaints by beneficiaries or nursing

facilities … about payments made pursuant to the BAF

system.” (Id.) They further note that federal regulations

permit HHS to approve a state plan amendment “on the basis

of policy statements and precedents previously approved” by

the agency. 42 C.F.R. § 430.15(b). Therefore, they argue,

HHS could reasonably conclude that the proposed

amendment, which “employed a substantially similar

methodology” to the one taken the previous three years, “was

likewise compliant with Section 30(A).” (U.S. Br. at 20.)

36

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

37

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 30(A). Rite Aid,

171 F.3d at 855. Seizing upon that statement, the Federal

Defendants describe provisions of the Nursing Home Reform

Act, 42 U.S.C. §§ 1395i-3, 1396, that allow for “oversight

and inspection of nursing facilities” and “require[]

certification that participating facilities satisfy certain ‘quality

of care’ standards.” (U.S. Br. at 21 (citing those provisions).)

They also note that in 2005 Pennsylvania instructed nursing

facilities that they have an obligation “to provide appropriate,

high-quality care” that “exists independent of any particular

payment rate or any features of the rate-setting methodology.”

(Id. (quoting 35 Pa. Bull. 6232 (Nov. 12, 2005)) (internal

quotation marks omitted).) Based on our holding in Rite Aid,

the Federal Defendants contend that HHS could have

reasonably relied upon such “independent assurances of

quality of care” when it approved SPA 08-007.

38

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. Geriatic 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

39

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 30(A), Minnesota v.

Ctrs. for Medicare & Medicaid Servs., 495 F.3d 991, 996 (8th

Cir. 2007) (internal quotation marks omitted).

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

40

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 842-43.23

23

Before the District Court, the Federal Defendants

argued that HHS “was required to more rigorously scrutinize

a proposed amendment only when [the state’s] assurances

41

were questionable on their face.” Christ the King Manor,

2012 WL 3027543, at *6. Although the Federal Defendants

do not repeat that argument on appeal, we take a moment to

address it here, as the District Court seems to have found it

convincing. See id. at *8-*9 (agreeing with the Federal

Defendants’ interpretation of the state’s obligations under

Section 30(A)); see also id. at *14 (concluding that “it was

within CMS’s expertise to determine whether DPW’s

representations concerning approval of the SPAs, which

mirrored those approved in the past, complied with section

30(A)”). HHS may choose not to exercise the same rigor in

scrutinizing all state plan amendments. But it must actually

scrutinize them, at least to the extent necessary to “make a

determination as to whether [the amendment] conforms to the

requirements for approval.” 42 U.S.C. § 1316(a)(1).

Furthermore, we reject the notion that, as a threshold matter,

we must determine whether a SPA is facially questionable

before reviewing the agency’s action. Such an approach

would require a reviewing court to make its own assessment

of whether a proposed change should have raised red flags

regarding quality of care, a task which is for HHS and which

we are ill-equipped to perform. Here, for example, the

Federal Defendants indicate that a 9.109% reduction is

nothing to worry about, but, absent information justifying that

assertion, a court has no way to know if such a reduction

should have caused HHS to take a closer look. The BAF

proposed in SPA 08-007 could have reduced rates by 5%,

10%, 15%, or something even greater, and presumably the

Federal Defendants would agree that, at some point, it would

be arbitrary and capricious for HHS to approve the SPA

based solely on soothing words from the state. For that

reason, the burden is on the agency, not on the reviewing

42

Of course, as the Federal Defendants rightly note,

there is a bit more in the record in this case than the state’s

assertion that SPA 08-007 would “still provid[e] payment rate

increases sufficient to assure that consumers will continue to

have access to medically necessary nursing facility services.”

(J.A. at 191.) There is also “data,” in the form of the

spreadsheet DPW submitted at HHS’s request, “showing that

payments to nonpublic nursing facilities would increase”

from the prior fiscal year. (U.S. Br. at 23.) But, as described

above, that increase does not, by itself, tell us or HHS

anything about the SPA’s effect on quality of care or access

to providers.24 So far as the record shows, Pennsylvania

decided to reduce its cost-based per diem rates to the amount

that it could afford to pay, without taking any steps to ensure

that payments would still be consistent with quality of care

and adequate access. In approving that decision, HHS seems

to have “entirely failed to consider” those “important

court, to supply a reasoned basis for its action. See State

Farm, 463 U.S. at 43.

24

Although Plaintiffs focus their argument on the

“quality of care” factor, we note that “quality of care” and

“adequate access to providers” are related concepts, and that

budget cuts have the capacity to affect both components of

Section 30(A). If, for example, a state reduces its payments

to significantly below the amount necessary for a nursing

facility to treat its patients, some facilities might cut corners

and provide inadequate care, whereas others might stop

accepting Medicaid patients altogether and thus restrict access

to providers. See Orthopaedic Hosp. v. Belshe, 103 F.3d

1491, 1498 (9th Cir. 1997) (discussing the possible effects of

payment reductions on access to providers).

43

aspect[s]” of Section 30(A). See State Farm, 463 U.S. at 43.

Indeed, the record suggests that the agency misunderstood the

proposed changes and blessed the SPA based solely on the

absolute increase in payments from the previous year. There

is no indication that the agency “examine[d] the relevant

data,” nor did it “articulate a satisfactory explanation for its

action.” Id. Therefore, because we cannot discern from the

record a reasoned basis for the agency’s decision, we

conclude that its approval of SPA 08-007 was arbitrary and

capricious under the APA.

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”).25

25

That does not mean that Plaintiffs will necessarily be

entitled to a rate recalculation, and we in no way suggest that

they should have been paid in accordance with the previously

approved state plan, which did not involve the use of any

BAF for the 2008-09 fiscal year. When, as here, “the record

before the agency does not support the agency action,” the

44

3. Compliance with Section 13(A)

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.)

agency may be afforded an opportunity “for additional

investigation or explanation,” upon which the agency could

lawfully base its action. Fla. Power & Light Co., 470 U.S. at

744. Cf. 42 U.S.C. § 1316(a)(4) (providing that, when a court

of appeals reviews a state’s appeal of an agency decision

regarding a state plan, the court “may remand the case to the

Secretary to take further evidence, and [she] may thereupon

make new or modified findings of fact and may modify [her]

previous action”).

45

Section 13(A) of the Medicaid Act requires that states

seeking to change their rate-setting methodologies provide a

public process under which:

(i) proposed rates, the methodologies

underlying the establishment of such rates, and

justifications for the proposed rates are

published,

(ii) providers, beneficiaries and their

representatives, and other concerned State

residents are given a reasonable opportunity for

review and comment on the proposed rates,

methodologies, and justifications, [and]

(iii) final rates, the methodologies underlying

the establishment of such rates, and

justifications for such final rates are published

….

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

46

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; that duty is

imposed on the Secretary.” Indep. Acceptance Co. v.

California, 204 F.3d 1247, 1251-52 (9th Cir. 2000). We must

instead consider, as we did with Section 30(A), “whether the

Secretary acted arbitrarily or capriciously when she accepted

the State’s assurance of notice as satisfactory to her.” Id. at

1252. In doing so, we accord deference to the Secretary’s

reasonable interpretations of Section 13(A), see supra Section

II.A.1, and we must give controlling weight to her

interpretations of her own regulations unless they are

inconsistent with the regulation or plainly erroneous. Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994).

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

47

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.26 Furthermore, although the BAF

described in the June Notice differed slightly from the one

submitted in the SPA, the revised BAF was, on its face, more

favorable to nursing facilities. HHS could therefore have

reasonably concluded that the June Notice “outlined the

substance” of the new rate calculation methodology “in

sufficient detail” to alert nursing facilities to the scope and

nature of the proposed change. Evergreen, 235 F.3d at 920.

That DPW may have failed to literally comply with

federal regulations regarding public notice does not make

26

Notably, Plaintiffs do not contend that they lacked

actual notice of the proposed changes, or that they were

denied adequate opportunity to comment on the new BAF.

48

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).

Plaintiffs also do not contend that the June Notice was

unavailable for public review – they just say it was not made

available in the precise manner provided for in the regulation.

But again, it is within the Secretary’s discretion to consider

publication in the Pennsylvania Bulletin the effective

equivalent of distributing a notice to county offices. In any

event, based on the record before it, HHS could readily

conclude that Pennsylvania had “substantial[ly] compli[ed]”

with federal notice requirements, which is all that is necessary

for the Secretary to reasonably accept a state’s assurances to

that effect. Indep. Acceptance Co., 204 F.3d at 1252 (holding

that “in accepting the State’s assurance, the Secretary was not

required to hold the State to absolutely literal compliance

with the notice requirements,” but rather “had discretion to

determine whether the State had given sufficient assurance

that its notice was in substantial compliance”); see also

Oklahoma v. Shalala, 42 F.3d 595, 603 (10th Cir. 1994)

(deferring to CMS’s decision to “relax[] the notice

49

requirement from full formal compliance to ‘at least minimal

compliance’ through publication of ‘an appropriate public

notice before the effective date of the proposed change’”).

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.

50

B. Supremacy Clause Claim Against the State

Defendant27

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

27

We note at the outset that it is questionable whether

Plaintiffs can sustain a cause of action under the Supremacy

Clause at all. In Douglas v. Independent Living Center, the

Supreme Court granted certiorari “to decide whether

Medicaid providers and recipients may maintain a cause of

action under the Supremacy Clause to enforce a federal

Medicaid law.” 132 S. Ct. at 1207. The Court declined to

answer that question, however, instead concluding that

federal approval of the contested state plan put the case “in a

different posture” and remanding the case to the court of

appeals. Id. at 1210. Therefore, although the dissent strongly

suggested that the Supremacy Clause does not provide a

cause of action when Congress has declined to provide one,

id. at 1211, the Court’s previous decision in Shaw v. Delta Air

Lines, 463 U.S. 85, 96 n.14 (1983), which recognized a

private right of action under the Supremacy Clause, remains

binding on us. Lewis v. Alexander, 685 F.3d 325, 346 n.20

(3d Cir. 2012).

51

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

(1971), it abstained from deciding the claim to the extent it

challenged state conduct that occurred before federal approval

of the SPA. The Court also denied all declaratory relief,

concluding that such relief was barred by Eleventh

Amendment sovereign immunity. That left only Plaintiffs’

request for an injunction, which the Court allowed to proceed

to discovery. The District Court subsequently entered

summary judgment in favor of the State Defendant on that

claim because of its conclusion “that the Federal Defendants’

approval of the SPAs was not arbitrary or capricious under

the APA.” Christ the King Manor, 2012 WL 3027543, at

*17. Although we have now decided that that conclusion was

in error, we will nonetheless affirm the District Court’s grant

of summary judgment to the State Defendant on the basis that

the Eleventh Amendment deprives us of jurisdiction to grant

the requested relief.28

28

“We exercise plenary review over a district court’s

grant of summary judgment,” and we will affirm only if

“there is no genuine dispute as to any material fact and the

movant is entitled to judgment as a matter of law.” Mabey

Bridge & Shore, Inc. v. Schoch, 666 F.3d 862, 867 (3d Cir.

2012) (internal quotation marks omitted). “Dismissal of an

action based upon sovereign immunity is subject to plenary

review by this Court.” Blanciak v. Allegheny Ludlum Corp.,

77 F.3d 690, 694 (3d Cir. 1996).

52

The Eleventh Amendment to the Constitution

provides that:

The Judicial power of the United States shall

not be construed to extend to any suit in law or

equity, commenced or prosecuted against one of

the United States by Citizens of another State,

or by Citizens or Subjects of any Foreign State.

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 (1974) (citing Hans v. Louisiana,

134 U.S. 1, 10 (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 (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

53

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 (1985). Plaintiffs may not

be awarded damages or other forms of retroactive relief.

Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89,

103 (1984).

That bar on retroactive relief includes forms of

equitable relief that are functionally equivalent to damage

awards. Green, 474 U.S. at 69-70 (citing Edelman, 415 U.S.

at 666-69). As we explained in Blanciak v. Allegheny

Ludlum Corp., “relief that essentially serves to compensate a

party injured in the past by the action of a state official, even

though styled as something else, is barred by the Eleventh

Amendment.” 77 F.3d at 697-98 (citing Green, 474 U.S. at

68; Edelman, 415 U.S. at 664-68). We contrasted such relief

with remedies that may have “a substantial ancillary effect on

the state treasury,” but primarily serve “to bring an end to a

present, continuing violation of federal law.” Id. at 698

(quoting Papasan v. Allain, 478 U.S. 265, 278 (1986))

(internal quotation marks omitted). The label given to the

requested relief is “of no importance” – we must “look to the

substance rather than the form of the relief requested” to

determine if it is barred by the Eleventh Amendment. Id.

When an action “is in essence one for the recovery of money

from the state, the state is the real, substantial party in interest

and is entitled to invoke its sovereign immunity from suit

even though individual officers are nominal defendants.”

Edelman, 415 U.S. at 663 (quoting Ford Motor Corp. v.

54

Dep’t of Treasury, 323 U.S. 459, 464 (1945)) (internal

quotation marks omitted).

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. 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.29 That SPA has not been in effect since

July 1, 2009, and Plaintiffs do not claim that Pennsylvania’s

current rate-calculation methodology violates federal law.

More to the point, they do not identify any ongoing conduct

by the Secretary of DPW that must be enjoined to ensure the

supremacy of federal law. Instead, they challenge the rates

DPW paid five years ago, and they argue that they are entitled

to “prospective corrective payments” from the state.

29

The District Court construed Plaintiffs’ claim more

broadly, saying that it challenged not only SPA 08-007, but

also “the underlying methodology” contained in the SPA –

that is, the use of budget-based adjustments generally. That

construction is too generous. Plaintiffs’ complaint is quite

specific in stating that it challenges SPA 08-007 and SPA 08-

008 (which, as discussed supra note 8, is no longer at issue).

Moreover, all of the factual allegations in the complaint focus

on the state’s adoption and implementation of SPA 08-007,

and key to Plaintiffs’ argument is that the BAF in that SPA

was more damaging than in previous years. We therefore

construe Plaintiffs’ complaint as a challenge to the particular

rates calculated using SPA 08-007, not as a generalized

challenge to the use of a budget adjustment factor.

55

(Appellants’ Opening Br. at 72.) Their overall case against

the State Defendant therefore seems to be precisely the kind

of suit that is barred by the Eleventh Amendment, as it seeks

“to compensate a party injured in the past by the action of a

state official,” not to “bring an end to a present, continuing

violation of federal law.” Blanciak, 77 F.3d at 697-98.

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 08-

007. (J.A. at 113.) In other words, they ask that we require

DPW to pay the 2008-09 rates in accordance with the

previously approved state plan, which did not apply a BAF at

all. Because SPA 08-007 is no longer in effect, that remedy

will not help prevent future violations of federal law, and it is

useful to Plaintiffs only if it “might be offered in state-court

proceedings as res judicata on the issue of liability, leaving to

the state courts only a form of accounting proceeding

whereby damages or restitution would be computed.” Green,

474 U.S. at 73. In fact, the record strongly suggests the

Plaintiffs will do just that, as they have initiated state

administrative proceedings requesting that DPW “recalculate”

the 2008-09 rates “consistent with [the] law.”

(Administrative Appeal, Doc. 20, Ex. A, at 14.) The relief

requested here would therefore “have much the same effect as

a full-fledged award of damages or restitution by the federal

court” – forms of relief that are clearly barred by the Eleventh

Amendment.30 Green, 474 U.S. at 73.

30

The District Court reached a similar conclusion,

holding that “insofar as [Plaintiffs] request … declaratory

56

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 (1981).

relief that the State Defendant’s implementation” of the SPA

“violates federal law,” that claim is barred by sovereign

immunity under Edelman and Green. Christ the King Manor,

Inc. v. Sebelius, No. 1:09-cv-2007, at 25 (M.D. Pa. June 29,

2010). The Court concluded that Plaintiffs had one viable

request for prospective relief, however – their request for

“injunctive relief preventing the State Defendant from basing

its Medicaid reimbursement payments” on SPA 08-007. Id.

But, as described above, that relief cannot be considered

prospective, because Plaintiffs do not ask that we enjoin a

continuing violation of federal law, but rather that we require

DPW to pay nursing facilities using the state plan in effect

prior to the challenged SPA. When, as in this case, there is

no ongoing violation of federal law, the requested injunction

is effectively a request for a declaration that the prior rate

calculations were unlawful, and is thus barred by the Eleventh

Amendment.

57

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 state’s

immunity from suit in federal court.

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

58

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.31

III. Conclusion

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.

31

Because we hold that the Eleventh Amendment bars

all requested relief against the State Defendant, which

deprives us of subject matter jurisdiction, we do not reach the

question of whether the District Court properly abstained

from resolving certain components of Plaintiffs’ claim, nor do

we consider whether their claim is moot.

59